AB Dynamics (LSE:ABDP) Q4 2026 Earnings Call

0:00 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 via the Q&A tab situated on the right hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However the company can review all questions submitted today and publish responses where it's appropriate to do so. Before we begin I'd like to submit the following poll. I'd now like to hand you over to the management team. Sarah, good morning.

0:31 Good morning. Welcome to the AB Dynamics 2026 four-year results presentation. Thanks for joining us. I'm Sarah Matthews Demeers, CEO, and I'm delighted to be joined by Ed Haycock and Andrew Lewis. Ed's our CFO designate and previously our Director of Financial Reporting, and he takes over officially as CFO on the 1st of December from Andrew. I'm very grateful to Andrew for having so ably stepped into the interim role. We are repositioning with purpose. Here's what that means. We have a new leadership team, myself and my executive committee, who collectively bring a combination of experience and fresh perspectives. Our markets are changing with regional challenges that demand action, and we're adapting with agility to meet our customers evolving needs.

1:23 We're proactively repositioning the business rather than simply reacting to short term market conditions. we've strengthened our portfolio by exiting from vada text declining market and acquiring impulse and IP rich business to access a growing sector. we're driving a culture of continuous improvement to generate efficiencies which allow us to reinvest and we're choosing to add additional resources to innovation and sales in fi 27. Our great technology high margins cash generation and robust balance sheet enable us to deliver consistently strong returns, even in conditions where revenue growth is constrained. Our focus is doing the basics well and delivering on our opportunities if we do this, we believe the market will appreciate the quality of our business.

2:15 I'll outline this year's progress, then Ed will cover the financial results. I'll return to our growth drivers and next year's outlook. Since becoming CEO last December I've made a number of changes to the organization to position the business for future growth. My first priority was strengthening leadership through targeted senior management changes. I've reinforced the culture of respect, accountability and collaboration delivering for our customers and the group. We launched the third professional development program for emerging talent, something that's particularly close to my heart, having been the architect of the first program five years ago. In the first half, I led innovation workshops at every business unit involving all levels of the organization, focusing on innovation, continuous improvement and excellence.

3:09 Over 500 ideas are now being reviewed and actions to drive growth and operational improvement. engineering and now prioritizing projects with the greatest strategic and commercial potential and a route to market effectiveness review is underway with a plan to allocate resources to address the findings and actions arising from this review in the first half of 27. we've renewed our safety focus and improved near-miss reporting helping us identify risks and prevent injuries Despite the challenging environment, we maintained our operating margin at 20% through operational improvements and early action on costs. We introduced 5S at our main manufacturing site and began rolling it out across the group.

3:55 We've also strengthened our portfolio by taking early decisive action to exit Vardatech as its market changed and acquiring MPulse, adding differentiated IP and attractive opportunities for sales synergies. Together these changes focus our portfolio on technology-enabled businesses with stronger long-term growth potential. I'll now hand over to Ed for our financial results.

4:21 Thanks Sarah. It's a privilege to have been appointed CFA and I look forward to starting the role formally on the 1st of December having worked closely with our interim CFA Andrew Lewis over the last few months. I would like to take this opportunity to personally thank Andrew for his support during this handover period. It's fair to say that FY26 was a disappointing year for the group in terms of financial performance, given the unprecedented level of dislocation in the automotive industry. With that said, AB Dynamics remains a business with great products and technology and a true market leader in the niches we operate in, as illustrated by our robust margin performance in a difficult year. This, combined with the strength of our balance sheet, provides us with the confidence to continue to invest in support of long term growth.

5:16 On to the detail of the FY26 results, which were consistent with the updated guidance we communicated in July. Revenue was down 12%, reflecting geopolitical events, challenging automotive market conditions and foreign exchange headwinds. operating profit decreased by 18% to 18.3 million as a result of the lower volumes but encouragingly operating margin was maintained at our medium term target of 20% with the negative impact of operational gearing offset by the four-year effect of operational improvements and early cost mitigation actions the effective tax rate increased to 23.5% due to a change in the geographic mix of profits including those that are eligible for the patent box in the uk and earnings per share decreased by 21 to 60.3 pence as we flagged in our july guidance customer deliveries were more heavily weighted towards the end of the year than usual and this impacted cash conversion which was 61 we are increasing the dividend by 10 reflecting our confidence in the business The order book at the year end was 31 million, providing visibility into FY27.

6:38 Moving on and looking at the year on year operating profit bridge. The negative impact of operational gearing was offset by three areas. Firstly, the full year effect of operational improvements which were implemented in the prior year, primarily in testing products. Next was revenue mix, which was a small tailwind in the year, mainly due to a heavier weighting of simulation software revenue and finally cost mitigation actions implemented early by management which was largely the delay of discretionary spend the strength of our gross margin performance which was up 80 basis points in a challenging market was pleasing to see both from an operational efficiency perspective and a demonstration of our strong market position which enables premium pricing The early and proactive approach we took to managing overhead spend was also key to maintaining a 20% operating margin.

7:34 Looking ahead to FY27, we expect most of the overhead saving to reverse as we balance financial performance with investment in innovation, sales and routes to market. Now looking at cash. Adjusted operating cash of 13.6 million reflected an investment in working capital. as customer deliveries occurred later in the year than usual driving an increase in receivables. We have reinvested this operating cash into the business with 8.1 million invested in capital projects including on new product development in line with our technology roadmap. The acquisition spend of 16.1 million reflects the initial consideration for the acquisition of mPulse in August as well as the final element of deferred consideration for the acquisition of VTS.

8:26 After returning cash to shareholders in the form of dividends, we had a net cash balance at year end of 24.5 million available to support strategic priorities. Moving on to the performance of each segment and starting with testing products. This segment includes driving robots, ADAS platforms and soft targets and laboratory based test equipment. Revenue was down 21% due to the challenging automotive market conditions, particularly in Europe. Also, the comparative period included a material delivery of robots to a North American OEM which did not occur in FY26. The margin was maintained at 22.6% as the lower volume was offset by the four-year effect of operational improvements that were implemented during the prior year.

9:21 While volumes suffered in FY26 as we saw OEM procurement impacted by market volatility, the ever increasing end cap testing requirements for ADAS and a heightened need for OEMs to automate their vehicle development activities represent strong market drivers for testing products over the medium term. Late in the year we completed the acquisition of MPulse which has expanded our laboratory testing product portfolio and going forward will be reported in this segment. Given the timing of the transaction, for FY26, mPulse did not contribute any meaningful revenue or profit. Testing services includes our proving ground in California and our laboratory testing facility in Michigan, which performs mileage accumulation testing for automotive OEMs.

10:11 Revenue increased by 13%, driven by strong performance in the mileage accumulation business. which has continued to grow its customer base since the group acquired it in 2024. The decrease in operating margin was primarily due to sales mix at our proving ground with a strong comparison in the prior year reflecting a larger proportion of higher margin OEM track testing and a lower proportion of projects for the US regulator NHTSA. Looking forward, as upcoming regulatory changes come into force in the US that will mandate automated emergency braking on all new models released from 2029, we expect this to drive positive customer activity levels at our California premium ground, as well as for product sales into the US.

10:58 As we communicated in our July trading update, we have completed the strategic review in relation to our Vardatech business, following a significant fall in volumes. and have commenced the process of closing the business which will conclude in the first half of FY27. As such, Bardatech has been treated as discontinued and its results have been excluded from those of the continuing operations. Simulation includes our simulation software RFPro and driving simulator motion platforms. Revenue increased by 10% despite a challenging market which saw order placement timing being impacted adversely, particularly in Europe during the second half of the year.

11:43 Growth was driven by strong demand for both hardware and software, while the modest improvement in margin was helped by operating leverage and revenue mix, with a slightly heavier software weighting within the prior year. During the year we have continued to invest in expanding our product offering, launching the T1 sport simulator for the growing low cost motorsport market and building additional digital models for adoption by a major Japanese OEM in the use of road car development. As a reminder, high value simulator sales are individually significant and the timing of order intake can have a material impact on reported results. our key financial enablers are unchanged and include our great people with over 200 qualified engineers and technicians supported by an experienced team of professionals across sales operations and finance our retention rate which is circa 90 is above industry averages is testament to the investment that has been made in our people our cash conversion record which we aim to continue at 100 through the cycle and our strong balance sheet which gives us flexibility with 27.1 million of cash and a 17.5 million rcf facility while we prefer to remain beneath one times leverage on a steady state basis our debt capacity at two times ebitda is now approximately 45 million which for the right acquisition we could use for a short period then pay down from cash generation

13:19 To capitalise on the strength of our balance sheet and the significant market opportunities we see over the medium term, we are committed to a capital allocation policy which prioritises investment in organic R&D and capex first, then M&A and finally dividends or other returns to shareholders. Sarah will cover numbers one and two in the later slides on organic and inorganic investment. In relation to dividends, we have a progressive policy as shown by our track record of consistent double digit dividend increases over the last five years. In terms of other capital deployment, we will continue to purchase shares via our employee benefit trust to hedge out obligations and prevent dilution of existing shareholders.

14:05 And in light of the current valuation of the business and to expand the range of options the board has at its disposal. a resolution to enable share buybacks will be proposed at the forthcoming AGM in January this will provide flexibility with any deployment of surplus capital assessed against our existing capital allocation priorities M&A opportunities and prevailing current valuation I'll now hand over to Sarah who will provide an update on our future growth drivers thanks Ed

14:36 The automotive market remains challenging, particularly in Europe, causing near-term disruption and cash conservation among some customers. However, the long-term drivers of our business remain positive. Our growth is supported by four long-term structural and regulatory growth drivers. New vehicle models, new powertrains, consumer safety ratings and regulation of assisted and automated driving. European manufacturers are navigating a generational transition restructuring a rethinking development and testing. In the short term, this is delayed procurement as customers conserve cash and reassess capital allocation. Over the longer term pressure to launch models faster and more cost effectively will increase demand for automated development driverless physical testing and simulation extending our relevance beyond traditional a test testing.

15:33 Different rates of EV adoption across the US, Europe and Asia are leading to development of more hybrids and refreshed ICE platforms, all of which require development and testing. We expect strong growth in level 2 autonomy as premium ADAS features move into mass market vehicles. AV development will also increase demand for high fidelity simulation and ultimately a combination of virtual and physical testing. Together, these tailwinds support sustained long term growth in the group's end markets. The underlying requirement is unchanged manufacturers must validate more technologies across more vehicle variants under increasing time and cost pressure. That combination supports demand for both our physical testing equipment and our simulation capabilities.

16:25 We have a global customer base with 40% of revenue from Asia Pacific, mainly China and Japan, and around 30% each from North America and Europe. The majority of consumer safety standards varies by geography, creating further growth potential. NCAT bodies independently rate vehicle safety, and each model variant must be certified by an accredited laboratory for its target market. There are 10 active NCAT programs globally, Euro NCAP currently applies the most stringent standards, followed by China NCAP and US NCAP. Requirements continue to develop in Japan and Southeast Asia. In India, Bharat NCAP currently focuses on passive safety, but is expected to add ADAS and active safety testing within the short to medium term time horizon.

17:17 As standards become more complex, demand for testing equipment should grow. we're well positioned through our sales and support offices and distributor network standards are also expanding beyond passenger cars into commercial vehicles and motorcycles creating additional target markets importantly this is not a single market opportunity each region is progressing at a different pace which creates a continuing sequence of regulatory upgrades and investment requirements rather than dependence on one implementation cycle NCAT ratings are awarded by accredited test facilities, where we have a strong global installed base. Each vehicle entering a new market must be tested under that market's protocols.

18:05 For example, as Chinese OEMs expand internationally, each new model requires local accreditation in the market in which it's being launched, making safety ratings increasingly important to market acceptance. Testing demand therefore grows both in China during vehicle development and in Europe for final accreditation. We supply the majority of accredited service providers and the consistency OEM seek across global programs positions us well for future demand. This installed base is strategically important, it gives a strong customer relationships detailed understanding of customer requirements and a platform from which to support future protocol changes and equipment upgrades. Our innovation and product roadmap is aligned with customers evolving requirements.

18:56 In testing products near-term development follows the NCAT roadmap to 2030 and addresses increasingly complex testing. Demand is growing for automated multi-vehicle driverless solutions that improve proving ground efficiency. In testing services we're broadening our offering and increasing utilization of our existing footprint while increased automation provides efficiency and repeatability. In simulation we're developing higher performance, higher fidelity driver in the loop simulators. We're also integrating physical powertrain and steering systems into simulation to improve feedback and open opportunities with additional OEMs. The convergence of physical testing and simulation creates a distinctive long term opportunity for the group.

19:44 customers increasingly want consistent results across virtual development and track or laboratory validation our unique capabilities in both physical testing equipment and simulation allow us to support that workflow and create a more integrated proposition despite current market challenges our business is resilient and our medium-term growth drivers remain attractive We are OEM agnostic, serving more than 150 customers, including major Chinese manufacturers. Our global customer base and long-standing relationships provide resilience and flexibility. We are also powertrain agnostic. Every new EV hybrid and ICE model must be tested and certified.

20:33 We don't supply components for production vehicles, so production volumes don't directly determine demand. The near-term risk is that pressured OEMs defer investment to conserve cash. However, over time, the need to innovate and develop models faster and more efficiently should accelerate adoption of simulation and our driverless testing capabilities. Overall, our market exposure and customer relationships provide resilience today and support sustainable long-term growth. The breadth of our exposure is therefore a strength across customers, geographies, power trains and development methods. The common requirement is rigorous and repeatable testing. That gives us multiple routes to growth as customer priorities evolve.

21:21 This slide shows how we expect to sustain growth through both volume and pricing. We operate in growing end markets. As safety technology advances, regulation and certification should follow, increasing demand for testing equipment, although timing will vary by geography and customer. Beyond market growth, we can gain share in areas including platforms and soft targets. We retain pricing power in niche positions such as driving robots and simulation software and will continue to capture that value. Replacement cycles provide a steady revenue base, while continued product investment should stimulate additional demand. The opportunity is therefore a combination of market growth, share gain, pricing and product development.

22:07 These levers won't move uniformly each year, but together they provide a balanced basis for sustained organic growth. We aim to maintain operating margin at 20% and deliver incremental compounding improvement over time through a relentless focus on continuous improvement. In FY26 the full year benefit of production planning, quality improvements and product rationalisation delivered a further 0.4 million of savings. Continuous improvement workshops are identifying the next wave of margin opportunities for FY27. Initially we will reinvest improvements in innovation and sales capability to support growth. Priorities include further supply chain improvement modularization and product rationalization efficiency gains across manufacturing and greater value from service support spares and software upgrades.

23:03 Our approach is disciplined, secure efficiency benefits, reinvest selectively where this strengthens growth and continue to protect the quality and reliability customers expect from our products and services. In August, we acquired MPulse Test Systems, which designs and manufactures servo electric systems for noise, vibration and harshness, structural and durability testing. Its equipment is used in the same laboratories as our SPMM machines, so the customer base is familiar and the technologies are complementary. The acquisition broadens our laboratory testing offer and gives customers access to more solutions from one trusted partner. mPulse is established in North America and can now use our global sales offices and distributor network.

23:52 Its technology may also accelerate development elsewhere in the group and integration of the product range and sales team is progressing well. The strategic logic is clear adjacent technology, familiar customers and immediate access to a broader international channel. These characteristics reduce integration risk and create practical opportunities for cross selling. Acquisitions remain an important growth priority and our pipeline includes near-term opportunities and longer-term relationships. We target cash generative high gross margin businesses at reasonable multiples with EPS accretion and strong potential returns. Typically targets are products or services that can be sold through our international channels.

24:39 mPulse demonstrates this model a high quality niche business integrated into testing products and given immediate access to new sales channels. We continue to develop relationships with other targets, the pipeline is promising and we have the resources and discipline to act when suitable opportunities arise. We will remain selective strategic fit quality of earnings valuation and deliverability all matter and will pursue transactions only where we see a credible path to value creation. Our absolute focus in FY27 is the front end of the business, innovation and sales. In innovation, we will prioritise opportunities with the greatest commercial and strategic potential, adapting our solutions as customers respond to changing market conditions.

25:31 In sales, we're strengthening structure, capability and processes with particular emphasis on execution and pipeline conversion. We are also optimizing routes to market and distribution channels and sharpening our focus on strategic accounts. Operational improvement remains business as usual, supported by rigorous continuous improvement. We're commissioning a new integrated design production support facility for simulation, bringing multidisciplinary teams together for the first time. In M&A we're integrating MPulse, realising commercial synergies from our broader laboratory offer and maintaining a disciplined pipeline to support organic growth. We delivered FY26 results in line with the guidance issued in July 26 and maintained operating margin at 20%.

26:26 We've proposed a 10% dividend increase, reflecting the board's confidence in the group's financial position and prospects. Our strong balance sheet, including 24.5 million of cash, supports further organic and inorganic development. For FY27 market conditions remain challenging, but we're strengthening the business to catch a long term structural and regulatory growth. The board remains confident that the group will make financial and strategic progress this year and expects FY27 adjusted operating profit to be in line with current expectations. That concludes the presentation, thank you for joining us and we'll now go to questions. That's great. Thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the Q&A tab situated on the right hand corner of your screen.

27:16 Just while the company take a few moments to review those questions submitted today, I'd like to remind you that recording of this presentation, along with a copy of the slides and the published Q&A can be accessed by our investor dashboard. As you can see, we have received a number of questions throughout today's presentation. Can I please ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end. Thanks.

27:39 Well, thanks everyone for your questions. A number of similar themes, so I've tried to collate and pull those together. So first one for you, Sarah, is the growth of Chinese OEMs a risk or an opportunity for you?

27:53 It's absolutely an opportunity for us. We sell globally, a significant part of our business comes from Asia Pacific, 40%. A large part of that is China. We sell to all the global OEMs. So actually, you know, we're well placed to benefit from growth in any of the markets.

28:12 okay thanks and and Ed could you perhaps touch on how the closing order book this year compares to what you've seen in the last couple of years and what you see that means for next year yeah absolutely so closing order book for fy26 was 31 million that is comparable to what we saw at the end of fy25 which is 32 million and again at the end of fy24 which was 30 million so broadly comparable um in the last two years that level of opening order book has supported revenue in the low 90 millions excluding vada tech consensus revenue for fy27 is in the high 90 millions and includes the additional revenue that impulse will contribute so on an organic basis the 31 million of opening order book that we carry into

29:03 fy27 is consistent with the last two years in terms of the revenue cover going into next year okay thanks and another for you Sarah I think you talked about investing in sales and the front end of the business could you maybe expand a little bit on what you mean by that sure so the first thing we're looking at is the sales resources that we have across our sales subsidiaries

29:32 And we're really looking at making sure we've got the right balance of skills across each of those in terms of hunters and farmers and inside sales support. There's a mix at the moment and we need to bring them all to the same capability level. we're also setting up global key account management across our large global OEMs and we're also focusing on channel management we have a number of distributors we're making sure that we are supporting them technically and enabling them to go to customers with the right value proposition and materials and also holding them accountable getting their market intelligence back from them and making sure they're putting their best foot forward for us.

30:22 Great thanks for that. Ed back to you if I may, you said the tax rate was up this year and could you perhaps give a view on expectations for the next couple of years? Yeah so the tax rate was up

30:35 this year as I said that was due to the geographic mix of profits a bit more color around that for FY26 the testing products was a smaller proportion of the group than it has been historically and that resulted in a proportionately lower amount of patent box relief this year

30:54 going forward over the next couple of years we would expect the profit mix in the group to be broadly consistent where it was this year so an effective tax rate in the range of 23 to 25 percent is is where we would expect it to be okay great thanks ed um sarah back to you if i may um you said the uh mpulse acquisition integration is progressing well um any surprises

31:20 surprises on the upside actually it's not often that you buy something and find additional synergies than you were expecting but we were obviously looking at sales synergies and how we put that through our existing sales channels and we've already had some success in japan with that and also the technology that impulse has has good opportunities for read across into other parts of the business which was the the piece that we hadn't identified before buying them

31:50 great well positive surprises we like mate yeah um again um maybe Sarah could you touch on the current status of the potential expansion into adjacent markets such as defense and mining

32:05 yes sure we're working with a number of partners where we can provide the physical actuation and they can provide the software stack that will enable us to penetrate into some of those adjacent markets it is early days it will take a long time to get into those but good potential for the future okay thanks and then what looks like the final question um i see the dividend is up 10 can you explain the board's thinking yeah sure so dividends up

32:35 10% this year we see that as a good discipline a good signal of confidence in our confidence in the future of the business and in line with our progressive dividend policy which fits in with the capital allocation priorities we discussed okay great I think that covers all the questions that I've managed to see on the screen and pull together so thanks everyone for submitting your questions Ed and Sarah thank you for your answers that's great thank you for answering those questions you can from investors and of course the company can review all questions submitted today and we'll publish those responses on the investor meet company platform just before redirecting investors to provide you with their feedback which is particularly important to the company Sarah could I please just ask you for some closing comments yes thank you for joining us this morning and thank you for your questions

33:31 We hope you found this morning's engagement useful and look forward to seeing you again at the half year in April. For now, goodbye from Andrew, Ed and myself. That's great. Thank you for updating investors today. Can 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 take a few moments to complete and I'm sure be greatly valued by the company. On behalf of the management team, we'd like to thank you for attending today's presentation and good morning to you.