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

So good morning, everybody. Just a few bits of admin. First, we're very pleased to welcome you to the full year results briefing from Cohort. This presentation is being recorded. So, if you miss anything, don't worry, you'll be able to watch it again next week at your leisure. And, the slide deck that the management are talking to is available on the Cohort's Investor Relations page along with other useful materials. You can submit questions as we go along using the question button on Zoom, which we shall try to address after the presentation. So great to have Andy and Simon back, and I shall now pass over to Andy to start the presentation.

Thank you very much, Andy, and good morning to everybody. Yes, as Andy said, I'm Andy Thomis, I'm Chief Executive at Cohort plc. And I'm here with Simon Walter, Cohort's Finance Director, to take you through our final results for the financial year ended in April 2025. And I'm going to start off by giving you the highlights of the results we've announced. 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'm happy to say that overall, we've once again seen a very strong performance, record operating profit, record revenue and a record closing order book. And that's the result of hard work and developments of the business over a long time. And it's really pleasing to see that we're showing some real momentum. So the numbers are on the screen now. Revenue and profit were both up strongly, revenue by 33%, adjusted operating profit by 30%. Adjusted earnings per share grew 27%, ahead of external expectations. And we significantly beat our expectations for net funds. It was another good period for new orders, which are, of course, the best leading indicator for future growth. Order intake of GBP 285 million significantly exceeded the revenue that we recognized. So, the total order book had grown to over GBP 616 million at the year-end. And if we aim off to take account of the one-off large order from the Royal Navy in 2024-'25 order intake actually exceeded last year's. Now that order book covered 79% of our expected revenue for the year, and it will be generating revenue for us well into the 2030s. Operating cash flow was very strong, significantly exceeding profit and helping us to maintain our positive net cash position despite expenditure on 2 acquisitions and CapEx on a major new facility. So, against that positive background, the Board has declared a final dividend, subject, of course, to a shareholder vote at the AGM of 11.05p. And that results in a total dividend for the year of 16.3p, once again representing an increase of 10% on last years. So, if you have the next slide then, Simon will give a more detailed breakdown of the performance of our divisions, but this slide shows the main factors behind the group's performance improvement. We saw good revenue growth in both divisions this year, especially Communications and Intelligence. As we had expected, EID made a positive contribution with its newly strengthened order book. MCL had a record year, successfully integration -- integrating its acquisition of ITS, managing an exceptional flow of urgent operational requirements with great skill and agility. Our most recent acquisition, EM Solutions provided a maiden contribution to the group in the final quarter. The integration has gone smoothly. We've established a new Board for EM Solutions with 2 experienced local non-executives to provide local support for the management. MASS remained the largest single contributor to the group's profit, though it saw some competition from MCL and SEA this year. MASS's performance in terms of profit was a little behind last year with customer-driven delays on some large existing contracts and a slightly less positive revenue mix. Keith Norton has taken over as the Managing Director from Chris Stanley who retired, and he's focusing on improving business development and restoring MASS to a growth path. In the Sensors and Effectors division, ELAC and SEA both contributed strongly to revenue growth. ELAC made good progress on its large contract to supply submarine sonars to the Italian Navy, and we're now approaching the critical delivery phase on that contract. And at SEA, we saw record levels of revenue and profit despite some problem projects that had an impact on margins. SEA announced the sale of its transport business at the beginning of the current financial year, and that's a strategic move to enable the management to focus on the core defense market. Chess had a more challenging year. It saw good growth in orders with strong demand for its portfolio of highly regarded products, but we saw a recurrence of operational and delivery challenges that had a significant impact on profitability. And Simon and I will be working closely with the business to overcome those this year. So that's the big picture. Let me hand over to Simon, who will take you through the financial position in more detail.

Thank you, Andy, and good morning to you all. Looking first at the income statement, as already trailed, this was another record performance for Cohort and included initial contribution from EM Solutions. The underlying organic growth was strong. The net margin was slightly down from 10.4% last year to 10.2% this year. And the main driver of this decline was the weak performance at Chess and the mix at SEA, both of which we expect to reverse in the coming year and beyond with net margins expected to be above 11% in this coming year. I'll explain the net margin elements in the next 2 slides. Sensors and Effectors delivered a significantly higher revenue, up by just over 20%. Within this, SEA achieved a record performance. The mix of work at SEA, especially continuing to deliver on an overseas contract at low margin, however, pulled its net margin back slightly. ELAC improved its revenue and moved its net margin into the low teens percentage despite still trading the large Italian contract at a low margin as it moves through its development stages. The main driver of the flat performance and the lower net margin was a much weaker performance at Chess, and this was due to delivery delays and recurring costs on -- closing older projects. Looking forward, we're expecting the net margin in this division to move back towards 11% on relatively small revenue growth, the latter in part due to removal of around GBP 8 million per annum of the transport revenue on its sale in June of this year. The drivers of this improvement are better mix in SEA's Defense business, Italy moving into production and delivery and the recovery at Chess. Chess itself continues to see strong demand for its products, especially the counter drone systems for ground-based air defense systems in NATO Europe. Turning to Communications and Intelligence, marked growth in revenue of 50% with a 65% increase in adjusted operating profit. The drivers of this were a record performance by MCL, a level we expect to drop markedly back from. MASS was still our most profitable business, although its performance was slightly weaker than last year. EID after strong order intake returned to profitability. With more domestic orders to come, we expect a further improvement at EID and more importantly, a steady next few years of gradually improving net margins. EM Solutions made an initial contribution with its highest net margin, helping to drive the division net margin close to 17% and above last year. Again, looking forward, a full year contribution from EM Solutions will drive higher revenue and the net margin of this division is expected to move towards the high teens percentage, help pushing the group to hopefully over 11% for the coming year. Looking at the net funds for the group, the closing net funds were much stronger than we expected and was a result of very strong working capital management across the group, especially in Sensors and Effectors, where SEA was able to successfully collect some older trading balances. Looking forward, we do not expect such a strong operating cash performance this coming year, but we do expect net funds still to improve to between GBP 10 million and GBP 15 million by April '26. In terms of CapEx, we will complete the build of the new German facility in the early autumn, and we remain on track to begin occupying the new site from September this year onwards. Overall, a record year, exceeding expectations for both earnings per share and net funds. And as we said earlier in our preliminary announcement of this week, adjusted '25-'26 earnings per share are now likely to be ahead of our previous expectations. Thank you. I'll hand back to Andy.

Thank you very much indeed, Simon. So, in this final section, I'm going to talk about the outlook, and I'll start with the broad market position, then I'll talk about some of the investments that we're making in new products and technology to maximize our opportunities. I'll show you how our existing order book runs off over the coming years, and then I'll round off with a summary of this morning's presentation. So we are, of course, seeing a much stronger demand picture than we saw at the beginning of the decade. And unfortunately, that's because the world is facing the most unstable and dangerous situation that we've seen since before 1989. And none of us should welcome that and the risks that we now see are real and concerning. The U.K.'s recently issued national security strategy says that for the first time since the cold war, we're entering a period with the potential for direct confrontation with our adversaries. Now the 2 main driving forces in demand for defense equipment have been the same since 2022. On the one hand, the continuing conflict in Ukraine and on the other, the influence of growing Chinese defense investments and aggressiveness from the Indian Ocean right down to Australasia. The third factor, growing conflict in the Middle East has been on a knife edge, occasionally exploding into violence with the potential for global consequences. And the impact for those geopolitical factors on defense spending amongst the democratic nations has been magnified by the words and actions of the Trump administration in the U.S. Explicit demands for NATO nations to spend more have had their effect as we saw at the recent summit. But the unmistakable message that the U.S.' allies can no longer rely on what were until recently, we thought ironclad commitments have had even greater force. The sequence of reversals in U.S. policy towards Ukraine to take the most prominent example, has had a profound impact on Europe's sense of security. And the results of that have been stark. According to the Stockholm International Peace Research Institute, worldwide defense spending grew by 9.4% last year. And if you look at non-U.S. NATO, so that's Europe and Canada, that group of countries collectively grew defense spending by almost 20% by 19.4% last year. And on the other side of the world, Japan facing the challenge of China grew its defense spending by 21%, which was its largest annual increase since the early 1950s. Australia and Southeast Asia also grew their defense spending in real terms, having already made increases in subsequent years over the recent past. In the U.K., as you have seen, announced a commitment to spend 5% of national income on defense and security at the recent NATO Summit. Now that increasing spend has manifested itself in demand for a range of different capabilities. And we've recently seen that in the U.K.'s strategic defense review, which identified priorities in the U.K. for defense capability investment. And much of that, many of those priorities are relevant to Cohort. So for instance, the need for electronic warfare, drones, counter drone capability and communications in Ukraine is driving demand for our business MCLs products. The requirement for resilient land and air capabilities across NATO Europe emphasizes the importance of Chess' counter-UAS systems and MASS's airborne missile countermeasures. The need to protect critical infrastructure from both cyber and kinetic threat generates opportunities for MASS and for Chess. And the growth in manned and unmanned submarine and surface ship programs worldwide, not just in the U.K., is relevant to SEA, to ELAC to EM solutions and to EID. Finally, the need to provide secure digital communications for multinational forces drives demand for new systems like EID's NATO-compliant TDCIS communication system for deployed headquarters and MASS's secure IT systems for higher-level communications amongst multinational forces. So if we could have the next slide. Thanks, Andy. Moving to specifics. I mentioned that we continue to see good opportunities, and I wanted to share a few of those with you. At ELAC, earlier in the year, we received an order for the fourth of the 4 new Italian submarines, and that brought the total contract value to over GBP 100 million. We're now starting discussions about 2 further possible boats at a slightly higher specification as well as upgrades to in-service vessels. If we look at EM Solutions, we see a promising list of opportunities in Australia, Europe and East Asia. And EM Solutions will shortly begin deliveries covering almost the entirety of the Australian surface fleet, and there is a lot more to come in the pipeline. MASS, well, it's just 1 or 2-year extension to its long-term contract to design and run large-scale military exercises for the U.K.'s strategic command. And as global tensions have increased, the drumbeat of those exercises has increased and the need for more of them will undoubtedly arise. MASS also has a growing relationship with a multinational defense alliance, as I've mentioned, to provide secure digital communications. And MASS is starting a shakeup of its business development under its new Managing Director, aimed at improving its organic growth prospects. At MCL, of course, we see several large potential prospects from urgent operational requirements, most of which I'm afraid are too sensitive to go into any detail about. And moving on to the Sensors and Effectors division, Chess sees considerable short-term opportunities for its optical tracking systems for countering drones, and it's got a very successful partnership with Rheinmetall and is looking to build others. At ELAC, earlier in the year, we received an order for the SONAR suite for the fourth of the 4 new Italian submarines. As I mentioned, that brought the total contract value to over GBP 100 million. And at SEA, we see multiple opportunities for the KraitSense and Krait Array products arising out of the need for large-scale underwater surveillance, particularly in the North Atlantic, but not limited to that. And SEA has a strong partnership with Turner, which is already bringing new opportunities for the important Ancilia Missile Protection System, which SEA is delivering to the United Kingdom and the Royal Navy. So if we can move on, Andy. As demand grows, we're not only investing in new products, but also in the capacity to deliver. And this slide shows the progress that we've made in the last year on ELAC -- I'm sorry, I've jumped ahead a slide. We haven't quite got the progress of ELAC's new facility yet. Where are we? -- Well, let's talk about the investment that we're making in R&D spend, which increased by 35% and is now over GBP 20 million in the current -- in the last financial year. And here, what we're doing is looking at market trends and looking at where we can develop new products to be able to meet the evolving needs of our customers, which we see through new initiatives like the U.K. Strategic Defense Review. MASS, for example, has invested in a product called THURBON CEMA, which combines cyber and electronic warfare data management for battlefield support. And this is becoming increasingly important as we see the full panoply of electronic warfare and cyber techniques being deployed on the battlefield in Ukraine. At Chess, we're investing in an integrated radar and electro-optical fire control system to combat naval threats from both drones and from surface unmanned vessels, which we've seen used to such devastating effects in Ukraine. And the tightly integrated radar and electro-optical capabilities that Chess is providing with this new radar from Rheinmetall will enable full 24-hour capability, capability and adverse weather conditions to accurately track and deal with these threats at longer range than ever. At MCL last year, we saw some great experimental work together with partners for the Defense Science and Technology Laboratory, MOD organization to demonstrate the bomb disposal capabilities of autonomous robots. And it turns out that Spot, the dog, as you can see in the photograph there, was very capable indeed at dealing with those kind of matters, particularly in complex environments involving locked doors, steps, etc. And it's much, much less dangerous than sending people to do those tasks. And finally, EID is investing in development of its OCEANEX naval communication system, bringing in advanced new capabilities, in particular, at cybersecurity, which is becoming ever more important for long-range naval communications. Okay. If we can move on to the next slide, Andy. And here, we do see the results of our investments in the new facility that we've been building for ELAC just outside Kiel and as well as providing improved accommodation for ELAC's engineers and scientists. That new facility is going to provide a flexible production space that will enhance the efficiency and flow of the company's very complex production assembly and test operations. And that facility, as you can see in July, is nearing completion and will be ready for ELAC to move in this autumn. And alongside that important investment, we're also working to increase production capacity, both at Chess and at SEA. And finally, in terms of capital allocation and no less importantly, we maintain our strategy of seeking and investing in value-adding acquisitions. Now we're very selective, and we won't acquire a business unless we know it will add value and growth in the long term. And our most recent acquisitions of EM Solutions and ITS do meet that profile. So if we can move on to the next slide, Andy. I've talked in broad terms about markets and capabilities. And this slide shows the tangible results of the demand picture that I've described. At over GBP 616 million, Cohort's year-end order book is the strongest that we've ever announced, and that includes nearly GBP 230 million for delivery this year and almost GBP 150 million for delivery next year. And that's a result of order intake in the year well north of GBP 0.25 billion, supplemented by the strong order book that we acquired with EM Solutions. The Royal Navy order for Ancilia at over GBP 135 million made a big contribution to the previous year's order intake. But if we put that to one side, we did even better in 2024-'25. And as I mentioned earlier, since the year-end, the order book has continued to grow, and we now have 85% revenue cover for the year. The larger part of our order book, as you can see from the colors there, sits largely with the Sensors and Effectors division. SEA makes a very strong contribution to that number and ELAC and Chess also add significantly to the total. But looking at Communications and Intelligence, since last year, we've seen almost a doubling of the order book. And the acquisition of EM Solutions was a major factor in that improvement. But EID, with its good order intake this year, also made a big contribution. Now for comparison purposes, the chart on the right shows the shape of the order book runoff as we saw it this time last year. And what you can see is that in broad terms, it's maintained its shape, but it's grown substantially. And in particular, the orders for execution and delivery in the current year and the immediate year following have grown really substantially. And if you'd like to move on to the next slide, Andy. Here, we can see that in more detail, the order book runoff for the current year, together with a comparison against the same position last year. So the growth in the total order book from GBP 590 million to GBP 616 million, and that's a 19% increase is a strong indicator overall of the potential for future growth. And since then, as I say, it's increased further. But the 2 shaded columns here show the revenue already on order for the year ahead compared to the same position in 2024. Order cover in both divisions has improved, but it's most marked in Communications and Intelligence this year. And that's the result of the EM Solutions acquisition and as I said, the improved order intake at EID. And that improvement, GBP 229 million this year compared to GBP 184 million in 2024 is almost 25%, and that positions us well for further growth. And subsequent to the year-end, that GBP 229 million number has increased to GBP 247 million. Now that brings me almost to the end of our presentation and a summary of the main points that I wanted to make. So once again, it's been a record year in terms of performance, reflecting both the growing demand picture and also the agility and innovation that our business model is designed to optimize. And as a result of our performance and our prospects, the Board has felt confident to increase the dividend by 10% once again. And we've grown the dividend every year since our IPO in 2006. The results we've presented today already show some of the potential that arises from the EM Solutions acquisition, and we expect the benefits of its strong order book and opportunity pipeline, together with the market access it brings to be even more visible this year. We retain our strong balance sheet and an excellent relationship with our banks, and that gives us the resource that we need to invest in new technology, greater production capacity and when opportunities arise, carefully targeted acquisitions. And finally, we've once again achieved a record order book, and we see an excellent pipeline of further opportunities ahead. Now the markets we are operating in are growing, as I've explained, and we expect to see those higher levels of spending maintained in the longer term. Achieving a book-to-bill ratio of greater than 1 once again is the best quantitative marker for future growth. And we maintain our revenue and profit growth expectations for the current year and expect our EPS actually to be a little better. Beyond that, we believe the combination of growing demand and our market position allows us to target further improvements in performance. And I hope what you've heard today goes some way towards explaining why we hold that view. And in bringing the talk to a conclusion, I want to take the opportunity to mention the great contribution to our success made by our management teams and employees, particularly in the subsidiaries. We're very much a people business. It is their expertise, dynamism, practicality and integrity that propel us forward. It's thanks to them that we've seen another step towards our exciting long-term future as a major independent U.K. defense technology group offering world-class systems to domestic and export customers alike. Our strategy continues to be to generate growth, both organically and through acquisitions, while paying a dividend that reflects our successful financial performance. We believe this offers the best long-term returns for investors, while creating high-value employment and enhancing the security of the U.K. and its allies. So thank you very much for your attention. If you have some questions, we'd be delighted to try and answer them now.

Great. Thank you very much, gentleman, comprehensive presentation and congratulations on very strong progress in the year. So just a reminder to everybody, keep the questions coming through, of which we have many. So diving straight in, maybe for you, Andy. You mentioned Ancilia. As much as you are able to, can you update us on potential international interest in Ancilia after the very large Royal Navy order last year? And added on another question, has your view on the scale of addressable market for such systems changed at all in recent months?

Yes, I can say that through the partnership with Ancilia, we've been -- sorry, with Turner, we've been continuing to progress a number of opportunities for Ancilia. And our view of the market potential has not changed at all. I mean we regard it as a product which offers really considerable potential for exports. Now what I would say there is that I don't expect those to start to be realized until we see the first Ancilia systems going into service with the Royal Navy. Now we're well down that path. We're through the critical design review for the product for the Royal Navy. But that's what we really want to focus on over the next year or so to bring that successfully into service so the Navy can demonstrate it as the capable system that we know it's going to be. And that's going to be the catalyst to start seeing those really strong opportunities being turned into real orders. So we expect to see that happen, but the focus for the time being is on delivery for the Royal Navy.

Thank you, Simon, perhaps one for you. Geopolitical tensions are a great driver for demand for you. But have you experienced any supply chain delays regarding critical components due to shipping issues in the Middle East that have hogged the headlines lately?

No. I mean we -- like many companies, we experienced supply chain issues back in post-COVID days, and during COVID and post it. That basically sort of reset really the supply chain timetables. So what often were days or weeks became months and even bit longer. They've come back a bit, but they've sort of steadied now. We've not seen -- I'm not aware of any particular supply chain issues around the group whatsoever at the moment. No, it's not an issue. And I think the Middle East, I think some shipping routes have already adjusted. It's like all these things, you get those slight bumps to it and then it sort of settles down again and everyone adapts. And we've certainly not seen anything in the last year. And I am not aware -- none of my finance directors or operational people are bringing that issue to my attention.

Yes, if I can just add. We like to keep our supply chains as short as possible. Obviously, some have to be international. But we're lucky that in all our operating areas, there's good local industry that supports us in the supply chain.

I mean I would add that the German business, for example, I think 95% of its supply chain comes from with within 1 hour of Kiel -- which might say more about German industrial base [ certain things I hope so ].

I think their trains are more reliable than ours, I mean that must be it.

Right. Moving back to the U.K., a couple of questions. In which U.K. service are you seeing the greatest number of opportunities at the moment?

In which U.K. service? Well, as I explained, the center of gravity of our business is maritime. And although we have some very important capabilities, both on land and in the air, I think it's the maritime side of things, which was definitely the best beneficiary of the strategic defense review. And that's not surprising given that the U.K.'s primary NATO task is the protection of the North Atlantic from Russian ships and submarines coming down through the Greenland, Iceland and U.K. gap. So it's the Royal Navy where the -- in the U.K., I think, where the best of our opportunities are visible. I'd cite, for instance, the work that's going into protecting the North Atlantic and detecting submarines coming through the North Atlantic, which was, I think, described as Atlantic Bastion in the strategic defense review. But we do see -- certainly see opportunities coming in the other areas as well and in the joint service area, which is true, for example, of the exercises that we run, which are fully joint across the services.

Thank you. And well, I'm not sure anybody could answer this one, but -- the strategic defense review has offered a lot of encouragement and warm words. How confident can you be that given the U.K.'s bank balance, it all the commitments to spending will actually come to fruition?

Well, I'll answer that in 2 ways. I mean one -- one thing that I would cite is the numbers that I mentioned in the presentation for what the actual increase is in European and in for that matter, Japanese defense spending has been over the last year. There's a lot of talk about future spending and percentage of GDP and so on. But the reality is that spending has actually been increasing very rapidly, albeit in many cases in Europe from a relatively low base. So the reality of the risks to the U.K. really can't be ignored. And as the Prime Minister himself acknowledged, the first responsibility of government is to the security and protection of its citizens. And I'm really pleased that the government fully acknowledges and has recognized that and it's been reflected in its statements both in the strategic defense review and in the NATO summit. I think those are serious statements, and we should take them seriously.

Okay, thank you very much. A few questions on competition. There seems to be a structural decline in the U.S. dollar going on at the moment. Does that have competitive pricing implications for you if you find yourself in competition with producers over there?

It's quite rare. Not -- I mean, it does happen, but it's quite rare that we find ourselves in direct competition with the U.S. primes. And that's because the U.S. has a particular model of linking defense sales to its foreign policy and using a particular mechanism known as FMS, foreign military sales, which are usually done on a government-to-government basis. I mean we do occasionally see competition from U.S. primes, but it's not that frequent. And where it does happen, it's often on the U.K. or European subsidiaries of those U.S. primes. And so they're more dependent on local supplier base and the dollar price isn't so relevant. What I'd say about U.S. competition is that it does seem to us that we are seeing a number of countries which would hitherto have naturally turned to the U.S. to meet their defense needs. And in part, that's because of the quality of products, but also because they see U.S. foreign policy support as being an integral part of defense sales. And I think with some of the changes in policy that we've seen coming from the U.S. administration, that inclines some of those customers to seek more diversity in supply and look towards Europe and the U.K. as suppliers as well.

Okay, thank you. And slightly more generally on competition. When you do get involved in group tenders, do you find that you are still coming up against the same competitors as, say, a year ago?

Broadly, yes. I think -- so I mean, if that's -- if the suggestion there is, are we seeing some of the tech pros coming into play? Not so far is the answer, not so far. Obviously, companies like Anduril have now set up a U.K. base. I would say that some of the new technologies that are coming out of the commercial and technology world have got a lot to offer in defense. And I think we're likely to see the benefits of that coming through in cooperation between some of these new businesses coming in with a great deal of artificial intelligence knowledge, for example, and businesses which are used to operating in defense, and understand how the end user operates and what the end users' needs are. I think that's going to be the best way to get the best out of those technologies. And we're doing that, for example, with cooperation with companies like Helsing and [ Haleon ].