Avon Technologies PLC

Good morning, ladies and gentlemen, and welcome to our 2021 year end results. For our agenda this morning, I will start with the key headlines and will provide further details regarding the strategic review of AMA. Nick will present the 2021 financial results, including the financial impacts of the strategic review and our 2022 outlook, following which I will talk about the group as it moves forward and the medium term outlook. and we'll finish with questions from those of you that have dialed into the conference call. 2021 has been both a difficult and challenging year for Avon Protection and I'll talk in a moment about the events that have led us to this strategic review of the Armour business and our conclusion that an orderly wind down is in the best way forward for all stakeholders. We're now refocusing the group on respiratory and head protection where we have strong, stable and growing business for the future. Whilst most people have focused on the challenges of BodyArmor and the supply chains during 2021, this has masked much of the progress we've made across the rest of the group. Over the year, we've invested significantly to improve our operational capabilities as we adjust to being a larger business and we've made further progress with all our organic product portfolios. and is the reason why both I and the board remain confident in the medium term prospects for Avon protection. The decision to review the armour business followed a combination of events. This started in December 2020 with a single-shot failure of the legacy body armour product DLAS Appy at first article testing. Then, as you all know, last month we experienced a further single-shot failure with our follow-on body armor product VTP SAPI. Meanwhile, there have been further customer delays in completing the DLA SAPI approval process. And collectively, this has created a challenging combination of events that calls into question the commercial viability of this part of the business, and hence why we've taken the time as a board to consider our options and review. This has been especially challenging, as we've had to try and ascertain the reasons for the failure and discuss with our customers as there are a combination of technical, financial, people, and timing challenges to consider in order to find the best and most amicable outcome for all parties involved. I'd like to take a moment to explain some of the history regarding BodyArmor and clarify some of the details around this issue. We bought the Ceradyne helmets and armor business from 3M back in January 2020. Whilst our primary interest was the helmets business, We regarded ARMA as a sensible adjacency to helmets and one that should be cash generative and we're happy to support. Historically, it had been a long term provider to the DoD and had delivered over $500 million of revenue from DLA SAPI since 2007. And we'd also delivered $70 million of the VTP SAPI under the low rate production contract prior to the acquisition. Some investors are confused between the difference of DLAS API that was in service from 2007 and the new VTP plate that will be the long term replacement. So we've highlighted the differences on the screen. The VTP is a lighter, thinner plate with a different shape profile and will replace the DLAS API over time. Having been awarded a share of the four-year $704 million VTP ASAPI contract in 2019 before the acquisition, it was known that the customer had mandated a change to remove the aluminum crack arrestor, which is highlighted in black on the screen. This was mandated for all body armor suppliers by the USDOD and was not expected to be a significant technical change, but has turned out to be the heart of the challenges that we faced. Following the first article test failure of DLAS Appy this time last year, we undertook an engineering review, resulting in a number of changes to strengthen our product and improve our engineering and testing processes. We brought in an external expert to assess the technology and our engineering processes. We added greater contingency to the product, which strengthened the products from the previous designs as highlighted on the screen. And we improved the quantity of testing and improved the testing consistency by using the government range for all pre-first article testing to minimize variation. This collectively verified our designs through statistical analysis of test data and substantially expanded the testing we do ourselves before going into the official testing process with the customer. For the DLA SAPI, this means it's moved through the ballistic testing stage of first article testing, which I can confirm we passed in August. We applied the same learning to the VTP SAPI plate, and having tested over 800 plates before submission, we went into the official testing with a very high level of confidence that was underpinned by our pre-test data. The failure was on one shot, having passed the pre-test at the same range only a few months earlier. And whilst I'm sure you would like to understand what has caused this, Our conclusion is that a form of unknown variation caused this failure, which neither we or the customer can explain, even today. The single incidence failure is something very difficult to address, as unlike last year, there is not an obvious list of further remedies, and we cannot identify what caused this failure. We've therefore considered our three options. redesigning the VTP plate and trying again, selling the Armour business as a going concern or winding it down, followed by closure. Looking at those in turn, if we consider option one, the customer process to revalidate will take around 12 months and cost up to $3 million, which is in line with our expectations in 2021 and will essentially be a repeat of the process we've conducted this year. Without a clear understanding of the cause of failure, it's very hard to redevelop the product with confidence. And at the end of that time, there would be no guarantee of success. And crucially, the VTP contract ends in March 2023. So there will be further ongoing uncertainty regarding the timing of future orders. Whilst we believe, like other suppliers, we will get there eventually, the timing and investment remains uncertain. and we believe there are greater opportunities to focus our resources on that will add further and greater value. The second option is to consider a sale of the Body Armor business, which would allow someone to take on the above risk. Whilst the number of plausible buyers is limited, on balance, we think it is unlikely and will take time due to the regulatory approvals and customer consents. However, without the VTP product approvals, this business has limited short-term revenue visibility so we believe it is unlikely to achieve an acceptable value. The third option is a wind down and closure of the business. The customer was not expecting this failure and has confirmed they would like us to complete the approval of the DLAS API and deliver the existing $20 million order once testing approval is finally received which is expected in the coming months. We're then expecting a further $20 million order once product approvals are in place making a total of $40 million of orders, which will take up to two years to complete. On FlatArmor, which has revenues of around $6 million per year, we will negotiate the end of the contracts to provide a smooth transition to alternative suppliers. Once our customer obligations have been completed, we will close the armor operations, which is expected to be towards the end of 2023. Our conclusion is that option three provides the best solution for all parties involved. It will allow us to complete the current contracts and provides our customers the continuity that they need and maintains our relationship with the US military. Our employees will have certainty and for shareholders it also prevents further cash outlay and provides certainty for the future. I'll now pass over to Nick who will pick up on the financial impacts of this decision and then move on to the year end result.

Good morning, everyone. I'd like to start by putting some numbers around what ARMA contributed in 2021. The table shows the split of business between ARMA and the core respiratory and head protection business. As you can see, ARMA has made a relatively small contribution to the top line, with the $6.5 million of revenue in 2021 being entirely flat ARMA, but has made a significant impact on the bottom line and margins given we have maintained the cost base ahead of the expected ramp up of body armour contracts. Stripping out the armour operating loss of 10.5 million highlights the underlying performance of the core business. As we wind down the armour business, we expect approximately 25 million of revenue in FY22 and a similar amount in FY23. being 20 million of DLA ASAPI plus around 5 million of flat armour in each year. Timings of DLA ASAPI revenues depend on receipt of product approvals, which we now expect in our second quarter. At this level of revenue, this business is broadly breakeven with low single digit millions of EBITDA are expected. The net cash costs of closing the armour operations and right-sizing the rest of the group is estimated at between $3 to $5 million. We are targeting a $15 million reduction in overheads following closure. Approximately half of that is directly related to AMA and will be realized in full following closure of the business, with the other half relating to right-sizing the retained organization, which will be realized progressively through FY22 and FY23. From a balance sheet perspective, there is an impairment of Armour assets of $47 million, partially offset by a reduction in the contingent consideration liability of $16 million, resulting in a net exceptional of $31 million. There is no impairment of the goodwill arising on the acquisition of the Ceradyne ballistic business or of the assets related to the Ceradyne helmet operations. Our balance sheet will continue to show the lease liabilities related to the Armour business of $12 million. We will seek to sublet the three buildings used in the Armour business to mitigate these lease costs. We expect to continue to report the Armour business as a continuing operation during the current financial year, as required by IFRS, with the business expected to be classified as discontinued once the exit has been completed. In the meantime, we will provide full visibility of the Armour financials and the underlying performance of the respiratory and head protection business. I'm going to cover the usual slides for our 2021 performance, but I'm aware that we gave you the headlines back in our post-close in October, so there shouldn't be any new news here. As such, I will keep my comments on the historical financials brief. Here are the headlines for the prior year. To be clear, all figures for FY21 are inclusive of the Armour business. It's worth touching on the dividend, which at the recommended payout represents a 30% increase on the prior year. Over recent years, we have increased the dividend by 30% to reduce the dividend cover to around two times adjusted EPS. Given the performance of the year, dividend cover is 1.3 times for 2021. In recommending the final dividend, we have taken into account our expectations that the cover will increase to two times this year and that the dividend will grow in line with earnings thereafter. This revenue bridge shows the benefit of 11 months of Team Wendy plus organic growth in military, respiratory and first responder. which was offset by a decline in ballistic military revenue to contract base. The decline in military ballistic revenue in a year when we had expected it to grow is the cause of the decline in EBITDA. Our overheads grew due to a combination of including Team Wendy and a four-year impact of Ceradyne combined with scaling up for the anticipated growth in ballistics. the net result being the decline in EBITDA shown on the slide. Cash conversion of 83% has been aided by tight focus on working capital. CapEx was elevated this year due to IT costs associated with bringing the ballistic business onto our IT platform, as well as additional body armor product development costs. This will reduce to more normalized levels this year, of around 25 million. At the end of September 21, we had net debt excluding lease liabilities of 26.8 million and gearing of less than one times adjusted EBITDA, very comfortably under our bank covenant of three times. While the past financial year has had more than its fair share of challenges, the order book has grown strongly. At the start of this new financial year, the order book of $143 million is over $40 million higher than at the beginning of 2021. Paul will talk more about that commercial momentum shortly. However, the level of orders, particularly in the rest of the world military respiratory, mean that we're in a good position for the coming year. Turning then to the FY22 revenue build, the starting point is $242 million of FY21 revenue, excluding armor. We expect the biggest growth contributor to be Rest of the World Military Respiratory, and this is backed up by orders already received under the NATO contract. Given the strength of our opening order book and pipeline of opportunities, we're confident in delivering continued organic growth from the rest of our respiratory and head protection business, as well as benefiting from a four-year contribution from Team Wendy. As highlighted earlier, we also expect up to $25 million of ARMA revenue depending on the timing of the LA SAPI product approvals. The current financial year has had a solid start ahead of last year on an organic basis. As highlighted on the previous slides, we have a strong opening order book going into 2022. On the other side, we continue to experience a challenging operating environment with ongoing COVID related supply chain challenges and disruption in customer ordering patterns due to hybrid working arrangements. We are seeking to mitigate these challenges where possible, but for now, this is the new normal. Given this backdrop, we're taking a cautious view on anticipated growth with expected revenue excluding AMA of between 260 and $290 million for the year, being growth of between 8% to 20%. Our EBITDA margin should improve materially as growth starts to come through the top line and we take actions to reduce overheads following the conclusion of the AMA strategic review.

Thank you, Nick. As many of you are aware, this will be Nick's last results presentation. We're in the advanced stages of appointing Nick's successor and expect this to be announced early in the new year. Therefore, I'd like to thank Nick for his contribution and wish him all the best when he leaves the business next year. Whilst the challenges in body armour have dominated the headlines for 2021, I'd now like to spend some time to refocus on the positive growth drivers for the future and explain why we remain confident in the future outlook of this group. As you look at the future shape of the group, the respiratory and head protection businesses, which have been delivering for shareholders, are the backbone of Avon Protection. This is where our focus now sits, and there remain some exceptionally high quality businesses at the heart of this group. These are both global leading businesses with technology leadership, exceptional longstanding customer partnerships, high structural margins and significant growth opportunities, both from expanding the geographic customer base and broadening the product portfolio in both product lines. Respiratory protection is at the heart of our group. The industry-leading M50 respirator developed by us over a decade ago still sets the global standard for respiratory protection that has evolved over the last decade. We have a longstanding partnership with the US military, which is our flagship customer. The installed base of respirators means that there's a steady income stream from spares and accessories as well as replacement products supported by long-term contracts. The FM50 has been adopted by NATO for the 10-year supply contract and will enable further growth opportunities for the decade ahead whilst mirroring the business model that we've seen with the U.S. DoD in the years ahead. We won the NATO contract in 2020. and are very pleased with progress to date and the wider opportunities this is creating. We currently have six countries placing orders under the contract totaling $48 million to the end of September 2021 and have ongoing dialogue with three further countries. Of that $48 million, $32 million contributes to the opening order book. So you can see why we're confident about building international sales and why this will deliver future growth The head protection business enjoys many similar dynamics to that of the respiratory business model. We have a leading position following the combination of Ceradyne and Team Wendy with global leading technologies for both the shell and impact systems within ballistic helmets. While Ceradyne are the lead technology provider to the USDOD, as we've seen with respiratory over the last decade, there are further commercial opportunities to be leveraged from this combination and wider crossover into the first responder market and wider opportunities outside the US. Focusing in on head protection, we currently have the first generation IHPS contract coming to an end in 2022, which has delivered over $200 million of revenue since 2017. The next generation IHPS helmet is significantly lighter and is the helmet that the US Army will deploy for the future. And we're on target to submit the helmet to go into first article testing in quarter two or quarter three of this financial year. The combination of Team Wendy and Ceradyne is a powerful one, and I can see many similarities to the journey we've experienced with RespirTree. We have the leading ballistic helmet to the US Army and are the design lead for the IHPS program. Our technology is at the cutting edge and is where the market will evolve towards in the decade ahead as the protection demands increase to meet the future threats. Team Wendy and Ceradyne are collaborating on tenders with their complementary specialisms both in military and first responder products to broaden the combined portfolio of products to our existing customers whilst expanding the wider geographic customer base beyond the US and have a positive future ahead. First responder remains a consistent and stable part of the group. Longer term, we see the first responder and Team Wendy businesses being more closely integrated as they both operate using commercial off the shelf business models. And together, they're some of the highest margin businesses within the group. Whilst the first responder respiratory business has grown significantly over the last five years, we believe there's a significant opportunity for helmets within this user community. During 2021, we developed and launched the F90 helmet for this key segment. Whilst it's still early days, this helmet is proving very popular, provides clear technical leadership in this segment, and we remain excited by the opportunities this will create in the years to come. We've invested significantly over the past year in products that will help us to win over the coming years. The product developments are in the areas of respiratory and head protection, as well as a CBRN boots and gloves portfolio that is under development. The page highlights a number of products and confirms how active we've been in this area, which is reflected in our capitalized R&D activity. Additionally, we've also invested in our teams throughout the year. There was a lot of positive work to integrate the Ceradyne business from integrating the financial and HR systems to optimizing the sales functions and implementing our own version of SAP across helmets and armor. In recognition of the scale of the task, along with the likelihood of on-off travel restrictions, we have appointed a Chief Operating Officer, Steve Genzer, who's based in the US. Steve joined us from Ball Corporation, where he was responsible for 24 manufacturing sites. And prior to this, he worked for Ansel Products and led their $700 million hand protection business. Steve joined us in September and his impact has been immediate as we've navigated these difficult moments and I'm delighted to have him join our team. As a highly regulated defence contractor, you will appreciate and expect a high level of natural governance within our business. However, we're adapting and evolving to the wider expectations regarding sustainability and the change in capital allocation this will require for the future. Avon Protection recognises the responsibility we have and the improvements we can make to evolve our sustainability and diversity performance for the future. There are already some improvements ongoing, such as energy efficient projects, implementation of ISO 14001 across our operational sites and a mentoring programme for female colleagues to improve our balance across the group. But it's also clear we have more to do and plan to put together an actionable strategy which we will be able to present this time next year. We expect this to be ambitious to achieve our vision of being carbon net neutral by at least 2045 and provide a platform to improve our performance in these areas for the future. Despite the obvious disappointment of BodyArmor, we continue to have confidence in the medium term and remain optimistic for the years ahead. Nick spoke to you about our confidence in our expected revenue range in the coming financial year that will also enable a rebound in our EBITDA margins. This confidence is underpinned by a range of multi-year contracts for products where we are the global leader. The market beyond the US remains a clear opportunity for us and one where we're already seeing success that we can further leverage into helmets. This combination of customer relationships, leading market positions, and market opportunities gives me confidence in the medium term and our ability to deliver growth in the years ahead. Ladies and gentlemen, that's it from us. I'd like to thank all of you for listening. Nick and I will now take questions from the conference call as usual. And could you please state your name and company followed by the question? Thank you.