Cohort plc - Investor Presentation (Half Year results) - January 2026

Good afternoon to everyone. Thank you very much indeed for joining us. As Andy has said, I'm Andy Thomas. I'm the chief executive at Cohort PLC and I'm here with Simon Walther, Cohort's finance director to take you through the results for the six-month period that ended on the 31st of October last year. By way of introduction, Cohort is a group of seven businesses providing technology-based defense products and services to the UK and its allies around the world. 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 quickly and close to the customer. It maximizes agility and innovation while supporting our businesses with the strong balance sheet and market reach of the wider group.

So today I'll start by talking through the highlights which you can see on the screen from the first six months of this financial year. Simon will then provide more detail including a divisional breakdown. And then I'll share some thoughts on the demand picture and on our future prospects and there'll be an opportunity of course for questions at the end. But in essence, it's been a robust first half. Revenue is up. We've got an order book and prospects that provide the basis to drive a strong performance in the full year and beyond. And our full-year expectations remain unchanged.

So, as you can see here, revenue has increased to a record 128.8 million for the first half. Profit is in line with expectations. Following a record performance in the prior period, we expected a small decline in adjusted operating profit in the first half which now sits at just under 10 million pounds. It was a good period for new orders and of course those are the best leading indicator for future growth. And with an order intake of 122.3 million pounds in the first half, that's kept our order book close to April's record level and over 600 million pounds. And as at early December, at the time of the results announcement, that covered 96% of the external revenue forecast for the year and will be generating revenue for us well into the mid 2030s.

Adjusted earnings per share for the six months ended 31st of October decreased to 16.16 pence and the effective tax rate was 15.5%. The operating cash outflow of 27.9 million was as expected reflecting a build in working capital ahead of second half deliveries as well as payments in relation to dividends and capital expenditure and that resulted in a net debt position as at the 31st of October of 32.5 million pounds. The capital expenditure included a further spend of 7 million pounds on EWAC's new facility which was completed on time and has now been moved into and we expect our net funds to be in line with previous expectations at the year end. We've declared an interim dividend of 5.8 pence once again representing an increase of 10% on last year's and that reflects the board's confidence in the group's prospects. So that's the summary. Simon will now talk you through our financial review of the first half in a bit more detail.

So, looking towards the mid and longer term, we see a number of opportunities for the group and I wanted to take you through some of the key factors that are driving those opportunities. If we could have the next slide, please. So we continue to see a strong demand picture in response to the deteriorating security environments and ongoing conflicts that we're seeing across the world. Clearly none of us should welcome that and the security risks that we now see affecting the UK amongst many other countries are real and a matter of concern. And in regions where these threats are at their most immediate, governments are under pressure to upgrade and modernize their defense capabilities at speed. And that of course is where mid-tier businesses like those within the Cohort group have the agility and expertise to provide innovative solutions to those defense challenges. The main catalysts of demand for defense equipment continue to be the conflict in Ukraine coupled with the rising tensions between China and its neighbors in Asia Pacific. Research from the Stockholm International Peace Research Institute shows that the biggest defense spenders last year include China at $313.7 billion and Russia at $149 billion. And the persistent geopolitical forces caused by their behavior are causing a long-term demand for defense capability enhancements. A further catalyst to demand is the arrival of new technology allowing artificial intelligence enabled and autonomous systems to be integrated into defense forces. And a good example of that is the UK's recently announced Atlantic Bastion program. And the words and actions of the current US administration significantly diluting the US commitment to NATO add a further accelerant as far as European defense spending is concerned. So what we've seen as a result of these drivers is increased defense spending in Europe and in Asia Pacific as well of course as the recently announced large increase in defense spending proposed in the US. The NATO countries at the summit last year committed to raise their defense related spending to 5% of GDP by 2035. Many European countries particularly those in the north and east are already increasing their defense spending significantly and looking to accelerate that target. In the UK, the government remains committed to increasing defense spending to 3.5% of GDP by 2035 with a further 1.5% of GDP on security related investment. And we're now expecting, we don't have a date yet for it, but we're expecting the UK's defense investment plan to outline how the objectives that were set out in last year's strategic defense review will be funded and prioritized.

And the need to increase defense spending to meet growing threats has been recognized well beyond the immediate vicinity of Russia and China. Modern conflicts demand systems that can adapt quickly and operate autonomously. The Cohort group is well placed to meet that need and has responded with investment in research and development and in future technologies. And we continue to see the increased focus on protecting underwater infrastructure providing opportunities for both ELAC and SEA. The need to protect our forces from both cyber and kinetic threats including missiles and drones is generating opportunities for MASS, Chess, and SEA. The growth in manned and unmanned submarine and surface ship programs worldwide is generating opportunities for SEA, ELAC, EM Solutions, and EID. The need for secure digital communications for multinational forces is driving demand for systems like EID's TDCIS and MASS's Jeffnet. And the need for electronic warfare, drones, counter drone and communications for the UK and its allies is driving demand for MCL's products as well.

The practical result of these geopolitical developments is a sustained higher level of demand for our equipment and services. And to share some examples of the kind of opportunities we're seeing, EID is focused on providing communication and network systems for new Portuguese Navy vessels, as well as multiple communication systems opportunities from NATO and Asia-Pacific customers, and we expect to see some significant order intake there this year. EM Solutions is also pursuing opportunities with the Portuguese Navy alongside potential fleet installations for New Zealand and the remainder of the Australian fleet that it isn't providing already. Their installation on the Japanese Maritime Defense Force trials is ongoing and they're working with the British Royal Navy on satcom renewals as well. And at MASS, as the focus on cyber security increases, MASS has seen an increase in training and electronic warfare exercises for the UK as well as coalition defense customers, too. And at MCL, well, they continue to work as a trusted partner to the UK MOD. And we're seeing some potentially significant orders there for electronic warfare and in the short term for uncrewed systems as well. In our sensors and detectors division, Chess is seeing a steady and increasing demand for their ground-based drone defense systems. ELAC continues to support the Italian Navy program and is also looking at new programs in NATO countries and in Asia as well. And finally at SEA, we're seeing significant growth in opportunities and indeed orders for our Crate sensor and Crate array and Towed array sonar systems. Now these are all prospects rather than orders and value and timing are both uncertain and the probability of win varies. But what I've hoped to try and do here is to paint a picture of the strong demand and opportunity picture that we see for the group.

So moving on, as the group has developed, our international presence has also widened. And that global expansion reflects our commitments to being closer to our customers and to developing defense technology solutions that will be able to support their future needs with local support as well. And in earlier presentations, you'll have heard updates on ELAC's new facility in Kiel in Germany. And I'm very pleased to confirm that following our 21 million pound investment and a lot of hard work from the team at ELAC, that facility is now fully operational and we look forward to sharing more details of that during the official launch which will take place later this year. The Italian Navy submarine program continues to be a very important focus for ELAC's team. And opening an office in La Spezia in Italy has been a key step in strengthening our support for the Italian Navy enabling closer collaboration, faster response times and sustained local value for this important customer. And I was present as you can see in the picture there at the launch event and the enthusiasm from the Italian Navy for ELAC's contribution to their submarine capability was absolutely unmistakable. And then finally on this slide, SEA has also expanded its geographical footprint with the opening of a state-of-the-art manufacturing site in Ottawa in Canada. And our vision is that this new facility will be the main manufacturing site for SEA's torpedo launcher systems initially for our customer in Canada but eventually for customers worldwide. And as well as delivering profitable revenue, these strategic investments support our business development activities in important international programs and thereby our long-term growth.

Now, another interesting example of our global expansion is the memorandum of understanding that I signed with the major Korean ship builder Hanwa Ocean at the Defense and Security Exhibition in Thailand last November. And that agreement signals our ambition together with Hanwa jointly to deliver defense technologies to address the needs and requirements of the Royal Thai Navy's second phase frigate acquisition program. And that memorandum of understanding will provide opportunities for businesses across the group to come together and provide a package of defense technology solutions that could include sonar systems, torpedo launcher systems and communications management as well. And the agreement is a key milestone in our growing relationship with Hanwa Ocean and an important step in strengthening Cohort's international partnerships. By combining the expertise and technology from across the Cohort group with Hanwa Ocean, we can deliver together naval platforms that enhance operational effectiveness and through our unique modular and open architecture design futureproof vessels to support long-term capability and security. And we're excited to be exploring new opportunities alongside Hanwa Ocean as well as delivering the Cohort group's market leading maritime capabilities to the Royal Thai Navy.

Now, in January last year, we acquired Australian satellite communication specialist EM Solutions, expanding our naval defense offering and reinforcing the group's presence in Australia. And led by their joint managing directors, Yorgos Mas and John Logan. EM Solutions are developers of innovative naval satellite terminals that help to deliver high-speed telecommunications across the world. And EM Solutions is now fully integrated as the group's seventh business. Their unique capabilities have enabled us to access the expanding satellite communications market. And they've also strengthened our performance in the first half, making the largest contribution in fact to group profit of all of our businesses, as well as generating Australian dollar 28.6 million of order intake. Now, EM Solutions sees much more opportunity ahead in the coming months. The team made an important contribution as you can see in the picture there to Cohort's presence at the large DSEI defense exhibition in London in September last year and that was an important event for their long-term prospects in Europe, Australia and Japan. And it also provided an excellent opportunity to discuss partnering with EID in the provision of satellite communications terminals to Portugal. Overall, it's been a very encouraging start for EM Solutions as part of the group and they'll continue to work with our other businesses to gather intelligence on opportunities to promote their Cobra family of satellite communication terminals.

So, I've explained something about the key factors that are driving demand for our defense technology products and services. And this slide shows quantitatively how that demand is translating into orders for the group. As I said at the beginning, the group's order intake was 122.3 million, delivering a closing order book of over 600 million, just below, in fact, the year-end record of 616 million. And our on contract revenue stretches out to the mid 2030s with particularly good order intake from MASS and EM Solutions within communications and intelligence and at Chess and SEA in sensors and detectors. And our full-year expectations for order intake remain unchanged and we continue to see a positive outlook for organic growth in the medium term underpinned by that healthy demand in our core defense markets.

Now that brings me to the end of our presentation and I wanted to finish with a summary of the main points that we've presented to you. So it's been another strong interim results period for the Cohort group. In part that reflects the growing demand picture. And importantly though, it's also a result of the agility and innovation that our business model is designed to optimize and our experienced and entrepreneurial leaders. We have an active acquisition strategy and look for businesses that will complement our product portfolio and provide opportunities to enter new markets or to strengthen relationships with our existing customers. And the contribution of EM Solutions in this latest results round is a good demonstration of how this strategy works out in practice. Our financial strength and public listing underpin customer confidence and enable future investment in acquisitions and product development. And finally, we've sustained our strong order book. And looking forward, we have an exciting pipeline of further opportunities ahead. And as a result of that performance and our prospects, the board has felt confident to increase the dividend once again by 10%. And before closing, in these presentations, I always want to take the opportunity to mention the great contribution to our success that's made by our management teams and employees. In the first half, we welcome some new members to our leadership team. Andy Smith took over as managing director at Chess following a successful career to date at Leonardo and at Marshalls, and Michael Flowers and Clint Thomas joined us as non-executive directors at EM Solutions and we look forward to working with them to build on the success of the group. Within our subsidiaries, our reputation as a leading mid-tier defense technology group continues to attract new talent. And it's the expertise, dynamism, practicality, and integrity of our people that will help secure future business success. We believe that the strategy for organic and acquisitive growth that we've adopted will offer our investors high-quality long-term returns. And we'll aim to do that while creating employment opportunities, driving innovation, and enhancing the security of the UK and its allies. Thank you very much indeed for your attention. If you have questions, we'll now be delighted to try and answer.

Yeah. So SEA is heavily involved in Atlantic Bastion, which is a UK program for monitoring underwater activity in the North Atlantic, which is examining a number of different concepts and we believe that the Crate sensor is going to be extremely valuable in that because it's low power, lightweight, very sensitive, very good at detecting underwater threats and is ideally suited to working with uncrewed vessels. So we're teamed with the European artificial intelligence specialist Helsing working on a concept that could bring that to life. And ELAC is developing, or has in fact developed, some specific products aimed at combating the threat to underwater infrastructure. A product called Enlight is designed to provide long-term surveillance of underwater infrastructure. And of course by that I mean things like underwater gas pipelines, oil lines, internet cables and power cables, and detect any oncoming threat. And watch this space for news about what we might be able to do to physically combat those threats as well. So we've got some really interesting work going on in that area, Andy.

That's a very difficult question to answer. I mean, I suppose I should say yes, we were responsible for it all, but actually they're a great business and they've got some very strong relationships. And whereas I'm sure that we are assisting in those territories where we've got a strong presence, particularly Portugal and the United Kingdom, you know it's their excellent products and technology which have won those orders.

Yeah, sure. So Chess has got some really great products and some really great engineers and it's that that has won it really an awful lot of work. In particular, we're providing the optical tracking elements of Rheinmetall's ground-based air defense systems which are of considerable importance to European security. They're being acquired in very substantial numbers and as you can imagine being used actively at the moment given the situation in central and eastern Europe. The issue has not been at all with the quality or pricing of those products which has been very very good but they've been undergoing a transition from an engineering centered business to one which also needs actively to manage volume production driven really by the strong demand patterns that we're seeing at the moment and that's proved to be a challenge. And Simon and I did our best to support Chess through that transition period. But ultimately we came to the view last year that we needed a change at the top of management. So we brought in a new managing director in October. Very experienced guy. I mentioned Andy Smith, initially from Marshalls but also with a long experience at Leonardo, with very very strong capability in the area of managing effectively high-quality production in defense at volume and we're already seeing some improvements. Definitely production has become more predictable and that's had a good impact on the relationship with our key customers. We've since then, Chess is now experiencing a certain degree of tightness in its supply chain as well which we'll have to deal with but I don't expect that to have a material impact on the results this year at Chess. And we've got the right people on board to manage that sort of thing. So yeah, but getting control of that supply chain and really putting in good practice into supply chain management because that's critical for Chess.

The stocking and assembly and quality management of production are going to be critical and I'm convinced that we've got the right team in place to do that now.

Well, let me take that one. I think we look at the Rheinmetalls and SARs and large European defense players and look at the ratings that they've got on public markets. Those do not necessarily translate down to the area that we're interested in, where we're talking about businesses with typically earnings before interest tax in the range of 5 to 10 million pounds annually. And the multiples that we're prepared to pay depends very strongly on the quality of the individual business. So if we see a business that's got a strong order book and a verifiable and strong pipeline of future opportunities, we're going to pay more for that than one that doesn't have one, simply because it's going to grow more in the coming years. And that calculus really hasn't changed. I suppose one thing that we have seen over the past year is we've seen some financial buyers coming in with heavily leveraged and as a result very generous bids. And when that happens, good luck to them. But the businesses that we see, there are many good reasons to choose us as an acquirer. Reputation is one. We look after businesses and we grow them. And we can be very flexible in the structures that we offer as far as acquisitions concerned. So no, I don't see that being insuperable barriers. The issue is more finding ones that will really work for us. We get a lot coming through, but really only a small proportion of those we think are worth pursuing.

Well, what we look for in our potential new subsidiaries, if we want to add businesses to our portfolio, are a combination of access to growth, so parts of the market that are growing, unmanned systems, autonomy for example, and also some kind of sustainable competitive advantage, so we're not just competing with peers on the basis of who's prepared to accept the lowest margin. And I think there are quite a few of those. In fact, we've just brought on board an experienced new strategy person who's taking a proactive look across the market, trying to identify a few of those little niches that we might explore and look at perhaps taking some proactive action. There are some areas, for example drone manufacturer, where you see certainly large demand and potentially large sustained demand in a conflict situation, but where barriers to entry are really very low and where it's not going to be easy to sustain a high margin given that there are so many competitors that could do what you could do. In some other areas, we see new technical developments making possible new opportunities that simply weren't there before. Artificial intelligence is one of those areas, and by teaming with some AI players, I think we've opened up some interesting market opportunities. Space is another area where the significant reduction in launch costs for low Earth orbit satellites has enabled new players to come in with new technology ideas which might not have been feasible before. So we'll see how things pan out, but I think there are a number of really interesting technology areas.

Well, we can offer really exciting careers to people. The businesses that we run operate as I said right at the beginning with a high degree of autonomy. And that means that the right leadership team really gets to experience the fruits and results of their decision-making and their leadership. And for good people, that's a really exciting opportunity. Of course, not so good people prefer to rely on a complex web of reporting chains that they can hide behind. But for the kind of people that we want, that's a really great opportunity. And it carries an awful lot of excitement and challenge with it. And of course, it's rewarded appropriately as well. So we've always found that whenever one of our senior leadership positions in the subsidiaries comes up, we get a very high level of interest from very high quality candidates. Talking about our non-executives in Australia, we felt it was very important to get some local really experienced support for our executives there because it's not so easy to mentor and work closely from 10,000 miles away. So Michael, some of you who may know the business, Camry, was formerly the CEO of Cameron before Mord took over. He's a very experienced Australian businessman and an ex-army man as well, so very experienced in the defense world. And Clint Thomas, our other non-executive director, is a distinguished retired admiral from the Royal Australian Navy, who was also the managing director of Ciros business in Australia as well. So two very talented, experienced, and well-networked people helping us out in Australia.

Yeah, I think the commodity prices don't have a direct impact because they make up a very small part of our overall cost base. And we aim to keep our supply chains as local as possible as well, relying on good general engineering partners, contract electronics manufacturers and so on in the localities of our businesses, to keep supply chains tight and close and to ensure maximum resilience and reliability. Some things are inevitably going to be exposed to those global tightnesses. We saw that with high performance semiconductor chips in the aftermath of COVID, and as I mentioned earlier, we saw a little bit with permanent magnet motors which form a part of Chess's equipment more recently. So I think we do need to look at those areas, and one important matter that Chess is going to be addressing is, as it moves into higher volume production and more extended production, maintaining some stocking, not necessarily at Chess but throughout the supply chain, to ensure a high degree of resilience to economic or supply shocks of one kind or another.

Yeah, it was. I thought the strategic defense review was a really good piece of work for the UK. It was very clear, very articulate, and I think it was very well argued as well, written by some real experts. And that gave me a lot of confidence for the future of UK defense, coupled as it was to the announcements of long-term increases in defense expenditure. And it's been very disappointing that that hasn't so far been translated into action. And I think we've seen a very tight spending position in the UK generally. We've seen some self-inflicted wounds like the Ajax program that people may be familiar with in the UK MoD. But we're waiting with a lot of interest really to see this defense investment plan because that will help us focus our own investment and priorities for the future as well in the UK. But what I would say is that whereas we haven't seen that step change in defense spending in the UK, in non-US NATO more generally in 2024, which is the last year we've got figures for, defense spending actual spending, not politicians talking about it, went up 19%. And if you look over to the east, Japanese spending went up 21% in that period. So these are real increases in spending, and reflected in the large growth that we saw last year in our revenue and profit. And the UK for the first time is significantly under half of our revenue in the first half this year.