Welcome to the AB Dynamics 2026 full year results presentation. Thanks for joining us. I am Sarah Matthews-DeMers, CEO, and I am delighted to be joined by Ed Haycock, our CFO designate, and previously our director of financial reporting. Ed takes over officially as CFO on the 1st of December from Andrew Lewis. I am very grateful to Andrew for having so ably stepped into the interim role. We are repositioning with purpose. Here is what that means. We have a new leadership team, myself, Ed, and my executive committee, who collectively bring a combination of experience and fresh perspectives. Our markets are changing, with regional challenges that demand action, and we are adapting with agility to meet our customers' evolving needs. We are proactively repositioning the business rather than simply reacting to short-term market conditions.
We have strengthened our portfolio by exiting from VadoTech's declining market and acquiring eMpulse, an IP-rich business, to access a growing sector. We are driving a culture of continuous improvement to generate efficiencies, which allow us to reinvest, and we are choosing to add additional resources to innovation and sales in FY 2027. Our great technology, high margins, cash generation, and robust balance sheet enable us to deliver consistently strong returns, even in conditions where revenue growth is constrained. Our focus is on doing the basics well and delivering on our opportunities. If we do this, we believe the market will appreciate the quality of our business. I will outline this year's progress, then Ed will cover the financial results. I will return to our growth drivers and next year's outlook.
Since becoming CEO last December, I have made a number of changes to the organization to position the business for future growth. My first priority was strengthening leadership through targeted senior management changes. I have reinforced the culture of respect, accountability, and collaboration, delivering for our customers and the group. We launched the third professional development program for emerging talent, something that is particularly close to my heart, having been the architect of the first program five years ago. In the first half, I led innovation workshops at every business unit, involving all levels of the organization, focusing on innovation, continuous improvement, and excellence. Over 500 ideas are now being reviewed and actioned to drive growth and operational improvement.
Engineering are now prioritizing projects with the greatest strategic and commercial potential, and a route to market effectiveness review is underway, with a plan to allocate resources to address the findings and actions arising from this review in half one 2027. We have renewed our safety focus and improved near-miss reporting, helping us identify risks and prevent injuries. Despite the challenging environment, we maintained our operating margin at 20% through operational improvements and early action on costs. We introduced 5S at our main manufacturing site and began rolling it out across the group. We have also strengthened our portfolio. We took early, decisive action to exit VadoTech as its market changed. We acquired eMpulse, adding differentiated IP and attractive opportunities for sales synergies. Together, these changes focus our portfolio on technology-enabled businesses with stronger long-term growth potential. I will now hand over to Ed for our financial results.
Thanks, Sarah. It's a privilege to have been appointed CFO, and I look forward to starting the role formally on the 1st of December, having worked closely with our Interim CFO, Andrew Lewis, over the last few months. I would like to take this opportunity to personally thank Andrew for his support during this handover period. It's fair to say that FY 2026 was a disappointing year for the group in terms of financial performance, given the unprecedented level of dislocation in the automotive industry. With that said, AB Dynamics remains a business with great products and technology and a true market leader in the niches we operate in, as illustrated by our robust margin performance in a difficult year. This, combined with the strength of our balance sheet, provides us with the confidence to continue to invest in support of long-term growth.
On to the detail of the FY 2026 results, which were consistent with the updated guidance we communicated in July. Revenue was down 12%, reflecting geopolitical events, challenging automotive market conditions, and foreign exchange headwinds. Operating profit decreased by 18% to GBP 18.3 million as a result of the lower volumes. But encouragingly, operating margin was maintained at our medium-term target of 20%, with the negative impact of operational gearing offset by the full-year effect of operational improvements and early cost mitigation actions. The effective tax rate increased to 23.5% due to a change in the geographic mix of profits, including those that are eligible for Patent Box in the U.K., and earnings per share decreased by 21% to 60.3 pence.
As we flagged in our July guidance, customer deliveries were more heavily weighted towards the end of the year than usual, and this impacted cash conversion, which was 61%.
We are increasing the dividend by 10%, reflecting our confidence in the business. The order book at year end was GBP 31 million, providing visibility into FY 2027. Moving on and looking at the year-on-year operating profit bridge. The negative impact of operational gearing was offset by three areas. Firstly, the full-year effect of operational improvements, which were implemented in the prior year, primarily in testing products. Next was revenue mix, which was a small tailwind in the year, mainly due to a heavier weighting of simulation software revenue. And finally, cost mitigation actions implemented early by management, which was largely the delay of discretionary spend. The strength of our gross margin performance, which was up 80 basis points in a challenging market, was pleasing to see, both from an operational efficiency perspective and a demonstration of our strong market position, which enables premium pricing.
The early and proactive approach we took to managing overhead spend was also key to maintaining a 20% operating margin. Looking ahead to FY 2027, we expect most of the overhead saving to reverse as we balance financial performance with investment in innovation, sales, and routes to market. Now looking at cash. Adjusted operating cash of GBP 13.6 million reflected an investment in working capital, as customer deliveries occurred later in the year than usual, driving an increase in receivables. We have reinvested this operating cash into the business, with GBP 8.1 million invested in capital projects, including on new product development in line with our technology roadmap. The acquisition spend of GBP 16.1 million reflects the initial consideration for the acquisition of eMpulse in August, as well as the final element of deferred consideration for the acquisition of VTS.
After returning cash to shareholders in the form of dividends, we had a net cash balance at year-end of GBP 24.5 million available to support strategic priorities. Moving on to the performance of each segment and starting with testing products. This segment includes driving robots, ADAS platforms and soft targets, and laboratory-based test equipment. Revenue was down 21% due to the challenging automotive market conditions, particularly in Europe. Also, the comparative period included a material delivery of robots to a North American OEM, which did not recur in FY 2026. The margin was maintained at 22.6% as the lower volume was offset by the full-year effect of operational improvements that were implemented during the prior year.
While volumes suffered in FY 2026 as we saw OEM procurement impacted by market volatility, the ever-increasing NCAP testing requirements for ADAS and a heightened need for OEMs to automate their vehicle development activities represent strong market drivers for testing products over the medium term. Late in the year, we completed the acquisition of eMpulse, which has expanded our laboratory testing product portfolio, and going forward, will be reported in this segment. Given the timing of the transaction, for FY 2026, eMpulse did not contribute any meaningful revenue or profit. Testing services includes our proving ground in California and our laboratory testing facility in Michigan, which performs mileage accumulation testing for automotive OEMs. Revenue increased by 13%, driven by strong performance in the mileage accumulation business, which has continued to grow its customer base since the group acquired it in 2024.
The decrease in operating margin was primarily due to sales mix at our proving ground, with a strong comparator in the prior year reflecting a larger proportion of higher-margin OEM track testing and a lower proportion of projects for the U.S. regulator, NHTSA. Looking forward, as upcoming regulatory changes come into force in the U.S. that will mandate automated emergency braking on all new models released from 2029, we expect this to drive positive customer activity levels at our California proving ground, as well as for product sales into the U.S. As we communicated in our July trading update, we have completed the strategic review in relation to our VadoTech business following a significant fall in volumes and have commenced the process of closing the business, which will conclude in the first half of FY 2027.
As such, VadoTech has been treated as discontinued, and its results have been excluded from those of the continuing operations. Simulation includes our simulation software, rFpro, and driving simulator motion platforms. Revenue increased by 10% despite a challenging market, which saw order placement timing being impacted adversely, particularly in Europe during the second half of the year. Growth was driven by strong demand for both hardware and software, while the modest improvement in margin was helped by operating leverage and revenue mix, with a slightly heavier software weighting than in the prior year. During the year, we have continued to invest in expanding our product offering, launching the T1 Sport simulator for the growing low-cost motorsport market and building additional digital models for adoption by a major Japanese OEM in the use of road car development.
As a reminder, high-value simulator sales are individually significant, and the timing of order intake can have a material impact on reported results. Our key financial enablers are unchanged and include our great people, with over 200 qualified engineers and technicians, supported by an experienced team of professionals across sales, operations, and finance. Our retention rate, which at circa 90% is above industry averages, is testament to the investment that has been made in our people. Our cash conversion record, which we aim to continue at 100% through the cycle, and our strong balance sheet, which gives us flexibility, with GBP 27.1 million of cash and a GBP 17.5 million RCF facility.
While we prefer to remain beneath one times leverage on a steady-state basis, our debt capacity at two times EBITDA is now approximately GBP 45 million, which, for the right acquisition, we could use for a short period, then pay down from cash generation. To capitalize on the strength of our balance sheet and the significant market opportunities we see over the medium term, we are committed to a capital allocation policy which prioritizes investment in organic R&D and capex first, then M&A, and finally dividends or other returns to shareholders. Sarah will cover numbers one and two in the later slides on organic and inorganic investment. In relation to dividends, we have a progressive policy, as shown by our track record of consistent double-digit dividend increases over the last five years.
In terms of other capital deployment, we will continue to purchase shares via our Employee Benefit Trust to hedge LTIP obligations and prevent dilution of existing shareholders. In light of the current valuation of the business and to expand the range of options the board has at its disposal, a resolution to enable share buybacks will be proposed at the forthcoming AGM in January. This will provide flexibility, with any deployment of surplus capital assessed against our existing capital allocation priorities, M&A opportunities, and prevailing current valuation. I'll now hand over to Sarah, who will provide an update on our future growth drivers.
Thanks, Ed. The automotive market remains challenging, particularly in Europe, causing near-term disruption and cash conservation among some customers. However, the long-term drivers of our business remain positive. Our growth is supported by four long-term structural and regulatory drivers: new vehicle models, new powertrains, consumer safety ratings, and regulation of assisted and automated driving. European manufacturers are navigating a generational transition, restructuring and rethinking development and testing. In the short term, this has delayed procurement as customers conserve cash and reassess capital allocation. Over the longer term, pressure to launch models faster and more cost-effectively will increase demand for automated development, driverless physical testing, and simulation, extending our relevance beyond traditional ADAS testing. Different rates of EV adoption across the U.S., Europe, and Asia are leading to development of more hybrids and refreshed ICE platforms, all of which require development and testing.
We expect strong growth in Level 2 autonomy as premium ADAS features move into mass-market vehicles. AV development will also increase demand for high-fidelity simulation and ultimately a combination of virtual and physical testing. Together, these tailwinds support sustained long-term growth in the group's end markets. The underlying requirement is unchanged. Manufacturers must validate more technologies across more vehicle variants under increasing time and cost pressure. That combination supports demand for both our physical testing equipment and our simulation capabilities. We have a global customer base with 40% of revenue from Asia Pacific, mainly China and Japan, and around 30% each from North America and Europe. The maturity of consumer safety standards varies by geography, creating further growth potential. NCAP bodies independently rate vehicle safety, and each model variant must be certified by an accredited laboratory for its target market. There are 10 active NCAP programs globally.
Euro NCAP currently applies the most stringent standards, followed by China NCAP and US NCAP. Requirements continue to develop in Japan and Southeast Asia. In India, Bharat NCAP currently focuses on passive safety, but is expected to add ADAS and active safety testing within the short to medium-term time horizon. As standards become more complex, demand for testing equipment should grow. We are well-positioned through our sales and support offices and distributor network. Standards are also expanding beyond passenger cars into commercial vehicles and motorcycles, creating additional target markets. Importantly, this is not a single-market opportunity. Each region is progressing at a different pace, which creates a continuing sequence of regulatory upgrades and investment requirements rather than dependence on one implementation cycle. NCAP ratings are awarded by accredited test facilities where we have a strong global installed base.
Each vehicle entering a new market must be tested under the market's protocols. For example, as Chinese OEMs expand internationally, each new model requires local accreditation in the market in which it is being launched, making safety ratings increasingly important to market acceptance. Testing demand therefore grows both in China during vehicle development and in Europe for final accreditation. We supply the majority of accredited service providers, and the consistency OEMs seek across global programs positions us well for future demand. This installed base is strategically important. It gives us strong customer relationships, detailed understanding of customer requirements, and a platform from which to support future protocol changes and equipment upgrades. Our innovation and product roadmap is aligned with customers' evolving requirements. In testing products, near-term development follows the NCAP roadmap to 2030 and addresses increasingly complex testing.
Demand is growing for automated multi-vehicle driverless solutions that improve proving ground efficiency. In testing services, we are broadening our offering and increasing utilization of our existing footprint, while increased automation improves efficiency and repeatability. In simulation, we are developing higher-performance, higher-fidelity driver-in-the-loop simulators. We are also integrating physical powertrain and steering systems into simulation to improve feedback and open opportunities with additional OEMs. The convergence of physical testing and simulation creates a distinctive long-term opportunity for the group. Customers increasingly want consistent results across virtual development and track or laboratory validation. Our unique capabilities in both physical testing equipment and simulation allow us to support that workflow and create a more integrated proposition. Despite current market challenges, our business is resilient, and our medium-term growth drivers remain attractive. We are OEM-agnostic, serving more than 150 customers, including major Chinese manufacturers.
Our global customer base and long-standing relationships provide resilience and flexibility. We are also powertrain-agnostic. Every new EV, hybrid, and ICE model must be tested and certified. We do not supply components for production vehicles, so production volumes don't directly determine demand. The near-term risk is that pressured OEMs defer investment to conserve cash. However, over time, the need to innovate and develop models faster and more efficiently should accelerate adoption of simulation and our driverless testing capabilities. Overall, our market exposure and customer relationships provide resilience today and support sustainable long-term growth. The breadth of our exposure is therefore a strength across customers, geographies, powertrains, and development methods. The common requirement is rigorous and repeatable testing. That gives us multiple routes to growth as customer priorities evolve. This slide shows how we expect to sustain growth through both volume and pricing. We operate in growing end markets.
As safety technology advances, regulation and certification should follow, increasing demand for testing equipment, although timing will vary by geography and customer. Beyond market growth, we can gain share in areas including platforms and soft targets. We retain pricing power in niche positions such as driving robots and simulation software, and we'll continue to capture that value. Replacement cycles provide a steady revenue base, while continued product investment should stimulate additional demand. The opportunity is there for a combination of market growth, share gain, pricing, and product development.
These levers will not move uniformly each year, but together they provide a balanced basis for sustained organic growth. We aim to maintain operating margin at 20% and deliver incremental compounding improvement over time through a relentless focus on continuous improvement. In FY 2026, the full-year benefit of production planning, quality improvements, and product rationalization delivered a further GBP 0.4 million of savings.
Continuous improvement workshops are identifying the next wave of margin opportunities for FY 2027. Initially, we will reinvest improvements in innovation and sales capability to support growth. Priorities include further supply chain improvement, modularization, and product rationalization, efficiency gains across manufacturing, and greater value from service, support, spares, and software upgrades. Our approach is disciplined, secure efficiency benefits, reinvest selectively where this strengthens growth, and continue to protect the quality and reliability customers expect from our products and services. In August, we acquired eMpulse Test Systems, which designs and manufactures servo-electric systems for noise, vibration, and harshness, structural, and durability testing. Its equipment is used in the same laboratories as our SPMM machines, so the customer base is familiar and the technologies are complementary. The acquisition broadens our laboratory testing offer and gives customers access to more solutions from one trusted partner.
eMpulse is established in North America and can now use our global sales offices and distributor network. Its technology may also accelerate development elsewhere in the group, and integration of the product range and sales team is progressing well. The strategic logic is clear: adjacent technology, familiar customers, and immediate access to a broader international channel. These characteristics reduce integration risk and create practical opportunities for cross-selling. Acquisitions remain an important growth priority, and our pipeline includes near-term opportunities and longer-term relationships. We target cash-generative, high-gross-margin businesses at reasonable multiples, with EPS accretion and strong potential returns. Typically, targets add products or services that can be sold through our international channels. eMpulse demonstrates this model, a high-quality niche business integrated into testing products and given immediate access to new sales channels. We continue to develop relationships with other targets.
The pipeline is promising, and we have the resources and discipline to act when suitable opportunities arise. We will remain selective. Strategic fit, quality of earnings, valuation, and deliverability all matter, and we will pursue transactions only where we see a credible path to value creation. Our absolute focus in FY 2027 is the front end of the business, innovation and sales. In innovation, we will prioritize opportunities with the greatest commercial and strategic potential, adapting our solutions as customers respond to changing market conditions.
In sales, we are strengthening structure, capability, and processes, with particular emphasis on execution and pipeline conversion. We are also optimizing routes to market and distribution channels, and sharpening our focus on strategic accounts. Operational improvement remains business as usual, supported by rigorous continuous improvement. We are commissioning a new integrated design, production, and support facility for simulation, bringing multidisciplinary teams together for the first time.
In M&A, we are integrating eMpulse, realizing commercial synergies from our broader laboratory offer, and maintaining a disciplined pipeline to supplement organic growth. We delivered FY 2026 results in line with the guidance issued in July 2026 and maintained operating margin at 20%. We have proposed a 10% dividend increase, reflecting the board's confidence in the group's financial position and prospects. Our strong balance sheet, including GBP 24.5 million of cash, supports further organic and inorganic investment. For FY 2027, market conditions remain challenging, but we are strengthening the business to capture long-term structural and regulatory growth. The board remains confident that the group will make financial and strategic progress this year and expects FY 2027 adjusted operating profit to be in line with current expectations. That concludes the presentation. Thank you for joining us.