Avon Technologies (LSE:AVON) Q4 2026 Earnings Call

0:00 Well, good morning, everybody, and thank you for coming, especially so shortly after the Capital Markets Day. 2026 was the last year of our star strategy. That strategy resulted in a materially stronger business. Revenue grew substantially in 2026. Adjusted operating profit grew over 50%, and margins increased to over 17%. The final year of our transformation is now complete. We've improved both operational and financial performance. We now expect much higher cash generation looking forwards. STAR has given us a platform for future growth. The strengthened system is embedded and we've invested into new products, customer relationships and sales and marketing.

0:52 Now we are moving into the next phase of our strategy, improve, grow and compound. We will continue to improve the businesses we own. We will invest behind the organic opportunities where we have a right to win. And over time, we will use our capabilities and balance sheet to acquire selectively and create additional shareholder value where we see opportunities to do so. Starr has delivered a stronger core business and we now have a clear plan to build from it. On our hand though, it's Rich and he'll take us through the financials.

1:32 Thank you, Josh. Good morning, everyone. So as trailed ahead of the capital markets day last month, the headlines demonstrate another year of strong progress. Order intake for 2026 nudged up to $354 million and the closing order book is in line with last year's record $263 million, giving us great visibility into 2027 and beyond. Reported revenue growth of 13% dropped through to strong adjusted operating profit up 51% at $60.7 million. This translates to EPS of 143 cents, 57% up on the year. And my preferred area of focus, return on invested capital, came in at 27.6% even after a modest increase in the amount of working capital in the business as we accelerated Team Wendy's production rates through the year.

2:24 Cash conversion of 93% represents another good year, and while we saw a late burst in the final quarter shifting receivables into FY27, we also benefited from the tailwind of a similar effect from the back end of 2025. In summary, revenue growth, operating profit, ROIC and cash conversion have all exceeded the medium term targets set out in 2023. Moving on to the P&L, the strong order intake reflects a very strong pickup in H2, notably in Team Wendy, where second half orders of $140 million included receipt of follow-on awards for both major DOW helmet programs. Revenue growth up of 12% on a constant currency basis reflects another strong performance across the board, with both businesses growing at about the same pace.

3:14 Operating profit of $60.7 million resulted in margin of 17.2%, an improvement of 440 basis points on last year. This leaves us in the margin range set out at the CMD last month, although there is still some work to do to sustain this as we benefited from a few one-off tailwinds in the year, which I will talk about in a moment. The other significant change to the P&L is in the tax charge, which has risen to $13.4 million, reflecting the increased profitability of the business at an effective tax rate of around 24%. This is broadly where we expected to stay absent further changes to the tax regime. This all adds up to adjusted basic EPS of 143.3 cents per share, an increase of 57%. And finally, the Board is recommending a 10% increase to the final dividend, giving a full year divvy of 26.8 cents per share, up 9% on the year.

4:11 Avon Protection had another very strong year. Order intake came in a bit lower than the 25 Comparator, which included some benefit from Ukraine, but still represents a very strong performance, given that the DOW MAS contract expired partway through 2025. We are now actively working on the renewal. The order book remained very strong versus history, and revenue grew 13% on an organic basis, which dropped through to operating profit margin of 22.5%. Revenue growth was driven by a strong year in commercial Americas and continued strong demand from NATO customers under the NSPA framework agreement and our filter lines have been working flat out following two orders totalling $27 million from the US Department of War and a Middle Eastern customer.

4:58 The excellent drop-through margin was helped by operational gearing Improving productivity and some particularly high margin but non-recurring product sales in the first half. Given the continuing strength of the order book and pipeline, Avon Protection is well positioned to deliver further growth in 27, although I would expect margins to drop back a little from these unusually high levels as we move towards a more normalised sales mix. Order intake in Team Wendy's saw a sharp recovery in the second half to end the year 23% higher than last year. The two main Department of War helmet programmes saw combined awards of over $80 million, and there was a helpful acceleration in Commercial America's orders towards the back end of the year. The backlog remains robust, with order cover on both of the DoW programmes well into 2028, although I would expect the order book to burn down over the course of the coming year as we have reached the contract ceiling for ACH orders. As we near the end of the current IHIPS contract, we now expect a new follow-on programme for a high-cut rifle helmet. This is exciting news, and although we will likely see a slowing in orders over the transition period, we have more than enough coverage to bridge that gap.

6:12 Revenue growth of 12.6% was driven by higher ACH2 deliveries as we increased production levels from 4,000 to 9,000 per month during the year, partially offset by a slightly weaker commercial backdrop in the US as the government shutdown held back orders. Operating profit margin saw meaningful improvement, increasing by over 6 percentage points to 11%. Sustainably increased production levels and the benefits of our transformation activities over the last few years were the key contributors, partially offset by the inevitable dilution from ACH shipments, which more than doubled in the year. The sequential H2 on H1 increase in margin, even after ACH growth, gives us confidence in further improvement on an annualised basis, although note that ACH deliveries are expected to increase again in 2027.

7:06 Now we move on to the usual operating profit walk for the year, and starting with the $40.3 million jumping off point for last year after adjusting for FX. The first positive bar of $12.7 million shows the effect of the significant improvements in Cleveland and Salem during the year. This manifested itself in volume growth, but was enabled through the step-up in productivity and efficiency delivered by the Team Wendy team. Then you see a partially offsetting cost of $3.5 million which was the dilutive effect of growth in lower margin ACH shipments. Growth in Avon Protection delivered a further $7.8 million benefit with top line advancement and some one-off benefits from commercial settlements of historical liabilities partially offset by a slightly weaker mix with strong growth in filters, boots and gloves.

7:59 Tariff refunds gave us a benefit of $0.7 million, and P&L IT costs were $1.9 million lower, reflecting some of the expected annual benefits of the transformation project. As previously mentioned, we invested in more sales capability in the year, totalling $3.1 million, with a bias towards Team Wendy, reflecting the international growth strategy. And this is already starting to pay dividends through higher orders and a significantly increased pipeline of opportunities. A further one-off benefit from Ohio State incentives for the Cleveland expansion totaled $0.9 million. And finally, other savings delivered a further $3 million, reflecting improved efficiency in our UK factory, strong cost control, which maintained a functional spend broadly flat despite revenue growth, and higher R&D tax credits.

8:53 The main things to pull out from the balance sheet include the continued reduction in intangibles, reflecting our disciplined application of a prudent capitalisation policy. Working capital, and specifically inventory, increased in the year, driven by two factors. Firstly, we took some raw material purchasing decisions designed to ensure sustained achievement of the elevated production rates in Cleveland. And secondly, we were sitting on a significant quantity of finished goods at the end of the year, awaiting government inspection prior to shipment. The nature of our contract with the customer means that there will always be a bit of the latter, but reducing both of these effects is a key focus for FY27. The pension deficit continued to decline, despite a negative impact from adverse actuarial experience. This was offset by contributions and elevated gilt yields, the benefits of which have now been fully locked in through increased hedging.

9:49 The deficit has reduced from around $80 million just five or six years ago and is now sufficiently stable that we're actively exploring options to eliminate the need to have to keep talking to you about it. Increased profitability and lower debt have seen the leverage ratio come down further to around 0.4 times. Moving on to the cash flow, you can see that net debt came down by over 30% year on year. There's still plenty to go at, however, and as already mentioned, we are now focusing on bringing inventory levels down in line with our ambition to materially increase inventory turns over the coming years. Transformation costs reduced to $6.8 million in the year, and this cost marks the completion of projects identified as part of the STAR strategy back in 2023.

10:37 The heightened pension contribution of $10.6 million included an additional $4 million payment under the recently agreed recovery plan following the completion of the tri-annual valuation earlier in the year and, as usual, guidance on future contributions and other financial matters is provided in the appendix to the slides. And finally, it's worth pointing out that while cash tax will remain lower than P&L tax for the next couple of years as we burn off historical losses, it will creep up to around 10% in FY27 and increase further in FY28. I've included this slide in the deck to give you a bit of an update on the transformation project we launched late last year aimed at better aligning our IT estate to the needs of the business both today and in the future.

11:23 We focused on creating a better site and SBU centric support infrastructure with a relatively thin center overseeing shared platforms and cyber resilience. This has, as predicted, enabled us to reduce the number and complexity of systems across the group, and therefore reducing the amount of internal resource required to oversee these systems. Most importantly, however, it has slashed our reliance on third parties, which means that we have a more innate understanding of our own systems and are much less susceptible to the impact of incremental price hikes. These changes, and the resulting improvements in response times and operational effectiveness, have been achieved while maintaining, and in many cases increasing, cyber resilience.

12:09 Total investment in this project was $2.7 million, which formed a large part of the transformation cost booked in the year, but we expect annualised benefits of at least $3 million, some of which came through in the year. This is among the best payback projects we've done, and the IT team have done a great job in what has been a very challenging year. As we said at the Capital Markets Day a few years ago, we believe this business has the ability to generate free cash flow of over $175 million over the next three years. Free cash flow is defined as cash generated from operating activities, less interest paid and capex. This slide sets out our capital allocation priorities in this context. As ever, our first priority is to invest in the organic business and we have lots of opportunities coming down the track which could accelerate organic growth and which represent a very low risk investment for us.

13:05 We remain committed to a progressive dividend, as you can see from today's proposed full-year dividend increase. And after that, we will look to deploy excess cash where it can deliver the greatest shareholder value, whether through disciplined M&A or capital returns. And we will retain financial discipline throughout with target leverage of two times or less. Finally, moving on to our expectations for the full year. We expect further good growth in helmet deliveries, with another leg of growth on the ACH programme as we annualise the elevated production levels seen in the second half of 26. The stronger order book and solid pipeline of commercial opportunities give us confidence that we will see growth here also. Avon Protection will see further top-line growth also, although at a more muted level than last year as we lapped the very high filter volumes and the $13 million of Ukraine-related sales in 2026.

14:01 These factors combined equate to mid-single-digit revenue growth at the group level. We expect operational improvements in Team Wendy seen through 26 to sustain into 2027 and beyond, being partially offset by a normalisation in Avon protection margin with the non-recurrence of the one-off benefits seen in 26. Even after the dilution from further growth in low margin ACH sales, we are confident that we can deliver operating margin within our 16-18% target range. And finally, with no planned transformation costs, significant improvements in working capital efficiency, assuming no prolonged US government shutdown, and a reduction in pension contributions, we expect free cash flow of between $50 and $60 million compared to $31 million in 2026. And with that, I'll now hand back to Joss to update you on the operational and strategic progress and our areas of focus for the

14:56 coming year. Thank you very much, Raj. I'm going to spend the next few minutes looking at what STAR has delivered, the organic opportunities ahead of us, and how we intend to build on them. STAR has fundamentally changed the quality of the group. The strength and system is embedded. 90% of our people have been trained and over 200 of our employees are certified on continuous improvement. With almost everybody involved in improving the business, we have an enduring competitive advantage and we can see the impact across our operational and financial metrics. And excitingly, we still see lots of opportunity to improve things further.

15:45 Our transformation projects are complete. We've right-sized the business, increased revenue per square foot by nearly 80%, reduced costs in our central functions and strengthened our sales and commercial functions. At the same time, we've increased investment into our people and new product development, and that investment is creating the next wave of growth opportunities. Star has done more than deliver great results. It's created a repeatable improvement system for future expansion and a stronger platform from which we can grow. These metrics demonstrate the impact of our strengthened system in practice.

16:31 Productivity has improved 54%, significantly exceeding the target. Scrap reduced by 54% and inventory turns improved by 14%. We are a little disappointed to have fallen short of our inventory turns target. Avon Protection made good progress. But in Team Wendy, we focus on achieving contractual delivery rates because it was critical for us to build credibility with the Department of War. And that strategy did pay off with strong order intake. As we move into 2027, we will focus on inventory turns more across both businesses and we have aligned the annual bonus to incentivize that.

17:16 We see our strength and system as strategic. If we can deliver high quality products reliably and on time, we are likely to grow. And if we can do that with lower capital than our competitors, we're likely to beat them over time. This slide brings the scale of the change in Cleveland to life. Three years ago, helmet capacity in our Cleveland factory was 20,000 helmets a year. Through the strengthened system, we moved from batch production to repeatable high volume flow manufacturing while building the workforce and improving planning and infrastructure.

18:03 We believe we're the only helmet manufacturer that does not manufacture in batches. That has enabled us to increase capacity almost 12 fold to 200,000 helmets a year without adding a single additional press. The presses are the most expensive capital needed to manufacture helmets. And we now make more helmets in a month than we used to make in a year. Next, we are implementing our well-proven hybrid tooling to our Exfil helmet line, which will reduce cycle times on those presses by more than half and double capacity. We expect overall capacity in this factory to increase to more than 300,000 helmets this year without significant additional capital.

18:52 We have built a much more scalable manufacturing operation, capable of supporting our existing programs and giving us the capacity to capture future growth opportunities. In our UK factory, it is a similar story. We moved all the equipment, bringing processes closer together and created integrated manufacturing cells that flow. At the same time, we've reduced the manufacturing footprint by more than 4,000 square meters, creating capacity for future growth. And you can see the impact in the numbers. Productivity is up 78%. Revenue per square meter has more than doubled. Inventory turns have improved by 18%, and scrap as a percentage of revenue is down 45%.

19:42 but just as importantly we have changed the way the site operates. Lean flow, standard work and Kanban are now embedded into the manufacturing system supported by a strong continuous improvement culture and capability. Turning to the advanced part of STAR that applied During 2026 and before that, our core respiratory franchise in Avon Protection continues to deliver attractive growth and recurring demand. We've delivered nearly half a million Avon masks to NATO countries. Every new system placed creates future demand for filters, spares and sustainment. We received our first full CBRN Ensemble order from our European customer, demonstrating the potential we have to use our CBRN leadership to expand into the integrated CBRN market.

20:40 Richard has already mentioned the strong demand for filters. The last filter order from the DOW was awarded to a sole source for the first time, demonstrating the credibility that we have built for reliable delivery of a high quality product. We launched our short-duration CS PAPA in June and secured the first contract award for 16 systems. This order is an important customer validation of a differentiated new capability. The system allows the user to seamlessly transition between three different breathing modes, adapting protection to changing threat. The system provides up to 20 minutes of breathing in high contaminant or oxygen deficient environments.

21:30 And last year we also launched a new common voice protection unit. The CVPU provides voice projection and tactical radio communications while wearing our respirators. We already have orders for 5,000 units and a pipeline of opportunities worth over $100 million. Excitingly, only yesterday, we received NIOSH certification for the CVPU, which will help us accelerate the pipeline in the U.S. and will help us maintain the competitive moat around our C50 and M53 mast system. We're excited that both the U.S. and Canadian Armed Forces ordered MITRE. It is likely that other militaries and first responders around the world will follow their lead.

22:19 and US law enforcement demand continues to grow with good demand across our core respiratory products and further growth opportunities across filters, accessories and sustainment. The core respiratory business is an attractive business. Market leading products create a growing install base, recurring revenue and strong long-term customer value. Alongside growth in the core, Targeted Investment is creating four potential platforms for step change growth. In US suits, we've been down selected to phase three of the program and secured an initial order for 1,500 suits. This program has significant long-term potential for us. In rebreathers, we're building on the proven MCM100 platform, creating potential for follow-on sustainment and international growth. We have opportunities in both Europe and the US.

23:23 In NATO combination systems, we're combining respiratory protection with complementary CBRN capabilities to meet customer demand for integrated mission-ready systems. and in Next Generation US Respiratory, we're working with the customer on the next generation of masks and improved system capability between the mask and the suits. These programs are at different stages and we're not going to win everything, but each expands our addressable market by building on the areas where we already have strong technology, customer access and program capability. In Team Wendy, we have made excellent progress, maximising our core programmes.

24:12 Demand for both IHIPs and ACH remains strong. In IHIPs, we see future demand being driven by the need for greater survivability, increased mobility and improved protection against blast protection. In ACH, we're very competitive cost-wise and see opportunity to expand growth margins further. As Rich mentioned, we expect orders to dip before picking up again as we transition to a new high-cut version of IHIPs and a new ACH contract. We have enough order cover to bridge that gap. In the North American commercial market, demand was soft in the first half but increased towards the end of the financial year. We currently see a much increased pipeline in US commercial compared to the first quarter of 2026.

25:08 We are delighted to have received $19 million worth of orders from the US Air Force for our Exfil helmet. This expands our customer base outside our core army contracts. Our Exfil LTP position with the US Naval Aviation Authority also provides a platform for broader adoption across the Navy and other services which we are pursuing with a strong new international development team. And internationally, we secured a new Australian Defence Force contract for up to seven years and our first order from a major European military. Team Wendy's international revenue increased by around $5 million, a 44% increase, and international order intake remains strong.

25:58 This provides early credibility for our strategy to grow our helmets business internationally and to diversify our customer base. The combination of leading technology, competitive costs, excellent credibility with the Department of War and growing market share in the US commercial business gives us confidence that Team Wendy can continue to grow. And beyond the core. We're building a broader and more diversified revenue base. Internationally, we plan to win share by offering a platform tailored to local markets and requirements and expanding the addressable market for elite rifle protective helmets.

26:43 These increase survivability while staying lightweight. As a reminder, there are very few companies in the world that can make rifle protective helmets. In the North American commercial and federal markets, we're focused on underserved states, extending our military head protection expertise into adjacent end markets and upgrading our helmet portfolio through our new Recon helmet and Exfil endurance helmets. and for future Department of War programs. We're helping to shape the next generation of integrated head protection. We are working closely with the US Army on future requirements with the benefit of funded research and development.

27:29 This includes even higher ballistic threat protection, broader system integration and improved blast mitigation. These opportunities take our capabilities and apply them to new customers, new geographies and adjacent markets. Now turning to the next phase of our strategy. Improve, grow and compound. This is the framework for how we intend to create value going forwards. First, improve. Through STAR we have codified how we improve businesses. We will continue to use that system to drive higher productivity, strong cash generation and better returns.

28:14 Second, grow. We will maximize our market leading positions and recurring revenue streams while investing behind the exciting new opportunities that I've just touched on. And third, compound. Over the long term, we will use the capabilities we built and the cash we generate to acquire selectively in protection technology and then improve and grow those businesses. Today, we have a stronger business with an organic platform for growth and the capacity to compound further. As mentioned at our recent Capital Markets Day, we see a large opportunity to build a broader protection technology group.

29:01 We have a large investable universe of companies in an addressable market worth some 15 to 20 billion dollars when close adjacencies are included. We will acquire selectively in areas we understand and where we can make a material difference as an owner. We will apply our business improvement system to improve and grow what we buy that will enable us to increase returns on capital and cash flow over time. And as we generate additional cash, we will reinvest behind future growth opportunities, creating a repeatable compounding cycle of buy, improve, grow and reinvest again. We have a large investable universe. but we will remain disciplined.

29:51 We will accelerate only where we see value and as our capability and capacity allow. We have translated this strategy into financial targets. For the current portfolio, we expect organic revenue growth of more than 5% a year, operating margins within the range of 16 to 18% and EPS growth of more than 10% a year. We're targeting group inventory turns of more than five times and cumulative free cash flow of more than $175 million over the next three years. The cash gives us the firepower to reinvest behind organic growth, pursue disciplined acquisitions and return surplus capital if appropriate.

30:44 Over five years, our ambition is to build a group with more than $600 million of revenue and returns on capital above 18%, with acquisitions helping drive EPS growth even higher than 10% a year. Whilst the timing of acquisitions will never be entirely predictable, the pathway is clear. Improve the current portfolio, grow organically, generate cash, and deploy capital where we see opportunities. Turning to the main risks and opportunities across the group. At Team Wendy, our plan to improve inventory turns depends on us improving right first time quality. To do this, we are increasing automated inspection and strengthening process controls. There is a lot to do.

31:36 Following the US midterm elections, it is possible that political stalemate could slow new contract awards and lot acceptance in the short term. In the medium term, we note that defence spending is correlated to the global threat environment much more than party politics. On the opportunity side, We're pursuing several new programs at the moment, and those opportunities are not fully reflected in our forecasts. And in Team Wendy, we have an opportunity to improve the order to cash cycle by shortening the time between completing a helmet lot and getting them approved for shipping by the government. We have strong momentum entering 2027. We hold market leading positions.

32:26 Our end markets remain attractive. We have a strong pipeline of opportunities and a clear organic growth plan across both businesses. Our priorities are equally clear. We will improve performance through continuous improvement. We will grow by maximizing the core and investing behind the programs that can materially increase scale. And we will compound value through selective acquisitions where we see the opportunity to create value. Importantly, strong cash generation gives us the capacity to pursue these opportunities while maintaining financial discipline and a strong balance sheet.

33:12 So we're entering the next phase from a position of strength, a better business, attractive growth opportunities, and a repeatable system for creating value for our shareholders. And with that, I will turn it over to questions. We're going to go to the little chairs, are we, Rolf?

33:41 Morning. Rob Byde from Zeus Capital. Just on the R&D guidance, I think you're guiding to 20% to 30% higher R&D spend this year. And obviously, you've talked about some of the new products. Could you give us a bit more detail on what's driving that increase, please?

34:00 Yeah. It helps to understand where we're starting from. We do look to push R&D forward every year. 2026 was a bit of an exception, not because we had less engineers, we absolutely didn't have less engineers, but what we did do was we redeployed a number of our engineering teams to helping the ramp up. So they became focused a bit more on process engineering than pure R&D, if you like. So if you exclude that effect, we're starting from a higher base already. And then we've got a number of programs in development. You've heard us talk about suits. You've heard us talk about the new helmet programs in development. It's pretty clear where we're going to focus those resources and more importantly perhaps you've heard us talk about the step change opportunities that we've got in front of us.

34:48 We want to lean into those and make sure that they're appropriately resourced. So it's kind of across the business really but from a higher starting point.

34:55 You've given me an opportunity to talk about something that I probably forgot in my script. We actually just signed a contract for $4.5 million from the US Department of War to fund R&D on the Team Wendy side. So actually we're super excited about that. And it may, if we get it right, enable us to generate another generation of helmets with even higher protection. Thank you.

35:24 Henry Carver Is this the kind of thing that could start happening now or is it more towards, you know, the sort of traditional ordering periods of the year that we'll start to see it come through? Just any kind of thoughts would be useful, thanks.

35:56 I think it could impact the flow of government grants because the shutdown last year did delay the grant funding and then it started to flow at the back end of this year. We do think there's a lot of grant funding waiting in the wings, so I think that should come through. But if we do have another government shutdown, it could delay grant funding. The other thing we see is a lot of grant funding flows to Republican states and not Democratic states, so the fact there's a few more Democratic states is not particularly helpful for now.

36:37 Thanks. Hi, it's Andrew Humphrey at Peel Hunt. I've got a couple, if I may, one on protection, one on Team Wendy. You've called out, I think, filter volumes over the last year as being exceptional. But looking around the world, threat environment is still elevated. There's clearly still a requirement for those sorts of products. There's an incentive to build up inventories. I wonder if you can kind of characterize that a bit and talk about what it was that made those volumes in 26 so exceptional

37:13 Well, we won a big Middle Eastern order from a new customer, actually. They'd previously bought them from India or somewhere. So they effectively upgraded their filters. You can buy sort of industrial type filters, but they're not military spec and they're not as robust. So I think with the increasing threat environment, we're seeing people want to go for the real deal. And then with the Department of War, We've only ever had one real competitor and they seem to have pulled out of the market for now. And actually they've been out of the market so long that their line would need refatting now, which is very expensive. So I think we're in a really good position on filters. We're actually just between contracts with the DOW at the moment, but we are working with them on the next one. So I do think filter demand is going to carry on being robust and our filter lines have been killing it.

38:07 They've been running basically flat out over the last, what, six months, I guess.

38:12 And in terms of pipeline there, can we think about, you know, is there a pool of potential demand out there where people might be looking at upgrading to something higher spec that you're actively exploring?

38:26 I would look at it more the other way around. We've got 2 million masks out in the US, plus the first responder masks, so more than that. And then we've got another half million across NATO countries, and we've recently won Australia with our masks as well. So every mask you sell creates an installed base that they're likely, not necessarily, they could buy cheaper ones, but they are likely to buy our filters to go on our masks. and if you buy the M50 or C50 masks, we're the only people that make those filters because they're a burnout fitting.

39:01 Great, thank you. And on Team Wendy, you've alluded to your contract transitions next couple of years. I wonder if you could kind of drill down into that in terms of potential timings of re-lettings, some of the commercials around that to the extent you're comfortable talking about it and what could move either way for the DOW.

39:21 Yeah, I mean, the ACH contract actually ends back into this year, beginning of next year. Yeah, 28. But we're already at maximum. They've maxed out the contract to us, so they can't order any more off us. We have enough to take us well into 2028, enough orders. They've already put out the RFI for the next contract. We've responded to it. We know roughly what volumes they're talking about. I think that program looks good for a long time to come. We've always said that it was one at challenging pricing originally. We actually regarded that as, well, okay, those are the cards we've dealt and our job was to make money out of it, which we've got to that position.

40:07 So we are extremely competitive. But there is quite a delta between us and the competition price-wise. I think we would be hopeful that we can extend the gross margins a bit on that program. And on IHIPs, that is a very exciting story. The US government or US Army recently put out a paper called How We Fight or something like that. And it really pushes the idea of survivability and mobility. and that is right in our zone because the iHips helmet or the Rifletec helmet on the commercial side are pretty much the only rifle helmets out there in the market.

40:54 On the commercial side it's only us and one other that even makes a rifle helmet that you can buy. and that elite rifle protection, we think that is going to push into more militaries and maybe even SWAT teams and so on. Because if you're in a threat that might involve a rifle, why wouldn't you buy a rifle rated helmet? Why would you buy a helmet that will only stop a 9mm round? And then the USDOW specifically, they've decided that the blast protection is better with a high cut helmet. IHIPS is a full cut helmet. So they're actually going to now migrate into buying a high cut version of the IHIPS helmet.

41:39 And we think that's going to lead to another fielding wave over the next three years. So I think the opportunity in IHIPS is much better than we were expecting it to be actually. And that's why I'm sitting here feeling quietly confident in the next two or three years. Great. Thank you.

41:59 Toby Thorrington from Equity Development. Given the improvements in manufacturing capability, particularly Team Wendy, I'm curious to know whether customers have started to order in a different way. For example, later notice because the capability in manufacturing is there, shorter blocks of volume. That's the first question.

42:26 Yeah, that one is a good question and we like that question because it's a good answer. Well, hopefully it will be. So we're constantly striving to push down the lead times on our commercial helmets. It's actually reported to me, it's actually every week it's in the, what we call the tier three deck and we report the lead times we're offering. We're always trying to push those lead times down. We did have them down to about four weeks. they have crept up a bit recently because there's a big pipeline of opportunities but we do try and offer substantially shorter lead times than the competition and I think it's probably fair we do offer substantially shorter lead times than the competition and if a police department is in a real hurry to get them we could get them a lot of helmets in a week or two So I think we've got a very responsive manufacturing operation.

43:22 So beneficial to work winning then?

43:26 Definitely beneficial to work winning. We do see people moving to us because they've either been quoted crazy long lead times for the competition or they just can't get the lead times they need.

43:38 So the follow on to that is how should we think about sort of book to bill? That's another good question.

43:56 Slightly ironic things about the way the analysts look at this business. The way we look at it is the less order but the better. We want to reduce the order to shift time as much as possible. But the way defence analysts look at it, they want to see a big order book. So we look at it more akin to a fast moving consumer goods company. If you order a helmet, you don't want it in six months. You want it next week. And that's where we're trying to get to.

44:21 Okay, so a book to build less than one then?

44:26 It depends a bit on the cycle of the DOW. But what we want is a shortened order to ship time as we can possibly achieve. So, yeah, ideally it would be lower. Revenue higher, just to be clear for the analysts in the room.

44:49 Thank you. I've got a few cash questions for Rich, if that's okay as well. Not in the technical guidance I've checked, so perhaps you could fill in a couple of gaps. Pension recovery cash, you mentioned there was a The depreciation numbers seem to jag down a bit as well to a short nine in 26. Is that sort of roughly the right number going forward?

45:37 It will creep up a bit because CapEx is going to creep up a bit as well. But it's never going to be a significant jump year on year. We're not particularly capital intensive.

45:47 Okay. But that's a reasonable base anyway.

45:49 We try and use wisdom before money. Exactly. It's our philosophy.

45:53 Great. Thank you very much.

45:57 Hi, Richard Hill from Jefferies. If I could ask another kind of question on cash and just thinking about the inventory turns and the kind of target, kind of rudimentary looking at it, it looks about a half a turn a year would kind of get you to all else equal, middle of the guide, etc., would get you kind of to your next year's cash target.

46:21 On average, yeah.

46:22 On average. Yeah. Is it right to think about it in terms of your production at Team Wendy is going to increase again and therefore you're looking to kind of get that benefit out of protection or kind of how do the moving parts when the division works in that kind of inventory turn space?

46:42 No, so we expect to see some improvement in both. but actually the opportunity right here right now in Team Windy is greater partly because production is going to go up again as we've said but perhaps More immediately, there was a fairly significant amount of inventory coming into 27 from the back end of 26. That was there for two reasons. Number one, as I think I highlighted earlier, we were sitting on quite a large amount of finished goods stock as we waited for the customer testing process to run through. And number two, we had deliberately accelerated raw material purchases through the back end of 2026 to support that ramp up. I would expect both of those and many aspects to reduce as we go through 2027 and beyond.

47:27 So I think that the sort of in absolute terms, the opportunity in 2020 is greater, but we do expect the improvement in both.

47:34 And just to sort of pick up on your point in a slightly different way, I think Richard's guidance is sensible, that the businesses are actually incentivized to achieve one turn a year. That's when they hit max bonus. We actually look at it on average to average but if you look at year end to year end it's a turn a turn a year. That in my mind is what they should be doing and that's what they're incentivized to do and they are very good teams. I'm going to be quite disappointed if they don't hit their bonus maxes but it could happen. You actually have to do a lot to improve inventory turns. You have to do actual stuff You can't just squeeze your suppliers or not pay people or whatever.

48:19 You've got to actually change your factories and how they operate. But I'm still going to be disappointed if they don't hit a turn of the year. Not least because their bonus is my bonus.

48:28 Thanks, that's very helpful. Can I ask just a second one and then touching upon the order for helmets to your first European military customer. Is that a kind of opening for a wider order or is it kind of This is for standard military use or is it kind of select a group? Appreciate you may not want to give a huge amount of

48:51 detail. What was the question?

48:52 On the new contract for a European military in Team Wendy.

48:59 Oh, okay, yes.

49:00 Just in terms of, is that for us to select a group, i.e. a more special forces orientated or wider and therefore could lead?

49:07 No, it is for the broader military. We've already deployed some. We actually just had the lot inspected and ballistic tested and it went very, very well. We hope that that will lead to a framework contract with that customer. At the moment, it was just one-off. It was 4,000 and a bit helmets. So it's a decent order for us, but we hope that's going to lead into a long-term program with the customer, but we have not signed that contract yet.

49:38 Okay, thank you.

49:46 Is that it? We've got Milena as well.

49:52 I'll do mine quickly. M&A. Who does M&A within the group? Is that you guys? Do you have a dedicated team? Are you building a team?

50:02 No, we do M&A. I mean just a little bit of history here. I know we've become known for improving businesses but actually I was head of corporate finance in a FTSE 100 and Richard was head of corporate finance in a FTSE 250 so between us I think we've got the M&A side pretty under control.

50:29 Hello, Milan Kerner from Barclays. Thank you for taking my question. The first one, just coming back on the inventory, how are you going to improve the turns without increasing delivery risk?

50:41 Oh, well, that's a very fine question. Well, firstly, we pair metrics. So inventory turns... I've probably said before, but we see it as the most important metric in a manufacturing business because it shows the efficiency of your processes. But you don't want it to affect the reliability you deliver to your customers. So when we look at terms, we always look at on-time delivery next to it to make sure they're working together. And we aim for 97 or something percent on-time delivery to the customers whilst improving The turns and we look at both of those metrics all the time. The way that we can take inventory down and improve turns is by having more efficient processes that reduce the time it takes from raw material coming in the door to product going out the door to the customer.

51:37 The raw material coming in the door bit is all about planning and working with your suppliers on their lead times to you and giving them enough visibility that they can deliver a little and often into our factory to keep our inventory levels down. On the raw material to finish product, flow helps us make that very quick. It used to take us, I don't know, a month. Now we do it in three hours from raw material cut to helmet finished and ready to go. And then the next thing is nailing the right first time quality. What absolutely murders us is where we make product off the end of the line and we put it in boxes and then we Sample test it, we find that the quality is not perfect and then we re-inspect it and rework it and that just causes delay between finishing a lot and cash and the customer accepting it.

52:29 So if we can get to a position where when the product comes off the line it is 100% perfect every single time, then it will go out the door quicker and we'll get paid quicker. We're working on all of those things at the moment. We're on it, Milan. I promise you are on it.

52:46 I'm sure you are. Then maybe on Tim Wendy, on the slide 17, you were indicating that Cleveland could ultimately exceed 300,000 without significant investment. What needs to change operationally to unlock that additional capacity for this year?

53:08 You're really giving me good questions here because I like answering these questions. I could get very excited. Pete's trying to get me to cut off. So it is super cool what we've done. We've designed tooling that has channels through it and we can heat and cool the tools. I'm not going to explain in detail how we do that because it's super secret. and we've changed the control systems on all the presses so we can heat and cool the tools quicker. We also make the tools out of a different material to every single competitor. and what that enables us to do is it enables us to heat the polyethylene in the helmet, combine that with different pressures and it enables us to cycle the presses probably twice as fast as our competitors, certainly twice as fast as we used to be able to do it before we implemented this technology.

54:01 The presses are by far the most expensive piece of kit in the factory. And if you can double the capacity of each press simply by changing the tool design, then that is what we've done. And we've got a few presses left, but we've already proved it out on nine of the 12, something like that. That's right, with another one to come.

54:18 We've got a few more to come.

54:20 But we do have to change the entire control system and the tooling on the press. So it is a reasonable undertaking in terms of time, but it's not massively expensive for us. Very good. Thank you very much, everyone.