Ab Dynamics (LSE:ABDP) — Half Year Results

0:01 Good morning and welcome to the AB DYNAMICS PLC Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time by the Q and A tab situated in the right hand corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question received in the meeting itself. However, the company will review all questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to submit the following poll. And I'd now like to hand you over

0:31 to James Ralph, CEO. Good morning, sir. Good morning, everyone, and welcome to the AB DYNAMICS first half results presentation. Always, today, I'm joined by our by our CFO, Sarah Matthews Demirs. So in terms of content today, we're going to start by providing a brief summary of AB DYNAMICS today, followed by some highlights of the first half. Sarah will then take you through a more detailed presentation of the financial performance before I take you through a review of each of our primary sectors in the business review. I'll then run through our recent strategic progress before summarizing and providing some guidance on future outlook. So we thought it was worth reminding everybody of our current range of products and services and how they address the end to end vehicle development tool chain.

1:19 Of course, we're not attempting to address all aspects of vehicle development, but our ever expanding product portfolio addresses several niche specialist areas where we can add significant value. So starting on the left and the largest part of our business is track testing products and services. This represents 70% of our current revenues and consists of products used on test tracks or proving grounds to evaluate complex vehicle systems such as advanced driver assistance systems or ADAS, automated or autonomous systems, and vehicle dynamics. The products offered to market include driving robots, ADAS testing platforms, software, and ADAS testing targets or dummies. In addition to the product offering, we also operate a full scale test track in California where we offer testing services and a road based vehicle test and evaluation service predominantly in Asia Pacific.

2:12 Our laboratory testing and simulation business is 30% of our total revenues and consists of driving simulators from small static systems to large scale, high frequency response systems, and also advanced physics based simulation software used by customers in the development of ADAS systems and vehicle dynamics. We also provide large test rigs such as our suspension parameter measurement machines, which are used to characterize vehicle ride and handling, as well as steering test systems and suspension noise vibration and harshness testing machines. Finally, on the right hand side, we've launched a new business to diversify into adjacent market sectors where we can leverage our core capabilities in driving robotics to convert off highway vehicle vehicles to automated functionality.

3:04 So moving on to the highlights. Overall, I'm very pleased to report a very strong first half of the year with revenue growth of 30% to 49,000,000, which is driven by strong growth in the lab test and simulation part of the business, partly due to the acquisition of Ansible Motion, but also good growth in our track testing business. The increased revenue dropped through to a 37% increase in adjusted operating profit to 7,800,000 and an increase of 80 basis points in adjusted operating margin to 15.9 despite a small reduction in gross margins due to the larger proportion of lab testing and simulation revenues and continued investment in operating costs. EBITDA increased strongly by 32% to 9,600,000, which is a 19.6% EBITDA margin, and all this translated into a 38% increase in adjusted diluted EPS of 27.5 p.

3:59 Net cash was very strong at 21,300,000 with good cash conversion, offset by the initial consideration paid for the acquisition of Ansible Motion in September last year. This strong cash position provides significant optionality for the group to drive ongoing growth through investment in r and d, new capabilities, and also value enhancing acquisitions.

4:23 The overall revenue of 49,000,000 is split 730% laboratory testing and simulation as compared to an f y twenty two full year result, which was split 81%, 19%. Following the acquisition of Ansible Motion and the investments that we've made in that lab testing and simulation sector, we believe this proportion is more representative of our revenue mix going forward. In terms of geography, Asia Pacific remains our largest largest territory at 43% of revenues, with The UK and Europe at 25% and North America at 29%. During the first half, we've seen good growth in all territories with North America growing fastest at 40%, but also strong growth of 21% in Asia Pacific and 32% in The UK and Europe.

5:09 In Asia Pacific, we've seen good growth in Japan, Australia, and India with more moderate growth in China. In The UK and Europe region, we've seen very strong growth, particularly in our German through our German market, but also in France and Spain, offset by a slightly slower performance in The UK. The revenue split by customer continues to show a similar split to last year with sales dominated by automotive OEMs at 71%, with the remainder mostly to service providers. So these are the operators of test facilities and proving grounds at 26%. And as mentioned during last year's presentations, we anticipated that our recurring revenue would now normalize at around 40%, and this was demonstrated in the first half results with recurring revenue remaining stable at 41%.

5:59 However, it should be noted that the absolute value of recurring revenue has increased from 15,500,000 in h one last year to to 20,100,000 in h one this year. So I'll now hand you over to Sarah to take a look through the financials. Thanks, James. Good morning, everyone. I'm pleased to be able to deliver a strong set of financial results for half one twenty twenty three, driven by double digit organic growth across both segments of the business as well as the acquisition of Ansible Motion. Strong cash generation has enabled us to continue to invest in the future growth of the business. Revenue grew by 30% to 49,000,000 with strong activity in both track testing and laboratory testing and simulation and increases across each geographical area.

6:50 Organic revenue increased by 14%. Operational improvements have been delivered to offset inflationary cost pressures supporting the gross margin. The decrease in gross margin of 60 basis points was due to a change in the mix across the segments with a higher proportion of lower margin lab testing and simulation revenue.

7:13 Adjusted operating profit increased by 37 driven by the operational gearing impact of the revenue growth, resulting in an improvement in the operating margin of 80 basis points to 15.9%. This was held back by continued investment in ABD Solutions. Excluding the £1,000,000 investment in ABD Solutions, the increase in revenue would have dropped through to a 42% increase in operating profit and an operating margin of 18%. The effective tax rate has reduced to 16.5% as a result of additional r and d and Patent Box deductions. And this resulted in a 38 increase in diluted earnings per share. Strong cash conversion leaves us with significant cash resources of £21,300,000 even after the acquisition of Ansible Vision.

8:10 The revenue bridge shows the key drivers of the group's results. Track testing products were positively impacted by the growing regulatory requirements for ADAS products. The recent launch of a new range of soft targets and a new platform and the recent release of the Euro NCAP 2030 road map and truck safe rating for commercial vehicles will all support further growth in this sector. Testing services were impacted by local COVID restrictions delaying the provision of services to China and continued delays in the availability of test vehicles. In The US, NHTSA have been unable to source vehicles for us to test, and we're now working directly with suppliers to source these. Together, this gave rise to a 13% increase testing revenue.

9:00 Lab test revenue grew by 1,000,000 with growth in simulation of point 7,000,000, reflecting customer demand for our simulation software. The acquisition of Ansible in September 2022 added 5,800,000, reflecting the strong order book at the time of acquisition. And FX provided a 3% tailwind. The increase in revenue dropped through to operating profit as shown in this bridge. The improvement in organic sales volume and mix has been supplemented by the contribution from the acquisition of Ansible, partially offset by the impact of investment in overheads, the main components of which are inflation, FX, and the incremental naught 500,000 of investment in ABD Solutions.

9:51 Turning to the cash flow. Operating activities generated a cash inflow of 9,900,000. Our focus on working capital management delivered a reduction in receivables, which partially offset a further investment in inventory to secure our supply chain. This resulted in cash conversion of 99%. We invested 1,200,000 in CapEx and paid naught 800,000 in dividends. The net initial cash consideration on the acquisition of Ansible was 13,300,000. And after other items, including ERP costs, interest, and lease payments, this leaves us with closing net cash of 21,300,000. We have a £15,000,000 RCF, which extends to February 2026, of which 9,000,000 is undrawn, leaving us with £30,000,000 of available liquidity to fund the deferred consideration of Ansible as well as giving us flexibility to mitigate the uncertain economic environment and support our future growth opportunities.

10:58 Currency provided a small tailwind in the period with the movement in the stronger dollar and euro partially offset by the weaker yen. The slide shows half one twenty twenty three retranslated at last year's rates. At constant currency, revenue and profit were naught point 9,000,000 and naught point 1,000,000 lower than reported respectively. And around 55% of revenue is denominated in dollars, euros, and yen. Future guidance is based on $1.20, €1.15, and $1.65 yen. Further movements would have the impact shown in the table. For example, if the dollar were to strengthen by a further 10%, this would add naught 800,000 to revenue and naught 100,000 to profit for the second half of the year. If all the currencies moved in the same direction and strengthened by 10%, this would add 2,400,000 to revenue and naught 400,000 to profit.

11:55 In summary, we delivered strong organic revenue and profit growth. Operating margins have improved in the traditional business, offset by investment in development of ABD solutions to give us access to additional markets. Operate, our strong operating cash generation supports our robust balance sheet, which enables investment in continuing to strengthen the business through organic and inorganic development. The integration of Ansible is progressing as planned and giving us critical mass in the important simulation market. And I'll hand back to James for the business review. Thank you, Sarah. So starting with track testing. Overall, our track testing sector revenue grew by 13% to 34,300,000, And the market drivers for ADAS testing remain supportive in this sector with the recent publication, as Sarah mentioned earlier, of the Euro NCAP 2030 road map and also the TruckSafe commercial vehicle ratings program.

12:55 So the Euro NCAP 2030 road map clearly shows increasing levels of complexity of vehicle testing and also includes simulation. And the truck safe ratings program ensures ensures larger commercial vehicles are also rated, which will support product sales, particularly for our heavy duty versions of both the guided soft target and Launchpad ADAS platforms. And there is an appendix to this presentation. So if anyone look on a bit more detail around those road maps what's going on in the track testing sector, you can see some more detail in the appendix. Driving robot sales continued to grow strongly, increasing by 46% to 14,200,000 based on a strong order book at the end of FY twenty two plus good order intake during the first half.

13:41 Demand for ADAS platforms continued, and sales grew more moderately by 5% to 14,000,000 against a very strong prior year comparator where ADAS platforms grew by 39. We feel this is purely a timing related issue as customers purchase ADAS platform equipment to meet certain test protocols. Our testing services revenue declined by 18% in the first half due to issues of availability of test vehicles due to due to the well documented supply chain issues during the first half of the year, which have now eased, plus the ongoing COVID related lockdowns in China that ran until after the Chinese New Year affecting our road based test and evaluation business. In terms of new product development, we've recently launched our new Launchpad Spin product, which addresses lower speed, higher maneuverability applications such as pedestrians, cyclists, and scooters, and alliance to the future test requirements of Euro Euro NCAP as well as supporting more advanced customers develop their automated and autonomous technologies with objects that move more realistically.

14:45 Both the soft motorcycle three sixty and the soft pedestrian three sixty ADAS testing dummies have been market launched with strong market interest, and we're currently awaiting formal Euro NCAP approval for both products. The market for track testing products has evolved recently, and most customers now have two distinctly separate groups within the same company. Those that do complex development testing for future ADAS technologies and those that conduct large numbers of current tests for NCAP approval. Therefore, to meet the needs of those conducting the larger numbers of current tests, we've developed a simplified and automated version of our track testing software with easy to use workflows and preloaded test protocols to assist customers with testing efficiency. We've also been actively investing in our test facilities in California, fitting out a new operational facility that will house customer vehicle bays, confidential customer workspaces, and a range of new track testing equipment such as our robots, guided soft targets, and launch pads.

15:46 New facility will also act as a testing as a service facility using one of our SPMM machines so we can provide testing services to West Coast US customers, but also use this as a shop window for our technologies.

16:00 In our laboratory testing and simulation sector, we saw significant revenue growth of 99% to 14,700,000, of which 20% was organic with excellent growth across both lab testing and the simulation sector. The lab testing sector grew 40% with good operational delivery of our SPMM machines, coupled with a strong order backlog. And the pipeline for our SPMM machines is particularly strong, and we expect to continue to deliver good growth. Simulation grew a 120% with the acquisition of Ansible Motion, adding 5,800,000 to our half year revenues, with organic growth in simulation of 13% driven by strong demand for our RFPro simulation software. During the period, RF Pro released their ray tracing capability for their physics based simulation software, and I'll show a brief video of this technology later in the presentation.

16:51 The development of the Alpha Motion simulation platform continues as per schedule, and the integration of Ansible Ansible Motion is now complete with Ansible performing in line with the board's expectations at the time of acquisition.

17:05 So moving on to strategy. On this slide, I'd like to just remind everybody of how our six strategic priorities coupled with our wider range of addressable markets deliver sustainable growth and ultimately our stated purpose. We continue to invest in the core areas of the business focusing on product development, capability improvement both in terms of technology and talent, and delivering on our service and support element to drive recurring revenues. Acquisitions remain a core part of our growth strategy, and we'll continue to allocate our capital to carefully selected value enhancing acquisitions. And the addition of ABD Solutions has provided an opportunity for the group to build a broader based business and diversify across a wide range of industrial sectors and has the potential to drive significant future organic growth.

17:54 So now an update on progress against our strategic priorities. During the year, we've made significant progress against our stated strategic priorities, and this slide just brings out some of the key elements. Starting with products and innovation, we've been very active developing new product offerings to the market. As mentioned earlier, we've completed the development and market launch of Launchpad SPIN, which is an evolution of the existing Launchpad product family to cover lower speed, high maneuverability applications for testing with vulnerable road users such as pedestrians, cyclists, and scooters. And we expect this product to start driving order intake during the second half of this year.

18:31 As mentioned earlier, both the soft motorcycle three sixty and the soft pedestrian three sixty have been launched to market, and we're currently awaiting Euro NCAP approval. We also completed the development of the simplified and easy to use version of our track testing software. We've also now developed a full durability testing product, which uses existing ABD robot technology coupled with the electronic control unit and sensors developed as part of ABD solutions to address the requirement for multi vehicle durability tests with a detect and stop capability. This product will be launched to market during the second half of this financial year. The Alpha simulation motion platform technology development project continues as per plan, and I'll provide a video demonstration of the RFPro ray tracing technology on the next slide.

19:21 In terms of capability and capacity, we've initiated our operational improvement program in The UK, which is already delivering results in terms of delivery performance and quality improvements. As part of this program, we've also rationalized some of our UK based sites into our Bradford and Avon headquarters, providing more efficient use of space, but also

19:41 improved process flow and communication. As mentioned earlier, we've been busy fitting out our new testing services facility in California and commissioning an SPMM to provide testing services to West Coast US customers. And finally, in that area, our ERP system has now successfully gone live. I'll cover our diversification progress with an update on ABD ABD solutions later in the presentation. And then, of course, we delivered the acquisition of Ansible Motion in September last year, and I'll provide an update on that later as well. So just moving on to the next slide and before we sort of play the video on the on the next slide. RFPro has developed a new simulation technology that significantly reduces the industry's dependence on real world testing for the development of autonomous vehicles and advanced driver assistance systems.

20:32 So if you can just play the video now, and I'll carry on talking, if you won't mind. So this state of the art ray tracing rendering technology delivers ultra high fidelity and realistic simulation. And you're seeing right now a a a render of Coventry City Center, and some of you may recognize it. It's designed to feed the perception systems used in autonomous vehicles and simulates how vehicle sensors actually see the real world. So for the first time, RFPro's ray tracing and multi exposure camera API is creating engineering grade physically modeled images to enable manufacturers to fully develop sensor systems using simulation as opposed to traditional real world data capture and tagging.

21:18 This solution efficient efficiently generates synthetic training data at scale and will significantly accelerate the advancements of autonomous vehicles and sophisticated ADAS technologies and reduce the requirement to drive development vehicles on public roads. Okay. Moving on to the next slide. So after the acquisition of Ansible Motion in September last year, we've been busy integrating our simulation business units into a single market facing business unit. Integration of Ansible Motion is now successfully complete, and the business is is delivering in line with our expectations. Following the integration, we now have the critical mass, the expertise, and product range to become the leader in this large, strongly growing market.

22:05 To deliver this growth, we've been reviewing our facilities footprint and early plans to expand our facilities in Norfolk around the existing Ansible Motion business. We now have an integrated coherent product offering across both simulator platforms and simulation software to meet a wide range of customers' use cases and budgets, addressing addressing multiple points across a wide range of customer applications. The Alpha platform I've mentioned earlier, that continues in line with our plans. This is a new simulator, and you can see it on the right hand side, the middle image there, with a relatively small physical footprint whilst delivering world class dynamic performance. As part of our commercial development to access a broader range of geographic territories, we've been building strategic partnerships in key markets in both North America and Asia Pacific.

22:56 And within our simulation software bit simulation simulation software business, we've been actively developing the next generation, and you've already seen the ray tracing simulation on the previous slide. But in parallel with that, we're also developing a scalable SaaS or pay as you go solution using high performance computing to enable RF probe to be used for large scale parallel and parameterized simulation applications. So now an update on ABD Solutions. So as a reminder to everybody, ABD Solutions business was established to automate existing vehicles focusing on mining, defense, and other off off highway specialist vehicles. It was launched around eighteen months ago. And from a standing start, we've essentially completed the technology development, including the development of new robotic hardware, our functionally safe electronic control units, and also our Indigo Drive user interface.

23:51 As part as part of the system level validation and support the sales process, we've developed a digital twin capability using our group RF Pro software where we can conduct a wide range of virtual tests and also show potential customers how the system would operate in a virtual world. Our existing r and d project for a Japanese customer is delivering as per plan and will be completed during this calendar year. In parallel, we've been successful in securing an initial order from a UK customer for a pedestrian detects and warn system for construction vehicles. And now for the mining industry, we're actively targeting Australia as a key market and assigned a memorandum of understanding with a company called Jevons Robotics to automate their specialist mining vehicles, and we expect first orders in q four of this financial year.

24:39 So our main focus with ABD Solutions is now transitioning the business from a technology development stage to full commercialization, and we have multiple advanced discussions with end users in the mining sector. Naturally, the mining sector is somewhat conservative if we require assurances around functional safety, the timing of any order intake around these opportunities is variable. And we're now gonna show you a brief video of the progress that we have made recently with ABD Solutions. Okay. So, hopefully, that gave you an overview

26:55 on where we are with ABD Solutions. Now just a brief mention of our capital allocation framework. We thought it'd be very useful to remind everybody of our clear capital allocation policy, which shows our disciplined approach to investment returns and capital efficiency. Our first area is investment in organic growth of the business through funding of r and d and new product development to drive revenue growth, but also to deliver the required capability in the business, including investments to drive operating efficiencies. The second priority area for capital investment is into ABD solutions, which helps drive our organic growth through our diversification strategy. The third are acquisitions, which accelerate our strategic progress and compound our organic growth. And finally, of course, we'll apply our capital to our progressive dividend policy.

27:43 So we started the presentation with a slide on AB DYNAMICS today, so we thought it would be appropriate to wrap up with a slide on where we see the our growth opportunity in the future. So we have a significant opportunity to drive organic growth in our core markets as they're supported by regulatory tailwinds and a rapidly changing technology environment, particularly in the field of ADAS and autonomy, but also electrification. We've built a strong commercial and operational platform that we'll we will leverage to drive ongoing customer market penetration. We'll also deliver on this market opportunity by continuing to innovate and bring new products to market to drive revenue growth and also expanding our operating margins through investment and driving operating efficiencies in our businesses. ABD Solutions in the future will have fully transitioned from a technology development business to a full commercialization against a very large multibillion market opportunity.

28:36 This provides diversification and has the potential to drive strong organic revenues. Our simulation business has been a strategic priority in recent years, and we now have a significantly enhanced simulation software capabilities and an expanded product range created through the acquisitions of RF Pro and Ansible Motion. This allows us to take market share in an already growing market, and we'll continue to invest in technology in this market to drive further organic growth. And then finally, our current and future strong financial position with a well capitalized balance sheet provides significant scope for further value enhancing investment in both technology and new product development as well as continuing our ongoing program of delivering carefully selected value enhancing acquisitions.

29:23 So summary and outlook. Before I go into the detail on this, I thought it'd be worth describing our picture that we have on the right hand slide side here, which shows our soft pedestrian three sixty articulating dummy, which articulates with variable gait depending on movement speed. However, you probably didn't notice our new ADAS platform product underneath, which is the Launchpad spin just for reference. So in summary, overall, we've made a very good progress during the first half, both strategically and financially. We're very pleased to have delivered another set of strong results, delivering revenue growth of 30% and operating profit growth of 37% despite various continuing economic uncertainties and some residual effects of the well documented global supply chain issues.

30:09 We delivered good performance in all areas of the business, but a particularly strong performance from laboratory testing and simulation, both organically and also from the acquisition of Ansible Motion in September last year. Our group order book is solid and provides good visibility into the second half of the year, and we continue to invest in key areas of new product development, our capabilities, and operational improvements intended to deliver gains in operating margin over the medium term. You've already seen that ABD Solutions is delivering as per plan, and we're now transitioning from technology development to commercialization. And following the acquisition of Ansible Motion, the integration has now been successfully completed, and the business is delivering in line with our pre acquisition expectations. In terms of outlook, there's significant opportunity in our core markets within automotive, which is supported by long term structural and regulatory growth drivers.

31:01 Despite the risk of short term volatility relating to global macroeconomic conditions and timing order intake, the market drivers both in the core business and in ABD Solutions remain strong. This backdrop along with the group's recent investments in capability and new products provide confidence in achieving the board's expectations during the second half of twenty twenty three and delivering further progress in the years beyond. So that brings the presentation to a formal close. So I'd now like to sort of open up for any questions. Jane, Sarah, thank you very much for your presentation. Ladies and gentlemen, please do continue to take your questions just by using the Q and A tab which is situated on the top right corner of the screen. While the company takes a few moments to review those questions from yesterday, I'd like to remind you that a recording of this presentation along with a copy of the slides and the published Q and A can be accessed via your investor dash board.

31:54 James, Sarah, as you can see, we've received a number of questions throughout today's presentation. And if I could just ask you to read out those questions and give responses where it's appropriate to do so, then I'll pick up from you at the end. Thanks. First question's from Chris. What in the pipeline of new product development excites you the most? Okay. I think I'll I think I'll answer that one. Obviously, we can't go into detail about what's in our future technology road map because that's commercially sensitive. What I can talk about, I'm very excited by the progress made in ABD solutions. We have developed world leading technology very quickly, highly talented team, and proven out what is a fairly complex solution in less than eighteen months, and that's now ready for market exploitation.

32:39 So really, really excited about that one. Rob says, can you talk about your strategy for integrating acquisitions? Are you still of the view that allowing a high degree of autonomy is preferred against full integration? Again, I think I'll I'll address that one. I think the answer is somewhere in between. Actually, I think we we we want our businesses to have a degree of independence so they can be agile and responsive to market conditions and and move quickly at the same time taking the benefits of being part of a larger group in terms of support and networks we have as part of a larger group. So it's kind of it's a hybrid, really, I think, summary. And another related question. Ansible Motion was a good acquisition. Can you give your thoughts on the potential appetite to further add businesses to the group? Well, we we stated in our capital allocation policy in a few times through the presentation, acquisitions are a key part of our strategy.

33:31 We we are have a program of acquisitions that's ongoing. And, clearly, we have an ongoing pipeline that we're looking at. We we tend to fund our acquisitions through cash generation, so not through debt. And so that dictates a natural tempo by which we can actually do deals. So as we generate operating cash, we can then deploy that capital to acquisitions. So so far, we've done one a year over a four year period on average. And so that kind of dictates the the the pace at which we'll be going in the future. And I'll take the final question. Do you have any hedging policies in terms of your FX exposure? Yes. We do. We don't hedge translational exposure on translating the results of the overseas subsidiaries because those are paper gains and losses that reverse in future years. But we do hedge the transactional gains and losses where we're selling in foreign currency.

34:29 And we hedge a very high proportion of the short term exposure and that we take out a decreasing proportion as the timescale goes out further. That was the last question. Okay. Thank you very much, everyone. Perfect. James, Sarah, thank you very much for that. I think you've addressed all those questions from investors. And of course, the company will review all the questions submitted today and will publish their responses on the Investor Meet company platform. But just before we direct investors to provide you with their feedback, which you know is particularly important for the company, James, could I just ask you for a few closing comments? Just to say thank you for everyone attending today. I hope you found it informative. And if there's any further questions, put them on the system, and we will endeavor to ask them. Thank you very much for attending today.

35:17 Perfect. James, Sarah, thanks once again for investors. Could I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete, but I'm sure it be greatly valued by the company. On behalf of the management team of AB DYNAMICS PLC, we'd like to thank you for attending today's presentation, and good morning to you all.