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

All right. So I think we can get started now. I'll just cover a few points of admin first. This presentation is being recorded. So if you miss anything, you can catch up with it later on. The slide deck that Andy and Simon are going to use is already available on the Cohort Investor Relations page. I think -- or I expect most of you who are familiar with Zoom. [Operator Instructions] We shall endeavor to address as many of those as we can after the presentation. Right. Moving on to main events. We're very pleased to welcome back the CEO of Cohort, Andy Thomis; and the Finance Director, Simon Walther. And to cover their recent results and in the recent transaction. I shall now pass over to Andy Thomis.

Hello. I'm Andy Thomis. As Andy has said, Chief Executive at Cohort plc. And I'm here with Simon Walther, Cohort's Finance Director to take you through our results for the 6-month period ended 31st of October this year. I'm going to start by giving you the highlights. Simon will provide more detail, including a divisional breakdown, then I will return with some comments about the demand picture and our future prospects. I'll take you through the runoff of the order book. And as Andy has said, there will be an opportunity for questions at the end. But first of all, I wanted to provide a reminder or introduction for those who don't know of who we are and how it is that we aim to create value for shareholders. If you're going to have the next slide, Andy. Thank you. So Cohort is a group of 6 businesses, soon to be 7, providing technology-based defense products and services to the U.K. and to 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 they're taking close to the customer. It maximizes agility and innovation and at the same time allows us to support our businesses with a strong balance sheet and the market reach of the group. And also, we've got no layer of coordination overhead between our small but experienced headquarters team and the operational management, and that gives us a real cost advantage compared to our large defense prime contractor competitors. We've got a strong record of growth, both organically and by acquisition since our IPO in 2006. And a few weeks ago, we announced the acquisition of our seventh business, EM Solutions, which we expect to push that growth on to the next stage. Organic growth has accelerated since 2022, when the Russian invasion of Ukraine really startled NATO Europe into a step change in defense spending. Tensions in the Indo Pacific and also in the Middle East are contributing as well to a growth in spending in our key markets. And one result of that is that we have a strong pipeline of opportunities. We find ourselves following up on many sales prospects, frequently bidding for contracts in the U.K. and around the world. And the evidence of that is our growing order book. As you'll see, it hit a new record at the end of the first half, and it's about to be boosted significantly again when the EM Solutions acquisition completes. Now that acquisition was funded using a combination of our existing cash resources, a bank debt and also support from our investors in the form of a GBP 40 million placing. And the result of that is that we've maintained a very strong balance sheet with low gearing, and that gives our customers confidence and will allow us to invest in product development, in capacity building and potentially further acquisitions, too, when this transaction completes. The final thing I should mention is our progressive dividend policy. We've grown the dividend every year since our IPO in 2006. Of course, that's valuable income for our shareholders. But just as importantly, it's a signal that we are not just developing interesting technology, but we're also a successful and cash-generative business. So that's the theory. Now the question, well, how well has this worked in practice over the last half year? And the summary is that it's been a good first half, much better than last year's. Here are the numbers. Revenue and profit were both up strongly. Revenue grew by 25%. Adjusted operating profit was up 69%, adjusted EPS grew even more strongly because of some movements under the bonnet of that measure, almost doubling to 20p a share. It was another good period for new orders, which of course, are the best leading indicator for future growth. Order intake of GBP 139 million, significantly exceeded the revenue that we recognized so the total order book had grown to over GBP 540 million at the year-end. Now that order book covers more than 99% of the consensus forecast of our revenue for the year. So in effect, there is no further need for infill revenue in the second half. The order book will be generating solid revenue for us well into the 2030s. And finally, our operating cash flow was very strong, significantly exceeding profit and helping us to push our positive net cash position up to nearly GBP 38 million. And of course, once again, all of this is preplacing on the acquisition. So against that positive background, the Board has declared an interim dividend of 5.25p per share, once again representing an increase of more than 10% on last year's interim dividend. Simon will give a more detailed breakdown of the performance of our divisions, but this slide shows some of the operational highlights of the first half year. Both divisions generated increased revenue and profit in the period. Within Communications and Intelligence, MCL, Mobile Communications has been intensely busy dealing with urgent operational requirements from the U.K. Ministry of Defense. So it's been an interesting start for Claire King, their new Managing Director, who began her role at the beginning of the year. MASS has performed steadily, showing solid growth. And EID performance has not been stellar, but the big news was the strong order intake at the beginning of the year, and we expect that to feed through into revenue and profit in the second half. In the Sensors and Effectors division, SEA has seen good progress on its largest project, which is the Ancilia missile defense system for the Royal Navy. The critical design review is coming up in March, and that's a very important milestone in the program, marking the approval of the design and the move towards reduction. ELAC SONAR has also seen good progress on its most important project, which is the Italian submarine sonar. Some of the most important and complex items in this large projects are now in production. And in this month, we're going to see the first factory acceptance test of some of the actual deliverables. And finally, Chess had a rather slow start to the year with some production issues affecting deliveries, but we're expecting a strong acceleration in the second half there. Now with such strong order cover already in place, what's going to be important in the second half for our businesses, much more than order intake, is delivery. But nevertheless, the opportunity pipeline is still very strong and we are expecting to receive more significant orders in the second half. I'll say a little bit more about the opportunity pipeline later. But for now, let me hand over to Simon to take you through those financial results in a bit more detail.

Thank you, Andy, and good afternoon to all. As Andy has already said, and I reiterate, a record first half trading performance for the group and ahead of our most recent guidance when we were marketing the EM Solutions acquisition. The higher revenue was driven by both divisions. The operating margin for the first half of 8.5% was above last year's 6.4% despite a slightly weaker revenue mix. And this supports our strategy of a steady rise over the next 3 to 5 years to a full year target of a low to mid-teen percentage for the group. Wrapping in EM Solutions in the second half, we expect to see a stronger net margin for the year compared with last year despite this weaker mix. As a result, the increase in the order book, we've continued to invest in our people, continuing the trends seen at the half year with a rise in head count from just over 1,300 in April to now over 1,400 this October, an 8% increase in six months. Next slide, Andy. Thank you. As already mentioned, improved performance in both our divisions. In Communications and Intelligence, we saw a 25% increase in revenue and 42% in adjusted operating profit. This reflected a strong first half for MCL and a solid performance at MASS. The improved order book was mostly from EID, which secured some long-awaited orders in the first half but not soon enough to make a difference to its first half performance, which again was a loss. However, the second half will benefit from this order intake at EID, and we expect Communications and Intelligence to deliver a much stronger performance than last year at a net margin of over 16%. Incentives and Effectors, the revenue increase was also up 25%, but the adjusted operating profit was more than double as a result of strong performances at both ELAC and SEA. Chess saw some slippage of deliveries, which are expected to recover in the second half. We are expecting again a much stronger second half from Sensors and Effectors, delivering a net margin of over 11% for the year. Turning to the net funds flow. A very strong first half cash performance for the group, delivering a record level of closing net funds, cash inflows driven by good trading performance and customer advances, especially within Sensors and Effectors. Excluding the impact to EM Solutions, we expect the second half to see a net cash outflow as we progress the investment in ELAC's new facility and the unwinding of some customer advances we've seen in the first half and last year. Including EM Solutions, I am still guiding towards a small net debt position as at the end of April '25. But as I've always say, the cash flows can be erratic, hence, why we retain a strong balance sheet. Summing up, a record first half of the group, a strong underpinning to the second half, and we expect to make progress in the second half and the medium term. Now I hand back to Andy.

Thank you very much, Simon. So in this section, I'm going to talk about the outlook and about the factors driving demand for our products and services. I'll show you how the existing order book runs off over the rest of the year and beyond. I'll say a word or two about the EM Solutions acquisition, and then I'll round off with a summary. So the two main driving forces for demand in defense equipment remain very much in place. And those, of course, are the continuing conflict in Ukraine and the influence of growing Chinese assertiveness from the Indian Ocean to Australasia. And adding to that mix now is the widening instability and conflict in the Middle East. I'll start with the impact of these factors on our export markets. The contract in Central Europe has driven demand directly as the NATO countries seek to help Ukraine resist the Russian invasion. And it's also made those countries think again about the balance of their defense forces and equipment. Many of the lessons that they've learned and the conclusions that they've drawn are relevant to us. The increasing importance of electronic warfare, the needs to counter drones of all kinds, the need for accurate and timely battlefield intelligence have all had a positive effect for us on both orders and prospects. The conflicts in the Middle East don't have the same direct impact as the other factors, but they are symptomatic over the wider tensions in the region, at the end of it, primarily between Iran and Saudi Arabia and its allies. And that's likely to drive further regional defense spending in what does remain an important market for us. And in Asia, Chinese assertiveness has not yet manifested itself in outright warfare but the clear threat is there, and they have instigated violent episodes around the South China Sea. And that behavior has had a very strong effect on defense policy and defense spending right across the Indo Pacific region. One very visible result has been the creation of the tripartite AUKUS alliance between the U.K., the U.S. and Australia. And we fully expect to contribute to the new AUKUS submarines in due course, and our new close relationship with Australia through the acquisition of EM Solutions that could only help with that. There are also many opportunities in what's turned Pillar 2 of AUKUS, which is focused on new technologies, including, for instance, for underwater detection and for countering hypersonic missiles both of which are very relevant to our capabilities. Chinese aggression and investment in its defense forces has had an impact on order intake and opportunities elsewhere in the region, for instance, in Thailand, Indonesia and the Philippines. Japan remains committed to a doubling of its national security spending as a share of GDP by 2027. And it's also joined the Anglo-Italian next-generation combat aircraft projects. And that bodes well, I think, for the opening up of a market that has historically been dominated by the United States. In our domestic markets, we've seen similar effects. The U.K.'s defense review is ongoing, and we expect to see its conclusions in 2025, but the government has already committed to increasing defense spending to 2.5% of gross domestic product. In Germany, we can see the impact of the step change in defense spending that's taking place. Our German business is already supplying specialist hydro acoustic equipment for new German surface ships and submarines, and we are optimistic that we will be able to take on a more prominent role with the German Navy in the coming months. And finally, in Portugal, we've seen some long-awaited orders coming in, and we're optimistic that there are more to come. I wanted to emphasize that we are investing to respond to those changes in demand pattern. We're increasing capacity at both Chess and SEA by expanding and reorganizing our facilities there. And ELAC will be moving into a brand-new custom-built facility next quarter. Now you may remember if you were on one of these calls at this time last year, this picture that Simon, showed taken last year in a snowy keel showing a large hole in the ground, which was the beginning of that work. And the work has moved on rather significantly since then. Andy, if we can have the next slide. As you can see, construction has come on a long way. You can see the main office building on the left. And on the right, the test tag building, and that sits on top of what was that very large hole, and that's where the new digital sonars will be tested. And ELAC is on course to be ready to move into that new facility next autumn. Now notwithstanding those investments, our overheads will not increase in proportion to our growing revenue. And so we expect to see further margin improvements in the years ahead, driven by that operational gearing as well as other factors. So if we can move on to the next slide, Andy. I mentioned that we continue to see some good opportunities, and I wanted to share a few of them with you. At ELAC, we're expecting to receive an order for the sonar suite for the fourth of the four new Italian submarines being built early next year. We already have orders for the first three and together with some other changes, this will bring the total contract value to around EUR 100 million. ELAC is trading that contract very cautiously at the moment. But as we get closer to delivery, we hope to be able to release some of the risk contingencies. And the addition of the fourth boat will naturally give another boost to the overall contract margin. ELAC is also in discussions with the German Navy about upgrades to anti-submarine sonars on some of its surface ships. And that will be an important step forward with its domestic customer. Most of ELAC's recent larger orders have been for export customers. ELAC is also focusing on several major submarine programs in Europe, Canada and Asia. EID, having won some large orders early in the year, is in discussion with the Portuguese Navy to provide communications for its new fleet of offshore patrol vessels. EID also sees some promising naval export opportunities through a growing partnership with the Dutch shipyard, Darwin. Following its initial success in Asia, SEA has multiple opportunities to provide its KraitSense towed array sonar system to export customers. It's also in discussions with BAE Systems and others about contributing to the next generation of the U.K. and Australia's nuclear submarines. SEA is also in discussions with several customers about its Ancilia Decoy launch system, and it's recently announced a partnership with the Danish company, Terma, to offer a complete antimissile system for naval ships. Our business, MCL, sees several large potential prospects from urgent operational requirements. MASS is in discussions for a new iteration of its long-term contract to design and run large-scale military exercises. Chess sees considerable short-term opportunities for its optical tracking system for countering drones. It has a very successful partnership with Rheinmetall and is building other partnerships, too. In a slightly longer term, Chess' combined radar and optical tracker for naval users is creating a lot of interest in the market. And with the acquisition of EM Solutions likely to complete in the near future, we'll be looking to investigate new opportunities with them as well. We already know that they have a promising list of opportunities in Australia, Europe and East Asia. Now I should say that all of these things I've talked about are prospects rather than orders. So it's by no means certain that we're going to win them all. And also uncertain is the value of each of these and the timing. So what I'm trying to do here, rather than give you a precise and accurate picture of our future revenue, is to paint a picture of the pattern of strong demand and opportunity for the group that we see emerging from the geopolitical factors that I talked about a few minutes ago. So I've talked in broad terms about markets and opportunities, and this slide now shows the tangible results of the demand picture that I've described. At over GBP 540 million, Cohort's period end order book is stronger than it has ever been before. It includes a very substantial element that will feed directly into revenue this year and next but it also includes over GBP 280 million of order cover for 2026, '27 and beyond, guaranteeing a solid flow of revenue well into the next decade. Now the larger part of our order book continues to sit with the Sensors and Effectors division, unsurprisingly because of their range of attractive products for very long-term maritime programs. In Communications and Intelligence, MCL tends to operate naturally on a short-term order book, so its contribution to the total is quite modest. MASS' order book is substantial, but only increases significantly in years when it's large long-term service contracts are renewed. EID's order book has strengthened considerably in the last half year, and there are still some good opportunities with its domestic and export customers to come. But the picture you can see here of the Communications and Intelligence division's order book, will be significantly enhanced when EM Solution joins the group because it will become part of that division, and it will bring with it a large order book as well as that strong opportunity pipeline. And if we can have the next slide, Andy. Now here, you can see the first column of the runoff in that chart, just that I've just shown in numbers, together with a comparison against the same position last year. So the growth in the total order book from October last year to this is from GBP 354 million to GBP 541 million, that's over a 50% increase. And that's a really strong indicator of the potential for future revenue growth. The two shaded columns show the revenue that's already on order for the second half year compared to the same position in 2022. And you can see that both divisions have got a significantly better underpinning that was the case last year. There was an improvement of about 15% in Sensors and Effectors but it's especially dramatic in Communications and Intelligence where the order cover for the second half has grown by more than 70%. And overall, more than 99% of the consensus revenue for the forecast for the year is now either delivered in the first half or on order for the second half. If you come to the next slide, Andy. So everything I've talked about so far refers to the existing group of 6 businesses reporting through our two divisions. But we fully expect to see an important contribution in the second half from the exciting acquisition that we announced last month of EM Solutions. It's a very significant transaction for us. It will have a big impact on our product range, on our technological capability, on our geographical footprint and not least on our financial performance. Now based in Brisbane and Australia, EM Solutions offers highly capable satellite communications terminals primarily for naval surface ships. And that is a challenging technology to develop because the terminals need to stay locked on to satellites as a ship moves potentially in heavy seas really quite violently. Now these products are fully complementary to the group's existing offerings, and they even actually interface directly to products that are offered by EID and SEA. Demand for satellite communications is growing particularly for advanced navies like those in Australia and the NATO countries. And it's likely that, that growth is going to be accelerated with the increasing use of uncrewed vessels that need long-range digital communications to control and to feed back the information that they gather. This acquisition is going to be the first time that we've been involved in the important area of defense space technology. And so bringing EM Solutions into the group is going to give us access to an important new stream of revenue growth. Over time, the balance of our output as a group has already moved more and more towards the maritime market and this acquisition will add another important family of naval systems products to the portfolio. And that will enable us to offer packages of systems to ship builders and integrators. Very importantly, bringing EM solutions into the group will have geography-based advantages in both directions. So our position as a domestic supplier in three NATO nations and our strong export relationships will help them in markets that have become very important to them. And for the existing group, having a footprint in Australia and being part of the sovereign Australian defense industry will greatly enhance our access to that important customer. We're optimistic that transaction could complete as early as the end of this month. We're working on that now. If it doesn't, then it won't be long after. Simon and I visited Australia at the end of November to meet with the management and the employees of EM Solutions and also for talks with the Navy and with the Australian Defense Procurement Agency. And those were very successful. We're looking forward to bringing this great new member of the group into Cohort because it will have a really big effect. Okay. So if I could have the final slide, Andy. I would -- just to give you a summary and say a little bit about the outlook. And of course, the summary is it's been a very pleasing period in terms of performance that sets us up very well for the year as a whole. We're not going to rest on our laurels. We're already onto the next thing, but we are very pleased to have grown once again, the size and strength of the group in this period. One consequence of that is that we've been able to increase our interim dividend once more by 10%. The acquisition of EM Solutions will take Cohort to the next stage of its development. It will be a good deal financially, materially accretive to adjusted EPS in the first full year of ownership, and it will broaden our product range, our technical capacity and our geographical footprint in a very beneficial way, as I've described. We're very grateful for the support that we received from investors at our placing. And that's enabled us to do this acquisition without weakening our balance sheet, giving us the flexibility to invest in facilities, in product development, and if more good ones emerge, in future value-adding acquisitions. And finally, and perhaps most importantly, we've achieved another record order book, and we see an excellent pipeline of further opportunities ahead. Achieving order intake materially higher than revenue, which we've done, again, is a strong leading indicator of future growth. It clearly shows that there is strong demand, that our products are competitive in what is still a market of very capable players. So it's an optimistic picture looking forward. That's what I had to say. Thank you very much for your attention. And we're now very happy to try and answer your questions, which Andy is going to tell us about.

Great. Thank you, gentlemen and congratulations on a very, very successful year calendar-wise or indeed the half one stage. So lots of questions in. Let's dive in. EM Solutions, a few around the acquisition. Can you be a bit more specific as to which customer groups you expect Cohort to do more business with, once you have EMS as part of your group offering?

Yes, absolutely. So we currently have three NATO nations our -- as domestic customers, the U.K., Germany and Portugal. Now EM Solutions is already delivering into Portugal, but we'll be able to smooth that process by providing local support through our subsidiary, EID. EM Solutions has made some initial sales into Germany, but very much is at the beginning of that opportunity. And having a local base there is bound to provide benefits in terms of being able to provide potentially local manufacturing, if that were to become important. Certainly, local support to make sure that, that product will be supported well. EM Solutions has not yet sold into the Royal Navy. Of course, we have our largest domestic presence in the United Kingdom. And the RN is just coming to a phase when it's considering replacing its existing satellite communications terminals. And it's had some preliminary discussions with EM solutions about that. Now having a strong domestic position is bound to be a big boost to their prospects with the Royal Navy, which is a very substantial potential market indeed. So I'd really emphasize that one. Of course, it's not a guarantee, but being able to provide local manufacturing, local support is very much in line with the U.K.'s social value criteria for making defense procurement as well, of course, as it being the best product that there is on the market, too. So that -- and of course, we've got wider export relationships in many countries around the world, which are complementary with those of EM solutions.

Very clear. And you've made reference to the trips that you and Simon have already made to Brisbane. We have a question. It's a long way away ahead. There's not only a division now of the group, but a receptive client base. How often do you think the two of you might be either together or individually going out to Australia in 2025?

Well, yes. I mean, of course, culturally, Australia is not too far away at all. And in terms of its approach to defense and its relationship with the United Kingdom, it's a very close partner as a member of the AUKUS tripartite agreement. However, I would be prepared to accept that operating a business in Brisbane has some differences with operating a business in Surrey. So we'll certainly give you that. The direct answer to your question is that Simon and I plan to be visiting 4 times in 2025. So we'll be having face-to-face meetings with the senior management there, at least, that many times. Then in fact, they'll be coming over to see us in January as well. But because we realistically can't provide them with the same level of mentoring and support directly that we're able to do with our U.K. Managing Directors. We're looking to appoint two experienced Australia-based non-Executive Directors on the Board of EM Solutions as well. And we've identified one of those, and we're just in the process of finding the other. And they will be able to both provide that local support as an experienced industrialist in the defense sector to the management over there. And at the same time, act as an early warning system of anything that might need us to divert more attention towards that business as well. So I hope that answers your question.

That was very clear. And in the context of future M&A, we have a question. Firstly, a statement, which I'm sure you agree with. You seem very pleased with the transaction and the perfect fit within the Cohort Group. Would it be reasonable to assume that further opportunities of this scale, which I think was around GBP 70 million, GBP 75 million enterprise value are not going to be available too often? And that, therefore, smaller bolt-on transactions are more likely to be seen in the next year or two?

Well, I'd acknowledge that we're pleased with the transaction. However, I would also say that the interesting bit comes now. Nice as it is to get pats on the back. Now we've got to make it really work within the group. So I can tell you that's very strongly our emphasis from here on in. In terms of future transactions, we're happy to do additional businesses that we can add to the group as we have with EM Solutions. And we're also very happy to do bolt-on acquisitions as we did with the business, ITS, which we integrated into Mobile Communications at the beginning of this financial year. Well, every time we do an acquisition, we sort of get a flood of people rightly to us and say, "Well, how about this one?" And this time, there's been no exception. But we are, I would say, a cautious and careful acquirer. We've been around since 2006, and we've not done that many. We'll be looking out for something that really meets our criteria as something that will enhance our growth, offer some real kind of sustainable competitive advantage as well as obviously operating in the right sort of market sector and being the right sort of culture as well.

And then perhaps last one on EM or more specifically, the group that they came from. Did you look at or have any interest in buying the whole of electro-optics systems rather than just the EM Solutions unit?

Well, it's had an interesting time, EOS, on the Australian Securities Exchange over recent years. But they've adopted a new strategy. They want to focus on their remote weapon station business. But they decided that EM Solutions was no longer part of that strategy going forward, and they made a decision to sell it. And that works well with us. I think looking at the wider business, as I said, which has got a good strategy to go off on its own. It's led by a relatively new Chief Executive. I mean it would be complementary to us in some ways. I wouldn't want to go into a personal view of the merits and demerits of an acquisition like this. But plainly, that's not what they wanted to do. And obviously, a deal is best struck between a willing buyer and a willing seller.

Yes. And that actually, I think, neatly answers another question, someone was interested why the vendor took cash rather than shares in Cohort. But it sounds like they will be going their own way anyway.

Very, very much so. I mean it would have been a slightly strange thing to do to take shares in Cohort, having made a strategic decision, and they no longer wanted to be involved in the SatCom terminal area, yes.

Right. They're coming much nearer time, in fact, home. The question on your penetration with the Royal Navy, and Maritime is a strong area for the group. And do you feel that the Royal Navy offers more opportunity from a lower base compared to your success with overseas Navies?

The Royal Navy is a very important customer to us. In particular, the provision of the Ancilia Ship Defect system, which is absolutely vital to the future of the Royal Navy's surface ship fleet. The award of that to our business, SEA, is a terrific vote of confidence, both in SEA and in the group more widely. We've got a very good relationship with the Navy. We had the first SEA launch, in fact, as a dinner guest who's spoken at a private dinner for the Cohort Board and some of the senior management recently. So that's a vitally important relationship with us, and we see it growing into the future both in terms of providing additional Ancilia. We provide also the electro-optics systems for the new Type 26 frigate. We've been working with the Navy on various sonar projects, including with the Krait lightweight towed-array sonar. We support Torpedo launch systems, Decoy launch systems on many of the Royal Navy ships. We support sonar systems on many of the Royal Navy ships. So it's an immensely important partner for us. But that doesn't stop us working with many export navies as well. So we see plenty of opportunities for each it's our relationship with the Royal Navy, in fact, that provides a big boost for us with those overseas Navies because it's such an important reference customer.

Yes. Very reassuring. And staying in the U.K. and the strategic defense review. We have a question, perhaps Simon, one for you. Have you noticed any slowdown in tenders being requested as the review gets nearer to its completion date?

Yes. Do you want to take that, Simon?

Yes, I'll take that. I mean the -- what we've seen is we've certainly, in the last couple of weeks, we've seen an MOD approach, which is not new. We have seen it in the past. We've been around 18 years. So we've seen the MOD well, where they basically tighten up the spending. They basically push the level of sign-off, up several tiers of sort of ranks. And that basically means a slowing. But for us, I mean as you can see, the second half is pretty much all on order. So it's all about delivery. It doesn't stop them carrying on with a big program. It doesn't affect any program or contract that's in place. It really -- I mean we've seen a little bit of slowing with the Defense Scientific Technology Laboratory, which is the sort of research part of the MOD. It's pretty small stuff. Whether that will continue right up to the defense review, whenever that publishes, which I think probably will be sometime after March, I think before June. We don't know. I mean it's not unusual for MOD to sort of tighten around this time of the year. And then as they approach their year-end in March, the sort of cash strings come off again because they realize they've got to -- it's a sort of use it or lose it approach of government spending. But at the moment, we're certainly not -- it's not affecting us, it's not impacting upon our deliveries or our forecast at all. Obviously, we continued long-term, [indiscernible]. But we're seeing them continue to do certainly urgent operational requirements that they need. So it's -- yes, I mean, it could have an impact, if it went on for long, but I don't think it will. I mean their long-term aim is to increase defense spend to 2.5% of GDP. And Mr. [indiscernible] saw this morning, that they had NATO -- head of NATO is now saying that really got to probably get to 3%. And when Mr. Trump returns to the White House at the back end of next month, I suspect he may be pushing European NATO nations to up their game again.

I think a lot of people support your suspicions there. And in terms of the strategic review, you're already in a strong position, so many of your contracts, as you've explained, are for multiyear delivery. So it would be a surprise to see a dramatic change in direction that affects you immediately anyway.

I think that's right. I mean we don't yet know what's going to come out of the review, but I'm sure it's just about a change of emphasis rather than a change of direction. I mean it's not as if we're suddenly going to stop focusing on Russia and China. So I think whatever comes out of it, and that's not clear yet. We will be in a good position to respond to that.