Avon Technologies PLC

Good morning, ladies and gentlemen. I'm Paul McDonnell, CEO of Avon Rubber, and thank you for listening to our 2020 interim results. Before we start, I want to quickly take a second to say I hope you and your families are all safe and coping with the current situation. Despite the challenging backdrop of COVID-19, the first half has seen impressive trading across the group. We've delivered top line revenue growth of 28.7%, which I'm sure you will agree is a pleasing number in the current climate. We took early action on COVID-19 to ensure our employees' safety and we secured our global sites. As a result, we've been able to continue to operate with only minor disruption and no material impact to date. Our current COVID-19 protocols are working and we do not feel the need to change anything quickly, so we'll continue to remain cautious and vigilant as we navigate COVID-19 during the second half of the year. This has only been possible with the exceptional contribution of our people, so it would be remiss not to start a results presentation which details their collective achievements without taking the opportunity to thank them for their efforts and ongoing support. For our presentation this morning, I will start with the key highlights. Nick Kveth, our CFO, will present the financial review and outlook. and I will close by summarizing the key takeaway from today's results and provide my thoughts for the medium-term outlook. We will then take questions from those of you that have dialed in, followed by questions from those of you that logged into the webcast at the end. We've made excellent progress over the first half in both revenue and EBITDA margin improvement. We've continued to grow on an organic basis and we've also begun to see the immediate benefit from our recent helmets and armor acquisition, winning $600 million of body armor contracts since completion, and we're very pleased by their initial integration progress. To date, we've seen no material impact from COVID-19, are financially robust, and we're confident in achieving expectations for the full year. Our investor proposition should be a familiar slide, and we continue to believe these are the KPIs you should measure our performance against. The slide broadly speaks for itself. Nick will go into more detail on the cash conversion performance, but from my end, I want to make it clear that we're confident these are one-off delays and we expect cash to unwind during the second half. Beyond that, we're doing what we said we would, and we remain confident in our ongoing commitments across these targets, which is why we've maintained our progressive dividend policy with a 30% proposed increase in the interim dividend. With that, I'll hand over to Nick.

Thanks Paul and good morning everybody. So now turning to our half-year financials and our outlook for the rest of the year. I'm delighted to present another strong set of results today with strong organic growth from both Avian Protection and Milk Right Interpulse as well as the first three months of contribution from Helmets and Armour. Revenue growth of 28.7% comprises 9.5% organic constant currency growth and 18.8% from the inclusion of helmets and armor for the first time. Revenue also benefited from a small currency tailwind with an average exchange rate for the half year of $1.283 to the pound compared to 1.294 last year. Moving further down the slide, you'll see that we have continued to grow our profit ahead of revenue with an adjusted EBITDA of 20.6 million, a 50% increase on last year. with an organic increase of 27% in addition to the Helmets and Armour contribution. On an organic constant currency basis, the EBITDA margin increased by 330 basis points with improved margins in both Avon Protection and Milkright Interpols. The strong organic performance and first contribution from Helmets and Armour resulted in an adjusted EPS of 38.1 pence, an increase of 64.2%, and that is up 37.5% on an organic constant currency basis. Cash conversion was lower than usual due to a delay in receiving the cash from last year's $16.6 million rest of the world last contract, as well as the Helmets and Armour working capital outflow as a result of the transitional arrangements with 3M. Excluding Helmets and Armour and the impact of the one-off delay, organic cash conversion was 102.9% in line with our normal expectations. Following completion of the acquisition and adoption of IFRS 16 lease accounting, net debt was £66.9 million at the end of March. Excluding lease liabilities of £21.1 million, bank borrowings net of cash was £45.8 million. I've highlighted at previous results presentations that our cash balances were holding back our return on capital employed. Having put our cash to work through the acquisition, we have delivered a return on capital employed of 24.2%, up 400 basis points from this time last year. Reflecting our continued confidence in the business as well as our balance sheet strength and liquidity, we have once again proposed a 30% increase in our interim dividend in line with our progressive policy. I now want to give you a quick overview of the drivers of our organic revenue growth. Both of our businesses delivered strong organic growth, contributing to organic constant currency revenue growth of 9.5%. Avian protection grew by 10% and milk right interpulse by 8.5%. Avian protection saw exceptionally strong military growth of 20.2%, more than offsetting the impact on first responder of our exit from the fire SCBA market. Our military revenue growth was driven by rest of the world revenues of £19.7 million, up from £8 million last year, reflecting the benefits of our focus on developing a broader customer base. US DOD revenues were, as expected, lower at £17.5 million compared to £22.9 million last year. This is as a result of the shift in the portfolio to higher margin M69 and M53 A1 products, offsetting lower margin M50 deliveries. Our first responder business grew revenues by 6.6%, with strong underlying demand for mask filters, spares, and accessories. Positive global dairy market conditions over the period benefited all lines of business in milk right into pulse. With moderate production growth and stable milk and feed prices, increasing farmer confidence and order intake. This resulted in an 8.5% increase in revenues on a constant currency basis. I now want to talk to you about our cash flow and net debt. As you can see on the slide, following the acquisition, we have moved from a net cash to a net debt position. And as I mentioned earlier, our net debt of £66.9 million also reflects the adoption of IFRS 16 lease accounting with £21.1 million of lease liabilities now included in our net debt. The £84.3 million increase in net debt due to the helmets and armour acquisition comprises the initial cash consideration of £70.8 million assumed lease liabilities of $8.8 million, plus deal and transition costs of $4.7 million. On final comment on the deal consideration, the previously announced $3 million contingent consideration triggered by the first order under the legacy SAPI Body Armor contract was paid in the second half. Future orders under this contract will trigger further payments up to a maximum total of $25 million. You'll also see on the right hand side of the bridge that there has been 6.2 million pound working capital outflow from Helmets and Armour. This is due to the timing of cash receipts from 3M to settle amounts due to us under the transitional service arrangements. This will reverse when we exit the transitional arrangements in the first half of our next financial year. Now moving back to the left hand side of the chart, you'll see that the organic working capital outflow of 15.6 million. As mentioned earlier, the delayed cash receipt relates to the rest of the world mask contract, resulting in an organic cash conversion of 20.1%. Excluding this one-off delay, as I said earlier, organic cash conversion was 102.9%. Receivable is due from a wealthy Middle Eastern state. The product has been formally accepted by the customer, but we have faced bureaucratic delays, which were then compounded by further delays due to the COVID lockdown in the country. Before moving on to look at the division results, I'd like to say a few final words on CapEx. We remain committed to investing for growth, developing our next generation of products whilst continuing improving the existing portfolio, all to maintain our leading positions for innovation in both businesses. We've invested £4.6 million of CapEx in the last six months. This includes £2.7 million of capitalised development costs. Paul will talk more about our investment development a little later. Okay, I'd now like to turn to look at Avon Protection in a little more detail. Avon Protection's results reflect a strong organic performance in the acquisition of helmets and armor. Order intake was up 31%, revenue up 39%, and operating profit up 91%. with a closing order book of £110.6 million, providing excellent visibility for the second half and beyond. Removing the £13.8 million of revenue and £2.6 million of adjusted operating profit contribution from Hammers and Armour, organic revenue was up 10% and the organic adjusted operating profit increased by 55%, with organic EBITDA margins up 420 bps. Organic order intake was down 9%, impacted by the timing of orders under the M53A1 contract. Following receipt of the first order for $20 million in the first half of last year, we are now receiving regular smaller orders spread out throughout the year, rather than one large annual order. The increase in organic EBITDA margins reflects both higher revenues and improved product mix. with a larger proportion of revenues from higher margin products from the new USDOD programs for rest of the world customers and our exit from the lower margin to our SCBA business. The results include the first three months of helmets and armour. The revenue of £13.8 million reflects ongoing IHPS helmet deliveries to the USDOD, completion of the low rate production volumes for VTP ASAPI, as well as sales of helmets to first responder customers and flat armour deliveries to rotary wing aircraft manufacturers. We now expect revenue to continue at a similar run rate in the second half due to the initial deliveries under the USDOD body armour contracts moving out into the next financial year. Profit impact from the lower than previously guided revenues expected to be fully offset by the earlier than previously guided delivery of cost synergies. We are firmly on track to deliver the targeted cost synergies of $5 million, and we also see potential for further efficiencies over the longer term. As you can tell, we continue to be delighted with the helmets and armor acquisition and its future growth prospects, which Paul will talk some more about a little later in the presentation. I now want to turn to Milkright Interpulse, which has delivered an excellent set of numbers in the first half. The combination of moderate milk price growth at around 2% and stable milk and feed prices, as you can see on the chart in the top right corner, has resulted in continued positive global dairy market conditions. This benefited all three lines of business, with order intake up 7.5% on a constant currency basis, revenues increasing by 8.5%, and an opening order book for the second half of £4.9 million, up 33% on this time last year. Revenue grew by 7.1% in interface, 8.7% in PCI, and 17.8% in farm services. We also saw a 60 basis points increase in EBITDA margin, constant currency, taking it to 22%. Margins benefited from both the increased revenue and the actions we took last year to consolidate all of our European commercial operations into Italy and transfer our European line of production to our UK facility. Milkright Interpol's order intake and revenues have continued in line with the first half trends in April and May. The global market conditions remain stable, as you can see on the slide, despite the wider macroeconomic uncertainties arising as a result of COVID-19. Together with the strong opening order book, this gives us confidence in our full year expectations. Paul gave a brief overview at the beginning, but I want to run through the impact of COVID-19 in a bit more detail, particularly from an operational and financial perspective. The well-being of our employees has been our top priority, and as Paul outlined at the start of the call, we took early action to protect their safety. By doing so, both Avon Protection and Milk Right Interpols have continued to operate throughout, with only minor disruption. continuing to play a crucial role in supporting our customers' ongoing requirements. As a result, there has been no material impact on our financial performance to date or our expectations for the full year. We have not accessed government furlough or loan schemes either. To reiterate what Paul said earlier, this has only been possible with exceptional contribution from our people. Our people have adapted well to the COVID situation and we have implemented a number of measures to ensure our sites remain safe working environments for those who cannot work from home. We've also been focused on maintaining the strength of our balance sheet and liquidity with cash of $9.5 million and undrawn bank facilities of $19.5 million giving us headroom of $29 million at the end of March. I expect our headroom will continue to grow in the second half as we generate cash and continue to grow our earnings. The net debt to EBITDA covenant of our bank facility is a ratio of less than three times, excluding lease obligations, and it's tested on a rolling 12-month basis at calendar quarter ends. At the end of March, our net debt to EBITDA on this basis was one times, and we expect this ratio to reduce in the second half. We will remain vigilant and continue to monitor and manage the situation closely. and adapt as needed as the US and UK start to move out of lockdown. Now I want to talk to you in a little bit more detail about the strength of our £115.5 million dollar book. Helmets and Armour is a large chunk of this, with £64.8 million of orders under the IHPS Helmet, Legacy ISAPI Body Armour and Flat Armour contracts. This is alongside 36.5 million of military orders across the product portfolio with the DOD and rest of the world customers, and 9.3 million first responder orders with strong ongoing demand for masks, filters, and accessories. And finally, in milk right into pulse, as I mentioned earlier, the positive global dairy market conditions has resulted in a very healthy opening order book of 4.9 million for the second half. So before I hand back to Paul, I'd just like to finish with a summary of our outlook for the rest of the year. We're confident in delivering our full year expectations as a result of the revenue visibility from our long-term contracts and our strong opening order book, order intake and trading for both businesses continuing in line with expectations in April and early May, and most importantly, our ability to adapt to protect our employees whilst continuing to operate normally with minimal disruption. Thank you very much for your time. and I will now hand back to Paul.

Thanks Nick. Having covered financials, I'd like to spend some time talking about the opportunities for delivering sustainable growth and why we remain optimistic for the medium term outlook. As I look back at the progress of the group, it's the continuing ability to deliver on our strategy which is the heart of our success. We're nearly three years into this strategy based on creating value through three key elements. Growing the core by maximizing revenue from our current portfolio and improving our operational efficiency, pursuing selective product development to maintain and expand our leading product positions through organic product development activity, and targeting value enhancing acquisitions to further accelerate growth and add value to the group. The strategy is consistent and we're building a consistent track record of delivering against it. This has transformed the group in recent years, so I'd like to highlight a few areas to explain our confidence in the future and how we will continue this progress over the medium term outlook. Having invested in the capabilities of our respiratory products and invested in the acquisition of our ballistic protection products, we are a significant supplier for life critical protection products that enhance the efficiency and capability of the end user through the use of our technology. Put simply, we rely on our customers and they rely on us, and we are relentless in our pursuit to push the boundaries of technology to give them the advantage and to protect their lives. When you look at our portfolio, you realise we are one of the major suppliers to protect all areas above the waste and are a key system supplier for most customers. In addition to the current portfolio, we have the opportunity to expand our organic R&D activities to develop tomorrow's products of the future. Or we will consider additional M&A when we believe the barriers to entry are too high, and we can find opportunities to further complement our portfolio and further accelerate growth. And together, they provide further areas of opportunity for the group. When looking at the strength of the Avon Protection Portfolio, we have long-term contract frameworks with the DoD for the M69 mask and M53A1 system, underpinning our military term outlook and are in advanced stage discussions with the DoD for a further five-year sole source contract on the M50. This, along with the potential for further upside from our broader Rest of World and Escape Hood portfolio, underpins the medium-term order guidance of 85 to 120 million pounds per annum. Now, moving away from the organic business, Helmets and Armour has come into the group with equally strong long-term contract positions. So I wanted to give you some similar guidance for what to think about when considering this business. We see similar framework contract agreements which are complemented by short-term delivery orders So the operating dynamic for helmets and armor is consistent with the Avon protection approach. The IHPS helmet is the next generation combat helmet for the US Army and is just starting the low rate fielding stage. We expect this product line to receive orders of 35 to 45 million pounds per annum over the next five years. When we acquired the business, helmets and armor had already secured a share of the $704 million four-year framework contract for the US Army VTP program. This included the VTP eSAPI plates and ex-SAPI plates. And since completion, we've won the third ex-SIBI contract, which is a dual source contract award on the same platform. Collectively, we're guiding to annual orders of 20 million to 35 million pounds across these three VTP body armor products. The Legacy ASAPI Body Armor Contract with the Defense Logistics Agency is an 18-month base contract with two one-year extension options with a maximum ceiling value of $333 million. This was the outstanding legacy contract that triggered the contingent consideration related to the acquisition. We've already received the first $20 million delivery order and expect deliveries to begin during H1 FY21. which further underpins our medium term outlook and a guiding for orders of 30 to 45 million per annum over the lifetime of the contract. When we also include the additional run and repeat orders from Flat Armour, Rest of World and First Responder, we are anticipating annual orders of 95 to 140 million pounds from the helmet and armour business per year. Turning to first responder revenues from the underlying business have grown during the period, and on the back of an increase in COVID-19 orders, we expect to see continued underlying growth during H2. We continue to see a wider global opportunity for the first responder products, and whilst our current helmets and armor priority is delivering the programs for the military customers, we also see a longer term opportunity within the wider first responder market for the combined portfolio. As Nick outlined earlier, we've continued to invest in our R&D pipeline, with the largest spend being on the next generation of escape hoods on the slide, the IHPS helmet, and VTP body armor as part of the DoD's next generation soldier protection system. R&D is not just about new products for us. We are committed to working closely with our customers to push the boundaries of technology and maximize their performance and capability. I spoke to you six months ago about the MCM100 and having undergone a full dive test program with the US Navy, we're working on a few small improvements that will position us for the upcoming contract. Likewise, we continue to work with the UK MOD on developing the capabilities of the UK General Service respirator, having only just started production during March. The key point here is that our technology leadership and capability is core to our relationship with our customers. and we are committed to driving this through ongoing R&D to create further value for the future. And it's why we maintain such a strong R&D pipeline with our customers. Hopefully, you will have been able to see the benefits of the helmet and armor acquisition throughout this presentation. But I just want to give you an insight to the work we've done so far. After completion, Nick and I spent a lot of time in the US, getting to know the people, focusing on the key priorities and putting our transition plans in place. And we made considerable progress in the first three months of ownership. What I can say is that we have cemented our views on the quality of this business and its fit with Avon Protection. Culturally, it's very, very similar to Avon Protection, with employees who take a great deal of pride in producing life-saving equipment every day. The existing management team are incredibly capable with the business being led by Terry Griffith, who's the President for Helmets and Armour, and we've also appointed Kiana Hughes as President of Protection Operations, who is responsible for all Avon protection sites, who have both joined the group executive team. The integration plans are firmly on track, with us bringing Helmets and Armour into the wider Avon management and operational frameworks. We're focused on integrating our IT systems, which is progressing well, and we're confident of delivering the $5 million of synergies we initially targeted, as well as identifying further long-term efficiencies. When taken in combination, our focus on delivering against our strategic priorities continues to drive the group forward and create sustainable growth. I'm very pleased by our first half achievements and the progress we've delivered across the group. We continue to navigate our way through COVID-19, taking early decisive action to ensure that our employees, factories and supply chains remain safe and we're able to operate at normal efficiency levels. Our full year and medium term outlook is underpinned by a strong order book and growing number of long term contracts, which continues to make progress. We continue to reinforce our technological leadership and capabilities working with our customers to ensure that our products continue to match their evolving requirements and developing the technologies of tomorrow. And where we believe there are further opportunities to accelerate growth, our balance sheet remains strong and will allow us to fund further M&A when the timing is right. This gives us confidence for the future. In what has been one of the most challenging economic environments, we remain confident for both this year and the medium term outlook for the group. Ladies and gentlemen, that's it from me. I'd like to thank you for listening, and we'll move to the Q&A. Just one final point. In our new digital age, I'd just like to make some quick logistical points. We'll take questions from the conference call first, and then for those who've submitted questions via the webcast, we'll read them out and answer them. We'll now take questions from the conference call, and if I could please ask you to state your name and company, followed by the question. Thank you.