Avon Technologies PLC

Well, good morning, everybody. I think most of you know me, actually, but for those of you that don't know me, I'm Josh Slater. I joined Avon just four months ago. Before that, I was CFO at Ultra Electronics, Castrol Lubricants and GKN. And a big part of my role at each company was to help create and implement transformation programs, which unlocked the full potential in those businesses and created significant value for shareholders. I am very excited to have joined Avon because I see similar potential. I visited all Avon sites. I've listened to shareholders, employees and customers. I now feel I have a good understanding of the business and I'm going to give you my first impressions and share our new strategy after Rich presents the results. For now, I will pick out in our financial performance just one thing. Revenue was below our expectations in the first half. While that is disappointing, there are a lot of positive things happening in Avon which have not yet had time to translate into improved financial performance. Over the last four months, I have seen meaningful steps forward. That gives me confidence that we will gain momentum and reveal Avon's full potential in the medium term. I'll now hand over to Rich.

Thank you very much, Joss, and good morning, everybody. So straight into the numbers and starting with the P&L, you can see the headlines, strong orders and a record order book, although we did see a decline in revenue, which I will go on to on the next slide. EBITDA margin was up on both an including and excluding armour basis, and I will walk you through the movements here shortly. The other item of note in the P&L was the increase in finance costs reflecting a higher net debt and of course the increase in variable rates. We implemented some interest rate swaps over the last year which do match the duration of our credit facilities and these have been instrumental in limiting the rate of increase in these finance costs. The Board has proposed an interim dividend of 14.3 cents per share, the same as the last first half, and consistent with holding the dividend flat at the full year results last year. As Joss will highlight later, the dividend policy will be reviewed later in the year as part of the revised capital allocation policy. Lastly, you will see that we have started to use return on invested capital as a metric for the business, which we feel is a particularly important measure to demonstrate value creation, and you will continue to see this reported in the future. So here you can see a more detailed breakdown of order receipts and revenue for the period, split out by end market, but also by respiratory and head protection. Note that this is on an excluding armour basis. Orders grew by 12% in the first half, with good growth in USDOD and UK and international orders across both respiratory and head protection, being pinned back slightly by a decline in commercial America's intake. Overall, head protection orders grew in excess of 30%, while respiratory grew by a more modest 3%. Despite the growth, we had higher internal expectations for DoD and particularly for UK and international orders. This doesn't represent lost opportunity, but rather reflects the challenge in predicting customer demand and funding. Revenue was down 14% on last year, with the biggest decline in respiratory coming from the UK and international market, following a very strong first half last year from the NSPA framework contract. The decline in head protection revenue was seen largely in the DoD, where we were still shipping first-generation IHPS helmets last year and have not yet started delivery of the follow-on next-gen IHPS contract, which is scheduled to commence in the second half. As we transition into our new organisational structure that Joss will talk about shortly, we will provide pro forma numbers for each of the respiratory and head protection business units ahead of the full year results. So now we move on to the EBITDA walk for the period and note that this is also on an excluding armour basis. The red bar represents the volume impact of the revenue decline covered on the previous slide. This was, however, more than offset by a number of other items. Firstly, we had favourable movements within the mix of our respiratory products as lower margin NSPA mask sales were replaced with higher margin sales into the DoD. We saw operational improvements within our respiratory facilities that resulted in reductions to labour and scrap wastage, although these were slightly offset by costs within head protection as we ramp up production on next-generation IHPS. And finally, we have continued to see the impact of the overhead savings programmes put in place over the last 18 months. It is, however, worth noting that inflationary headwinds have continued, especially within our people costs, where we have increased average compensation by 8%. Moving on to the cash flow statement, you can see that net debt increased by $27.6 million in the period. Working capital increases of $22 million accounted for the majority of this movement, largely due to the investment in inventory in preparation for deliveries in the second half of the year to satisfy firm orders. These deliveries include next generation IHPS, a large mask order for a Middle Eastern customer which was originally planned for the first half, and of course the runoff of our outstanding armour obligations. Other lines that are worth highlighting include payments to the pension plan which, as explained at the full year results, were prepaid in full last year. We received a tax refund of $4 million in settlement of historical tax overpayments. And lastly, you will notice that the share buyback programme has now been formally cancelled. As with the previous slide, the most notable movement on the balance sheet comes from the large inventory build, although we also saw an increase in the pension deficit as a result of a lower discount rate being applied to the liabilities. Leverage on a bank covenant basis has increased since October, although it is slightly lower than this time last year. We expect to see a considerable improvement in leverage in the second half as the high inventory position starts to unwind. As Armour transitions to a discontinued business, this will also have a very positive impact on the metric. And then finally, moving on to our expectations for the full year. We continue to expect good growth in helmet deliveries year on year as next generation IHPS deliveries ramp up. The weaker demand environment we have seen for our respirators in the first half is not expected to fully recover in H2, and so now we are more cautious on H2 respiratory revenue than at the time of the full year guidance. As a result, we now expect group revenue excluding armour to be around 9% lower than last year. This clearly represents a bit of a recovery in the second half, but is lower than initially expected, reflecting the weaker respiratory demand and risk remaining around the timings of some shipments. EBITDA margin excluding armour for the full year is expected to be broadly flat year on year, following rapid and decisive action on right-sizing the part of the business where we have seen weaker than expected demand levels. One of the key themes in the second half will be high margin respiratory products being replaced by lower margin head protection volume, which will hold back the margin growth as we would otherwise have expected. The year-end cash position is expected to be broadly in line with last year, with strong cash inflows in the second half as we reduce the inventory position built up in the first six months. The combination of these will see a good improvement in the leverage ratio, which will be further helped as the armour business moves to discontinued operations. And I'll now hand back to Joss to talk about our future direction for the business. Thank you, Rich. Thanks.

I'd like to start by sharing my view of both Avon's strengths and some of its weaknesses. I believe that Avon has extraordinary potential in the medium term. The exit from the armour business has been difficult, but will result in a more focused, higher quality business. We have supportive markets, which we expect to grow at 2% to 3% in the medium term. driven by the increasing global security threat and a need for better, lighter products. We have a lot of excellent people. We're developing exciting new products and we have a strong competitive moat. Certification is a major barrier to entry and we have some long-term contracts, strong brands and patented technology. The customer base is now well diversified, with much less reliance on the DoDM50 program. With the right strategy and improved execution, Avon can significantly improve growth, margins, and ROIC. In terms of my views on the business, Respiratory is the global leader in air purifying respirators. Customer feedback consistently cites Avon as having the highest quality, most technically advanced products. And we have an enviable customer base across the military, special forces and first responders. The large installed base of masks drives replenishment orders and sales of filters, spares and accessories. This provides reliable long-term revenue at good margins. In the first half of this year, sales of filters, spares and accessories were over 40% of respiratory revenue. In addition, the respiratory business has built a leading position in self-contained breathing apparatus and underwater rebreather technology. And in both of those areas, I see good potential for future growth. In head protection, Team Wendy continues to perform well and the DoD head protection business is at the start of a rapid period of growth and margin expansion. We are going to try and ship around four and a half thousand IHIPs helmets between now and the year end. though this is heavily dependent on the speed that the customer can process some pending change requests. And over the next few years, we see DoD helmet volumes increasing from nothing in the first half of this year to around 25,000 IHEPs helmets per year and 50,000 ACH helmets per year. Volumes could be even higher. if our competitor can't meet the customer requirements. At the moment, there's still some way behind us. In addition, we are expecting Team Wendy to supply pads to all ACH helmets and next generation iHips helmets, including any made by our competitor. This provides both OEM revenue and reliable aftermarket sales. As the DoD volumes increase, we expect both operational gearing and self-help to accelerate margin expansion in the head protection business. We are making excellent progress expanding with the DoD in the US, but our helmets market share outside that is still fairly small. In the medium term, we believe that we can grow our head protection business further by commercializing our leading edge ballistics technology and our pad systems, expanding beyond the DoD in a similar way to our expansion of respiratory in the past. Whilst Avon has considerable strengths, it inevitably also has some areas that we can improve. Employee feedback consistently cites a lack of strategic clarity, which hindered focus and the ability to manage execution. Our employees have not always understood the need for initiatives, resulting in some initiatives stalling. For example, when I arrived, there was a data project using external consultants, which had already cost $1.2 million. but which had no business case, plan or support from the factories who had to implement it. We have stopped the project and focused on higher priorities. Strategy execution more generally was hindered by a complex functional organisation where there was no P&L ownership and little accountability. The head protection business consists of three historic businesses. These have not yet been fully integrated and are only now starting to play as a team that is stronger together. I've seen a lot of waste in the factories in the form of inefficiency, scrap, rework, quality issues and high inventory. In general, the head protection factories are less mature than the respiratory factories, And it is going to take work to get the DoD programs to the profitability we expect. But with better planning, scheduling and flow, we can improve lead times, productivity and inventory terms. Avon also lacks some capability in program management. And in general, there is an opportunity to inject more structure, pace and urgency into the business. With regard to growth, I think it's worth focusing on mask orders from the DoD for a moment. This year, we expect the DoD to order less than 10,000 masks, lower than the 15,000 ordered last year. Replenishment levels are behind previous expectations. due to the refurbishment of masks by the DoD, the exceptional durability of Avon's masks, and low usage levels due to the US withdrawal from active deployment in the Middle East and low levels of training during COVID. Sales to the DoD could increase in the medium term towards more normal replenishment levels if usage increases or masks reach the end of their useful life. But we must not be complacent. We have work to do to strengthen the relationship with the DoD in respiratory. And we must work harder to drive sales by launching innovative new masks and filters. In helmets, we need to work out how to leverage the Team Wendy and Ceradyne technologies and brands more effectively. As you can see from this slide, The weaknesses have translated into a period of disappointing financial performance and unacceptable returns on capital. Things are now starting to improve. I'm now going to explain how we can accelerate. On this slide, I want to introduce you to the new strategy, which we call the STAR strategy. We involved around 40 of our people to develop the new strategy, which ensures buy-in and therefore increases the likelihood of excellent execution. The strategy has four elements, strengthen, transform, advance and revolutionize. It starts with strengthening the fundamentals to quickly improve short-term performance. We have medium term transformation initiatives to improve efficiency and working capital terms. We have initiatives to advance the core business organically and scale up some of our emerging business models. And we also want to revolutionize the business so that it will still have a great pipeline of opportunities in four or five years time. I will expand on all four points of the STAR strategy on later slides. STAR is primarily a five-year plan, which we will refresh each year to stay agile. In the short term, we will focus on quick wins. This is critical if we are to deliver to our customers. During the next six months, we will plan our transformation projects in more detail with benefits expected over the medium term. We see the transformation activity tailing off towards the end of 2026 and ending completely during 2027. We will identify one-off transformation costs when we publish our results. As the transformation projects end, We expect continuous improvement to be very well embedded, enabling momentum to continue. Whilst the majority of our resources will focus on strengthening, transforming and advancing, we will also invest in research and development to ensure that growth is sustainable in the long term. We've strengthened the leadership team to improve execution. We have created a new respiratory protection and head protection strategic business units, which are led by Steve Elwell and James Wilcox. Both are internal appointments, though Steve Elwell joined us fairly recently. We have removed the chief operating officer role, and Paul Hamilton has joined us to drive operational excellence and continuous improvement. He is already making a difference. Overall, the team is a good mixture of people with an in-depth understanding of Avon's technology and history and new recruits who have broad capability and an external perspective. I'm conscious that execution is just as important as strategy, if not more important. So we have spent considerable time over the last four months defining the programs of work and individual initiatives. Each priority and initiative has an owner and a sponsor. We've made good progress defining benefits, timing, resource requirements and milestones. But there is more to do. The SBUs are responsible for delivering their strategic initiatives and next year we will align their incentives to their performance and delivery against their strategic initiatives. To ensure we can track progress at a group level, we have introduced a project funnel which is consistent across the business. we will shortly implement a platform for the senior management team to track every strategic initiative real-time, providing transparency and improving performance management. I'd now like to spend some time going into detail on all four points of the STAR strategy. In Strengthen, We are implementing a new operating model in which the strategic business units are responsible for delivering their strategies and control all resources to do so, unless there are obvious efficiencies by organising at group level. This operating model will significantly reduce complexity and increase speed and accountability. We are also moving quickly to strengthen our factories by improving both leadership capability and processes. We're seeking quick wins by implementing quarterly improvement Kaizens at each factory using a new Avon methodology supported by common KPIs across productivity, scrap, rework and operating efficiency. And we're creating a higher performance management culture through new monthly and quarterly reporting processes. In Transform, we are focused on some typical transformation levers. There is a lot we can do to improve performance in Avon. We can significantly increase throughput and revenue per square foot, improve operational efficiency, reduce program under delivery, reduce supply chain costs, strengthen innovation, sales and marketing, and improve productivity and finance. The detailed initiatives will vary in each strategic business unit, depending on their levels of maturity. To give you an anecdotal example of the opportunities, when I first visited the factories, I found that all of them have very high scrap and rework rates. The savings opportunity in this area alone is over a million dollars per factory. In advance, for respiratory, we are going to launch a certified SCBA and a new entry-level mask in the near future with a view to expanding our addressable market. We like the filters business and see opportunities to reduce costs. and we see an opportunity to capture a leading share of the growing market for deep water rebreathers. In head protection, we need to capitalize on the known strong DoD demand for new helmets and pads. Importantly, we need to bring the best of the Saradine and Team Wendy technologies together to exploit the large unaddressed market beyond the DoD. In revolutionize, we have some really exciting longer time opportunities. We're developing a game changing short duration combat respirator and higher capability filters. We see opportunities to expand rebreathers into adjacent markets, such as mid to shallow water. And we see opportunities to expand mask systems into some hard to access countries through localization. We also have a roadmap towards expanding the capability and technology of our helmet platforms to include power and data and reduce traumatic brain injury. Ultimately, we see an opportunity where we will have a major competitive advantage by integrating helmets and respirators. The grid on this slide shows the STAR initiatives down the left, and our financial and other objectives across the top. The shading in the stars shows the degree that each element of the strategy helps to deliver our objectives. As you can see, the strategy is designed to drive growth, expand margins and improve ROIC, whilst generating strong cash conversion and protecting more lives through our innovative products. We are also confident that we can reduce our impact on the environment by reducing scrap rates and optimising our manufacturing footprint. We'll publish a more detailed sustainability strategy in due course. We're in the process of developing the detailed implementation plans for our strategic initiatives, and we'll be able to put more specific guidance around the targets and timing once we've completed that. We will also carry out a balance sheet review in the second half in the light of the new organizational structure and our plans for site optimization. I want to make it clear that this strategy is not all about future action. We are already in action. We have introduced the standard continuous improvement methodology to all sites and have already carried out half a dozen Kaizens. I personally joined one in Cleveland a few weeks ago with Rich and our team found opportunities to reduce helmet assembly lead times by over 90% and improve productivity by around 50%. I am confident that we will find further opportunities in other areas. We've also moved fast to fill critical capability gaps, including appointing a new leadership team in our Irvine factory, bolstering the Salem team with help from Paul Hamilton, and significantly strengthening the respiratory team, which liaises with the DoD. We have been very pleased with the progress that we've seen so far. In Transform, we've insourced production of our Exfil SL helmet, resulting in a gross margin improvement of over 15 percentage points. We've also had to move fast to right-size our factory in Cadillac in the light of the current demand forecast. Over the last few weeks, we've reduced headcount in Cadillac by around a quarter. This sets the factory up with the right level of resources from where we can drive continuous improvement from here. We have implemented a new program management cadence, two-weekly sprint methodology and oversight processes in relation to the DoD helmet programs. This is already helping to surface issues quickly and enabling us to remove barriers to progress. but there is more to do to embed excellent program management more generally. In advance, a lot has been going on. The first of the next generation IHIPs has been approved for delivery to the DoD. Excitingly, we've also had the Team Wendy pad systems approved for use in all DoD helmet programs. In addition to all that, we have launched a new ballistic helmet range for sale outside the DoD called Epic, and we expect to start shipping that in H2. In Revolutionize, we've already developed a short-term combat respirator, which we have demonstrated to key end users. Feedback was very positive. We're also making excellent progress developing next generation of filters, to address the changing threat landscape. We reviewed our approach to capital allocation to align with the new strategy. With higher interest rates, we'd like to reduce leverage to between one and two times EBITDA and do not envisage further buybacks. We see a lot of opportunity for organic growth. So we're focused on that for now. In the medium term, we will be in a better position to assess the potential for M&A to accelerate our progress once the balance sheet has strengthened and we have proved that our transformational strategy works. Similarly, we're reviewing our approach to shareholder returns and dividend policy with the aim of putting in place an approach that is both attractive for shareholders and sustainable. So, to wrap up, I am convinced that Avon has the potential to be a world-class business with world-class performance. To achieve this, we need to make some changes and to do so with urgency and purpose. We have a clear understanding of what needs to change and we've got a new leadership team in place. We're already underway and we are moving fast. With the new star strategy, the organization is focused on obtaining some quick wins, gains in efficiency, and growth in the medium term, and building a pipeline for future growth beyond that. We see significant opportunity to grow the top line, increase margins, and improve cash returns on capital. And with that, I'm very happy to take any questions that you may have. It's always one straight out the gate, isn't it? That'd be good. Thanks.