Andy Thomis, CEO & Simon Walther, CFO - Cohort (CHRT)

Yeah, some said I'm Andy Thomas, I'm the chief executive at Cohort PLC. I'm delighted to say that I haven't come here single-handed. Sorry, that's the best joke you're going to get this evening, I'm afraid. As I'm here with my colleague Simon Walther, who's the Finance Director, and we're here to introduce our AIM-quoted defense technology business, Cohort PLC. So this slide is effectively Cohort on a page. The extract at the beginning is from our mission statement, and it is fundamentally the Cohort concept in a sentence. We try and bring together the best of both small, independent, agile businesses with the benefits of being part of a larger group in terms of finance, customer access, breadth and depth. We are a group of six operating businesses, all of them small to medium-sized enterprises, all highly customer-focused with a strong element of technological innovation. We started off in 2006 with a single business when we IPOed, and we've grown gradually both organically and by acquisition. Our businesses operate with a high level of autonomy. We select our executives very carefully and we delegate a lot of responsibility and freedom to them over day-to-day decisions and over development of strategy too, although that work is done in close consultation with us, and that of course takes place inside a framework of governance controls to ensure that they manage funds properly, produce accurate financial reports and results, and comply with the many laws and regulations that you'll be aware affect all listed companies, but our sector has some particular ones as well. Now the businesses are helped by a small but very experienced headquarters team. There are only 15 of us, so there's a limit to the amount of interference that we can do, but several of us, notably the executive directors and the non-executive directors, have got many years experience in the defense sector. We don't at the headquarters provide central services like human resources or marketing or engineering, because it's up to the businesses themselves to shape and resource themselves and to meet those needs according to their own strategy and aspirations, and we don't have a large, expensive, complicated and prone to infighting layer of middle management in between the headquarters and the managing directors of the operating businesses themselves, and that reduction in cost helps make us pretty competitive as well. Now we operate, as I've said, primarily in defense. We offer a range of technology-based products and services. Simon will tell you a little bit more about exactly what those are and our experiences in that sector. That being agile and innovative provides a strong degree of competitive advantage, because the sector is really dominated by large, slow-moving, conservative customers and suppliers, and by working with a business like ours, they can help, we can help them by making decisions quickly and responding rapidly to changing needs.

In terms of our markets, the UK is our largest single customer, made up about 54% of our revenue last year, but we're also a strong exporter. We export into NATO Europe, into Southeast Asia, into the Middle East, and into the Americas as well. And in terms of size, we're about 1,200 people, and as I've said, about 15 of those are in the headquarters. The large majority of those 1,200 people are skilled technologists. Many of them have got advanced qualifications to higher degree level, because that's primarily how we add value for our customers. We're not a capital-intensive manufacturing operation. Fundamentally, it's about producing good technology which solves urgent needs for our customers. And we operate at 12 different sites in the UK and in Europe as well. Market capitalization about £200 million. Revenue last year, well we'll give you the details, about £180 million. Our order book when we last announced it on our AGM last month was £370 million.

So this slide shows the development of the group since we IPOed back in 2006. We started with just one operating business, but we've now grown to six. I won't talk through it in a great deal of detail, but you can see that our largest acquisition was done the year after we IPOed, that was SEA at £25 million. Most of the others have been between £10 and £20 million. So for instance, MASS at £13 million, that was back in 2006, and MCL at £14 million. Simon just reminded me earlier on today that MASS in fact was the highest EBITDA multiple we paid for an acquisition, because it was making about a million pounds a year at the time we acquired it and we paid £13 million for it. Now that sounds a bit pacy, but last year it made about £9 million in profit, so I think I would come out all right in the end. As well as adding members to the group, and I've described the way that the group is structured, we've also done some what I term bolt-in acquisitions where we've integrated businesses into the existing group members. An example there was Abacus, an electronic warfare consultancy, which we did in 2010 and integrated into our business MASS. And another business called JNS, doing naval support work, which we integrated into SEA in 2014. And we've been prepared to restructure or divest businesses where they have not suited our business model for one reason or another, and where that's made sense. We did that for example with our scientific space business back in 2014. So we're not theological about having six independent businesses. We're perfectly prepared to adjust the shape and size of the organization when that's needed. Very importantly, I think, apart from employee share schemes, we have not issued any shares since 2007, and so all of our acquisitions since SEA have been made from our own cash generation, with some bank debt here and there just to smooth the flow. And Simon's going to say some more about our historic financial performance and our dividend record as well.

But before we go on to that, let me summarize our most recent set of results to give you a better picture of our financial performance. These cover the year ended 30th of April 2023, and it was a good year for us with a record level of revenue and profit. Revenue was up by a third, and profit up nearly a quarter compared to the preceding year. And it was especially pleasing for us that our order intake was considerably higher even than that record level of revenue, because a book-to-bill ratio of greater than one is for us a good indicator of future growth potential. And that left us at the end of the year with an order book of nearly £330 million, covering about 80% of what analysts expect our revenue to be this year. And as I've said, by the time of our AGM last month, that had gone up to £370 million and we had 93% cover for the current year. Net funds flow in the year was very strong, bringing us to a net funds position of £15.6 million by the year end. And with very strong support and good relationships with our banks, that gives us a lot of flexibility to invest in new products and in acquisitions as well. And on the back of those good results, we increased our dividend by 10%. So I'm going to come back in a few minutes and talk about some of the market factors affecting the business, but I'm going to hand over to Simon now who's going to get a little more into the detail behind those numbers. Thank you.

Right, so I hope that's given you an insight into the kind of products and services that we provide for our customers in the UK and elsewhere. And I wanted to talk briefly about the factors driving demand for those products and services. And that really starts at the geopolitical level. And until recently, there have been two primary drivers of demand internationally for defense equipment: the war in Ukraine being one of those, and Chinese expansionism in Asia and the Indo-Pacific region. And now in recent days, sad to say, those have been joined by a third, namely the reignition of conflict in Israel, which has got a huge and unpredictable potential for international chaos as well. But starting with Ukraine, experience in that conflict is driving a re-evaluation of equipment and tactics by the NATO countries and beyond. And it's especially relevant to drones and counter-drone systems, both of which you'll have seen in the news have been used very widely to remarkable effect on both sides in Ukraine. Communications, intelligence, and electronic warfare, all again of which have been used extensively, and all of which are very important areas for the Cohort businesses. Further east, huge investment by China in its navy, and especially the aggressive use of those naval assets in the South China Sea, has had really what I can only describe as an electrifying effect on defense postures from the Indian Ocean right over to the Pacific and down to Australia. In particular, the Chinese investment in submarines and technology like, as Simon was mentioning earlier, hypersonic anti-ship missiles, has stimulated demand for anti-submarine warfare and ship defense products. And again, Cohort has got a world-leading capability in those areas. The conflagration in Israel hasn't yet had a direct impact on world defense demand, and I won't try to predict exactly how that terrible situation is going to unfold, but I have to say I think it's unlikely that it's going to have a calming effect on that volatile region in the world.

So looking at our particular markets, and looking at our domestic markets first, I mean the UK has recently refreshed its Integrated Defense and Security Review, and that identifies Russia as being the nearest and most pressing threat, perhaps unsurprisingly. And the UK is responding to that by adjusting its defense investment priorities, by building industrial capacity, stockpiles, and also supplying large amounts of equipment as it has to Ukraine over the last two years. But the UK also recognizes China as a longer-term but perhaps even greater threat. The UK is a country with global relationships and global supply chains, global influence, and all of that is put at risk if China upsets the world order by its actions in Asia. Now the most obvious manifestation of that, of the UK's response to that, is AUKUS, the trilateral pact to build a new common nuclear submarine for the UK and Australia. And I'm confident that Cohort will have a significant part to play in that in due course, as we have with the UK's existing submarine fleet. And AUKUS also covers a wide range of other technologies that all three partners are interested in, including artificial intelligence, seabed warfare, and again Cohort has got a real interest in those. In our other domestic markets, Germany has announced a steadily increasing core defense budget as well as a €100 billion top-up fund to reverse the hollowing out of its defense forces that have happened over many years. And we see the impact of that in more orders from Germany for Elac, its domestic supply. And in Portugal, after a long delay, several important defense projects are now getting underway, including building six new naval surface ships with EID equipment on board. And in export markets, we see a similar impact. The new and existing NATO members are looking to increase their level of defense spending up to or even beyond the 2% of GDP NATO target. And we've seen the results at Cohort with NATO customers adding to existing orders, making new orders, or increasing the scope of what we're supplying. And in Asia as well, we've seen strong demand reflecting that Chinese aggressiveness, especially for anti-submarine warfare and electronic warfare technology.

So to summarize, we see a positive market picture with major demand drivers that are likely to remain in place for many years to come. And that's the reason that our order book has been so strong, that's why 2023 was a good year for us, and that's why we're confident about the future. So let me leave you with this quote from our AGM statement which was released on the 26th of September. I won't read it all out, but following contract wins since the start of the financial year, £90 million order, the books stood at £370 million. Strong momentum has continued in the first quarter with good prospects to secure further long-term orders. An encouraging start to the 23/24 financial year. I hope you have gathered from the tone of that that we feel positive about the future. Thank you very much for your attention. We'll be very happy to try and answer any questions. And I've only gone a few seconds over my allotted time, so I'm pleased with myself for that.

That yes, so if we can open it up to any questions from the floor. We got two, so maybe if we go to this gent here and then.

Who owns your shares?

A split. We've got quite a strong institutional holding. So several strong City small cap players like Schroers, Harold Lion Trust. We've got one sort of anchor shareholder who is one of the founders of the business, who's now got about 22% I think. Exactly 22%. And our chairman has a much smaller shareholding, and Simon and I have modest shareholdings ourselves. And then a relatively small retail holding, but we're always keen to see more retail shareholders.

Excellent, a strong City institutional weighting. That's helpful. Great. And then a question just here.

There many possible companies that to be takeover targets on your radar so to speak, and is there possibility of any add-ons?

Well, that's a strong part of our strategy. I mean, we aim to grow both organically and by acquisition. And I have to say, we're very selective. We could do a lot of acquisitions, but a lot of them we wouldn't want to do. So we want to choose businesses that will really add value for our shareholders. We are seeing quite a few at the moment, I would say more than we've seen for a while. I think because small businesses are seeing upturns in demand and potentially owners are seeing an opportunity to find a new owner for the business. But as I say, we're pretty selective.

And is there any synergies between the companies, you know, like common use of software tools, management tools of that nature?

Yeah, quite a bit. We see more and more cooperation between the businesses. I'd say first that by configuring ourselves the way we do with strongly autonomous, semi-independent businesses, we recognize that we forgo the opportunity to say right, you've got to work with you and you on that project. But there's a price to doing that because they may not be the best partners. There may be other partners out there in the market who'd give you a better chance of winning. So we encourage cooperation and building of relationships between our businesses and understanding of each other. We have quarterly meetings of all the MDs together with Simon and myself, and that results in them naturally recognizing each other as partners when a good opportunity comes up. We have a great one going on at the moment between two of our businesses which are competing for a really substantial UK MOD contract, and they are just naturally perfect partners for each other, fulfilling two parts of that requirement. And that sort of thing goes on quite a lot.

Another question or another couple of questions, one at the back there and then we'll come to you.

Just on that commonality theme, do you do any kind of with only 15 central staff, do you do any common purchasing for example, recruit nothing like that?

No. That's really quite a deliberate decision to do that. We would have to have a purchasing department or an HR department. And experience over quite a few years tells me that those departments might be pretty good for most of the businesses, but they won't be right for all of them. They won't do it the right way, they won't be looking for the right sort of people, they won't recognize what the needs of the business are. And worse than that, over a period of time they'll start to think of themselves as being actually rather special in their way, they maybe grow a bit, maybe have a few extra employees, and perhaps the boss will become a little bit more important, want a bigger car. Those sorts of things, costs tend to accrete to cost centers. So we're not a great believer in that. Now we recognize that there's a price to pay in a certain lack of efficiency which nominally you could get, but actually our way in our structure is more efficient, we firmly believe.

Okay thanks. And are you on a yes we are training as Cohort Charter?

You mentioned that currently your business is about 54% UK and I'm just wondering how you see that going say over the next 5 years relative to what's happening around the world. It looks as if you've got some interesting prospects.

Yeah, the UK took a big boost last year for various reasons. It was on a sort of downward trend as a proportion of the business, and I expect that that downward trend will recommence. I would say we're seeing strong demand from NATO Europe, continuing strong demand from Asia, and I see some big opportunities elsewhere. That said, actually we do have some rather larger opportunities in the UK, so maybe that large proportion will persist to a certain extent. But in the long term, I would see it's just getting more and more international.

Any further questions from the floor? We've got another one just here. Just if you just wait for a second. Yes.

Russell Gosman could ask about your domestic market. Are the contracts long term or basically short term?

They vary quite a bit. Simon, do you want to say a word or two about contract duration?

Okay, typically in terms of order book, I mean a good half of our order book tends to run off the following year and then after that there's a long tail on it. There was some really quite good analysis in the annual report if you're interested, showing not duration but size of contract and the amount of revenue according to the size of the contract. I think it shows which gives you an idea of the kind of makeup of our revenue.

Excellent. Any further questions? In which case I've got a couple if that's okay. So one of them is obviously it is quite a sort of significant increase in order intake and in the order book. Does that come with its own challenges in terms of working capital and making sure the business is properly funded for it all?

Working capital is an interesting one for us. It varies. But I mean typically for export customers, we would typically aim to get quite a substantial advance, right, sure. And so we try and liquidate the contract throughout its duration. We wouldn't get that for our domestic customers so much, but what we do get are really pretty regular milestone type payments. And payment terms for the UK are very good indeed, 10 to 15 days something like that. So working capital can change quite a lot because when we have large contracts, I mean a £200 million business, you can have contracts that are worth £50 million or more, and a single payment on those could be really big enough to move the dial. And if it falls on the sort of first of May or the 30th of April, then that makes quite a big difference to our cash in the year.

And I mean the cash generation has been pretty strong as well. How do you just sort of make decisions in terms of allocation of capital and what you do with that? Obviously there was quite a big increase in the dividends at the last opportunity.

Well, we've had a pretty steady strategy of looking for acquisition opportunities, but alongside that we also invest in products and of course we return money to shareholders through the dividend as well. We generally looked at businesses to be developing product out of their own cash flow, and we expense R&D. With a very few small exceptions, we expense R&D in the year that it's actually incurred, so there aren't any kind of imaginary assets hanging around on our balance sheet.

Okay, that's helpful. Any final questions?

Just hang on, just wait a moment. Well, I heard that question. So yeah, what's the share price just now? It was about 4.79 early today. I'm not sure where it ended.

Yeah, it's been a bit soft, hanging around 5, a bit soft recently. Yeah, it has been. I mean, have you got, I know it's not, you know, when you ask a manager, usually you want to hear it's not their job to manage the share price, but have you got a read on what's been happening with the share price recently?

Well, everyone tells us that it's been doing terrifically well on AIM because everything else has been plummeting. We've at least been steady. It's all right. I'll give you the sort of standard answer, but it is true. I mean, we don't try and manipulate capital markets. What we try and do is deliver results, because that's what we can do. And we're firmly of the belief, however naive, that if we carry on doing it long enough, then the share price will catch up.

That makes sense. That's probably a good point on which to end. Thank you very much.