Cohort plc (CHRT) Earnings Call Transcript

Okay. Well, good morning, everybody. and thank you very much for those joining us in the room and for those joining us virtually as well. I'm Andy Thomis, I'm the Chief Executive at Cohort plc, and I'm here with Simon Walther, who's our Finance Director. Cohort provides advanced defense technologies and services to the U.K. and Allied Nations worldwide, and Simon and I are here to present our latest financial results and to explain the innovation, geopolitics market drivers that support our growth. There we are. Cohorts businesses share a common purpose, which is developing advanced technologies that contribute to our customers' national security and defense. Each of our businesses brings its own specialist expertise. Collectively, they deliver innovative solutions that help customers address increasingly complex operational challenges. Operating through our Communications and Intelligence and Sensors and Effectors divisions, we offer a broad range of capabilities, as you can see from this slide. We'll say more about demand patterns, but I'll highlight a counter drone, antisubmarine systems and seabed warfare as areas that are clearly relevant to the needs of defense customers today as a background to the results, I thought it would be helpful to show you cohorts total shareholder return since our IPO 20 years ago this year. And it's benchmarked against both the AIM. All Share Index and our peer group of U.K. listed defense firms. Over the period, as you can see, cohort has significantly outperformed the broader A market and delivered returns ahead of our peer group. Now while there has naturally been some share price volatility during the period, the overall trend is of sustained growth underpinned by strong operational performance, increasing order intake and since 2022, a favorable defense spending environment. The sharp acceleration you can see from 2024 onwards reflects growing investor recognition of cohorts market position and the opportunities arising from increased defense and security investment across the U.K. and allied nations. And what this shows is that we've been able to create value consistently for shareholders over a long period through the successful execution of our strategy. And this 1 shows in more detail how we've delivered that shareholder return. The chart on the left shows the progression in adjusted operating profit since 2006. And from a relatively modest base, we've steadily expanded the business a combination of organic growth, underpinned by investment in both technology and capacity and strategic acquisitions. Despite periods of economic uncertainty and changing geopolitical conditions, the overall trajectory has remained strongly upwards, culminating in the record performance that we've seen this year. The chart on the right demonstrates our commitment to delivering value to shareholders through our progressive dividend policy. Since 2006, the dividend has increased every year, reflecting both the resilience of our business model and the confidence that we have in the group's long-term prospects. Together, these trends highlight the strength of cohort strategy, the quality of our businesses and the growing demand for the specialist defense and security capabilities that we provide. This year's results represent the continuation of a long-established track record of profitable growth and increasing shareholder returns. And this slide shows the financial highlights of our '25, '26 financial year. And it was another outstanding year for cohort, delivering record revenue and record adjusted operating profit. That revenues continued to increase now over GBP 306 million, and our operating profit has grown this year by 32% to more than GBP 36 million. Demand for our products and services remained robust throughout the year, and I'm pleased to report an order intake of GBP 314.2 million, exceeding our revenue and that brought us to a year-end order book of nearly GBP 620 million. And that provides excellent visibility of future revenues with contracted work extending out to 2037. As expected in the year as a whole, operating cash flow and net funds were lower than the exceptionally strong levels reported last year, primarily reflecting working capital movements and investments associated with the growth of the business, about which we'll have more to say. Nevertheless, the group remains in positive net funds and continues to maintain a strong balance sheet. And we're pleased to recommend, again, a full year dividend increase of 10% to 17.9%. And that reflects the continued confidence in the group's prospects. And now I'd like to invite Simon to share some more details of our financial performance. Simon?

Thanks, Andy. Good morning to you all. I'll move on. Now this slide highlights the performance of our divisions, Communications & Intelligence and Senosrs and Effectors, both of which continue to benefit from strong and growing demand across their respective markets. Starting with Communications and Intelligence. Revenue increased by 27% to GBP 158.9 million while the adjusted operating profit rose by more than 50% to GBP 32.4 million. The operating margin improved significantly to 20.4%, reflecting strong program execution and a favorable mix of higher margin activity. During the year, the division secured several important contract awards, including integrated communication systems, networks and satellite communication systems for the Portuguese Navy. We also continue to see strong demand for drone capability resulting in significant contract wins with the U.K. MOD. Turning to Sensors and Effectors. The revenue for this division was relatively flat at GBP 147.5 million. Profitability was below last year, mainly a result of the disposal of our high-margin noncore transport business earlier in the financial year. The order book and the pipeline for this division gives us confidence that it will grow in the coming year and improve its net margin. We've improved operational performance at Chess, the first deliveries of sonar systems for the Italian submarine project and closure of low-margin projects at SCA. The combined offerings of our communications intelligence and sensors and effectors businesses man a key strength of cohort, providing both resilience and exposure to a broad range of markets, defense markets, and security capability requirements across an international customer base. Moving to the net funds bridge. You'll see it's been quite a swing this year. We moved from opening net funds of GBP 5.3 million to net debt of GBP 32.5 million at the half year. primarily due to significant working capital outflows associated with the execution of major programs. As expected, the second half improvement was much improved, generating an GBP 18 million -- or over GBP 18 million working capital inflow, alongside strong profitability. Consequently, the group returned to a positive net funds position of GBP 2.2 million at year-end. This demonstrates that the movements in cash were largely timing related and that the underlying business remains strongly cash generative. We move to the next slide. This gives you the last 5 years of the group, and you can highlight the capital allocation. So we've generated GBP 142 million of cash from operations, providing the flexibility to invest in future growth while continuing to deliver returns to shareholders. In those 5 years, we invested approximately GBP 60 million organically across the business, including the completion of our state-of-the-art manufacturing facility in Kiel, Germany. Investment in Create Sense and the development of our Enlite and Eros technologies in response to increasing demand for undersea infrastructure protection. These investments strengthen our position -- sorry, strengthen our capabilities, support innovation and position the group for future growth. Alongside organic investment, we deployed just over GBP 40 million on acquisitions, net of funds raised, completing the EM Solutions and Interactive Technical Solutions transactions. These acquisitions have expanded our technology portfolio into satellite communications and broadened our regional growth opportunities, particularly in Australia and Asia Pacific markets. We are pleased to have maintained our commitment to shareholder returns, distributing GBP 30 million through dividends over the last 5 years. Overall, this allocation of capital reflects our strategy of investing for growth while maintaining a strong balance sheet and delivering return to shareholders. And looking forward, we entered this financial year, 26 '27 with a strong level of visibility supported by an order book that already underpins 88% of our expected revenue for the year. Combined with an encouraging pipeline of opportunities across our markets, this gives us confidence in our growth outlook. As we look towards 2030, our strategic objectives remain unchanged. We continue to target a net margin in the mid-teens and expect to deliver double-digit percentage earnings growth per annum for the coming year and the 2 years after that through a combination of organic growth and operational leverage, improving our net margins. The chart on the right illustrates our 3-year capital allocation framework. We expect to generate approximately GBP 140 million of cash from operations. Of this, around GBP 60 million will be reinvested in the business to support organic growth initiatives, including GBP 15 million in a new facility at Horsham for Chess, which should be completed in early 2020 and enable increased capacity to meet demand and improve efficiency to achieve the mid-teen margins. It also includes spend on innovation and future capability development. After this planned investment, we expect around GBP 80 million of cash generation to remain available, assuming the continuation of our progressive dividend policy, we anticipate returning approximately GBP 30 million to shareholders through dividends over the coming 3-year period. This leaves around GBP 50 million of available funds on top of which we have a significant new bank facility. Together, these provide significant flexibility to pursue value-enhanced opportunities, including strategic acquisitions, whilst maintaining a strong balance sheet. Overall, our guidance reflects both confidence in the underlying performance of the business, a disciplined approach to capital allocation that balances investment, shareholder return and future growth opportunities. With that, I'll hand back to Andy.

Thank you very much indeed, Simon. And before we move on to the strategic context, I wanted to highlight some operational initiatives that we've taken in the last year. So earlier this year, we appointed Chris Axcell as the group's first Chief Operating Officer, and Chris is here in the room with us. So if you have questions of an operational nature to ask later on, I shall throw them in his direction. Chris joins us from Leonardo U.K., where he held multiple technical and leadership roles, including Vice President, Surveillance and Protection Technologies, Vice President, Sensors and most recently, Senior Vice President, Integrated Sensing and Protection, where he was responsible for 2 of Leonardo U.K.'s major facilities. He brings extensive experience and expertise in managing business operations within the defense sector and adds deep industry knowledge and values to the group's headquarters team. And as Chief Operating Officer, Chris will work alongside Simon and me to provide oversight and strengthen operational performance across the group. He'll also take over from me the day-to-day relationship with certain of our operating businesses and support me more widely across the range of my responsibilities, including, for instance, identifying acquisition targets. And Chris' appointment has enabled us to take several initiatives with the aim of enhancing our operational performance. So we've launched under Chris' leadership, a group forum for engineering operations and supply chain teams, creating opportunities to share best practice to solve common challenges, and to leverage the collective experience of our businesses. And we now plan to create a project management forum, again, under Chris' leadership, further strengthening program delivery across the group. And that will include the introduction of a group-wide project life cycle framework to provide a consistent approach to bidding project execution and governance. And in addition, we're introducing integrated project teams at Chess, bringing together the key disciplines required for successful delivery under a single structure. And this approach is improving accountability decision-making and program execution, helping to drive on-time delivery and customer satisfaction. I would also -- as Simon has mentioned about to invest around GBP 15 million moving chess from its current 13 buildings in Horsham to a single new facility that will make a big contribution to its operational efficiency. And collectively, these initiatives are enabling us to enhance our operational capability right across the cohort group. So in this next section, I'd like to share with you some of the strategic highlights from the past 12 months and to talk about the outlook for future years. The 3 components of our strategy are to grow organically to accelerate that growth through targeted acquisitions and to maintain sound culturally rooted governments to underpin that growth. And in terms of capital allocation, that translates into 2 areas: internal investment in new products, technologies and facilities and external investment in acquisitions. So this line is on the first of those 2 areas, how Cohort continues to invest in technical innovation that provide solutions to the defense challenges facing our customers. Our KraitSense towed array sonar is a key anti-submarine warfare capability designed for both crude and uncrewed platforms. And the focus is on delivering a flexible, modular and scalable system with a small footprint, lightweight and low power requirements. And that unique combination of features makes it particularly suitable for a wide range of naval customers and platform types and demand is increasing, especially for cost-effective anti-submarine capabilities based on uncrewed vessels as Navy seek to expand maritime surveillance and deterrence. And staying with the underwater battle space, we're developing 2 complementary products and lighter Enlitor and Erazor to protect underwater infrastructure. And Enlitor Oil is a passive underwater surveillance system designed to provide persistent monitoring of undersea infrastructure. And working alongside in Enlitor, Erazor provides an active countermeasure designed to enable threats to be intercepted and neutralized. And then as a third example, in Satellite Communications, we're progressing development of combined optical and radio frequency turns. Now this technology integrates traditional radio frequency communications with high-capacity lasers within a single antenna system. And the approach has got the potential to deliver greater bandwidth, resilience and operational flexibility, supporting future defense satellite networks. The laser communication system, although it's limited to use in suitable atmospheric conditions is effectively unjammable, which is a vital capability in time of conflict. So together, these technologies address the evolving needs of defense customers as they respond to growing risks and the changing nature of conflict. The second area of strategic investment I wanted to highlight is acquisitions. Over the years since our IPO, we've executed 7 major transactions. There is always risk associated with acquisitions, but our industry knowledge and our experienced team have enabled us to manage these with some success, as I think this slide demonstrates I'll particularly highlight our very first acquisition, MASS, which last year generated operating profit of almost GBP 11 million, not far short of the GBP 13.5 million purchase price. On our most recent acquisition, EM Solutions showed a really material improvement in performance after just 1 year. Now we haven't executed any new acquisitions in the 2025, '26 financial year, although we do continue to see a steady flow of opportunities. And we review those carefully against our. we're looking for successful, profitable defense technology businesses of the right size and with a culture of innovation and agility. And beyond that, we're looking for exposure to growth opportunities within the overall defense market and some kind of sustainable competitive advantage based on technology, incumbency or historic relationships. And over the last 20 years, our acquisition strategy has been a driving force in the growth of the group, and we expect that to continue into the future. Now we continue to see a strong demand picture in response to the deteriorating security environment and ongoing conflicts that we see around the world. And none of us should welcome that. The risks that we now see coming from that are real. And I'm sorry to say that they have the potential to affect us here in the United Kingdom. And in regions where threats are perceived as being the most pressing, governments are under pressure to upgrade and modernize their defense capabilities at speed. And this is where mid-tier businesses like those within the cohort group have the agility and expertise to provide innovative solutions to those defense challenges. In 2025, global defense spending reached USD 2.63 trillion. And that growth reflects an increasingly uncertain geopolitical environment, and a widespread reassessment of national security priorities by governments around the world. The chart shows the way that defense expenditure has grown since 2021. It excludes Russia and China. And as is clear from that chart, you can see that the United States remains the largest single defense vendor, but also that the fastest growth has come in Europe and in Asia. In Europe, the driver is clearly the continuing intense and bloody conflict in Ukraine. And as well as driving increased defense spending, the conflict has highlighted the importance of sea air and land drones for a range of tasks, including reconnaissance, strike and logistics. It's also highlighted the importance of air and missile defense systems. The U.K.'s recent defense investment plan includes a strong focus on maritime capability to protect the North Atlantic region from Russian submarine incursions, and interference with underwater infrastructure and uncrewed vessels will play a major part in those plans. In Asia, Chinese investment in its arm forces together with its increasingly aggressive use of its Navy and Air Force have catalyzed strong growth in defense spending, notably in Japan, Taiwan, Australia and the ASEAN nations. And although China is increasing spend in all areas of its defense, its threat to its neighbors is significantly maritime in nature, both on and below the sea surface. The continued instability in the Middle East, including the conflict between U.S., Israel and Iran and the consequent regional security concerns is also driving increased demand for defense technology in particular, for communications and intelligence solutions. Now these trends align closely with the capabilities that we have in the Cohort Group in communications, intelligence, cyber, electronic warfare, sonar, maritime systems and counter drone technologies, and that provides us with a really supportive backdrop for long-term growth. Now this slide highlights the strength and diversity of cohorts geographic exposure and importantly, the alignment of our business with regions where defense spending is expected to grow most strongly over the coming years, as I've shown you in the previous chart. So what this shows is a comparison between 2024, '25 revenue, '25, '26 million revenue and the revenue that is held in our order book breaking it down by percentage regionally. And the most striking features that you can see are the growing proportion of our output going to Europe and Asia Pacific with the proportion going to the U.K. and Australia reducing. Now the increases are in line with the international demand patterns that I've described. But in Australia, we're delivering our existing order book really quite rapidly, but we expect that to be supplemented by some large opportunities in the next few years. In the U.K., it's too early to say exactly what the consequences of the recent defense investment plan are going to be, but there may be a less rapid falloff in the proportion of our work going to the U.K. if the new Prime Minister follows through on promises to increase defense spending further. Looking at the order book revenue, the third column, what's particularly encouraging is that it's diverse well balanced across regions and closely aligned with those markets where defense spending is increasing most rapidly. The U.K. remains an important source of revenue, but the trend illustrates our ability to tap those markets where spending is growing most rapidly. Now this chart shows a similar comparison between '24, '25, '26 and order book revenue, but this time, broken down by end user domain. And you can see from here that Maritime remains our largest domain and has grown as a proportion of group revenue over the last year. And the trend is even more evident in the order book, where maritime programs account for almost 80% of contracted future revenues. And that reflects the long-term nature of maritime defense programs, which provides strong visibility and support sustainable growth over many years, in this case, out to 2037. And -- and our land domain work is also very strong and long term. Now those proportions represent our technical strengths, but they also are a function of the demand patterns that I've described in Europe and Asia. Our cyber and information work is important, but the small proportion that's there in the order book represents the relatively short-term nature of contracts in that area. Air and space work remains substantial. But the other category, which you can see is a thin layer on top of 24, 25 and 25, 26 has almost disappeared following the sale of our transport business last year. Overall, we expect that future revenue will include a healthy balance of long-duration maritime and other contracts, supplemented by shorter duration orders in areas where agility is at a premium. And that long-term base of order revenue is an excellent building block on which we can build our future growth. Now this time, which many of you will be familiar with gives more detail on a breakdown of that important order book. On the 30th of April, the value of the order book stood at over GBP 618 million. And as I mentioned, that includes contracted revenue that will be recognized out to 2037, and of the total order book, approximately GBP 264 million is scheduled for delivery this year, providing us with very good revenue visibility. And importantly, that's balanced quite well across our 2 reporting segments, with Communications and Intelligence contributing GBP 128 million and Sensors and Effectors contributing GBP 136 million. And looking further forward, a substantial proportion of the order book extends into later years, reflecting the long-term nature of many of the programs that we work on. And that includes around GBP 132 million that's scheduled for delivery beyond the 2829 financial year. And overall, that runoff profile highlights both the quality and longevity of our order book. It provides strong revenue visibility supports confidence in our medium-term outlook and gives us a solid platform from which to pursue further organic growth and new contract wins. And now above and beyond the order book and across both divisions, demand remains strong and is being driven by those same geopolitical and defense spending trends that I've spoken about. Within Communications and Intelligence, we continue to see significant opportunities for electronic warfare and secure communications, particularly in Europe where lessons from the conflict in Ukraine continue to shape procurement priorities. And we're also pursuing major naval satellite communications opportunities in both the U.K. and Japan while our electronic warfare and operational support capabilities are gaining increasing traction in export markets, including the Middle East. The Portuguese Navy program provides an excellent example of how multiple cohort businesses can work together to deliver integrated solutions, combined communications, networking and SATCOM technologies. Within Sensors and Effectors we see a substantial pipeline of opportunities for counter drone systems through established partnerships. Demand is also growing for technologies that can detect, monitor and protect critical underwater infrastructure, reflecting increased concern around maritime security and seabed protection. We continue to see strong opportunities for our sonar and sensor technologies, a submarine and surface fleet modernization programs progress across a number of international markets. And programs such as the Royal tie Navy's new frigate, demonstrate the benefits of collaboration across the group, bringing together complementary technologies and expertise. And we also expect to benefit from investment associated with the U.K.'s Atlantic Bastian initiative and wider NATO efforts to strengthen antisubmarine warfare and underwater infrastructure protection capabilities. So overall, that pipeline of opportunities is strong, reflecting the patterns of growing global venture and the market relevance of our products and technologies. So as we come to the end of the presentation, I wanted as a final point to summarize how we aim to generate value for our shareholders. First, only the business benefits from robust financials underpinned by strong cash generation and a healthy balance sheet. We remain focused on investing in areas that generate sustainable returns, prioritizing expenditure on research and development and expanding our capacity. Across the group, we maintain and invest in innovations that address mission-critical customer requirements and reflect the security challenges they face in today's world, as I hope I've shown you this morning. We're also well positioned through access to growth markets and have demonstrated our agility and responsiveness to geographical market trends. Our acquisition strategy has been an important contributor to shareholder value creation. We've got a proven track record of acquiring high-quality businesses and integrating them successfully, identifying opportunities to collaborate across the group where appropriate. And finally, we have a consistent dividend track record having increased the dividend every year since our IPO 20 years ago. And that reflects both the strength of the business and the Board's confidence in the group's long-term prospects. Before closing, I want to take the opportunity to mention the great contribution to our success made by our management teams and employees right across the group. I'm very grateful to all of them for the part that they've played in helping us achieve these good results. It has been a successful first 20 years, and we look forward to the future with confidence. And let me leave you with this extract from our preliminary statement. And we'd be delighted to take any questions that you might have.

Thank you. We have had a number of questions pre-submitted and submitted live. [Operator Instructions] Our first question is, the order book remains incredibly strong. Can you give us a feel for how much of that is genuinely new work versus extensions of existing contracts?

That's an interesting question. I don't have that precise breakdown. But I'm tempted to say that a large proportion of it is new work. So for example, I mean, the large components of the order book, things like program to supply the new sonar suites for the new fee Italian submarines. The contract to supply missile defense systems to the raw Navy in the U.K. Now these contracts do tend to get extended and changed over time. They're long and complex. And indeed, the Italian submarine contract has already been extended on a few occasions, so perhaps should include that in my initial response. But I think for the most part, it is new contracts. What I should also emphasize is that they are all legally binding contracts and there is nothing speculative in there. Nothing that wouldn't -- that would need a contractual change in order to be removed or extended or whatever. Simon, do you want to add anything to that? Is there any further culling...

The only thing I'd add, Andy, is that I think a lot of what I would call the repeat work is the smaller orders that we get and often delivered within the period. So they don't really get seen in the order book because they're sort of turned in the period. So small orders, spares, repairs, that type of work often come in, go out in the same year. Some will extend. But when you look at our order book and the longevity of it out all of that mostly is work. These are lumps that we've won. There will, at some point, be extensions to no doubt about that they will grow the ancillary order, which is the longest. I expect that will be extended once we get into full service support and things that are now for a few years.

Yes. I mean just reflecting on it, actually. So we've -- we have, as I've said, seen the original also contract extended from originally 2 submarines, and I would certainly expect to see the Acella contract extended to further ships, and our large contract in Australia, not yet clear whether that will be extended or whether there will be a new conduct to cover further ships, but certainly, we will be doing more of the same work for the Australian Navy. Sorry, we couldn't give you a precise numerical answer, but I hope that gives you a flavor.

Thank you. The next question reads, the cash position still looks healthy. Is the priority more acquisitions, paying down debt or continuing to grow the dividend.

As Simon's slide shows, all of the above. I mean we're driven by different things. IN relation to investment internally, we do what's needed, and also, when we see good opportunities, see a good return on internal investments, for example, through product development, those are things that we will certainly pursue. Acquisitions have to be more opportunistic because we can only acquire something in it to sell. We didn't make any acquisitions in '25, '26, as I said in the presentation earlier. But that's really because we're looking for a very particular special acquisition targets, and we don't see them all the time. We've done 7 since we IPO-ed back in 2006. And the growing dividend is something that we've always been committed to, but each year, we reconsider carefully in terms of the cash available and future prospects. And I'm happy to say that we've always seen it appropriate to continue increasing that dividend. Simon, is there anything else you would add to that?

I'd only add on the final point of dividend that we -- as you can see, and we've been increasing it pretty much at 10% per annum, which is what our targeted earnings growth is. And we our policy is to look for around about earnings to dividend cover each year. Actually, we've been running at slightly higher than that in the last few years. But no, that's certainly the case. I think on the investment, as you said, Andy, it's more driven by what -- it's -- that's more of a bottom-up and a top-down approach is what our businesses need, and we assess it each year as part of our 3-year strategic plan as well thought out. And sometimes it's higher and sometimes it's lower in general what the demands are.

Yes. And with the new bank facility in place, we certainly got plenty of flexibility to invest where we need to.

Which markets or business segments offer the greatest growth opportunities over the next 3 to 5 years.

Well, I think in terms of geographical markets, the answer is Europe and Asia. In Europe, we're in a period of transition really from sort of post-cold war period of low defense spending and the peace dividend to a realization, well, I think in the words of the last defense secretary now recently appointed to the Chancellor. We're moving into a prewar period rather than a postwar period. And so people are once again looking at defense spending as a very, very important form of insurance with the aim of deterrence, hopefully, rather than having to activate defensive measures. So we're in a progression from maybe sort of 1% or 2% of GDP on defense for most European countries up to 3.5 or above. And some countries are in front of others on that. Germany is moving very fast. Poland is moving very fast, the Nordic countries, the Baltic countries moving very fast. The U.K. so far has moved a little small, but indications from the new Prime Minister and particularly the installation of Mr. Helius is the new Chancellor other suggests that we may be prepared to go further than the original defense investment plan proposed. And we see a similar situation in Asia, a very wide region, of course, where China is investing a huge amount in its defense forces both Army and Navy and Air Force. But where its main effort to exert its influence is maritime, and that affects its neighbors in the ASEAN region, around South China Sea. It affects Japan, Korea, all the way down to India and Australia. And so across that wide region, countries are looking to build their defensive capabilities. So it's not to be intimidated by this kind of behavior and make sure that China doesn't feel that it can exert its influence without consequence. So both of those regions are growing very significantly. And those are augmented by the policies of the current administration in the U.S., which is firstly, pushing the non-U.S. NATO members to spend more on defense. And secondly, perhaps some of its behavior in relation to allies and for example, talking about annexing Greenland or invade in Canada and this sort of thing, is encouraging these countries to think should we rely solely on the U.S. as a means of supportive provision of defense equipment to I hope that answers the question.

Thank you. How is the company managing supply chain risks, inflation and labor costs?

Well, supply chain risks these -- I mean I mentioned in the presentation that we have brought in for the first time a Chief Operating Officer into our headquarters team, Chris Axcell who is a very experienced guy has spent 26 years in Leonardo and its predecessor organizations in the U.K. and a lot of that time in managing production operations in defense. So that adds to our team, a new capability to enable us to support our businesses. and several of them are undergoing that transition from engineering-led businesses, where the main value is created by designing clever solutions into more production line organizations where we create value by producing in a regular repeatable way, significant numbers of the equipments that we've designed. And he has instituted a cross-group forums on several important operations-related matters, and one of those is supply chains, identifying potential supply chain pinches, particularly those that affect more than 1 company across the group, and enabling us to put in place policies for dual sourcing or increasing stock holdings and so on. so that we can manage those matters. And so far, I think the only sort of cross-group supply chain actually that we've noted is the supply of permanent magnet motors, which has been limited by the availability of rare earth elements, which are needed for the permanent magnets. And so that's an issue that we're dealing with. As far as the other matters are concerned, those are primarily dealt with through commercial terms. So do you want to say a word or 2 about inflation and labor costs?

Yes. There's still inflation first. Obviously, that comes from both our own costs, labor cost primarily and supply chain. In contracts really where anything more than normally 2 years in duration, certainly 3 years and above. We will look to put in inflationary clauses into each contract term. Effectively, they are price index to deal, and they will be linked to industrial indices often of a national nature. And we'll -- and we literally will be adjusted. So -- good examples are the large Australian contracts, the Italian contract an cilia, all having their variation of price clauses to do with inflation. In other contracts where we may not be able to get inflationary causes. We're building contingency to deal with potential inflation risk. So effectively, you put the price up to cater future costs. And obviously, with our own labor inflation. Well, obviously, that's about remaining sort of trying to keep our cost to what we think enables us to be competitive, whilst ensuring that we attract and retain the best people. We could -- if we go too low, we will lose the good people and end up delivering about service. So we don't make money in the customer, I can't get very happy. It's not very happy with the service. So the main protection for us is obviously ensuring that our pricing is correct. And the variation on contracts on pricing is very important on long contracts, very important. Okay.

Thank you. Export revenue to other Europe nearly doubled. To what extent is this growth contingent on urgent short-cycle procurement related to the Ukraine conflict versus multiyear suffering programs.

Right. To what extent is it related to urgent operational requirements for Ukraine, a very limited extent is a short and easy answer to that. Yes, most of what we're doing is serious long-term stuff. And for the reasons that I outlined before, people are not embarking on a sort of while shopping spree of things that they need in short order. European countries are considering very carefully how they need to build up their forces over a number of years and embarking on some really pretty major programs, and that's what we're seeing coming through into our order book.

Andy, I would add that the revenue that was linked to the contract in Ukraine directly was around 1% for the group last year.

Thank you. The next question is, is there any customer that accounts for a bigger proportion of the revenues than you'd ideally like? Or is the business now well diversified? Well, I have got to see from the charts that we presented, that the revenue streams now are really very well diversified. In particular, I mean, we're a U.K. center group, 4 of our 7 businesses are based in the U.K.