Cohort plc (CHRT.L) Earnings Call Transcript & Summary

Good afternoon. I'm Andy Thomis, Chief Executive of Cohort plc. I'm joined by Simon Walther, Cohort's Finance Director. And we're here to talk about the contract win that we've announced this morning, which is providing our Ancilia tradable decoy launch system to the Romania. I'm going to start by giving you the highlights and explaining what is that we're going to do. Simon will then talk through the impact on our financial performance, and I'll summarize at the end. So if we can move on to the first slide. Here's the big picture. The initial value of the contract is over GBP 135 million, and that's going to have a significant impact on the group's order book, which is going to exceed GBP 0.5 billion for the first time, and that's a few [indiscernible]. The contract value is linked to an inflation index, so it will grow over time. And there are also a number of options for additional systems that Ministry of Defense could choose to exercise. The biggest contract though is for development production of multiple systems and productions in continue over the next decade. And that will provide a steady strut revenue cash. Now one of the things that pleases us most about this is that to develops and deepens our long-term relationships with partner of the world maybe. Aside from Ancilia, SEA supply submarine communications and torpedo systems to the Royal Navy. Chess provides electro optic trackers. Mobile communications provides electronic warfare equipment and EID provides service ship communications. And it's a relationship that saw great value in itself, which also carries considerable weight with export customers. And interestingly, Ancilia is an example of cooperation within the Cohort group. Chess Dynamics has done the design and prototype on stabilized trainer base and SEA development launches and integrated the whole system. I'm often asked about whether our businesses could add value by working together. And I think this is a clear example and the demonstration that they can [ and they do that. ] Very importantly for us, this win establishes Ancilia as the world-leading solution to what is a growing threat. And I'll say a bit more about that threat in a moment. We were awarded the contract in the face of stiff international competition from leading defense businesses. And the win is a confirmation of the capability of that Ancilia to meet the demanding requirements of the world class or maybe and to do so cost effectively. It's also a measure of the Royal Navy's confidence in our ability to deliver. And our position in that growth market is important. Our conservative excellence of the addressable export market for Ancilia is that it exceeds GBP 250 million. And we're optimistic on winning a good portion of that, although none of that is assumed in the numbers that Simon is going to share with you shortly. So moving on to the next slide. Why is it [ standard ] Navy actually needs a product like Ancilia? Well, the threat to service vessels from anti-ship missiles is growing. It was first demonstrated back in 1982 with the sinking of HMS Sheffield by an Exocet launched by the Argentinian Navy. And since then, technology has moved up dramatically. This also is in service with potential advisories, can travel at extraordinary speed, not miles per hour or even last minute, but miles per second. This also going to attack with a low sea skimming trajectory, which is hard to see on radar, but also now with the ballistic trajectory that drops vertically down towards the target. In an effort to overwhelm defense system, adversaries can launch waves of multiple missiles, including coordinated simultaneous attacks from multiple directions. And success with Ukraine's experience against the Russian Navy once again demonstrated that [ potency ] of EMC missile -- sorry, anti-ship missile threat. But it's not just large surface [ prominence ] and aircraft carriers that are at risk from this kind of attack. Developments in other technologies [ missiles ] used for example, SCA's created defense system sonar, meaning that even covet and petrol works, smaller main vessels and deliver a powerful defensive or offensive capability. So they too will be targeted by advanced technology missiles. That means that significant numbers of defense systems will be needed by many navies, but are science and weight that can be accommodated on [indiscernible] small vessels. One problem faced in defending against the kind of attacks that I've described is that the high speed of [ WAM ] is very little time from detection to impact. Vessels have no time for maneuver to optimize the position of fixed decoy launchers. So we need launches that can rapidly train in the right direction and find patterns of decoys and then do it again against the threat from different direction. And if you have the next slide, that is exactly what Ancilia can do. It's been designed by Ancilia Chess, combining world-class capabilities, decoy launches and in large-scale tradable stabilized platforms to use and enable the [indiscernible]. It's a step change in design of best to the current generation of fixed decoy launches solutions. Its trainable [ measure ] removes the need to move the vessel in response to a threat. Its small size enables it to be fitted to a wide range of maritime platforms, right down to covet and control vessels. It can move, elevate and fire at speed to create a protective shield in the short time window that modern missile technology allows. Ancilia supports are not acute at different [ cost ] measures. So it could counter a wide range threats quickly and effectively. Its open architecture allows a quite range of effectors to improve programs in [indiscernible] and that includes all major standard decoys. And finally, Ancilia has been designed to fit into the physical footprint of existing fixed launches. It also has a low mass compared to other systems on the market, making it a simple and cost-effective upgrade for many users. I'd like now to show you if we move on to the next slide, a short video showing a demonstration of the Ancilia prototype. And you can see from this video, the prototype, both moving in [indiscernible] and training and validation as well. And you can see the speed at which it does that. And that in practice will be achieved with an exceptionally heavy load large countermeasures. So you can see that there is some real technical challenges in developing a system, which will not only do this, but also be stabilized on a moving seaborne platform and then be able to find multiple sets of decoys out to create several successes patents. Okay. So if we can post the video there and move on to the next slide. Because finally, before Simon talks about the financial impact of the order, I wanted to say a word about the international market. We launched Ancilia at the DSEI exhibition in London last year. And since then, we see interest from a number of prospective customers. We've seen very significant investments in anti-ship missile technology from China and Russia. And we've also seen recently the Yameni-Houthis arm with Iranian technology, causing a significant hazards, both civil and naval ships operating in only the Red Sea. Navy's worldwide are responding to that threat and Ancilia provides an essential helmet of that response. And so as surprisingly, given that background, we see particularly intense interest in the Asia and Pacific region, most likely a result of the huge effort of China putting into the creation of a well-armed large blue water navy. SEA is building partnerships with local and international suppliers to access these markets and to provide a complete solution from detection to counter measures. It's important for our export success to have the support of domestic customers. And that's generally true when the domestic customer is one of the world's navy [indiscernible], that's, of course, it is in our case. And that's why today's management is so important. And while that importance goes well beyond the significant direct benefits that it provides to us and to our Romanian customers. As I've said, the conservative [indiscernible] the addressable market is over GBP 250 million. Today's announcement has a big positive impact on our ability to access with those opportunities. So with that, I'll hand over to Simon who will talk about the direct financial impact of the win. Simon, over to you. Can we have the next slide.

Thank you, Andy. Good afternoon to you all. And if you could move to the next slide, please. As a result of this significant order and recent wins in Canada prior to our torpedo launch system and Australia for [ SCO ] positions. We were able today to enhance our forecast for '24/'25 and '25/'26. We expect revenue uplifts against external forecast of GBP 5 million and GBP 15 million in each of those use, respectively. This is expected to provide a good uplift to '24/'25 adjusted trading profit and earnings per share and a material uplift to the '25/'26 in both respects. As we said at the presentation of our interim statement last December, we are working on moving the group net margins up and we now expect this to be around about 12% in '25/'26. We are now guiding net funds at the end of April '25 and '26 to be around GBP 15 million and GBP 20 million, respectively. As Andy has already said, the contract win announced today, along with those recent wins extend out into the middle of the 2030s, and we anticipate an annual revenue stream of around GBP 15 million. We continue to work on improving the group's net margin, and this win will help us towards that mid-teen net margin in the next 3 to 5 years. If we could move to the next slide, please. As you can see from this slide, [indiscernible] adds GBP 135 million with options and price variations to come and is over half the order book for delivery from '26, '27 onwards. As already mentioned, group order book currently sits at over GBP 0.5 billion, with visibility now out to 2034. We already have over GBP 160 million on contract for delivery in the coming financial year '24, '25. As we said at the half year, sensors and effectors continues to dominate the group order book and we've [indiscernible] now added is over 75% of the group order book. Thank you.

Thank you, Simon. And if we can move to the next slide, I'd like to summarize before we move on to questions. So this is a financially material order for SEA and the group that has a strong positive impact on our outlook, Simon has explained. It brings the group order book to over GBP 0.5 billion, a new record, it will generate revenue for a decade after 2034. It's a clear demonstration of Ancilia's capability that will currently wait in international markets. And we will be looking to win a good portion about GBP 250 million addressable export attention. In short, it is the next major step towards our long-term vision to be a major independent U.K. defense technology group. I'd like to invite questions now. Thank you very much for your attention, and let me hand back to Rachel.

The first question comes from Mike Jeremy from Equity Development. Mike asks -- says, congratulations on such a high-profile contract. You noted that the wider market potential could be GBP 250 million. Could you comment on this and any other areas where the technology used in Ancilia might be applied?

Yes, of course. Thanks for the question, Mike. Well, as I indicated in the presentation, we certainly see potentially strong demand coming from the Southeast Asian region. But also, there are some significant opportunities in Europe as well. We are a business of exports worldwide to those markets where we can export of course. And we will certainly be looking around the globe for these opportunities. But I think recent to that and world stage have increased the [indiscernible]. I'm trying to explain a defense against anti-ship missiles, and so we see strong demand likely to arrive globally. And as far as the technology of Ancilia is concerned, well, it's interesting how that comes from some of the other products that we've developed. So the launch technology, for example, which requires electronics and software together pre-program and countermeasures to make sure they do the right thing, comes very much from SEA, which has a long heritage of doing this, not only for countermeasures, but also for torpedo interest. And on torpedo interest, which are capable of launching any torpedo have sold very strongly worldwide, and we continue to see a good market. And as far as the tradable platform is concerned, well, Chess has provided those for a number of other applications, for example, a very large seaborne radar weighing several tons make use of Chess platform being supplied by world-leading defense prime contractors. And they come to us for that kind of technology. So literally, with that background, we're sort of vertically placed to provide this kind of technology, and I'm sure there will be many other important applications to come. I hope that this in some way answered your question. Can we have the next one, Rachel.

The next question comes from Tim Freeborn from Slater Investments. He asks what is the likely profile over the revenue for this contract? Is there guidance on margin?

Thanks, Tim, and delighted that you're on board. I'm going to invite Simon to talk about that, but I think I can say that there's limited guidance that we'll be able to give on margin for obvious commercial reasons. Simon, over to you.

Yes, Tim, in terms of the revenue, as I sort of indicated in my earlier slide, there's a ramp-up over the next year, so around about GBP 5 million in the coming year, and then it moves up into the sort of above GBP 10 million, said we mixed the image Australia and Canada for this upgrade, but those are only GBP 15 million each over 10 years almost. So you can see the vast proportion of the revenues coming from this program. And I would envisage it running at around the sort of mid-teens and around GBP 15 million per annum over that period. It is very -- some of it will be dependent upon the ship build program of the Royal Navy. So there will be probably ups and downs over that period. But at the moment, that's our sort of modeling. So it's relatively flat once we get up, it will be then a sort of plateau we expect for sort of 7 to 8 years after that.

The next question comes from Andrew Peck from Investec. He says you've indicated the GBP 135 million contract value could increase over time. Could you give some color on what could drive the increases? And would this be additional vessels, for example, or are the capability upgrades on the road map?

There isn't much I can say about that because the [indiscernible] is answered is not something about it. What I can say, though, is that it's an inflation index contracted, so it will naturally go up over time. And in fact, it already has, to a certain extent. And it is perfectly possible that additional vessels will be fitted out and the upgrades will be necessary. So both of the those [indiscernible] are possible I think.

We have another question from Andrew. He asked, could you comment on the status of the sales pipeline for overseas customers for Ancilia?

Well, as of today, I hope the other probabilities are going up a bit because it's very good to have your domestic customer on board. I wouldn't like to comment on timing, but I can certainly tell you that we're quite closely engaged with at least 2 other customers.

And the next question is from Nicholas Fox from Raymond James. He says I'm a bit surprised that your estimate of the international market is not larger, might it be reasonable to assume that given the urgency of the threats you may well be in export negotiations currently.

As I think I just mentioned, we are closely engaged already with a number of customers. And I did use the word conservative in front of the estimate GBP 250 million. We don't want to sell any [indiscernible] policies raising too fast. And the balance, there is competition out there. We had to face quite a bit in order to win this one. But as I've indicated, I think this just demonstrates that we have got some really quite substantial advantages to the other systems that are out there.

The next question is from Richard Fowler from Raymond James. He says, is Ancilia intended purely as a defensive system or can it be deployed offensively?

No, it is intended purely as a self-defense system for the surface ships. We do, of course, also provide torpedo launches, which are not quite as defensive. But -- and there is certainly the possibility honestly wide to provide countermeasures against threats other than [indiscernible] on service or any other service. But no, it is very much of self defense.

The next question comes from Aidan Bell from Close Brothers. He asks, how will the revenue from the GBP 135 million be shown under the cash flow statement.

Simon, I want to invite you to respond.