Cohort plc (CHRT) Earnings Call Transcript

So another welcome to everybody. We're very pleased to welcome back the Cohort team having just released their results for the 12-month period, the end of April, the record results, of which you're about to hear an awful lot more. Little bits of admin for me. This presentation is being recorded. So if you miss a little bit, don't worry, it will be available publicly in a day. The presenters will be using a slide deck that is already up on the Cohort Investor Relations page. Should you want to go back and study that in detail. You can submit questions as we go along, [Operator Instructions]. Right. We're delighted to welcome back Finance Director, Simon Walther; and CEO, Andy Thomis, and I'm now going to pass over to Andy.

Thank you very much, indeed, and I hope everyone can hear me. And good afternoon, and thanks for joining us. you've got us a large format has to speak to you. I'm Andy Thomis, I'm the Chief Executive of Cohort plc. I'm here with Simon Walther, who's Cohorts Finance Director. Cohort, for anyone who doesn't know, provides advanced defense technologies and some services to the U.K. and its allied nations around the world. And Simon and I are here to present our latest financial results and to explain some of the technical innovation, the geopolitics and the other market drivers that support that growth. So a word about our capabilities Cohorts businesses all share a boon purpose in developing advanced defense technologies to contribute to our customers' national security and defense. And each of our businesses brings its own specialist expertise. Collectively, they deliver innovative solutions that help customers address what our increasingly complex operational challenges. And we operate through two divisions: Communications and Intelligence and Sensors and Effectors. And across those two divisions, we offer really quite a broad range of capabilities, as you can see from this slide. Now I'll talk more about demand patterns later in the presentation, but just looking at this list, I would highlight the counter drone capability, the anti-submarine systems, seabed warfare, others as well. But these are all areas that are clearly relevant to the current needs of defense customers. If we can move to the next slide, Andy. As a background to the results, I thought it would be helpful to show you cohorts total shareholder return in our IPO, which is 20 years ago this year. This is our 20th anniversary. And the chart shows it benchmarked against both the AIM or Share Index and our peer group of listed U.K. defense companies. As you can see from the chart here, over the period, cohort has significantly outperformed the broader aim market and delivered returns well ahead of our peer group. As you might expect, while there has naturally been some share price volatility over that extended period. The overall trend is sustained growth, underpinned by strong operational performance. and increasing order intake. And since 2022, at least, a favorable defense spending environment. And that sharp acceleration you can see, 2024 onwards reflects growing investor recognition of cohorts market position and the opportunities arising from increased defense and security investment in the U.K. and across our other markets in its value nations. And the conclusion from all of this is that we've been able to create value consistently for shareholders over a long period through the successful execution of our strategy. If we can move to the next slide, because this slide shows in a bit more detail how we've delivered that shareholder return. The chart on the left shows the progression in adjusted operating profit since 2006, our IPO. And from a relatively modest base, that we've steadily expanded the business. Through a combination of organic growth, and that's underpinned by investment in both technology and capacity and strategic acquisitions. And despite periods of economic uncertainty and changing geopolitical conditions, and I'll pick out the arrival of austerity with the coalition government in 2010 and the post COVID hangover in 2022. Overall, the trajectory has remained strongly upward, culminating in, as I will explain in a moment, a record performance this year. And 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 we have in the group's long-term prospects. And I'm reliably informed that as a company that has increased its dividend every year over a 20-year period, we are now officially a dividend hero. I'm not sure how that lands with you. But anyway, it sounds pretty good to me. So can we move on to the next slide, please? Because this shows the financial highlights of our '25, '26 year the year finished in April 2026. And it was another outstanding year for Cohort. We delivered record revenue and record adjusted operating profit. The revenue has exceeded GBP 300 million for the first time, now over GBP 306 million, and the operating profit grew by 32% to more than GBP 36 million. And of course, with that, we've enhanced our margin as well, moving it towards our longer-term aim of mid-teens. Demand for our products and services remained robust throughout the year. And I'm pleased to say that our order intake of GBP 340.2 million exceeded our revenue, and that brought us to a record year-end order book of nearly GBP 620 million. And that provides excellent visibility of future revenues and contracted work, which goes out to 2037. As expected, operating loan 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 will have more to say. Nevertheless, the group remains in a positive net funds position and continues to maintain a strong balance sheet. And we're very pleased to recommend a full year dividend of 17.9p, once again representing an increase of 10% on last year's, and that reflects the Board's confidence in the group's continued success. So now I'd like to invite Simon to share some more details of our financial performance.

Thank you, Andy, and good afternoon to all of you. We move to the next slide, please. This slide highlights the performance of our two divisions, Communications and Intelligence, and Sensors 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 adjusted operating profit rose by more than 50% to GBP 32.4 million. The operating margin improved significantly to 20.4%, reflecting a strong program execution and a favorable mix of high-margin activities. During the year, the division secured several important contract awards included integrated communication systems, networks and satellite communication systems for the Portuguese Navy. We also continue to see strong demand for drilling capabilities, resulting in significant contract wins in 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 disposal of our higher-margin noncore transport business earlier in the financial year. The order book and pipeline for this division gives us confidence that it will grow in the coming year and improve its and margin. We've improved operational performance at Chess, the first deliveries of [ Sonos ] systems for the Italian submarine project, and closure of low-margin projects at SCA. The combined offerings of our communications and intelligence and sensors and effectors businesses remains a key strength for cohort providing both resilience and exposure to a broad range of defense and security capability requirements across our international customer base. Move to the next slide. This slide shows factors behind the net funds movement throughout the 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 outflow associated with the execution of major programs. As expected, second half cash improvement was much improved, generating an GBP 18.1 million working capital inflow alongside strong profitability. Consequently, the group returned to a positive net funds position of GBP 2.2 million at the year-end. This demonstrates that the movements in cash were largely timing related, and that the underlying business remains strongly cash generative. And in this next slide. Here, we see the capital allocation over the past 5 years. During this period, the group has generated GBP 142 million of cash from operations, providing the flexibility to invest in future growth while continuing to deliver returns to shareholders. 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 KraitSense and the development of our [indiscernible] and [ Eraser ] technologies in response to the increasing demand for undersea infrastructure protection, and Andy will refer to these later in the presentation. These investments 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 telecommunications and broaden our regional growth opportunities, particularly in the Australian and Asia Pacific markets. We are pleased to have maintained our commitment to shareholder returns, distributing GBP 30 million for dividends over the last 5 years. Overall, this allocation capital reflects our strategy of investing for growth while maintaining a strong balance sheet and delivering growing returns to shareholders. Looking ahead, we enter '26, '27 with a strong level of visibility supported by an order book that already underpins 88% of expected revenue for the year, combining 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 on a new facility or auction for Chess, which should be completed in early 2028 and enable increased capacity to meet demand and improve efficiency to achieve mid-teens 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-enhancing opportunities, including strategic acquisitions while maintaining a strong balance sheet. Overall, our guidance reflects both confidence in the underlying performance of the business and a disciplined approach to capital allocation that balances investment, shareholder returns and future growth opportunities. With that, I'll hand back to Andy.

Thank you, 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. If we can move on to the next slide, please. Earlier this year, we appointed Chris Axcell as the group's first Chief Operating Officer. And Chris has joined us from Leonardo 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 two of Leonardo's major U.K. 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 headquarters team. And as COO, Chris will work alongside Simon and me to provide oversight and strengthen operational performance across the group. I'll also take over from me the day-to-day relationship with certain of our operating businesses and supportable more widely across the range of my responsibilities, including identified potential acquisition targets. Next slide, please. 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, solve common challenges and build on the collective experience of our businesses. And we now plan to create a project management for, 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 and more specifically focused on Chess, we're introducing there integrated project teams, bringing together the key disciplines required for successful delivery under a single structure. And this approach is improving accountability, decision-making and program execution, and that's helping to drive on-time delivery and consequently, customer satisfaction. We're also about to invest about GBP 15 million, moving Chess from its current 13 buildings at a single site in [ Horsham ] to a 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. If we have the next slide, please. So in the section coming up now, I'd like to share some of the strategic highlights from the past 12 months and to talk about the outlook for future years. The three components of our strategy are to grow organically to accelerate that growth through targeted acquisitions and to maintain sound culturally rooted governance to underpin that growth. And in terms of capital allocation, that translates into two key areas: internal investment in new products, technologies and facilities and external investment in acquisitions, and this slide focuses on the first of those two areas, how Cohort continues to invest in technical innovation that provide solutions to the defense challenges facing our customers. So taking these in turn. Our KraitSense to array solar solution is a key antisubmarine warfare capability to design 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 this unique combination of features makes it suitable for a wide range of naval customers and platform types. And demand is increasing for cost-effective antisubmarine capabilities based on uncrewed vessels as navies look to expand maritime surveillance and deterrence. Staying with the underwater battle space, we are developing the [ Enlightor and Eraser ] products to protect underwater infrastructure. [ Enlightor ] is a passive underwater surveillance system designed to provide persistent monitoring of undersea infrastructure like Internet cables or gas and oil pipelines. And working alongside [ Enlightor ], [ Eraser ], which I think you can just about see at the top of that graphic, which is a sort of small torpedo, provides an active countermeasure capability, enabling threats to be intercepted and neutralized. And the third example in satellite communications, is the development of our combined optical and radio frequency terminal. As technology integrates traditional radio frequency satellite communications with high-capacity lasers within a single antenna system. And it's an approach that has the potential to deliver faster communications, greater resilience and operational flexibility, supporting 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. And together, these technologies are good examples of what we're doing to address the evolving needs of defense customers as they respond to growing risks and to the changing nature of conflict. We can move on to the next slide, please. The second area of strategic investment I wanted to highlight is acquisitions. Over the years since our IPO, we've executed seven major transactions and indeed, all seven of the businesses that are part of the group now the result of acquisitions. And there's always a risk associated with acquisitions. But our industry knowledge and our experienced team have enabled us to manage these with some success as the slide, I think, demonstrates. I particularly highlight our very first acquisition, MASS, which last year generated operating profit of almost GBP 11 million, and that's not far short of the GBP 3.5 million purchase price back in 2006. And our most recent acquisition, the EM Solutions also showed a notable a strong improvement in performance after just 1 year. Now we haven't executed any new acquisitions in the '25, '26 financial year, although we do continue to see a steady flow of opportunities, and we review these carefully against our criteria. What we are looking for is 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 market and some kind of sustainable competitive advantage, whether that's based on technology or incumbency or historic relationships. And over the last 20 years, this acquisition strategy has been a driving force in the growth of the group, and we expect that to continue into the future. If we can have the next slide, please. So let's turn to the demand picture. And we continue to see strong demand in response to are still deteriorating security environment is still deteriorating security environment and the ongoing conflicts that we see across the world. And obviously, none of us should welcome that the risks that we now see in Europe are very real. They have the potential to affect us here directly in the United Kingdom. And in regions of Europe, where the threats are 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. And in 2025, global defense spending reached a new peak of USD 2.63 trillion. And that growth reflects the increasingly uncertain geopolitical environment and a widespread reassessment of national security priorities by governments around the world. And this chart shows how defense expenditure has grown since 2021 across the world, but excluding Russia and China, which are not great markets for us. As is clear, the North American market, of which all but a tiny sliver is the United States remains the largest defense spender. But 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 particular technologies like see air and land drones in those cases for a range of tasks, including reconnaissance, strike as well as 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 incursion and interference with underwater infrastructure and uncrewed vessels will play a major part in those plans. In Asia, Chinese investment in its forces together with increasingly use particularly it's Navy and Air Force that have catalyzed the strong growth in defense spending. And that's notably strong in Japan, also in Taiwan, Australia and the ASEAN nations. And although China is increasing spending in all areas of defense, its threat to its neighbors is significantly maritime and focus, both on and below the surface. And in addition to those two big drivers, the continued instability in the Middle East, including the conflict between the U.S., Israel and Iran and the consequent regional security concerns is also driving increased demand for defense technology, in particular, communications and intelligence solutions. And those trends align closely with the capabilities that we have across the Cohort group in communications, intelligence cyber, electronic warfare, sonar maritime systems and counter drone technologies. And that provides a supportive backdrop for long-term growth. We've jumped ahead a slide, which is good. This slide highlights the strength and diversity of Cohort's geographic exposure. And very importantly, the alignment of our business with regions where defense spending is expected to grow most strongly over the coming years. What it shows is a comparison between '24, '25 revenue, '25 '26 revenue and the revenue that is held in our order book and breaking it down by percentage regionally. And again, you'll see the most striking features are the growing proportion of our output going to Europe and to Asia Pacific with the proportion going to the U.K. and Australia reducing. Now those increases are in line with the international demand patterns I've described a moment ago. In Australia, we're delivering our existing order book quite rapidly, but we expect that to be supplemented by some large opportunities in the next few years, which will change the look of that chart to a certain extent. In the U.K. Well, it's too early to say exactly what the consequences of the defense investment plan will be. But it's possible there may be a less rapid fall off if the new Prime Minister follows through on promises that he's made to increase defense spending beyond that set out in the dip. Looking at the order book revenue. What's particularly encouraging is that it is 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 the spending is growing. If we can move on to the next slide. This chart shows a similar comparison between '24-'25, '25-'26 and our order book. But this time, broken down by end user domain. And what you can see here is that Maritime remains our largest domain and has grown as a proportion of group revenue over the last year. And that trend is even more evident when we look at the order book where maritime programs account for about 80% of contracted future revenues. And that reflects the long-term nature of Maritime defense program, which provides strong visibility and support sustainable growth over many years, and in this case, right out to [ 2037 ], and our land domain work is also long term. So those proportions represent our technical strengths, which to good in maritime and land but also the demand patterns that I've described in Europe and Asia. The cyber and information work that we do is important, but the small proportion of the order book reflects as much the relatively short-term nature of contracts in that area as it does overall demand. Air and space work remains substantial. But the other category, which was noticeable in '24, '25 has now 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 on order revenue provides an excellent starting point on which we will build our future growth. Next slide, please. So at this time, provides more detail on that very important order book. On the 30th of April 2026, the value of the order book stood at over GBP 618 million, has grown since, of course. And as I mentioned, that includes contracted revenue that we recognized out of [ 2037 ]. Of the total order book, approximately GBP 264 million is scheduled for delivery this year, providing very strong revenue visibility. And importantly, that's broadly balanced across our two operating segments, with communications and intelligence contributing GBP 128 million, sensors and effectors contributing GBP 136 million. Looking further forward, a substantial proportion of the order book extended to later years, reflecting the long-term nature of many of the programs that we're working on. And that includes about GBP 132 million scheduled for delivery beyond 2028, '29. Overall, this 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. If we can have the next slide, please. And beyond that order book across both divisions, we see strong monitoring, which is being driven by the same geopolitical and defense spending trends that I've spoken about. Within Communications and Intelligence, we see significant opportunities for electronic warfare, secure communications, particularly in Europe where lessons from the conflict in Ukraine are shaping procurement priorities. We're also pursuing major naval satellite communications opportunities in both the U.K. and Japan, while our electronic warfare and operational support capabilities gain 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 that combine communications, networking and SATCOM technologies as well. 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 [ sona ], sonar and sensor technologies as submarine and surface fleet modernization programs progress across a number of international markets. And programs like the Royal [ Thai ] Navy's new frigate, demonstrate the benefits of collaboration across the group where we have four, four of our seven businesses are independently working with Hanwha Ocean on that program, bringing together complementary technologies and expertise. And we also expect to benefit from investment associated with the U.K.'s Atlantic Bastion initiative and wider to efforts to strengthen antisubmarine warfare and underwater infrastructure protection. So overall, the pipeline of opportunities are strong, reflecting the patterns of growing global expenditure and the market relevance of our products and technologies. Next slide, please. So I'm almost coming to the end now. And as a final point, I wanted to summarize how we aim to generate value for our shareholders. First, as you've seen, we benefit from robust financial results, including 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 on expanding 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. And we're also well positioned through our 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 have 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 IPO. That reflects both the strength of the business and the Board's confidence in the group's long-term prospects. We'll move to the last slide, please. Before coming to a close, I wanted to take the opportunity to mention the great contribution to our success made by our management teams and employees across the group. And I'm grateful to all of them for the part that they've played in helping us to achieve these good results. It has been a successful first 20 years and we look towards the future with confidence. And let me leave you with this extract from our preliminary statement. And also to say, we'd be delighted to take any questions that you might have.

Right. Thank you very much, gentlemen. Very clear presentation and obviously, a very, very successful year. Lots of questions already. [Operator Instructions]. We've got a couple about Chess to start with. The first one says you must have quite a lot of confidence in the demand for Chess services to be investing a sizable sum of money. Do you have outline realistic financial expectations as to what benefits might come from this consolidation of the physical assets?

Yes, I say a word about that. So the short answer is yes, we have a great deal of confidence in Chess' future revenue. I mean, this year, it's got the highest level of order cover of any of our businesses at over 90%. And it has a very strong tailwind of future demand and a very solid order book going forward. Chess has not performed as we would want it to perform this year. It's performance. It's been profitable, but really at a very low level. That is not because of the profitability at the gross margin level as products are really very good. It's been a combination of some supply chain tightness that we've experienced and also -- some issues in -- and we highlighted this half year point some issues in operations and production delivery. Now that's one of the reasons that Chris Axcell has joined us as Chief Operating Officer. I know Chris is in the audience today rather than on a panel, but I'm sure you'd want to chip in at this point if you could. But Chris is very experienced in managing operational delivery and defense very successfully. And we also appointed last year, Andy Smith as a new -- the new Managing Director of Chess. Andy and Chris both worked at Leonardo for a long period of time, although I joined us in fact from [ Martens ]. But he's also very experienced in delivery. And so we're confident that with their expertise and the action that they're already taking that I outlined, that we'll be able to enhance Chess' delivery. In terms of the new investment, well, of course, at the moment, we're leasing a facility and that lease is coming to an end. So the development -- the new facility will immediately give us a return on saving the rent that we otherwise have had to pay. But much more than that, it will enable much more efficient production as we're able to line up production facilities really from beginning to end in a single space. We'll be able to organize test at the right points in that -- and we'll have the ability by having more space, simply to add more supply chains and multiply up capacity as is needed. And we do expect capacity to meet to grow because we see a lot of demand for Chess products. I hope that answers the question.

It does indeed and a good message. And perhaps following on from that, Simon, one for you, a question of -- what is the time scale? And when will the CapEx of GBP 15 million actually be allocated against the balance sheet for this project?

The [indiscernible] is that we should be into the lease to nearly part of 2028, [ 728 ] in Europe [indiscernible] , and the spend will be over the next 2 years, probably around about GBP 10 million is coming for this finance and the balance in the second financial year, so sort of 1/3 it.

I think your microphone might just need plugging back in Simon. Again there, but I think we got the basic numbers for there. Moving on. Could you give someone a bit more detail on progress for the ELAC sonar work for the Portuguese Navy on the submarine communications contract.

Yes. I mean a lot of great deal. I mean that's really -- I'm not sure what we're thinking about here. I think -- if we're thinking about the submarine upgrade program, that is some years in the future before ELAC is likely to do that. They will be providing underwater communications equipment for the new vessels that the Portuguese Navy is acquiring. And these, as far as we're concerned, are very straightforward sales. These are well-established products. We've got a very efficient production line for them. So I would expect those to happen in a very straightforward manner. But these are -- they'll be relatively modest size. Unless Simon, you have anything else, I'm sure quite what the question is referring to you. It might be a good idea to bail out and come back in again because I think your microphone is playing one of its tricks.

All right. Right to direct this 1 to you then Andy. Looking at the defense investment plan, the [ DIP ], we have a question, which of your subsidiaries are most aligned to its recommendations, particularly on developing hybrid crude or unmanned fleets.

Okay. Well, it's two of our subsidiaries are most aligned with the U.K. generally, and those are mass and [ SEA ] or I should add an MCL as well, that MCL in a slightly different way. And I think of the U.K. businesses, it's [ SEA ], which is most aligned with the defense investment plan and particularly maritime aspects of it that I highlighted a moment ago. They've already been involved in Atlantic Bastion, which is one of the small number of projects, which did actually make some progress even in the absence of the defense investment plan. So I'm optimistic that they will play a part in that. And when we look at the plan, the very ambitious plan to move towards hybrid Navy, that is to say, more uncrewed vessels supported by a small number of mother ships. Then what we see there is that the proportion of expenditure that goes on those -- that goes on the kind of systems that we provide, particularly SEA provides. But beyond that, things like communications, sensors for intelligence gathering, sensors for environmental awareness and weapon effectors as well. All of those things, a much higher proportion of the overall value of the platform will be spent on those things. And so we see that as a positive for us as well.

Great. And whilst we're talking about the [ MOD ], you pointed out the very strong performance of overseas revenue providers. And that has brought the [ MOD ] related revenues to about 40% of the group, which is historically quite a low level. So there's a question in here. which regions do you see today as having the most potential for genuinely strong growth in the medium term? Might it be Asia Pacific might it be NATO, both of which you've got good order flow already or potentially even Canada. That's the question.

Yes, that's an interesting one. Well, all of the ones that I just mentioned are showing really strong growth. I think within them, there are particular countries that I'd highlight. . Japan is a market that we're not doing an enormous amount at the moment, but is becoming increasingly open to European providers. So we've been providing satellite communications terminals into Japan. But some of the signals are that Japan is likely to become a more important market. So I'll pick out the fact that for the first time, they're actually exporting frigates, the serious major service competence to Australia, through the Mogami class, which indicates a new interaction with five other countries. They joined -- they're [indiscernible] [ JCAP ], the very important future comment aircraft program. And all of these things indicate that Japan is recognizing it needs to fund alliances beyond its traditional alliance with the U.S. and so will become a more open market. For the last few years, it's been right there's been a DSEI exhibition in Japan, not as big as the one that's held in London every 2 years, but nevertheless, very substantial and itself an indicator of opening up and we'll be attending that next year. In Europe, I think particularly at the moment, it's those countries that see themselves as being most exposed to the Russian threat. So the Nordics, the Baltics, Germany and Poland, particularly are increasing their investment. Germany is the standout in the next few years, it will be the largest defense spender in Europe by 2030, will be spending more than the U.K. and France put together, a very important market for us, but those others are as well. And I couldn't should go past without mentioned in Canada, which has traditionally not been a large defense spender, but now is both increasing its defense spend as it sees we're starting to see a threat from the South as well as the North. And perhaps not surprisingly in those circumstances, looking to widen its defense industry relationships as well. we've actually set up a manufacturing facility in Canada as we've got a significant combination of orders and prospects there relating to the purchase of 12 new major combat vessels.

Right. Now I see you're back with us, Simon. That sounds better. We're going to land you straighten it with a question on counter unmanned aerial systems. So someone is curious if you're allowed to say for the [ CUAS ] business, you're presumably providing sensors to third parties who then supply a total package. Can you indicate what proportion of the end package cost to an end user cohort might be providing.

We -- basically, the system is provided by Chess. The value per system there is dependent upon the actual specification. But you're looking at a per unit value of somewhere around the region of GBP 220,000 to GBP 250,000 to GBP 260,000. That's the value to us. Yes. We don't have the final selling price, but that's going to be between 5% and 10%.

Very clear. Thank you. we'll keep you while we got you, Simon. A question on margins between the two divisions. And obviously, at the moment, one division has much higher margins than the other. What will make that change and over what time horizon?