CHG.LCHG.LLSE
Loading
Michael Ord: Good morning, and thank you for joining us for Chemring's full year results for the period ending 31st of October 2025. I'm joined today by James Mortensen, our Chief Financial Officer; and we have Tony Wood, our Chairman, with us also. This morning, I'll start with the group highlights for the year, then hand over to James for a detailed review of our financial and operational performance. I'll then return to discuss the market environment and update you on the progress we've made in delivering our growth-oriented strategy. FY '25 was another year of solid performance for Chemring. What was particularly pleasing is that we achieved this despite some short-term headwinds, most notably softness in U.K. government order placement across national security and defense, which impacted Roke. This resilience reflects the work we've done to build a high-quality business capable of navigating challenges and delivering sustainable growth. Global defense spending continues to increase, driven by U.S. demands for greater burden sharing across NATO, the conflict in Ukraine and rising tensions in the Asia Pacific region. These dynamics underpin a sustained upcycle in defense and security investment, which is expected to persist into the next decade. Our record order book is clear evidence of this trend. During the year, we secured several strategically important contracts, including STORM, Roke's GBP 251 million U.K. MOD multiyear missile defense program. And these wins strengthen our future prospects and support our ambition to double annual revenue to GBP 1 billion by 2030 while maintaining strong margins. Turning to the headline numbers. Our three Energetics businesses delivered exceptional results with all three achieving record order books and two delivering record revenues and operating profits. The group revenue increased by 2% to GBP 498 million, and operating margin improved from 14.3% to 14.8%, reflecting strong operational effectiveness and agility. Earnings per share were 19.4p and cash conversion rose to 114%, reinforcing the cash-generative nature of the group. Order intake reached GBP 781 million, up 20% year-on-year, delivering another record order book of GBP 1.3 billion, up 32% since last year. We also continue to advance our safety and ESG agenda and our total recordable injury frequency rate fell to 0.48 from 0.69, demonstrating progress towards zero harm ambition. Looking ahead, I'm more confident than ever in Chemring's position to capitalize on long-term demand. We are a specialist manufacturing and technology business with the unique positions at the heart of national security, defense and space markets, all markets in which growth has been driven by rising global instability and the need to rebuild defense industrial capacity after decades of underinvestment. With market-leading positions, which are often sole source, our diversified and synergistic portfolio is by design and hard work, positively exposed to structural tailwinds expected to persist for many years, and our track record of execution is evident in expanding margins and excellent cash conversion. Our resilient balance sheet enables investment in organic and bolt-on acquisitions and enhance our offering and strengthen market leadership. In summary, Chemring is very well positioned to deliver superior and sustainable shareholder value over the longer term. I'll now hand over to James, who will take you through the financial results, operational performance and our innovation review in more detail.
James Mortensen: Thanks, Mick. In what has been a challenging U.K. contracting environment, we have still managed to deliver an improvement across all of our key metrics, demonstrating the resilient high-quality nature of the business. So first to the highlights. Another record order book, up GBP 1.3 billion, up 32%. Continued momentum in revenue, up 2%. Operating profit was up 6%, resulting from a focus on operational excellence. This resulted in margin up 50 basis points to 14.8%. EPS up 3% despite higher tax and finance costs, strong cash conversion at 114%. And so the Board has declared a final dividend of 5.3p, giving a total dividend of 8p, up 3%. So turning next to our segmental performance. Countermeasures & Energetics revenue grew 17%. Energetics delivered ahead of schedule and improving operational performance at our Tennessee Countermeasures business resulted in a strong result. Operating profit was up 37% and margin increased to 19.1%. It was a weaker period in Sensors & Information, as expected and previously highlighted. This was because there were delays to U.K. government spending and the prior year benefited from JBTDS LRIP. This meant revenue was down 18% and operating profit down 25%. As a result of early action to control cost, we maintained operating margins of nearly 18%, demonstrating how even in the current market, this is a high-quality business. Group revenue was up 2% despite an FX headwind of GBP 5 million. Group operating profit was up 6% and operating margin was up 50 basis points to 14.8%. On a constant currency basis, group revenue would have increased by 3% and operating profit by 7%. So let's look in a bit more detail at each of the segments. It was another strong year for order intake in Countermeasures & Energetics, demonstrating the critical often sole source, highly engineered nature of the products in this segment. Order intake was up 21% as our customer programs are ramping, we are seeing that demand often in the form of multiyear orders. There was a strong performance in Energetics with completed projects delivering ahead of schedule in Chicago and Norway. We also saw some benefit from increased pricing and the results of our continued focus on operational excellence, improving volumes. This resulted in a particularly strong H2 margin performance. The expansion projects in Chicago and Scotland are substantially complete with just the commissioning phase to be completed in Scotland. In Norway, the first phase is complete and delivering ahead of schedule. However, as a result of higher infrastructure and groundwork costs, we now expect total costs of GBP 180 million, up from the GBP 145 million initial estimate. This will be offset by GBP 90 million of grants, given the net spend of GBP 90 million. We still expect to generate very attractive returns on the investment and for group revenue to increase by GBP 100 million per annum and operating profit by GBP 30 million per annum from 2028 once the three capacity expansion programs are complete. In countermeasures, teams executed well across all of our facilities. In particular, we saw improving operational performance at our Tennessee countermeasures business with improving volumes coming out of that facility, the operational challenges and low-margin contract that held us back last year are now completely behind us. Operating profit grew 37% and margin was up 280 basis points to 19.1%, reflecting that strong operational execution. We have great visibility into next year and beyond. Order cover remains really strong with 95% coverage for '26, 93% for '27 and 59% for '28. So moving now to Sensors & Information, where order intake grew 19% to GBP 179 million. In particular, it was pleasing to see that Roke order intake was up 24% on the prior year. Revenue was down 18% to GBP 175 million as a result of a softer U.K. government contracting environment affecting Roke. We have tightly managed the business in this challenging environment, reducing headcount by about 80 in the year, whilst protecting key capabilities. We now have a bigger bench of employees with the highest clearance than when we started the year. This demonstrates we are well positioned for the current environment and for when order flow improves. We continue to execute well in our U.S. Sensors business, receiving a $15 million order for the naval version of our biologic detector. We remain on track to receive the FRP award for the Army version, JBTDS, in 2026. In August, we completed the Landguard acquisition. Integration has progressed well, and the business performed in line with plan. We think this is a great business with a strong management team, and we are confident this is a combination that will deliver. Early action to manage our cost base meant we held operating margin at 17.8%. Operating profit fell 25% following the drop in revenue. The order book grew 5% on prior year at 45% order cover for FY '26. It's in a similar place to last year, and we expect to return to growth in the second half of FY '26. Given the critical areas where we support our customers and the strong pipeline and opportunity for product sales, we remain on track to grow Roke to GBP 250 million by FY '28. So moving on to net debt. With a strong focus on cash generation, cash conversion was 114% in the year with operating cash of GBP 112 million. We have continued to invest in additional capacity with GBP 76 million spent in the Energetics and a further GBP 29 million spent on automation and maintenance. This has been offset by GBP 24 million of grant funding. We've also returned GBP 26 million to shareholders through our growing dividend and the share buyback, and we've also purchased shares to satisfy acquisition consideration and employee share options. After great progress made by the business in managing working capital, closing net debt of GBP 89 million was lower than expected, representing 0.95x (sic) [ 0.90x ] leverage. On capital allocation, we remain consistent. Overall, we want to maintain a resilient balance sheet, and we will target leverage of less than 1.5x. First, we'll continue to invest in the business. Norway is now the primary focus, given spending is largely complete in Chicago and Scotland, but we were also looking at opportunities for further automation like at our U.K. Countermeasures business. Second, we'll continue to execute focused M&A. Landguard was a good example of a bolt-on within Roke, which remains the main focus. We'll also continue to screen for targets in space and missiles in the U.S. and Europe. We'll remain disciplined, and we have a healthy pipeline of opportunity. The target annual dividend cover of 2.5x has now been met, and so we expect to maintain that level of cover going forward. And finally, we'll return surplus capital to shareholders. We've returned GBP 4 million in the year with GBP 36 million remaining on the buyback. So now let's turn to FY '26 and how we see that progressing. Overall, trading guidance unchanged with 76% revenue cover next year with a similar H2 weighting to prior year. In Countermeasures & Energetics, we are targeting low double-digit growth. That's made up of mid-teens growth in Energetics and low single-digit growth in Countermeasures. Like last year, we expect an H2 weighting. Sensors & Information, we are targeting mid-double-digit growth. U.S. Sensors will be flat as we wait for JBTDS to full rate production expected to start in FY '27. We expect Roke to return to near '24 revenue levels next year, but a return to growth in H2, so an H2 weighting for revenue and profit. Interest costs will be about GBP 10 million. Rates haven't come down as much as we thought and net debt is higher. We now expect CapEx in '26 to be in the range of GBP 100 million to GBP 110 million, mainly resulting from higher costs in Norway. And finally, as we enter a growth phase, we expect cash conversion in the range of 80% to 85%, but returning to normal levels in the medium term. We're also mindful of some external factors, which we also flagged last year, continued short-term budget timing disruption in the U.S. and U.K. and obviously, any significant movements in FX. So that was the numbers. Now for innovation, one of our core values, and it still amazes me just how much capability we have. Drones pose an increasing threat, not just to our armed forces, but also to our civilian infrastructure. This is CORTEXA, a small, rapidly deployable system that is a result of over 5 years work with the U.K. MOD. It's a great example of how Roke can fuse its software with the best off-the-shelf technology. Depending on the mission, you can swap out the sensors and it's compatible with a range of factors. As the threat changes, it can evolve by training the AI classifier. It combines miniature active radar and point tilt zoom sensors to provide a high-resolution capability in day or night. The AI in Roke software allows you to identify multiple threats automatically. First on radar, so the system can determine its location and its track. Next, an image generated by the sensor -- using an image generated by the sensor, AI classifies the object. Is it a threat and how serious? So not just if it's a drone, but what kind of payload does it have? Then this is fed back to operators in a simple user interface, so they can take appropriate action fast. The system can track more than 20 threats at a time, so it can counter the increasing threat of drone swarms. This product has both military and civil applications. Having already sold our first preproduction units to a key reference nation, we can see a clear market opportunity. So thank you. That brings me to the end of my section. I'll hand back to Mick for the strategy update and outlook.
Michael Ord: Thanks, James. Before turning to our operational performance and growth opportunities, let me start with what we're seeing in our core markets and why this underpins our confidence in the longer-term outlook. Geopolitical tensions remain at the highest levels in recent memory, whether it's the conflict in Ukraine and an increasingly assertive Russia or rising tensions across the Asia Pacific, this environment is driving a fundamental rearmament cycle expected to last at least a decade, possibly two. Technology and innovation continue to reshape defense and security activities and demand for traditional capabilities such as munitions and missiles is growing alongside disruptive technologies. This very significant increase in demand has exposed vulnerabilities in NATO's defense industrial base after years of underinvestment. Rebuilding resilience will take time and governments are placing greater emphasis on national security and closer collaboration with industry. In the U.S., the world's largest defense market, the Trump administration is focused on maintaining overwhelming military superiority. The FY '26 DoD funding request is $961 billion. And in parallel, the U.S. has signaled it will no longer shoulder NATO's financial burden, prompting members to target defense spending of 3.5% of GDP by 2035. How nations respond to this rising global instability will likely create significant opportunities for Chemring. Next, I'll focus on the U.K. and Europe. Starting with the U.K. While short-term softness persists, we expect sustained investment in capability, resilience and technology over the medium to longer term. The U.K. government has committed to increase defense spending to 2.5% of GDP by April 2027 and an ambition to reach 3% in the next parliament. Recent publications, notably the Strategic Defense Review, National Security Strategy and Defense Industrial strategy, all signal a focus on sovereign-based manufacturing and advanced technologies. Priorities in munitions, energetics, active cyber defense and operational mission support are all aligned with Chemring's strengths. The defense investment plan expected before year-end should outline funding priorities and its release should trigger new contracts in munitions, energetics and digital defense capabilities. Turning to Europe. Defense budgets are rising sharply, reaching EUR 326 billion in 2024 with a further EUR 100 billion increase projected by 2027, alongside major EU initiatives, including the EUR 800 billion Readiness 2030 program and the EUR 150 billion Security Act for Europe instrument. European priorities are to increase industrial capability and military readiness and the Nordic nations, in particular, are investing heavily in energetics. Our sales into Europe have grown over 120% in the past 3 years, and we expect this upward trend to continue. Against this positive backdrop, let's review our progress in 2025. We set out 3 strategic imperatives last year: grow, accelerate and protect, and I'm pleased to report good progress against all 3 areas. Organic growth initiatives are on track with some ahead of schedule. Our U.S. countermeasures business rebounded after FY '24 challenges with operational improvements in Tennessee delivering higher production volumes and reduced downtime. And in August, we acquired Landguard Group, enhancing Roke's defense technology portfolio and creating operational synergies. Integration is progressing well, and we see a healthy pipeline of similar bolt-on opportunities across Roke and the U.S. space and missiles market. And as always, safety remains nonnegotiable with our recordable injury frequency rate reduced, reinforcing our zero harm ambition. Our Energetic expansion program is advancing well. In Chicago, the expansion program is ostensibly complete and was delivered on budget. The facility fit-out has been successful with the team establishing continuous flow production operations ahead of schedule. With strong order visibility, the business is firmly on the front foot. In Scotland, construction of the new propellants facility is complete, along with the installation of production machinery. Facility commissioning is underway and revenue generation is on track for FY '27. Market demand for double-based propellants remains strong, and the facility's order book is underpinned by a 12-year agreement with Martin-Baker and GBP 47 million worth of NLAW missile orders from Saab. In Norway, Phase 1 of the expansion program is ahead of schedule and Phase 2 is progressing well despite some cost increases. However, investment returns remain strong. In addition to our existing production site, the Norwegian government has allocated funding for the next phase of work to establish the new greenfield production facility. In Germany, work is on track to deliver a new Energetic blending facility in 2027, supporting Diehl Defense's 155-millimeter munitions line under our EUR 231 million framework contract. And in the U.K., we are completing customer-funded studies assessing the feasibility of establishing new energetic material production capabilities at our Ardeer site in Scotland. These projects strengthen our critical position in munitions and missile supply chains. And whilst they are long term in nature, we remain focused on delivering near- and medium-term growth. Roke faced a challenging U.K. market in FY '25 with slower-than-expected recovery in U.K. government order placement. But importantly, we've seen no cancellations and no competitive losses, only contract delays and extensions. And notwithstanding these challenges, Roke was successful in securing GBP 65 million worth of contract renewals from national security customers, continuing to provide a very solid underpin for the business. Looking forward, Roke will increase revenues from its growing portfolio of market-leading defense products, and we will continue to access more international markets. Highlights for the year have been the launch of the DECEIVE EW detection and attack system and CORTEXA, the counter-drone system, which James took you through, both of which have been well received by U.K. and international customers. And the team won more than GBP 20 million in defense product orders outside of the U.K., including Resolve, Perceive and Locate systems to Latvia, Sweden and Egypt and with the expectation of further orders to come in '26. With recovery in national security expected in H2 of '26 and with opportunities pipeline that exceeds GBP 900 million, Roke remains well positioned for future growth and all of which supports confidence in Roke achieving GBP 250 million worth of revenue by 2028 with continued strong margins. So to conclude, we've made solid progress in '25, continuing to build a high-quality and resilient business whilst investing for future growth. Trading since the start of the current financial year is in line with our plans and with 76% of expected '26 revenues already in the order book, the Board's expectations for '26 performance remain unchanged. With market-leading products, technologies and services critical to our customers and with a resilient balance sheet, we are confident in achieving our ambition of EUR 1 billion annual revenue by 2030 and balancing near-term performance with longer-term growth and value creation. So that concludes the presentation, and we're now happy to take your questions. Could I ask that you state your name and the organization that you represent before asking your question? Thank you.
Sash Tusa: Sash Tusa from Agency Partners. You talked about the U.K. government's request for proposals for new energetics production. Clearly, one of the sites that's been highlighted by the government is Ardeer. If it's not, it's something very near it. And one of the products that they -- particular products they're looking for is HMX, which is something you already produce. Are there any other sites or any other products that you would be interested in bidding for, firstly? And then secondly, what do you see as being the risks if other companies decide to come into the U.K. market and try and bid for other capabilities or indeed sort of bundle up some of the capabilities the U.K. government is looking for?
Michael Ord: It's a good question. So as you know, Sash, earlier this month, the government put out a public notice asking for expressions of interest from companies interested in establishing the production of energetic materials here in the U.K. I mean in advance of that PPN, earlier in the year, we had already completed the first feasibility study for our site up in Ardeer in Scotland. And indeed, as we sit here at the moment, we're currently complete or working through a second feasibility study associated with the infrastructure that will be required to increase capacity expansion at the Ardeer site. So maybe step back and look at that. So firstly, we really welcome the U.K. government's focus on establishing production of energetic materials here in the U.K. We've had a long tradition in producing energetic materials at our Ardeer site and others. And we believe that we're very well placed to help the government in that national mission. There's a raft of materials that you'll have seen in the public procurement notice, and you're absolutely right. So we are looking at -- is it possible to establish HMX/RDX NTO production in Ardeer, all of which are materials that we produce in Norway. And clearly, there's a huge synergistic opportunity there for the Norwegian and the U.K. businesses to work together, and we've been in conversation with the U.K. government associated with that. And if you look down that list of materials, then our primary focus is probably in the high explosives area. So you'll see the likes of HNS and PETN on that list. So those are materials that are not produced in the U.K., so the high explosive materials that ourselves, but also other U.K. defense companies in the U.K. We import from overseas. We know how to produce those materials. We do so in small quantities in our laboratories. So we will be in discussion with the U.K. government associated with primarily the high explosive elements of those materials. There are other areas such as nitrocellulose and nitroglycerin, et cetera, that clearly, we know how to manufacture those, and we make nitroglycerin in our lab for test purposes and whatever. But we don't really see that as an area that we want to pursue. With regards to do we see it as a competitive threat if other companies want to establish operations here in the U.K.? No, I don't. I think that establishing a greater defense industrial base here in the U.K. is good for everyone. I think a rising tide lifts all boats, and that will be good for Chemring. And specifically in a number of the materials that they're looking for, we don't manufacture them and we don't see strategically that we would want to invest in those manufacturing and they don't compete directly with us. So it's not as if someone will be establishing capacity that would eat our lunch. And indeed, we have a very dominant and very strong and well-established position for military high-grade explosives in Norway. As you know, we're one of the largest and soon to be the largest producer of HMX and the whole of NATO with our expansion programs, et cetera. And as we mentioned, the opportunity to establish a second production facility in Norway in partnership with the Norwegian government. We will put our Norwegian business well ahead of all of the European competitors in that area. So long-winded answer to say, I see this as a very good thing. We're actively engaged. And I do think it's a good opportunity for us.
Sash Tusa: And just a follow-up. Norway Phase 3, I think you indicated earlier on this year that you would hope that the Norwegian government would commit to that probably by the end of the year. Is that still a possibility? Or are there any particular issues that have caused the Norwegian government to delay that? Or is it just government stuff getting in the way?
Michael Ord: So I think you're getting ahead of Phase 2. So the second phase of the feasibility study for the greenfield is well advanced. So it's a matter of public record. The Norwegian government has allocated funding for that second phase of the feasibility study. And the team in Norway are in final stages of agreeing what the contract looks like for that second phase. We're hopeful that we'll get that contract signed this side of Christmas. And then we will crack on with that feasibility study. We think the second phase is going to take between 6 and 8 months. And just as a reminder, so Phase 1, which we've done was a feasibility study, which we proved it was feasible and Norwegian government have supported that. The second phase, which is what we're just about to execute is concept selection, which will agree the physical configuration of the second facility that we'll build, what materials we'll produce and then what capacity and then Phase 3 is the detailed design and then construction. So no, a lot of momentum, funding being allocated. I expect to see a contract hopefully, this side of Christmas. Really excellent opportunity, really exciting.
David Richard Farrell: David Farrell from Jefferies. A couple of questions for both of you, really. I'll start with James. Can you just help us on Roke and the order cover? I think you've got GBP 95 million for execution in the year ahead. This time last year, that number was GBP 101 million, which ended up being 58% cover what you ultimately delivered. So how can you have confidence that Roke will come back to the extent you expect in the second half? Is there an assumption here that part of STORM gets booked in the first half and then gets delivered over the second half, which in turn has an implication for the margins?
James Mortensen: Yes, a couple of questions in there. So we are flagging that we do think Roke is going to recover next year. And we do think it's going to get to near '24 levels next year. But obviously, that recovery is in the second half, and we're flagging particularly that the operating profit is weighted in the second half. STORM, we are progressing that, and we probably will see some orders that we execute through the next couple of years on that. But it's not because of STORM that we're saying that we're going to get back to that revenue. No, we think actually, it's the product side of the business that is going to come back strongly in the second half as well. And then also that national security business as well. We talked about the GBP 65 million of renewals that we got. We expect that renewal season, April, May to be really strong this year as well.
David Richard Farrell: Okay. Going back to Energetics. In this kind of new world, clearly, some of your customers probably are reevaluating whether or not they are vertically integrating. Is there any evidence that your customers are maybe going to be producing some of the HMX and RDX for their own usage and then kind of using you for kind of excess amounts over the next maybe decade?
Michael Ord: No. I know you're -- so there -- absolutely. So the likes of Rheinmetall or whatever are vertically integrating their supply chain, especially for munitions, and we know the likes of BAE Systems and whatever are exploring the possibility of doing the same. None of these are our customers. So our primary customers are in the missile domain or rocket artillery or whatever. And where we supply into munitions programs, we have long-term supply agreements to supply those munition programs. So I think we've spoken before in the past that we've got a long-term supply agreement with Diehl Defense to support their munitions program that goes out to 2031. We expect that, that will get extended into the mid-30s, potentially longer as well. So I think that trend of -- you're seeing that some munitions manufacturers are vertically integrating and producing extensively the likes of RDX. I think we will see that, but it doesn't eat into our market share because we don't supply those anyway. And we haven't factored supply in them into what we see as our forward demand model.
David Richard Farrell: Yes. And final question, just coming back to the GBP 1 billion revenue ambition. Clearly, a large proportion of that GBP 150 million presumably is another Energetics facility. You've talked about 6 to 8 months kind of for the next stage in Norway, which can take us to the end of the year, which maybe give us kind of 3, 4 years kind of build on a greenfield. That seems quite ambitious potentially. So is the chance of really that GBP 1 billion is more 2031 than 2030, depending upon when you sanction the new project?
James Mortensen: So we've always said about the GBP 1 billion. So yes, GBP 850 million, our current organic plan and then GBP 150 million on top. That GBP 150 million is made up of either -- we'd love to do it organically, right? And so we've always talked about the Energetics expansion projects, but there are other things that will come along as well. And then also, there's the bolt-on M&A that we're going to do. And like Landguard, it just takes a few to kind of get there as well. And so there are both routes that we can get there. It's not just holding on the Energetics expansion.
Benjamin Pfannes-Varrow: Ben Varrow from RBC. First one, we've spoken about the 2 possibilities of plants in Norway and the U.K. Can you expand on -- or give an update on Germany?
James Mortensen: All right. Yes. So in Germany, in Germany, so we're building a blending facility at the site in Lubin where we're going to supply MCX for the 155 munition line, the Diehl contract that Mick was just talking about. And so plans are progressing really well in relation to that. We're going to start breaking ground, and we expect to be in operation from '27, supplying into that filling line. It could be that there are other opportunities that arise in Germany or in other European countries. But that's the one that we're focused on, and that's the one that we're executing against.
Benjamin Pfannes-Varrow: Okay. In terms of Norway, the current expansion. So is that all on track despite the CapEx overrun? And sort of what gives you comfort that, that CapEx number doesn't swell further from here?
James Mortensen: Should I do that?
Michael Ord: Well, in Norway, the first phase we've delivered -- well, kind of a little bit of ahead of schedule actually. So we've seen revenue already coming on ahead of when we expected to do that. It is right to say that the second phase that we have seen some cost increases associated with that, and James spoke to those. I mean there's a few factors that we kind of saw, like, that caused that. So we've had -- I think we've talked about a little bit in the past, the geological issues that we've had there. And we've also identified areas of infrastructure that require greater scope than we originally forecast. And that would take us back to -- if you go back to October '23, where the ASAP program was opened by the European Union, there was only -- in the window was only open for, I think, it was 57 days. The team did a fantastic job to be able to submit all of the proposals in such a short period of time to secure what ended up being GBP 90 million worth of grant, which delivers a fantastic IRR return on these projects for all of our shareholders. But because everybody was moving so quickly, it's understandable that maybe some of the estimates and the uncertainty that was associated with those was a little bit broader than maybe we would have preferred. But we're -- I think we've got all of that under control now. That's our -- we understand what's caused that cost increase. We've baselined the schedule. And so therefore, we've got confidence now that we'll execute against that.
Benjamin Pfannes-Varrow: Last one just on working capital. Advanced payments continue to feature quite a bit. How should we think about that going forward? Is that an unwind at some point? Or is that really just a feature of the tightness of the Energetics business.
James Mortensen: So I think we think it will continue to be a feature of the tightness of the energetics market. I think we did quite well last year. And so that's why you saw that in the kind of strong cash conversion we saw. What we are seeing is that often quite a lot of those advanced payments, we then put that into the supply chain to get the kind of long lead time items so that we can ramp at the rate that we want to. And so you've also seen a slight increase in inventory as well. And so that's the unwind that you would expect is the inventory will come down, but also those advanced payments as well.
George Mcwhirter: George McWhirter from Berenberg. Two questions, please. Firstly, on Roke, can you just comment on the split between products and services that you expect in FY '26. And also in FY '28 as well in the midterm.
James Mortensen: So I think we've always guided about the split in the Roke business is about kind of 70-30 between product and services. It's probably slightly less than that last year. We expect it to be probably slightly more than that by the time you get to FY '28 as that kind of product business grows faster than the services business.
George Mcwhirter: The second one is on Roke as well. In terms of the U.K. defense investment plan expected to be published in December, what's the risk that if it's published in 2026 that the growth recovery is pushed to the right?
Michael Ord: So I'm confident that the defense investment plan will be published before the end of the year. And I think, look, you've got to look at '25, I think, has been a year of significant activity and change from a U.K. government and U.K. MoD perspective. There was a general election in '24. We got the new administration. I think we were one of the first companies that were advising shareholders that to expect some fiscal trickle, I think, as we explained it, around as the new administration came in and that they instigated as we expected, the strategic defense review. And when you've seen the cycle many, many times, as some of us have been in this industry for decades, that always slows down the process of contracting and budget allocation and whatever. And then as we went through '25, then that did play out. We saw the strategic defense review, then we saw the defense industrial strategy. They all came out. They were a little bit delayed, took a little bit longer, but it's a complex landscape that the MoD are navigating through. And that's probably the reason -- the major reason why we saw the slowing down of contract placements and whatever. I think the key backdrop to that, though, is that there has been no change to the threat environment or the capabilities that the U.K. MoD and the national security -- sorry, our national security clients are identifying as crucial going forward. And that is what we've aligned the Roke business 100% towards. So I'm confident that the investment plan, it will come out. It may take a while for us to really be able to percolate and then into what does it mean for specific projects and contracts. But I do think that it will underpin the recovery that we're expecting in Roke in '26.
Richard Paige: I'm Richard Paige from Deutsche Numis. I'm afraid another one on Energetics, please. I think on the original schedule, the GBP 100 million of revenue, GBP 30 million of operating profit, you talked about GBP 15 million delivery in '25. It feels as though you're ahead of that schedule. Is that squeezing more from what you're adding or existing facilities? Or is it ultimately trying to understand if a GBP 85 million remainder is still well on track as well?
James Mortensen: Yes. So I think we said, yes, we were going to probably deliver about GBP 15 million in '25, about GBP 30 million in '26. I think what we're saying is that actually, we've gone really well in Chicago and Norway. And those -- that first phase in Norway and moving into the new facility in Chicago has meant that actually, we brought some of that GBP 30 million this year into '25. And so it's not a kind of one-off. It's -- the business has just grown a bit quicker than what we thought. And so that should continue going forward.
Richard Paige: And trying to shift the focus from Roke and Energetics, I will ask one on U.S. sensors. Is there a prospect of contracts outside of EMBD and JBTDS at the moment?
James Mortensen: Yes. So in terms of that business, so the JBTDS, so -- and in both of those products, we're sole source into the U.S. government. The JBTDS product, we can sell that internationally now. And so it was great. We were displaying it at DSEI, and we were -- we saw some good interest from countries around the world, obviously, friendly U.S. nations, but we can't sell that around the world. I think in the short term, though, we do think the focus is going to be U.S. And JBTDS, we're going to have another fallow year this year while we wait for that full rate production order, which we expect in the -- at some point in '26, and then we'll ramp up FRP through '27 and beyond.
Richard Paige: And then one last one, again, trying to avoid the other 2 countermeasures. You talked about improved operational performance from Tennessee. Are you now there at full run rate for that business? Or are there other opportunity?
James Mortensen: Look, we've seen some really good volumes coming out of that facility now. It's the only fully automated countermeasures facility anywhere in the world. And so the team there have done a fantastic job. Like I say, we're seeing much better volumes out of there. No, I don't think we're at full rate yet. But yes, we're going really nicely now.
Michael Ord: Not far to go, though. We've really come up the yield curve in Tennessee across all the facilities, especially the new facility. I think we'll see a really strong year in '26 from Tennessee coming through. And then more broadly from a countermeasures perspective, the U.K. countermeasures business is going like a train. So the demand that's going into that business is fantastic. And that business, so as a reminder, only about 25% -- 20%, 25% of the volume goes into U.K. MOD, 75%, we export and Andy and the team do a fantastic job of exporting across the whole of Scandinavia, European NATO all the way through the Middle East and into Asia Pacific. And we're seeing enhanced demand for especially airborne, but increasingly naval countermeasures. And we're looking at that business with regards to is there an opportunity for us to invest for greater capacity in that business over the next couple of years. So we're really quite excited actually about the -- especially the European NATO countermeasures business market. There's a lot of opportunity there.
David Richard Farrell: David Farrell from Jefferies. Quick follow-up. James, you said in your prepared remarks, you're always amazed how much capability you have. I imagine others in your space are also amazed by your capability and would like to partner with the -- to what extent kind of JVs going forward help you drive revenue growth? Because I guess so far, we've not really seen much evidence of that, but maybe some of your peers are putting in place JVs, framework agreements, MOUs, et cetera.
Michael Ord: It's an interesting question. So Roke works with probably all of the defense companies that you could name in some way, shape or form, whether they work in partnership with them or they sub to them or with the likes of -- you see the STORM contract where Roke is the prime and you've got the major traditional primes as their subcontract. So I think there's all forms of relationship are open. From a Roke perspective, joint venture could potentially be one of those that we would explore. I think Sash had a question.
Sash Tusa: Actually, I've forgotten it.
Michael Ord: Let me ask Sash a question. Asking one on [indiscernible] or something...
Unknown Analyst: I'll fill the void. Thank you for the extra color on CORTEXA Guardian and revealing that. Could you just put a number on the potential pipeline within the sort of GBP 300 million product pipeline for Roke?
James Mortensen: For CORTEXA specifically, so we wouldn't want to kind of call that out. But I mean you can tell, it's got both military and civil applications. You only need to go online actually. There's a good kind of LinkedIn post from the Roke team where they were demonstrating it in Canada. They were on the top of a hotel in a kind of competition against those of other systems. And I think they all think that their system worked pretty well. You kind of saw it at DSEI, it's kind of got a much smaller form factor and it's a really nice product. So whilst I won't want to put a number on it, I mean, we think it's a really nice product.
Michael Ord: I would say, do go and have a look at that LinkedIn post. It's a really unique and innovative thing that the Canadians did. In the middle of Ottawa, on the top of a hotel, on the roof of a big hotel where Roke alongside lots of other companies set up their counter drone detection capabilities and then operators did fly drones against these systems. And I think that was a demonstration of not only -- I mean, we just normally kind of primarily think about it this is from a military context perspective, clearly, what's going on from a Ukraine point of view. But the -- I think the Canadians were really smart in doing it on a hotel in the middle of Ottawa. And I think that demonstrates the significant proliferation that we're going to see in these counter drone and drone detection capabilities associated with critical national infrastructure and civilian infrastructure as well, which is why we think a system such as CORTEXA, which is very scalable, very high-end capable that's interoperable with effectors and whatever has got a fantastic market opportunity. And as James said, we've sold 2 systems to a very high-end specialist military user in the European sphere. Unfortunately, we're not allowed to disclose who that customer is. But it is a military customer that is at the forefront of new technology adoption in these areas such as counter drone technologies and electronic warfare.
James Mortensen: And it's interesting, actually, isn't it? I think Sash was out in Estonia, wasn't it, for the kind of field trials for the EW kit. And I think that's where we're seeing Roke performing really well is kind of in the field up against our competitors, actually demonstrating that these products work really, really well. And so we've got really good feedback on Perceive, and now CORTEXA as well.
Michael Ord: Sash you remembered your question. Sash should build up.
Sash Tusa: On opportunities for M&A and bolt-ons in particular, I wonder if you could just explain for Landguard, Landguard was both an add-on, but also an effectively a supplier to you. So what's the net increase in your external revenues from Landguard as opposed to the internal efficiencies you get from owning your own supplier of software-defined radios and VPX cards and so.
James Mortensen: Yes. So we said Landguard was going to generate about GBP 10 million in revenue.
Sash Tusa: That's external revenue.
James Mortensen: Yes, that's external.
Sash Tusa: Yes. Okay. And then I just wondered, Alloy Surfaces, sorry, I know this is now history or at least like but what happened so quickly there? And are there any other businesses you've got that might experience the same sort of sudden deterioration in trading or other businesses that you're worried might experience that?
Michael Ord: Yes. Good question. So I'll answer the second bit first. So no, there are no other businesses that we are worried that potentially the demand signal would diminish. So what happened with Alloy Surfaces is -- actually, let's take it back. So you saw last year in '24 that we reacted very quickly to the U.S. DoD signaling potentially different machine configurations associated with explosive hazard detection. And the transition of the HMDS product, moving from an OEM new build program into just purely a sustainment phase, which clearly is not our business model. And you saw us act very quickly to sell that business to someone who is a better owner of that business in that sustainment phase. So I think we -- that was a demonstration of that we're very active in making sure that our whole portfolio, not just the businesses, but the capabilities are incredibly relevant to our customers today and going forward because that drives growth. So HMDS was the first one that we did when we saw that technology sunsetting. With Alloy Services, I think we have been saying over the last couple of years that we've seen the demand for these pyrophoric decoys starting to wane. And the reason for that is that, as I'm sure you know that the pyrophoric decoys are primarily most effectively used for things such as insertion and extraction of troops, normally at nighttime, and that was incredibly important when you were in the counterinsurgency operations in Afghanistan and et cetera. Clearly, in the new configuration from a mission perspective in the U.S. DoD, where it's more associated with area denial in the Asia Pacific, the DoD signaled to us that they saw the demand for pyrophoric decoys diminishing significantly. So we acted very quickly to ensure that, firstly, we took cost out of the business to maintain performance. And then we got to a point where we identified that actually we were not the best owners for that business. So -- and if you go all the way back, Sash, I'm sure you do. If you think back to the heights of Afghanistan and whatever, Alloy Surfaces actually expanded from one facility up to three facilities because the demand for those decoys for those counterinsurgency operations was so large. And then as we came off the counterinsurgency missions and then into the new force configuration over a number of years, we went from three facilities down to one. And then unfortunately, we got to a position where we couldn't sustain a single facility.
James Mortensen: But just to be clear, there's still some really nice IP within that business. We're the only people we're sole source to the U.K., U.S. government on that -- on those pyrophoric decoys. And so we will still -- we're in a process to sell that business. And so we hope to realize some value for it.
Michael Ord: It's a very viable product line. It's just not a stand-alone business in its current configuration. Any more questions? Just looking around, Sash. We'll come back again in a few minutes. Okay. All right. All right. Well, if there's no more questions, then thank you very much for joining us today, and we look forward to presenting our FY '26 half year results to you in June. Thank you very much.