Cohort PLC

LSE:CHRT

Earnings Call Analysis

Growing Order Book Boosts Revenue Prospects

Amid increasing global security challenges, the company's focus on developing counter-drone systems, advanced submarine detection technologies, and missile decoy launchers is paying off. Innovative products like the multi-sensor unit for drone threats and sonar suites for submarine detection have led to significant orders from countries like Austria and Denmark and contracts for 3 submarine fits. An investment in a fast, smooth elevator system also promises to improve naval counter-missile strategies. With a record order book of over GBP 365 million, a 16% growth from the previous year, and a solid flow of revenue expected for a decade, the company is positioned well for future growth. Introducing acquisitions to enhance value, combined with a one-third higher order intake than revenue, signal robust demand. This has instilled enough confidence for a 10% dividend increase and an optimistic revenue outlook.

Robust Pipeline and Record Order Book Signal Future Growth

The company stands on strong ground with a promising pipeline and a record order book valued at over GBP 365 million. Their investment in technology and product development, particularly in areas such as drone threats, undersea detection, and missile defense, aligns with the escalating global security demands. Notably, their multi-sensor unit (MSU) and integrated defense systems have secured orders from several countries, with anticipation for continuous demand. Additionally, their new digital submarine sonar suite is positioned to capitalize on the critical need for advanced submarine detection, ensuring revenue flow far into the next decade.

Selective Acquisition Strategy to Enhance Growth Potentials

While autonomous growth remains the cornerstone, the executive team is keen on acquisitions that promise cultural fit and competitive advantage, especially those undervalued or in niche defense segments. The favorable market conditions, marked by global geopolitical tensions, may affect the pricing landscape of potential targets. The company, however, approaches mergers and acquisitions (M&A) judiciously, seeking not just to grow but to do so in a manner that enhances long-term value.

Solid Financial Management and M&A Approach

Cohort maintains a strong balance sheet, providing a comfortable cushion for investments while avoiding the necessity to use debt for day-to-day operations. M&A remains a tool for potential acceleration of growth, and the company has shown prudence in its use. Their M&A strategy is conservative but opportunistic, aimed at complementing organic growth without depending on it. The company's absorptive capacity for M&A is underscored by a focus on R&D spend aligned tightly with strategic goals rather than speculative pursuits.

Global Expansion and Diversified Customer Base

The expansion into various international markets ensures a diversified customer base, diluting risks and promising robust sales channels. Countries like Sweden may represent future growth opportunities, especially in light of potential NATO expansion. The company's export capabilities to the Middle East, Southeast Asia, South America, and North America demonstrate its global outreach and resilience, notwithstanding the challenges in markets like the U.S., where defense exports are notoriously competitive.

Supply Chain Stability in a Post-COVID Market

In the wake of COVID-19, the company navigated through supply chain elongation and inflationary pressures. Presently, the situation has stabilized, and no significant supply chain challenges persist, which speaks volumes about the company's operational controls and planning efficiency. This operational stability provides confidence in the company's ability to deliver products within reasonable time frames and maintain its client relationships and project timelines despite earlier delays.

Earnings Call Transcript 2024-Q2

[Unknown Executive]

All right. I think we've got everybody here. Welcome, everybody. Just a few points of admin to start with. This webinar is being recorded. So, if you miss anything, don't worry. It will be up on the website later on. The slide deck that the gentlemen are going to present to is also on the Cohort website, so you can follow up on that. Should you wish to submit questions, please use the Q&A button that you can see at the bottom of your Zoom guide, and we will deal with those later on.And I'm delighted to welcome back, to talk about the interim results announced this morning, both the CEO, Andy Thomis; and the Finance Director, Simon Walther. So without further ado, over to you, Andy.

[Andrew Thomis, executive]

Good afternoon. As [ Ollie ] said, I'm Andy Thomis. I'm the Chief Executive of Cohort plc, and I'm here with Simon Walther, Cohort's Finance Director, to take you through our results for the 6-month period ending 31st October this year. So I'm going to start by giving you the highlights, and then Simon will provide some more detail, including a divisional breakdown. And then, I'm going to come back with some comments about the demand picture and about our future prospects.And the summary is that it's been a good first half, much better than last year's. Revenue and operating profits are up strong. And once again, we've got a new record reported order book. Prospects are good. We expect to continue our growth in the full year and beyond.Now, if you can see the numbers now, as I said, revenue and profit both up strong. Revenue up 22% to GBP 94.3 million. Adjusted operating profit up 20% to GBP 6 million. Adjusted EPS is also up, not by quite as much for reasons that Simon will explain in a moment. It was another very good period for new orders. And of course, that's the best leading indicator of future growth. Now, the order intake of just over GBP 119 million significantly exceeded the revenue [Audio Gap]. So the total order has grown to over GBP 350 million at the year-end. And that order book covers 95% of the consensus forecast of our revenue for the year. And that order winning run has continued after the period-end. And in early December, the orders have grown to something like GBP 365 million, and that gave even higher order cover for the year. Finally, operating cash flow was also good. It exceeded profit, and that helped us to maintain a positive cash net position of GBP 13.2 million. And against that background, the Board was very pleased indeed to be able to recommend an interim dividend of 4.7p per share, and that represents an increase of 10% on the dividend at this time last year.If you can have the next slide, Simon will give a more detailed breakdown of performance of our 2 divisions, but this slide shows the main factors behind the group's performance improvement. The Communications and Intelligence division delivered a marked increase in both revenue and profit, and that was driven by a record first half performance of our subsidiary Marlborough Communications, MCL, and that was a result of its unusually high opening order book at the beginning of the year. EID also saw some improvement, but MASS was slightly behind its first half performance last year as some of its higher margin work slipped into the second half.In our other division, Sensors and Effectors, revenues improved, but profit performance was slightly lower from same period last year. Both Chess and SEA performed well, but profitability at ELAC was affected by the high proportion of low-margin revenue on the development work for the new Italian submarine sonar. And we're recognizing margin very prudently on what is a very complex technical program at the moment, but we expect a much improved performance from Sensors and Effectors in the second half.So, let me hand over to Simon, who is going to take you through those results in a bit more detail.

[Simon Walther, executive]

Thank you, Andy, and good afternoon to everybody. As Andy has already said, and I reiterate, a record first half revenue and trading profit performance for the group. Gross margins have been generally maintained. The increase in overhead includes around GBP 1.5 million of investment, including property refurbishment at SEA and Chess, preparing to deliver the expanded order book for SEA. Business development spend was also higher, particularly the biennial DSEI show in September in London. The higher overhead also reflects the headcount increase that we've seen, rising from 1,075 last October to 1,243 employees this October. Much of this increase is actually in direct staff, particularly engineering, but it comes obviously with associated costs of recruitment, bringing people on board and particularly getting their utilization up as we bring them through processes and training. However, overall, we do expect the net margin for the group to improve in the second half and to deliver somewhere close to the same level as last year.Turning to net funds, there's a good first half performance. Historically, we've usually seen a larger decline in H1, as we saw in 2022, due to the build of working capital for the second half. This year has seen larger customer advances, particularly in Sensors and Effectors, which will unwind during the second half and into '24-'25. This, combined with higher CapEx spend as we commence work on the building for the ELAC's new facility, will lead to a net cash outflow in H2. And I am still guiding closing net funds being around GBP 8 million to GBP 10 million at the year-end. As usual, though, the nature of some of our receipts typically can be difficult to predict and been several million sometimes in size, [ can't ] make any prediction, and [indiscernible].Turning to the earnings per share, as Andy said, this is up 2% although somewhat lower than the adjusted operating profit growth of 20%, and there were 2 primary drivers. One was the higher tax rate in the U.K. Our overall tax for this year we estimate at around 20% compared with 17% last year, and that reflects higher U.K. tax rates and higher net interest costs, obviously, higher interest rates. We did pay down GBP 3 million of our sterling loan in the last 6 months, and we'll continue to review our gross cash and debt positions. Although we currently expect the U.K. -- our overall tax rate to be around 20% for the year, we do have opportunities to achieve a lower rate coming year-end.Turning to the divisions, Communications and Intelligence had a strong operating performance with revenue and trading profit up by 32% and 15% respectively. The improvement has come from a very strong MCL performance, driven by U.K. MoD demand carrying on from last year into the first half of this year, especially for hearing protection and drones. EID's loss for the first half was lower than last year's equivalent, but still disappointing, with continued delay to large naval orders from Portugal. These now are expected to be secured in the second half of this financial year. We've already seen the main ship build contract for a multi-role vessel signed in late November, and we expect to be on contract for development and delivery of our latest communication system for this ship soon. We expect EID to improve in H2 and progress further in the new financial year.The weaker net margin for this division was a change in mix at MASS with higher-margin EWOS work now expected to be delivered in H2. Order cover for this division is around 80% at the end of October. This is typically lower than our other division, Sensors and Effectors, with the short-term nature of some of the work at MASS and particularly at MCL. As we indicated back in July, we expect a relatively flat trading performance for this division.Turning to the second division, Sensors and Effectors, bit of a mixed operating performance here, with revenue up 15% but trading profit slightly down by 8%. We saw an improved performance at Chess, which delivered stronger profit [ largely ] on similar revenue, as we continue to see improved operational efficiency. At ELAC, as Andy has touched on, we continue to work our way through the design stage of the Italian sonar contract, and therefore, continue to trade margin prudently. They expect to enter production on the first [indiscernible] during the coming financial year '24-'25.Last year also benefited from the last payment from the seller of ELAC, Wartsila, which was around GBP 0.5 million. If you exclude this item, actually the underlying operating performance was up around 15%, so in line with the revenue increase we've seen for this division in the first half. SEA, as expected, delivered more revenue but its mix was weaker with much greater subcontractor efforts, especially for a delivery to an overseas customer. As I hinted out earlier, the order cover for this division is much higher at around 97%. And with the recent boat 3 order for the Italian Navy, that increases that cover and gives us confidence around the design for the new Italian submarines. We expect this division to grow in the second half and drive the overall group forward in the rest of this year and into future years.Our new facility at ELAC is progressing, and we expect the build of the facility to commence around March-April 2024 and complete in June 25. The overall investment is expected to be around GBP 18 million, and we do not expect this to impact our ability to invest in M&A and R&D. The facility itself, if we move to the next slide, here you will see the site, this is the new site. It's actually near Kiel Airport. It's north of the Kiel Canal, a few miles from ELAC's current facility, which is actually south of the Canal. And as you can see, apart from the wintry conditions -- the very large [ hull ] you'll see on the picture is the [indiscernible] way through, digging the test tank that will be part of the facility. That will be finished first, and then they will start to build the building. But overall, I reiterate a strong first half, and H2 well underpinned to deliver to our expectations.I'll now hand back to Andy.

[Andrew Thomis, executive]

Simon, thank you very much. 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 illustrate that with some examples of major contracts that we've won in the last 6 months. And then I'll talk about some of the investments that we're making in new products and technology. I'll show you how our existing order book runs off over the rest of this year and beyond. And then, I'll round up with a summary of the points that we've made.So the 2 main driving forces for demand in defense equipment remain in place, and those are the continuing conflicts in Ukraine and the influence of growing Chinese assertiveness from the Indian Ocean down to Australasia. And adding to that mix since October has been the developing violent conflict in Gaza as well. I'll start with the impact of those factors on our export markets.So the conflict in Central Europe is primarily, although not exclusively, land based, and it's driven demand in 2 ways, both directly as the NATO countries seek to help Ukraine resist the Russian invasion; and it's also indirectly made NATO and other countries think again about the balance of their defense forces and the equipment that they need. Now, some aspects of that rethink don't really have an impact on us. We don't make 155 millimeter ammunition, and we're not about to start doing that, but other lessons that [Audio Gap], for instance, the importance of electronic warfare, the need to counter drones of all kinds, and the need for accurate and timely battlefield intelligence have all had a positive impact on both orders and prospects for us.In Asia, Chinese assertiveness has not yet manifested itself in a violent way, but the clear threat certainly is there. Most notably, Chinese behavior has driven the creation of the tripartite AUKUS alliance between the United Kingdom, the United States and Australia. And we fully expect to make contribution to the new AUKUS submarines in due course. But there are also many opportunities in what is termed Pillar 2 of AUKUS, and that's focused on developing new technologies for defense, including for underwater detection and countering hypersonic missiles, which I'll say a little bit more later. Of course, Taiwan is at risk from China, but aggressive behavior and maritime claims in the South China Sea are also having a major influence on defense postures and equipment spending really throughout the region. And that's had an impact on order intake of opportunities for us in, for instance, Thailand, Indonesia and Philippines. Japan remains committed to a doubling of its national security spend as a share of GDP by 2027. And it's also joined the Anglo-Italian next-generation combat aircraft project, forging closer links with Europe, where traditionally, its closest defense link has been with the United States. I witnessed a very excited Japanese delegation closely examining SEA's KraitArray at a large international exhibition recently.The conflict in Gaza does have the same direct impact on our demand as the other factors, but it's the emerging tip of an iceberg, which is the wider tensions in the region, primarily and ultimately between Iran and Saudi Arabia and its allies, and that tension is likely to drive further regional demand for defense spending in what remains one of our most important markets.Our domestic markets have seen similar effects. The U.K. Defence Command Paper announced initiatives to make U.K. a science and technology defense superpower and to develop new and more strategic relationship with industry. And that complements the refreshed integrated review earlier in the year that confirmed the need to invest in responding to challenges from both Russia and China. In Germany, we can see the impact of the step change in defense spending that is taking place there. Our German business is already supplying specialist hydroacoustic equipment for new German surface ships and submarines. And in Portugal, the long list of domestic opportunities for EID is finally gathering momentum, with bids being invited for several major programs and a new military procurement law approved by the Portuguese parliament. A few weeks ago, I attended the [indiscernible].We have a slight problem here. We seem to have lost our screen. I'm not sure if the rest of the webinar audience is able to hear what I'm saying, but we'll try and get it sorted out as soon as possible.

[Unknown Executive]

We can still see you loud and clear and hear you loud and clear. If you can carry on, Andy, that would be great.

[Andrew Thomis, executive]

Okay. We're back. Apologies for that, and I hope you can hear us now. Yes, I was talking about the gathering momentum for a set of opportunities in our business, EID, looking for Portugal, because a few weeks ago, I attended the signing ceremony for the acquisition of a new multipurpose vessel by the Portuguese Navy. And this was a pretty big event. The vessel will be a mother ship for both air and sea drones. It will be a new concept of vessel, the first new vessel that the Portuguese Navy has acquired for quite some time. And not only was the Head of the Navy there, but also the Prime Minister came along, gave a speech, and that to my mind, signifies that there's some real momentum behind acquiring these important investors.Finally, in this session, I wanted to emphasize that we're interested in growing profit, not just revenue. Now, I'm happy to say that the more extreme effects of COVID on our supply chain and recruitment costs are now fading, and that has helped us to keep our costs under control. We've also taken action to improve margins, for instance, at Chess, by improving prices and by bearing down on some of their problem projects. We expect margin to improve sharply at ELAC when we get through the challenging development stage of the Italian submarine sonar, which is its largest project. And for the group as a whole, and especially at SEA and EID, we'll keep control of overheads so that margin will improve as revenue grows. Now, the group operating margin is currently hovering at around 10%, and our aim is to drive that up to mid-teens in the next few years. And taken together with the growth that's going to be driven by the demand that I've described, that offers a period of really considerable opportunity.So, I wanted to highlight some recent contract wins to demonstrate the real impact of these geopolitical events on our day-to-day operations. And I' going to focus in doing that on the maritime area. So, taking a few of these examples, in August, we announced that SEA had received a GBP 17 million contract from the U.K. Ministry of Defense to provide the communication system for the new Dreadnought ballistic missile submarines. Now, that's a clear vote of confidence in SEA, which has provided similar systems for U.K.'s Trafalgar-class, Astute-class and Vanguard-class submarines in the past, and as well as being incredibly valuable in its own right, puts us in a really good position to do the same thing for the next and the largest ever class of nuclear submarines to be produced in the U.K., the AUKUS class, for the U.K. and Australia.Earlier this month, it was confirmed that ELAC has been contracted to supply a third submarine sonar suite to the Italian Navy with a value of EUR 16 million. Now, that provides confirmation that we are providing a world-class system for a NATO navy that has access to the best technology available, and we're very proud of that.Back in May, SEA won a GBP 26 million pound contract to upgrade the communications on board 2 of the Royal New Zealand Navy's frigates. Now, that's a clear sign of how regional tension is influencing even relatively low defense spenders like New Zealand to enhance their naval capacity. Also in May, SEA won a GBP 7 million pound contract to provide its KraitSense submarine detection system for 2 ships of a Southeast Asian navy. Now, that's the first win for the new KraitSense system, which is based on a relatively new product, the KraitArray towed array sonar, which has been produced and designed by SEA. And that purchase is a perfect illustration of how navies in the Southeast Asia region are equipping themselves to counter the growing Chinese submarine threat.Moving on, Chess has won a GBP 5 million contract to supply its [ Hawkeye ] cameras to BAE for the Type 26 frigate for the Royal Navy. Now, that's a precursor to what we expect to be a much larger contract for chess to incorporate these into its stabilized fire control systems for the ships. And finally, ELAC's underwater communication systems are widely used, and they've sold to many, many customers recently, including Japan, Germany and Italy. I'm picking one particular order here, which was EUR 4 million, as a particularly substantial one, but there are many more worth a mention. And that product is on the way to becoming something like a worldwide standard.Now, of course, there's many other contracts as well, but I think that these give a good illustration of the importance customers place on their maritime capability and the capability and competitiveness of our offerings as well. Looking forward, the pipeline of opportunities is as strong as ever.Now, against that encouraging background, we are maintaining our spend on technology and product development to meet the evolving needs of our customers. Many of the products that we invest in are very sensitive, but I can share some of these examples with you. To deal with what is perceived to be an ever-increasing drone threat, Chess has developed a multi-sensor unit, or MSU, which is able to detect and track small airborne targets. Now, that MSU has been integrated with a medium caliber weapon from [ Pierburg ], which is a Swiss defense company, part of the Rheinmetall Group, to create what is one of the world's most potent counter-drone weapon systems. And it was announced just yesterday, the 12th of December, that 28 of those systems have been ordered by Austria. And a few months earlier, they were also ordered by Denmark. And the seriousness of the drone threat, which has been so well illustrated by defense in Ukraine, is likely to result in many more orders for this system in the coming months and years for [indiscernible] and for Chess as well.Now, moving on, from Asia Pacific right through to the Atlantic, one of the greatest security challenges is driven by the need to detect and deter hostile submarines. And the best way, of course, to detect and track a submarine is to use another submarine. ELAC has developed a new digital submarine sonar suite that allows more accurate detection and location [Audio Gap]. Now, that's the most advanced elements of the suite, the [ distinct ] array, which should be visible to you on the drawing of the submarine that you can see there, based along the side of the submarine. That's made up of panels of sensors and electronics attached to the sides of the submarine. Now, I can't show a picture of the actual panels because the German security authorities have said that we mustn't. But I can tell you that each panel weighs several hundred kilos and it measures about 2 meters by 1 meter, and a fit of one submarine could include over 100 of those panels. ELAC is currently contracted now to provide 3 submarine fits. So that gives you an idea of the scale of the task that they're embarked on and just how busy that new facility is going to be.Now, finally, a key technology for [ AUKUS fleet ] and a vital capability for anyone facing Russian or Chinese forces at sea is going to be the ability to counter hypersonic missiles. The essential technique of dealing with anti-ship missiles is to launch decoys into just the right place to seduce and confuse the missiles. Now, in the past, that has relied on the ship maneuvering to be head on to the attack with fixed launchers to dispense the decoys in exactly the right direction. And that works fine at subsonic or just supersonic missiles, perhaps approaching at a speed of 600 miles an hour. When a missile is approaching at something like 1 mile a second, that simply isn't feasible to make such a maneuver. And with support from Chess, SAE has developed a system called Ancilia that can train and launch the decoys at precisely the right angle and elevation in a matter of seconds. Now, this product has already generated a significant amount of interest, and we believe that many nations will see this as an essential upgrade as well as an essential fit for new ships.Now, to demonstrate that this is more than just a PowerPoint presentation, I'm going to show you a short video, I hope, on the next slide, showing the Ancilia prototype in action.

[Unknown Executive]

I don't think we've got the video live on this one, Andy, if you want to carry on.

[Andrew Thomis, executive]

Well, I'm very -- I'm very sorry about that. So you miss that out, I promise you that we do have a video, we do have a prototype, which moves very rapidly in the visit. To give you an idea of the scale of the system, it's about 2 meters tall and fully loaded, it's going to weigh about 2 tonnes. And the very fast, smooth elevation will allow ships to counter multiple simultaneous attacks from different directions, which frighteningly is a likely plan scenario that they'll have to face.[indiscernible] subject to investments and nonetheless, importantly, we maintain our strategy of seeking and investing in value-added acquisitions. We're very selective about most and we work to acquire business unless we are convinced that it will add value and grow for the long term. But we do have an experienced acquisition team, and we have no shortage of opportunities to review, that's for sure.So I talked so far in broad terms about markets and capabilities on demand. This slide shows the tangible results of the demand picture that I described. [ At ] GBP 350 million, Cohort's period-end order book is stronger than ever before. It includes a very substantial element that will directly feed into revenue this year and next. You can see over GBP 90 million in the second half of the year and over GBP 117 million already on order for next year. But it also includes over GBP 145 million of order cover for 2025, '26 and beyond, guaranteeing a solid flow of revenue for a decade. As I mentioned earlier, since the end of October, the order book continued to grow, and it's now over GBP 365 million, and that is just over a [indiscernible].Looking at the colors, you can see that the larger part of the order book now sits with Sensors and Effectors. SEA makes a very substantial contribution to this number. It's received a further boost to its order book in the period, as you've seen. It has more opportunities to win new large long-term orders in the months ahead. ELAC and Chess will also add significantly to the total.In Communications and Intelligence, MCL tends to operate naturally on very short-term order book, so its contribution to the total is quite modest. MASS' order book though is substantial, but it only increases significantly in years when it's large long-term service contracts are [ renewed ]. EID's order book is relatively poor at the moment, but there is some very important and attractive opportunities with its domestic, naval and the military customers. And with, as I've explained, the Portuguese Navy gathering some momentum on its new ship purchases, I think there were some reports on that front.If you can move to the next slide, I will show you the first column of that chart in numbers, together with a comparison against the same position last year. And you can see the total growth in order book from GBP 304 million to GBP 354 million, which is 16%. And that's a very strong indicator for potential future revenue growth. The 2 shaded columns shows a revenue already on order for the second half of the year, and that's compared to the same position in 2022.And in Communications and Intelligence, you can see that the underpinning is a little behind where it was last year. MCL's ability to win and deliver new business in the year will have a big impact on the division's eventual performance, which we expect to be broadly in line with the performance last year. For comparison, in Sensors and Effectors, the underpinning for the year has risen by GBP 43 million to over GBP 60 million, which is an increase of 41%. And that positions us very well to these external expectations for the year.Now that brings me almost to the end of our presentation and to a summary of points that I wanted to make. It's been another pleasing year in terms of our performance. We're not resting on our roles, but we're very pleased, indeed, to be growing a silent strength of the market. Maybe more importantly, we've achieved another record order book, and we see an excellent pipeline of opportunities ahead. And that order book, as I mentioned, now over GBP 365 million.Now achieving order intake for the period of 1/3 higher than revenue is a very strong leading indicator of future growth. It clearly shows that there is strong demand and that our products are competitive in what is a market of very capable [indiscernible]. Our strong balance sheet enables us to invest in the products and capabilities that our customers will need as they look to keep themselves safe in order to become a more challenging global security environment, and I'll show you some examples.If we can, we'll accelerate our growth through targeted acquisitions of good businesses. We continue to expect to grow this year, and I'll try to explain a bit of what's behind that view in our presentation this afternoon. And beyond that, based on our order book and based on prospects that you can see, we expect that growth to be accelerate. As a result of our performance and our prospects, the Board is so confident to increase the dividend once more by 10%. We've grown the dividend every year since our IPO back in 2006.So in closing, I want to take the opportunity to thank our management teams and employees for all of their hard work in the first half of the year and the success that they delivered. If we can switch to the final slide, let me leave you with this as a snapshot of how we see ourselves developing in future years. We've made considerable progress towards -- since our earliest days in the market back in 2006. And our strategy continues to be to generate growth organically and when possible 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.That's what we wanted to say. Thank you very much for your attention. If you have questions, we'll try and [indiscernible].

[Unknown Executive]

That's great, gentlemen. It's very, very clear. Thank you very much. As a reminder to the audience, do use the Q&A button to submit any questions you may have. We have plenty already. So let's dive in.Simon, 2 or 3 questions, I'll try to roll together into recruitment. So I hope you can remember them all. Firstly, you've taken on a lot of people in the period. Is there any 1 or 2 or 3 particular subsidiaries that have been taken up the bulk of that intake? Secondly, if you're going after technicians or quality engineers, have they been easy and expensive to find? And then the last one, sorry for 3, is, do you expect this pace of recruitment to extend into the second half or even further?

[Simon Walther, executive]

Okay. The increased headcount has primarily come in the Sensors and Effectors division and has been across all 3 businesses of Chess, ELAC and SEA, not surprising when you see the growth from their order book, and these obviously are people we've been investing in. In terms of getting a hold of them, what we found is that, obviously, the shrinking services, we're taking less and less people from ex-service background now and more and more investment into graduates and apprentices and obviously, at times we have to acquire more experienced people.But in a way, that partly explains why the overhead is higher because we have taken on more graduates and more apprentices, which means we have to spend time training them and bringing them up to the level where they can actually contribute. And in terms of -- and that in a way, once you got through this, I certainly expect to see no -- particularly no further increases at Chess now. I think that's pretty much [ fully met ].ELAC is probably okay as well. Germany, not a large order, it turns out they will need more people. SEA probably needs to add a few more tens of people. But I don't see the coming -- we've grown from just under 1,100 to about 1,250 in the last year. I don't see that rate of growth carrying on in the next 6 to 12 months. But if the order book [indiscernible] the last couple of years, then we may won't have to.But one of the points Andy touched on earlier is one of the ways is you've got to improve the market profitability of the business and not just go after revenue is that we've got to make our engineers and think we deliver more efficient. And that ultimately is we've been investing in people. We now look to get the return from them so that we can get more productive work out of them and not have to train and support a mentor as much as we probably had to in the last year. So I think that answers all 3 points.

[Unknown Executive]

And it does, and there's never any harm in investing for the future. Andy, M&A, again, rolling a couple of questions together. The group has completed successful acquisitions in the past. One question, are there particular regional areas? Or are you likely to look at products, add-ons if the opportunity is right?And second question is, it is, I suppose, unfortunately, for the rest of us, but good for defense companies, a difficult geopolitical background at the moment. Is that affecting prices of businesses that you might be looking at? And related to that, how do you -- the 2 of you looked at the financial criteria to apply to an acquisition?

[Andrew Thomis, executive]

Well, starting off with what kind of acquisitions -- excuse me, are interesting. Fundamentally, it's businesses operating in the defense space that have good growth potential, that are agile and innovative, so a good cultural fit with the group, and that have got some kind of sustainable competitive advantage. So [indiscernible] price with a lot of other companies doing exactly the same thing.And that tends to bring us towards certain areas of the defense space, which, of course, is very wide. And we've attempted to try and find, if you like, slightly unfashionable areas to invest in because there's plenty of evidence that suggests that fashionable areas tend to attract very high prices for acquisitions, which then are very justifiable performance of the acquisition. [indiscernible] is an example of that, the large cybersecurity businesses, which we're selling for a multiple of revenue, they weren't actually making the profit and then disappointed their new owners.So we've tried to avoid that conflict. Examples of the sourcing -- you're aware of, really. So acquiring businesses like Chess, which is a bit below the radar of most defense businesses, but is actually really crucial towards the amount of vital importance war against drones, that businesses are ELAC, which submarines, sonars are perhaps the most fashionable thing about this. But when we see a huge investment that China is making into a submarine fleet, then we see the real need to [indiscernible]. So I was trying to find those little less fashionable but more cost-effective areas.Now, you've highlighted the increasing demand for defense equipment globally and the situation that's created, that I talked about. That is certainly, I think, driving up multiples especially on the main market, depending on the Europe and see how [indiscernible] done in recent years to see that. It's also interesting bringing them out quite a lot of small businesses thinking that this might be a good moment to sell. So quite a lot of opportunities are coming on our desks at the moment. Sadly, not one that so far we have judged to be were really pursuing hard. In many cases, perhaps ambition just outstrips evidence of performance, I would say. But nonetheless, we are continuing to look at. And I do -- I mean we're seeing plenty of opportunities to [ attempt to save ].In terms of valuation, it's very much -- and this is one of our advanced, relatively small business where the senior management are always deeply involved in acquisitions. We are -- we're not -- we don't have a sort of book of multiple that we paid to different kinds of businesses. We look individually perhaps the risks and the growth opportunities of particular businesses, how much growth is built in and how much is still to be won, how much requires our asset to deliver. And we price on that basis, also take into account the size as well. But don't forget, we're looking at businesses typically with revenue in the range of close to GBP 50 million, 300 people. So we're not talking about large businesses.Simon, anything you'd want to add to that? [Technical Difficulty]

[Unknown Executive]

You're not getting away that likely, Simon, I afraid. A possibly related question is paying for it. I think an interesting question on working capital, and there are quite significant movements through previous years. And you've just detailed the successful on-budget investments in Kiel and the assets there. But the question is within those pieces and drops, how does the 2 of you look at assessing the capital required for R&D as well as what that leaves you in terms of the scale of M&A opportunity?

[Simon Walther, executive]

Yes. I mean, how do we -- working capital, I mean, we're not on a heavy CapEx business. Kiel is an unusual investment for us. It has to be done because the [0:39:45.3] exited their own city by the end of '25 as the owner wants to develop it. Now we've not yet made a decision on whether once it's built, whether we leave you on that balance sheet or do some sale and leaseback and free up some cash. We'll make that decision at the appropriate time in the future.But other matter is that you have a big investment. Most of our CapEx is what I would call replacement CapEx, mostly in IT, machinery, but not a great deal. Working capital is a big movement for us. And we have -- I said that -- and so that have large invoice receipts of some millions in individuals. We have obviously some reasonably large supplier demands, things like radars that fit on screen, some Chess's equipment can be as much as sort of touching GBP 1 million each. So we obviously -- what we do to deal with that is we tend to structure our contracts such that as much as possible, the customer pays for most of our working capital as far as we can. And we have some businesses like MCL, we chose to work on new working capital.Mass is a very low working capital business because it's people and the -- it's making customers pay very quickly. That's why we think about defense, but others like our Sensors and Effectors division is a bit more demanded on working capital.In terms of the R&D, how we do that is each business basically each has a 3-year plan with a budget done every year. And they set their R&D targets. And what we do is sort of -- so they have a framework within which, obviously, we have expectations of the operating performance and what we'd like to see at the bottom line and the cash flow spun out of that. But basically, they will come to us and put forward their R&D proposals. In fact, in some cases, I think Andy and I are challenging to try to move up the R&D spend because [indiscernible]. But it's -- what I'm always aware of and I've been in defense for over 25 years now.But one area you've got to be careful of is that R&D somewhat will become what engineers who are not busy will spend their time on. That is not what we want to be doing. We want to actually be developing R&D, that is actually like a project as any other project in the businesses, very much focused on our product portfolio, and that has been a focus for us very much over the last 3 to 5 years, particularly in our product businesses of SEA, ELAC and Chess where it's just develop whatever you think is a good idea. Let's look at what we strategically want to be in. And we put in management teams now that are very much focused on that.So no, I'm fairly comfortable. And then really in terms of the M&A firepower, we obviously have our paper if we need it, but that really is where the debt facility is. I mean, if you look at our current debt, Cohort has been there 17 years, you've never used our overdraft in 17 years. And so our debt is very much structural debt for M&A. We never -- we're funding the ELAC, we will fire our own cash flow. So my funds, my debt facility is very much there for buying businesses, not for funding the business day to day.

[Unknown Executive]

That's a very important point. And probably the last question related to M&A. More of a judgment call, the 2 of you looking ahead on that sort of 3- to 5-year period, you've just mentioned, Simon. Is it -- the question from a shareholder is, is it reasonable to assume that strong organic growth is the main plank in that period and that you would hope to buy useful M&A to accelerate that growth if it comes along, but if it doesn't, you're still very happy with prospects?

[Simon Walther, executive]

Yes, I would say that would be a conservative assumption. If you look back, we'll see we've done an acquisition in recent years not once every 2 years. We've had a little bit of a hiatus since 2020 because of the obvious thing that happened. But we're certainly pleased to find another one we think that, that will enable us to accelerate our revenue and profit growth further.

[Unknown Executive]

Okay. Just a little bit on current and expected clients. We've got a question and you quite rightly majored on the strong position that you have with members of NATO and now the AUKUS Group. The question is, is that an exclusive group for exporting to? And related to that, are you confident or hopeful that the members of AUKUS will grow over time given the tensions in the region that you've alluded to?

[Andrew Thomis, executive]

Well, that's an interesting question. I'm not sure I'm the right person to talk about that. But although I mean there clearly is some interest being expressed in certain capital about this alliance and whether it might be open to additional partners. But I would say and ask the first question. No, I certainly not. I mean, we are a very wide exporter. We export strongly to the Middle East and Southeast Asia, 2 very important regions for us. To a lesser extent but still important to South America as well. And to some extent, into North America, too, Canada. And we do a bit in the U.S., although, as you know, it's a pretty difficult market to break into [ NATO ]. So we're a worldwide exporter, although the U.K. is our largest customer. We're very strong.

[Unknown Executive]

Yes. And it's probably fair to say that [ it's ] a topical matter, but the growth in the numbers of -- members of NATO is a distinct possibility as well.

[Andrew Thomis, executive]

I would say it is. Well, I mean it's a very strong possibility that Sweden is going to join NATO [Technical Difficulty]. Those are 2 countries where we have -- Sweden, particularly we have very good relationship where they are both a market for us and a supplier for certain equipment, too. Very good [ defensive stream, too].

[Unknown Executive]

Good. And then just perhaps the last one, you featured maritime order flow and the recent events that certainly raised the awareness of the importance of assets such as undersea cables and pipelines or strategic reasons. The question is, you're already seeing order flow. How do you see the time lag or response from government to suddenly become aware of vulnerability? How many months or does it still take years for significant spending patterns to emerge?

[Andrew Thomis, executive]

I think when the government sees stock risks, which are being thrown up by the Ukraine conflict, the response would be very fast indeed, and that's manifested in the order intake [indiscernible]. In times where this is less obvious and less talk, then things tend indeed to slow down a little bit. And the emphasis becomes off of the long-term strategic decisions rather than responding to the immediate threat. But we see governments, not only in the U.K. but elsewhere, can respond to a rapidly changing situation. That is pretty impressive. And our mission is to respond just as fast to the requirements.

[Unknown Executive]

Very good. Very last one for you, Simon. We've got a comment here that I echo. It's very nice to go through a presentation without hearing about logistic and supply chain problems. So you obviously seem to be in control of the situation. Is it fair to say there are no material residual problems?

[Simon Walther, executive]

I mean, we -- obviously, in COVID, we saw lengthening of supply chains and obviously then followed by the inflationary impacts. What I would say is it's got no worse. And in fact, in some areas, it's now start to improve again. But there are some components about are still on longer time frames than we would like. But clearly, that's now worked its way for the system and the customer now stands that if they want this product, that these times are X not Y, because of those delays.We've seen probably in the legacy, I would say, is probably still more in Portugal than anywhere else, and that may be a reflection more of the size of the Portuguese market as a whole. We've certainly -- Germany has certainly seen these and then the U.K. has. We're not -- I said 2 years ago, Andy and I would be greatly talking to managing directors and finance directors and maybe bringing these issues up, I don't hear these come across my desk now for at least -- well, probably a year.It's very much quietened down. As said, defense is such that it's any way almost like everything. If you know something is going to take 2 weeks to turn out, you tell everybody it's going to take 2 weeks and that's what it takes. And it's just -- what was back -- you didn't have a clue, you try to say when is it coming, I don't know, all that is now pretty much gone. And we're not seeing that anymore. So no, I'm quite pleased with that.

[Unknown Executive]

You're not even crossing your fingers under the table. So, we will take that as a...

[Simon Walther, executive]

Those are the confidence.

[Unknown Executive]

Great. Excellent. Well, thanks very much to our audience for a wide range of interesting questions. A quick reminder that not only this deck, but ultimately, the recording and the recent research report out from [indiscernible] Equity Development is available on our site, will be available with our site and on the cohort website soon. Thank you very much to our presenters, and we wish you all the best for the H2 and the many years where you have forward visibility of orders. May it all turn into cash.

[Andrew Thomis, executive]

Thank you, [ Andrew ].

[Simon Walther, executive]

Thank you.

[Unknown Executive]

Thank you.

[Andrew Thomis, executive]

You're welcome.