Avon Technologies PLC

Well, good morning everyone and welcome to the presentation of the financial year 22 financial results of Avon Protection Plc. In terms of the presentation this morning and just have the next slide and the next one. The structure will be that after giving a few of the headlines of the year, I'm going to hand over to Rich Cashin, Chief Financial Officer for the Strategic and Operational Review. He'll then run through the financial review, and then we'll move on to the outlook. Rich will first talk about the outlook for our new financial year 23, and then I will make some comments on the medium term outlook. and then we'll move into questions, initially questions from the room here and then we'll take any questions that have come through online. So moving on to the headlines for the year, summed up with strong second half recovery and significant long-term growth opportunity. Certainly the positive of the year, looking back, is in that first bullet, strong order intake and strong organic revenue growth with revenue growth 9% organically over the previous year and some really good orders that have come in through the year which Rich will be describing a little bit more in the presentation. Particularly I think in picking out in terms of the success in developing the head protection business with the initially in February of this year the award of the large contract with the USDOD on the ACH Gen 2 basic military helmet and then towards the end of the year bringing in the next generation IHPS helmet our first delivery order on that contract really showing our progress on the testing of that product So in the head protection business we can really make that statement that we are the leading world supplier of head protection systems to the USDOD but also expanding that worldwide. Also growth in our international markets, the contract that we won with the NSPA for NATO forces last year on the respiratory products has come through strongly in the I think you'll have seen in the statement that we've now delivered over 200,000 respirators under that contract and very significantly some 65,000 actually making their way through that contract through into Ukraine. So some real positives in the head protection business worldwide and also growth in international markets. And those orders coming in and the revenues generated there offset a rather softer year in the USDOD respiratory side of the business. but I think the main challenge really for the year we can see in the in the third bullets here the challenge has really been converting those orders into revenue and then from there into decent levels of profitability and I'm going to leave rich with all of the lame jokes related to World Cup and football but the only one that I will say is that we do have this game of two halves here so the first half very much if we look back to the first half of this financial year and it was a very different world post-afghanistan pre-ukraine a lot of uncertainty out there in the world's militaries and i think that reflected itself in in our business uh... orders coming through rather smaller and uh... and rather slower than we were expecting supply chain issues really starting to affect us and not really having the confidence to put in those orders and to ramp up production until I suppose at the half year point we then saw a change in the environment sadly with Ukraine and we were able to lean forward a little bit more into ordering of our raw materials for products and also in terms of setting production levels and I think we've seen that coming through in the second half in terms of improved operational efficiency. And obviously we've made some major steps which Rich will describe on the whole overhead side of the business as well. But against that also the background of the losses within the armour business through the year. But we certainly saw that improvement coming through in the second half of the year on profitability. Strong cash generation, cash conversion of over 140% in the year and that really has had a positive effect on the leverage in the balance sheet which has gone down below the 2.0 level. That's good to see. Final dividend of 44.9 cents level with the previous year and really reflecting the confidence in the medium term future of the business. That heightened demand environment really underpins that confidence and therefore allows us to maintain that dividend at the level. And then I think finally, before I hand over to Rich, I'll embarrass him first that I think one of the major changes during the year that really gives us confidence moving forward is the strong executive team that we've managed to get in place firstly through the appointment of Rich Cashin as Chief Financial Officer at the half year, and then more recently, as you know, we have announced the appointment of Josh Sclater as Chief Executive, and he's starting in January. So we have a good, strong, experienced management team carrying us forward into the medium term. So I think that's all I'm gonna say in terms of introduction. I'll hand over now to Rich to go through the strategic and operational review.

Thank you, Bruce. And good morning, everyone. I'm afraid I've got to read from this. As we're all aware, the threat environment around the world has changed dramatically over the last 12 months. As Bruce said, so with the war in Ukraine and increasing tension around the South China Sea, the need for protective capabilities has never been stronger and Avon remains very well placed to meet these needs. Our pre-existing contract frameworks within Europe and the US, as well as our established wider rest of the world customer base with countries including Australia and the UAE, provide a strong platform to enable us to get products in the hands of those who need it. Whilst the current climate also presents greater opportunities over the medium term, to increase our presence in markets and geographies where we don't currently operate. Defence spending in the US, NATO and their allies looks to be robust in the medium term, with the very evident fiscal challenges being offset by the requirement to respond to the current threat environment. As mentioned on the previous slide, our long-standing relationships with militaries around the world provide the basis for the strength of our core respiratory business. This is no more evident than in Europe, where we have seen further success off the back of the NSPA contract, which enables us to provide our full range of respiratory products to a number of European countries. In the year we've made deliveries to seven countries under the framework contract, with more countries expressing interest in joining the framework in the future. And as Bruce already mentioned, we celebrated the 200,000th mask delivery under the NSPA framework during this year. Notwithstanding our strong relationship with the USDOD, we did see a decline in DoD revenues in the year following the conclusion of the M69 respirator contract, along with reduced volumes of powered air purifying respirators and a very strong prior year comparator for spares and accessories. Nevertheless, we continue to work in partnership with the USDOD and we maintain a very strong market share for our respiratory products, demonstrating our long-term relationship with this important customer. We have also made substantial strides in developing our head protection business during the year. Following contract award in 2021, we received the first delivery order for $42 million for the next generation IHPS in September of this year. Initial deliveries are expected to ship in the first half of FY23. We were awarded the ACH Gen 2 contract in February of this year and submission for first article testing is planned for right around now actually with initial revenue expected in FY24. This product is of particular note as it combines the helmet shell technology of Ceradyne with the liner technology of Team Wendy and is a great example of the strategic benefit of bringing these two businesses together. The result of these two program wins is that Avon Protection will become the leading supplier of ballistic helmets into the US military. We've also made further synergies by insourcing the helmet shells for a number of legacy Team Wendy products, allowing us to capture more of the value that these generate. Despite the strong year from a demand perspective, particularly in the second half, we have seen a number of challenges. The global supply chain issues coupled with increased volatility in customer order patterns hampered our ability to react to the demand in the first half of the year. We took the initiative to buy forward a number of components where we had seen the largest increase in lead times, predominantly electronics and textiles, to combat these issues which has allowed us to run our facilities at much more consistent and therefore more efficient levels of output. We have also made significant progress against the two cost reduction programmes announced in the year. Half of the $15 million announced in December 2021 has now been executed, with the other half linked to the closure of the armour business, which we expect to be fully withdrawn from by the end of FY23. The further $6 million reduction announced in May of this year has been fully delivered, but as mentioned at the time, these costs are more variable in nature and therefore we will likely put some of these costs back as revenue grows. Lastly, delays in approvals for a number of our products resulted in limited throughput in some of our facilities whilst bearing all of the costs. As previously announced, we have now been granted FAT approval for both our NGIHPS helmets and our DLA ASAPI body armour and we're therefore ramping up production accordingly. So we'll now move on to look at some of the financials for FY22 before looking at some guidance and expectations for the year ahead. You can see the headlines here. Orders received for the year were down slightly on the prior year with increases in head protection including the previously mentioned $42 million for NG IHPS offset by decreases in respiratory following a strong prior year comparator with respect to orders received under the NSPA contract. Order book was up as orders received outpaced revenue. Revenue was up with an increase in our UK and international business, driven by the NSPA contract, offsetting, as I said, a decline in USDOD sales following the end of M69 and strong spares and accessories in the prior year. You can see from the donut charts on the right that our UK and international revenue has shifted from 22% of the group in the prior year to 38%, whilst the proportion of respiratory and head protection revenue stayed relatively unchanged. Adjusted EBITDA was down for the year and I will talk through the movements in more detail shortly. The remainder of the P&L flows pretty much as you would expect with an EPS excluding armour of 54.7 cents and including armour of 20.4 cents and as Bruce said we're paying a final dividend of 30.6 cents giving a full year dividend of 44.9 cents in line with last year and in line with the decision made at the half year results. From the income statement you can see that Armour contributed 13.3 million of EBITDA loss to the group in the year due to low revenue and operational challenges along with a high overhead cost base. The losses will continue into FY23 but will be alleviated somewhat by increased revenue from higher deliveries of DLA Asapi and Flat Armour. So walking through revenue. As at the interims, we segment reporting by U.S. DOD, which is U.S. military, commercial Americas, which is largely first responder and includes Team Wendy, but also captures other military sales in that continent beyond the U.S. And then there's U.K. and international, which is everything outside North and South America, both military and first responder. This year we saw a large increase in revenue from the UK and international business driven by the NSPA contract offsetting a decline in USD as I've already described. The increase in commercial Americas predominantly reflects the additional month of Team Wendy. Following from the previous slide, we now see an EBITDA walk for the year and note that this is on an excluding armour basis. Although we saw favourable volume and FX swings in the year, headwinds within mix and operational efficiency led to the decrease year on year. The adverse mix impact is partly a result of the shift in revenue from DoD to UK and international and partly owing to higher accessories revenues within UK and international. The remaining $9.6 million decrease is roughly split 50-50 between manufacturing inefficiencies encountered in the first half due to a number of factors, including supply chain issues and increased overheads. This change in overheads is broadly as had been planned at the time of the FY21 results, but it was expected to be more than compensated for by higher revenue and profit. The two cost-saving programmes initiated in the year have been executed, excluding the armour element, and we will see the benefits entering the new year, albeit tempered by inflationary factors. So here you can see the cash flow. The numbers are largely self-explanatory, but there are a few points worth highlighting. Firstly, the payment into the pension plan, which included a $4 million prepayment covering contribution for FY23, enabling us to lock in benefits following the increase in bond yields. Second is the large decrease in capital expenditure, which is driven by decreases in IT programmes and in armour-related investment. We expect this to trend back towards normal levels moving forwards. And finally, there is the purchase of our own shares, which relate to the share buyback programme, which was suspended in May. Please refer to the technical guidance in the back of the deck for more information on a number of line items. Net debt, shown here excluding lease liabilities, has increased by just over $17 million in the period, with $26 million returned to shareholders. Walking through the bars, you can see the lower than expected contribution from EBITDA offset by tight control of working capital. We then have the larger-than-usual pension contributions highlighted earlier, alongside the returns to shareholders covering dividends and the paused buyback programme. In line with what we said at interims, leverage, defined by our bank covenants on a pre-IFRS 16 basis, has fallen to under two times. Lease liabilities at the end of the year totaled $23.8 million, down from $29.1 million this time last year. Looking at the balance sheet, there are a few points of note. Capital assets have reduced, with DNA outpacing additions following lower levels of capital expenditure than previous years, and impairments of assets related to the UK GSR programme at the half year. The largest movement is, of course, the reduction in the pension deficit, which has been all but wiped out by the increased discount rate driven by the change in bond yields. And now moving on to some FY23 expectations. Firstly, the new financial year has started in line with our expectations and is supported by the opening order book of $151 million. In terms of revenue, with the commencement of the next generation IHIPs, we will see growth in head protection, although this will be offset slightly by a modest decline in respiratory following a strong year with the NSPA contract in 22. Armour revenue is expected to total between $28 and $30 million as we fulfil our contractual obligations. Margin is expected to be in line with FY22 on an excluding armour basis, with some adverse mix as a result of new product introduction costs and heightened inflationary pressures, largely offsetting the annualised effects of the cost-saving programmes and operational efficiency improvements that we have implemented. Looking beyond FY23, next generation IHIPs and ACH Gen2, along with a number of new opportunities, will underpin future growth. As current headwinds subside and growth generates operating leverage, there is an opportunity for margin improvement from here. Although armour will continue to be a headwind in FY23, the negative impact will lessen as we ship more DLA Asapi product, resulting in an improved margin on an including armour basis from 9.4% in FY22 to double digit levels. And I'll now hand back to Bruce to conclude.

Thank you, Rich, and thank you for giving the near-term outlook, looking at the next financial year or the current financial year, FY23. If we now look more medium and long-term, firstly, you can see greater focus on protective technologies and capabilities. The world has changed since even during this last year, and unfortunately, that is to our benefit in terms of the products that are demanded in this era. Increased threat environment. Ongoing proliferation of the CBRN chemical, biological, radiological and nuclear offensive capabilities in hostile nation states. Again, with that, then that creates the demand for our products particularly. And just generally anticipated increase in public defense spending on personal protective equipment over the medium term. long-term, including those long-term upgrade programs. So I think with those first three bullets, you see that we see an environment from a market point of view that offers us greater opportunities in the medium and long term. And I hope also through the presentation that Rich has delivered that we do look forward with confidence with a business that has improved in the second half of this year, moving into the first half of this current financial year. with improvements being made in the operational efficiency with a more stable production planning environment and very importantly and finally with a strong executive management team in place ready to move the business forward. So I think with those final words, let me hand over now to the questions in the room. And before actually asking the questions, if you could just give name and company, obviously for our benefit, but also for the benefit of the webinar.