Interview conducted by Alan Kohler.

Interview conducted by Alan Kohler. Worth a read as I pickedup a few good points from it. I think they will make much better margins on thehelmets than stated? Finance comments were interesting also.There’s been abit going on with the company, so I thought it was time to catch up withPhilippe to get some details of what they’ve been doing. They’ve signed acontract with the Finnish army and also borrowed some money from theCommonwealth Bank to build a new production line, so I thought it would be agood idea to get some detail. Maybe they’re going to start making some decentprofits. Philippe, perhaps to begin with, could you bring us up to date withyour cash situation? You put out a March quarter update but there were no kindof details on cash in there. What’s the situation now, how much cash have yougot?The cash isactually in reasonable shape. It’s pretty hard to sort of give you a figurewhen I don’t give it to the whole of the market. But you’ve seen that we’vesecured a loan with the Commonwealth Bank for $2.5 million dollars, so cash isokay on one side and we have enough money with that loan to sort of fund theinvestments we need to do and the working capital we need to have, so it’spretty positive.Why don’t youhave to give it to the whole market? I don’t understand how you get out ofdoing an Appendix 4C cash flow report each quarter. We don’t reportevery quarter, we report every half-year and we give the cash then, yes,absolutely, and we will at the end of July.Okay. You hadsome wins lately. Just bring us up to date with what you’ve done. The loan fromthe Commonwealth Bank was a specific purpose loan, right? Yes, because wesort of planned a number of things in terms of investment, in particular, tosort of manage to produce large quantities of helmets, we needed to top up thecash so that we could do that investment which is sizeable. At the presenttime, we can do that alignment, we can do a medium amount and a small amount ofhelmets, especially on what we call the pre-forming, that’s the first operationthat takes a flat stack of plies and puts them into the shape of a helmet. Sowe need a number of presses to do a large number of those and as you know, whatwe’re trying to do, not go for small quantities, but go for the market, really.Can we have some detail on that?You’ve got a contract for these helmets, right? At the presenttime, we have distribution channels through the acquisition we did in Septemberlast year in HighCom in the US. HighCom is actually a company that has beenmanufacturing armour, helmets and plates, and soft armour as well, and has hada very wide distribution network with mainly in law enforcement in the US.These people are basically ready to pick up what we can deliver and set.They’re very actively engaged in the market, but we’re now getting very closeto being able to deliver smaller quantities to start with and then much largeras we go.We have accessto the largest market in the world. The US is 40 per cent of the world market.Law enforcement – 800,000 officers is 18,000 agencies that buy separately. It’sa very, very large market on its own and they consume tens of thousands ofhelmets a year. We are basically ready, we have the people, these products areon the website of HighCom. They are pushing the salesforce across the US tostart the sales, so yes, we are ready to go. As you’ve seen as well, in termsof other markets, we’ve signed a contract with the Finnish defence forces forabout 4,000 plates that we delivered before the end of the year. Now, we haveserious contracts on foot and we’re getting more. Remember, that a lot of whatwe do in terms of law enforcement, particularly in the US, is a very, veryshort delivery time. They tend to sell a lot out of stock, so that’s prettymuch immediate, all within a month or two, so it comes really quickly. Weexpect quantities to grow very substantially and very quickly.But to be clear,the deal with the helmets is not a contract, you’re just going onto the websiteof this outfit in the US and you expect that to lead to sales, right? That’scorrect?No. It is on thewebsite that it’s there for sale, but we have a network of distributors that wework with actively and we sort of court for specific opportunities. We haveabout 15-20 different distributors over there that basically sell to the 18,000agencies. As I say, they go from a few units to thousands of units, it dependson the opportunity.The $2.5 million from the Commonwealth Bank is to build apressing line to be able to produce more of these things, right? Yes, that’scorrect. It actually transforms a flat stack of material into a semi-sphericalshape of a helmet. This then goes into our [X-Glove] that actually consolidatethis, increase the temperature and make it a solid shape that withstand rounds.How many wouldyou be able to make? With one machinewe’re planning to be able to generate up to $40 million dollars a year. When wehave a turnover this year of about $45 million, that’s definitely a verysubstantial amount. We’re planning in the medium term to have a second line inthe US because we have a factory there and when you want to sell to themilitary in the US you need to produce there. We’ll have a second line in theUS, that means the two lines together can give you $80 million dollars ofturnover.Did you say thatyou have $40 million sales or that you plan to have the $40 million sales? We have thecapacity to make $40 million in sales.Okay, and howmany items is that? What’s the per item cost? That’s why I’veexpressed it in that way, which is something that investors can understand. Ifyou talk quantities, it depends – we can do plates that sell for about $400dollars, we can do helmets that sell for $1,300 to $1,500 dollars. But we cando less helmets than plates.This line, theproduction line, actually does plates as well as helmets? I thought it was justhelmets. No, the preformline that we’re funding with the Commonwealth Bank is for helmets. The machinethat we have installed in our facility in Adelaide – and remember, we opened upthe facility in February, has the main machine which is what is called the[X-Glove] that is really the process that we have that is unique and patented.That’s your IP,right? That’s right,yes. That machine can produce the $40 million. We’ve got presses that are a lotcheaper that feed into this, basically.Right, that thenfeeds to the helmet line, is that right? Those pressesare used for helmets, yes. To do plates, we have all the equipment already, sowe don’t need to invest anymore.I get that. Thehelmets sell for $1,300 to $1,500 dollars, is that right? Well, it dependson what circumstances, what equipment on them, what specifications we need.Yes, that gives you a rough idea.How does thatprice compare with the competitive helmets in The United States?Well, the beautyof this is that the helmet in question really has very few competitors. Mosthelmets or nearly all helmets at the present time are protecting againstfragments and pistol rounds, not against rifles. Our helmets are actuallyprotecting against a rifle at what we call muzzle velocity, that means point-blankon the helmet. And there’s very few of those that are available. Some of themare made out of titanium and cost a fortune and weigh an enormous amount.Others are just putting what we call applique, so it’s a sort of ceramic thatyou put on top of your normal helmet.All of thoseweight 2.5 kilos, ours weigh about 1.5-1.4. That’s a huge difference and whenyou know that a helmet on the head of someone beyond 1.6 kilos is starting toproduce some issues in your neck in the long-term or worse, if you jump with aparachute for instance in the very short-term. It’s really a massivedifference.It sounds like you’re going for theAmerican law enforcement market first, is that correct? Yes, that’scorrect because we have a very large market for that, and people exposed to riflesin the US is very large. We protect against AK-47 rounds, you don’t find verymany of those in the public and in the rest of the world because we have lawsthat are a lot stricter. But in the US, you go to any demonstration, they havethem. That’s the first market we go to…And what do youthink your potential market share of that particular market might be? Well, it’s hardto say. We’ll fill out 80 million without much of an issue, I can tell youthat…$80 milliondollars? Yes. And ofcourse, we go as well for the military in a number of other countries. Militarynormally takes a lot longer. We did a lot with the military here, that’s ourbread and butter in Australia. Even small contracts can take months, if notyears. The Finnish defence force’s, for instance, took us two and a half yearsto – we knew it was happening, it took us that length of time to get there. Youneed to have the short-term thing that the law enforcement can give you and themedium-term one that the military worldwide can actually offer.The deal withFinland is for the plates, right?Correct, yes.That’s an actual contract, can youtell us the detail of that contract? Well, I’vementioned it in the press release, we’re talking about something around just abit less than $2 million dollars to be delivered before the end of the calendaryear. These are very, very light plates, typically, they do the job of a platewhich frees up to 30 per cent more heavy. That’s why people are particularlyattracted to that because, in general terms, the technology we offer isbringing much lighter items, basically, to the soldier or the law enforcementperson.The Finnish armyisn’t one of the big armies of the world. I just wonder, how come itturn out to be Finland who bought the things first? Who knows? We’vebeen in touch with them, they’ve been interested from day one. Our agent inEurope is actually in Finland, so that probably helps.Right, okay, Iimagine you expect now if that works and Finland’s happy with these things,other military forces will be interested in picking them up as well, is thatwhat you think? Absolutely, andwe’ve been very active on the market for a number of months, if not years, tosort of prime the orders like this. The Finnish army is actually maybe a smallarmy, but it’s a very sophisticated one. They happen to have probably thelongest border with Russia. These guys are feeling very threatened and they’revery, very careful in what they buy because they have a big neighbour that isnot always as friendly as you want, so it’s a very, very good reference. Whenyou talk to people outside in other countries, for them to see the Finnishhaving placed an order like this is normally a very, very good sign becausethey try and protect their people to the nth degree and they are very close toa potential threat.Do you have asales pipeline you can tell us about? At this stage,it’s hard to say. We’re talking to a lot of people and these are maturingslowly, as I mentioned, so, no, it’s not possible to give you much more thanthat.When does your business planning haveyou at cash breakeven? The company isnot burning cash, the company has been in operation for about 30 years or so.We’ve been profitable in the last three years and in terms of cash, foroperation, we’re not burning cash.Maybe I’mlooking at something incorrectly. The half-yearly had a negative cash flow? Well, yes,that’s the seasonality of our sales. Typically, our cycle of sales – andremember that a lot of what we’re doing at the present time tends to be more onthe drone side. We have a large contract with the Australian army on this.Typically, our operation tends to go with the cycle of the budget – the budgetis actually decided in May, normally, of each year. People start to enquire onwhat they want in July/August, place orders before the end of the calendar yearand we deliver towards the end of the financial year. The first half isnormally very quiet, the second half is very busy.This year, wehad a bit more activity on the first half, but definitely, the second half isreally making your year, and so as we speak we deliver a lot of things and webelieve that we will continue that trend. Typically, if you look at the past,the first half tends to be negative and but we normally catch up with what’shappening in the second half.Right, okay,well that explains it. Could you give us a sense of, if you do manage to sell$40 million dollars’ worth that you’re going to produce of the helmets thisyear, how much of that falls to the bottom line, what’s your margin? We expect thetypical margins that you get in defence, 8 to 10 per cent net. That’s what weexpect typically.I expected itwould be more than that, that’s pretty tight margins, heavens![Laughs] Well,this is the real world, you know?Bloody hell,this is high-tech material, gee!Well, yes, sure,but don’t believe that defences are paying premiums, they’ve turned to be verytight with the taxpayers' money and 10 per cent net is not a bad margin at all.You can live quite well on it.No, of course,that’s right. Your profit for the full year, June 2019 profit was – let’s lookit up… Not that amount.No, no, but I’mjust interested because – I mean, what sort of difference the margin on $40million dollars would make to your profits?Very, verysubstantial. What happened is that our typical business before used to bemainly in distribution. That means, we buy things from overseas and resell itto defence here. That is a low-margin business, that’s why probably I’m happywith 10. But I mean, I’ve been in defence for a long, long time and that’s whatnormally people do. The model that we had before of distribution is somethingthat we want to diversify from because it’s very low margin. The way to do thisis have good products where you have IP and you own the IP and then you’recapable of selling it worldwide. So, we sort of invested for the last fewyears, trying to keep still in the black, but with very modest profit.The fact thatwe’ve now got a fair bit of maintenance on these UAV drones, is enhancing ourprofit. The fact that we have these new products coming up in terms of mainlythe plates and helmets, are helping to sort of push us into much more healthygross margins and net margins already from next financial year. So, yes, it’s achange in the model which goes from a low margin business to a high marginbusiness, which is what we wanted to do and which is very important for ourshareholders.It’s interestingthat you decided to fund the production line for the helmets with a loan. Whydidn’t you raise equity?Normally, weraise equity because banks wouldn’t give us money. We’re a small organisation,most of the time banks are basically saying, “No, you’re not a good risk.” Andthe only way you can fund yourself is through equity, and we’ve done that inthe past of course. What happened there is we had three years of profit, wewent to the bank and said, “This is what we want to do, will you help us?” andthey basically said, “Yes.” We asked for $1.8 million and they gave us $2.5 million.How much arethey charging in interest? It’s not public,but it’s very competitive. It’s slightly more than a home loan but not verymuch more.Less than 10 percent?Oh, yes, muchless![Laughs]But, so, in theend, we get money and we don’t dilute our shareholders, so in the end, it’s areally good thing to do. Being able to borrow, for us, was the best newspossible because that means we can get large banks behind us. I mean,Commonwealth Bank is not exactly a small entity. The level of confidence thatthat shows from a bank that is, by definition, very risk-averse, is actuallyvery, very good news. On the other side, we can see that other people arelooking at our share very positively for what we do, about $40 million dollarsof turnover. We’re talking about a market cap I think has just gone above $40million because we had a big increase in the last few days. But if you listento Morningstar, for instance, it will give us a fair value at 94 cents and theshare is at the present time at 75 cents, shows that there is a lot ofconfidence from people that are very serious in the market.Well, it’s beengreat talking to you again, Philippe, thank you very much. My pleasure,Alan.That wasPhilippe Odouard, the CEO of XTEK.