Avon Technologies : 19 November 2024 Full Year Results 2024 Document Full Year Results 2024 RNS

About this update from Avon Technologies Plc

AVON TECHNOLOGIES PLC ("Avon Technologies", "Avon" or the "Group") PRELIMINARY RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2024 ACCELERATING PERFORMANCE Change Change 30 September 30 September 2024 2023 (constant Period ended: currency) 4 Continuing operations 1 Orders received $364.4m $258.7m 40.9% 40.1% Closing order book $225.2m $135.8m 65.8% 64.3% Revenue $275.0m $243.8m 12.8% 12.2% Adjusted 2 EBITDA $43.4m $35.7m 21.6% 22.9% Adjusted 2 operating profit $31.6m $21.2m 49.1% 53.4% Adjusted 2 profit before tax $25.3m $14.0m 80.7% 88.8% Adjusted 2 basic earnings per share 69.9c 40.3c 73.4% 80.2% Total dividend per share 23.3c 29.6c Net debt excluding lease liabilities $43.5m $64.5m (32.6%) Statutory results Operating profit/(loss) from continuing operations 3 $10.7m $(12.6)m Profit/(loss) before tax from continuing operations $2.3m $(20.2)m Profit/(loss) for the period $3.0m $(14.4)m Basic profit/loss per share 10.0c (48.0c) Net debt $65.4m $85.4m Strong financial performance Significant growth in revenue, operating margin, ROIC and free cash flow o Leverage now below 1x Continuous Improvement ("CI") delivering All factories now implementing CI programmes o Significant operational KPI improvements 21% productivity improvement 5 vs FY23 54% reduction in scrap 5 across all factories vs FY23 Group inventory turns 5 increased 7% to 3.1x (FY23: 2.9x) Transformation getting bolder Consolidation of helmet manufacturing sites on track Additional CI opportunities with strong payback potential identified Transformation operational expenditure expected to be self-funded through CI improvements 1 Orderbook and pipeline expanding Record order book of $225m gives confidence for FY25 and beyond: Up to £38m UK MOD General Service Respirator and filter contract win New respirator contract win with Australian Defence Force US DOD delivery orders totalling $34m for ACH (Advanced Combat Helmet) GEN II $42m Next Generation Integrated Head Protection System (NG IHPS) delivery orders from US Army New Zealand and German Navy rebreather orders 3 new 'Programs of Record' with US DOD for Hood Mask Interface development programme Faster progress towards medium-term goals Expect continued growth and consistent returns in FY25 as we implement our footprint and manufacturing optimisation programmes Potential to reach medium-term operating margin and ROIC target ranges in FY26 (previously FY27) o Confidence in delivering further sustained growth and improved returns over the long term Jos Sclater, Chief Executive Officer, commented : "It is now 18 months since we launched the STAR strategy and we are making good progress. This is demonstrated by our much stronger financial performance, improving operating metrics and a fast-growing order book. I am however most excited by the ability of the organisation to change and translate strategy into action. We have built a culture where improving processes is becoming the Avon way of life, we have much more capable people and the pace of change is accelerating. As a result of the progress made during the year, we see the potential to reach our medium-term operating margin and ROIC guidance target ranges a year early, in 2026. We also expect the transformation programme to be largely complete by then, with an accompanying significant decrease in transformation cash costs providing the platform for a broader capital allocation strategy." For further enquiries, please contact: Avon Technologies plc Jos Sclater, Chief Executive Officer +44 1225 896 848 Rich Cashin, Chief Financial Officer Gabriella Colley, Corporate Affairs Director +44 7891 206 239 Sodali & Co James White [email protected] Pete Lambie +44 7855 432 699 Analyst and investor webcast Jos Sclater, Chief Executive Officer, and Rich Cashin, Chief Financial Officer, will host a presentation for analysts and investors at 9.00am this morning, at Sodali & Co, 13 th Floor, 122 Leadenhall St, City of London, EC3V 4AB. The presentation will also be broadcast live at: https://brrmedia.news/AVON_FY_24 To attend in person please contact: [email protected] 2 Notes: At 30 September 2023 Armour operations were fully closed. Armour was therefore classified as a discontinued operation in the prior period. The Directors believe that adjusted measures provide a useful comparison of business trends and performance. Adjusted results exclude exceptional items and discontinued operations. The term adjusted is not defined under IFRS and may not be comparable with similarly titled measures used by other companies. Reported operating profit includes $6.2m amortisation of acquired intangibles, transformational costs of $13.0m, and $1.7m impairment of non-current assets. See Adjusted Performance Measures section for full breakdown of adjustments and comparatives. Constant currency measures are provided in the adjusted performance measures section. Productivity improvement is measured as revenue / direct headcount, scrap is measured as scrap value / revenue and inventory turns is measured as cost of sales / inventory. Full calculations are provided in the Adjusted Performance Measures section. About Avon Technologies plc: Avon Technologies plc make products that are trusted to protect the world's militaries and first responders. Our dedicated teams achieve this by developing mission-critical solutions that enhance our customers' performance, efficiency and capability, whilst providing ever-increasing levels of protection. With a portfolio that includes respiratory and head protection systems, we are renowned for our innovative thinking and our steadfast approach to manufacturing unrivalled products. For further information, please visit our website www.avon-technologiesplc.com Legal Entity Identifier: 213800JM1AN62REBWA71 3 CEO REVIEW FINANCIAL SUMMARY We closed the year with a record $225.2m order book, a 64.3% increase vs last year, reflecting the benefits of our new operating structure, strategy and excellent demand for Avon Protection and Team Wendy's market-leading products. This strong order intake was predominantly driven by growth in Team Wendy's Next Generation Integrated Head Protection System (NG IHPS) and second generation Advanced Combat Helmet (ACH GEN II) orders from the US DOD and accessory sales. We also saw the order book at Avon Protection double this year (up 101.1%) with UK GSR MOD orders, US DOD M50 and accessory orders, FM54 order from Australia and demand from Germany and New Zealand for rebreathers. In addition, we continue to see excellent visibility of orders from our recurring and aftermarket revenue base. The current geopolitical situation continues to support demand for both masks and helmets. We are seeing evidence of higher numbers of on-the-ground personnel, higher personal equipment specifications and a rise in perceived threat levels including chemical, biological, radiological and nuclear (CBRN) attacks, along with continued equipment modernisation programmes, all driving budget requests within NATO countries. In the US first responder market, the prevalence of both guns and drugs supports demand for ballistic helmets and respiratory protection. We are also seeing West Coast police forces re-capitalising in preparation for the FIFA World Cup and the Olympics. Group revenue, at constant currency, grew 12.2% to $275.0m (FY23: $243.8m). This was driven by a 48.9% increase in Team Wendy, partially offset by the expected 7.2% decline in Avon Protection due to timing of filter orders from the US DOD. Adjusted operating profit increased by 53.4% at constant currency, resulting in operating profit margin increasing to 11.5% vs 8.7% last year. Avon Protection experienced a slight decline in operating margin to 18.3% (FY23: 18.7%) with the significant manufacturing efficiency improvements made within the year, positive product sales mix and a more disciplined approach to pricing offset by lower revenue. Team Wendy delivered an increase in operating margin to 3.9%, reflecting improved operating leverage as the division grows, which is pleasing to see ahead of the consolidation of our facilities in the US in 2025. Adjusted basic EPS increased by 80.2% at constant currency, reflecting the growth in operating profit and a reduction in finance charges due to lower net debt through the period. Adjusted earnings also benefited approximately 4 cents per share from a lower than forecast effective tax rate driven by one-off items which are not expected to recur in 2025. We delivered a year of very strong cash generation with cash flows from operations of $63.7m (FY23: $3.4m), mainly due to improved receivables and an increase in average working capital turns to 4.52x (FY23: 3.71x). We ended the year with a significant decrease in our bank leverage ratio to 0.91 times net debt leverage (FY23: 1.94 times). Return on invested capital increased to 13.7% (2023: 8.7%), reflecting higher operating profit and the reduction in working capital. OPERATIONAL SUMMARY - EXECUTING OUR STAR STRATEGY Our STAR strategy was launched in 2023 and set out the strategic priorities required to achieve our medium-term goals of at least 5% revenue CAGR, adjusted operating profit margins of 14-16%, ROIC of more than 17% and cash conversion of 80-100%. As a result of progress made during the year, we now see the potential to reach our operating margin and ROIC target ranges a year early, in 2026. We are increasingly confident in the benefits and payback of our transformation and continuous improvement programmes. As a reminder, our STAR Strategy comprises four focus areas: 4 STRENGTHEN THROUGH CONTINUOUS IMPROVEMENT to always deliver quality products on time while using capital efficiently and improving productivity. TRANSFORM the cost base to increase margins through a programmatic approach to transformation ADVANCE organically by growing the core and scaling up emerging opportunities REVOLUTIONISE by developing the next generation of products to drive long-term growth 1. Strengthen through Continuous Improvement Now we've fixed the foundations of the business, we're evolving our 'Strengthen' pillar to become 'Strengthen through Continuous Improvement', reflecting the value we see in continuous improvement and a desire to see it as a central part of our strategy. We believe that CI will: increase employee happiness and motivation; free up cash to invest into the business, funding our transformation programmes and R&D; improve productivity, which generates wealth; and help grow the business by enabling us to reliably deliver quality products with short lead times. How are we doing it? On the shopfloor we aim to dramatically improve our production processes to: achieve one piece flow; make product to customer demand ("takt time"); connect our customers to the shop floor through a pull system; and establish standard work to remove waste from the processes and sustain gains. Off the shopfloor we aim to: remove waste in the product development process; and identify waste in the office-based processes and remove it through Kaizen. Progress so far: All our sites have a long history of batch manufacturing and our previous structure on our manufacturing floors was based around equipment type. We needed to break up these functional silos and move to a structure based around value-adding activities. We have now changed most of our DOD helmet lines, commercial helmet lines and mask manufacturing lines from traditional batch manufacturing to flow, improving inventory turns, quality, lead times and productivity. We have reorganised every major factory into value streams and every line now has visible metrics showing progress by the hour to reduce inefficiencies, cut down on waste and ensure each step adds value. We now also have digital data on our most important lines showing productivity, scrap and rework real time. We have recently developed a new process called the "Plant Preparation Process" that we are using to transform three of our facilities. This process creates the plan for the whole plant, which is then implemented through Kaizen. We carried out over 350 Kaizen activities last year . By involving everyone from operators to senior leaders, we're making sure these improvements are sustainable and benefit the entire operation. Operational KPIs improving: Safety - Making our workplace a safer place to work , measured as our lost time incident rate Quality - Reducing scrap and rework and further improving customer confidence Delivery - Radically reducing lead times and improving on-time delivery Inventory - Growing while freeing up significant cash from inventory Productivity - Reducing costs and increasing capacity for further growth by improving efficiency 5 We set targets of a 25% productivity increase, a 60% scrap reduction and inventory turns of more than 5 in the medium- term. We have made such good progress that we have stretched our productivity and scrap targets from where they were at the Capital Markets Day in February 2024 to a 35% productivity increase and a >60% scrap reduction. Versus FY23, at a Group level: productivity has improved by 21%; scrap has reduced by 54%; and inventory turns have improved by 7%. This is pleasing progress but we still have a significant number of improvement projects in the pipeline, including training the new employees hired in Cleveland ahead of full rate production and solving some material-related scrap issues in the first batch of ACH made in Cleveland, which will significantly reduce scrap rates at that facility. The improvement in inventory turns has freed up $19m of cash since the middle of 2023. We now believe that this inventory release will largely generate enough cash to pay for the transformation project's total operational expenditure. 2. Transform Our transformation projects remain focused on reducing costs to improve margins and free up resources to invest into growth. Our existing transformation programmes remain on track with a total investment in FY24 of $13.0m (FY23: $2.9m) and $1.7m of capital expenditure. Workstream Goals Progress in 2024 Footprint 50% improvement in Our largest transformation project is the consolidation of our optimisation revenue/sq ft helmet manufacturing sites which includes: 10ppts improvement • moving IHPS moulding to Salem and IHPS finishing to in Team Wendy gross Cleveland and closing Irvine, while also improving margin immature processes in parallel; • increasing production of ACH from 0 to a run rate of over 60,000 helmets a year; • stabilising and shortening lead times on the commercial helmets, particularly EPIC and EXFIL; and • moving both Salem and Cleveland from batch to flow and from end of line testing to in line testing, significantly reducing WIP and improving productivity at the same time. This project remains on track and we are making good progress in obtaining approval from the US DOD to finish the IHPS helmet and make the ACH GEN II in Cleveland. We still expect to close the plant by the middle of the 2025 calendar year and we expect to start seeing the financial benefit of this programme in FY26. With a goal to improve productivity and reduce inventory and footprint, our UK site has also started a transformation to move from batch to flow manufacturing which is progressing rapidly. Since the beginning of 2024 we have already reduced our footprint by over 25% through Kaizen activities which have started to flow each production line. 6 Operational 35% productivity We are now part way through major plant transformations at three excellence improvement factories: Cleveland, Salem and our UK site. (plant >60% scrap All our manufacturing sites have moved to a value stream model, transformations) improvement where Value Stream Managers are responsible for product families Inventory turns >5 and delivering against our operational targets. We have now appointed the Value Stream Managers and are embedding the new structure and culture. We have moved all our DOD helmet lines, commercial helmet lines and mask manufacturing from traditional batch manufacturing to flow, improving inventory turns, quality, lead times and productivity. We have ambitious plans to flow more lines this year, including our rebreather line and the new MITR line. We are also investing in new technology to make manufacturing more efficient and improve quality and reliability in our Cleveland site. This includes better moulding, tooling, kitting and painting equipment. This investment will not only improve consistency but also support our strategic objective to deliver the higher production output needed as we ramp up production in the coming 12 months. Functional Roll-out of SBU Finance excellence - The restructure of this function is now excellence functions complete, generating savings of c.$1m p.a. We are also currently planning the removal of SAP from our Salem plant, which could save over $1m a year. HR excellence - New dedicated HR teams are now in place at SBU level and a Global HR Director has been appointed to lead the restructure of this function, set strategic direction and support our move to a continuous improvement culture. Programme management - Over 100 employees have now been trained on our newly created programme management approach and process. We have appointed programme leaders to drive our US footprint optimisation project, who will also lead other programmes of significance including the new product introduction process as the footprint optimisation project completes in FY26. We have, however, won a lot of DOD Programs of Record and have two new helmets to design and ramp up in Team Wendy, so will need even more to strengthen our programme management capability. Sales excellence - During 2025 we have more to do to strengthen both the processes and organisation of our sales teams, although we have now established an operating model for our North American commercial sales team and international sales team. 7 Commercial Complete screening We have reviewed the product portfolio and have addressed optimisation of product portfolio, pricing opportunities where appropriate. Work has begun to identifying potential improve the pipeline management with our US and International improvements sales teams and understanding of how we can partner with customers to better predict orders and delivery expectations. We have also standardised common bid and programme management processes and rolled-out professional sales and negotiation training in Team Wendy, and are focused on building out our sales team to focus more on delivering international and new market growth in both SBUs. We continue to strengthen our e-commerce platform. We have also taken a more market-based approach to pricing, which contributed to the 370 basis point improvement in gross margin year on year. We have several additional opportunities currently in the appraisal and planning stages of our transformation funnel and anticipate that FY25 transformation spend will be at similar levels to FY24. Transformation costs are still expected to fall sharply in 2026 as the programmes end. The expected payback on our portfolio of projects and progress achieved to date means that we have the potential to realise our medium-term operating margin and ROIC goals a year earlier than originally expected. 3. Advance Our Advance pillar is about delivering innovative products in the short and medium term, driving increased sales, orders and pipeline. Avon Protection We have strong demand for masks from NATO countries and excellent demand for both rebreathers and supplied air products. During the year we won several strategic contracts within Avon Protection: UK MOD - £38m four-year contract for General Service Respirator; A seven-year Swedish police C50 contract; One-year extension to the M53A1 US DOD contract A five-year DRSKO contract for Self-Contained Breathing Apparatus; FM54 contract win with Australian Defence Force; and Rebreather contracts in Germany and New Zealand. We saw winning the GSR contract as important to defending our commanding position as the respirator provider of choice across NATO and the Five Eyes, so we were pleased to win this long-term contract with the MOD. Our position as the market leader in CBRN protection was further strengthened by winning the contract to supply the Australian Defence Force. This is a three-year deployment contract with follow-on replenishment. We now supply the Australian military with both masks and helmets and see this win against a long-established incumbent as cementing our position as the mask supplier of choice to the Five Eyes. As mentioned at the half-year, demand for masks from the DOD has picked up slightly. We have strengthened our relationship with our DOD programme office during the year and continue to work on improving forecast demand. 8 Our rebreather continues to be the system of choice across NATO. We have further rebreather opportunities in the pipeline and remain of the view that we have a technological advantage over our competitors which improves diver safety and mission effectiveness. The US Navy cancelled its procurement for rebreathers but we have good current demand and still see considerable opportunity with both US Special Forces and the US Navy. We are working with both and believe we are well positioned for any future prospects. We are planning to launch the MITR-M1 Half Mask this financial year with a groundbreaking goggle set and adaptable helmet integration clips to be released by the end of 2025. We are also starting to get some traction in chemically resistant suits and earlier this year we introduced the EXOSKIN-S1 suit, offering advanced protection against chemical warfare agents for up to 24 hours. We have made our first sales of EXOSKIN; whilst modest, they demonstrate the customer need for the integrated CBRN protection packages that we can now offer. Team Wendy During the year we announced two DOD orders for the ACH GEN II of $19.5m and $14.2m and orders for NG IHPS totalling $42m. We have now successfully delivered seven lots of ACH GEN II to the DOD and continue at run rate on our NG IHPS with no lot failures. Our focus now is on meeting ACH GEN II customer demand for 2025 of over 50,000 helmets per year. We are also making good progress on our discussions with the DOD to extend our NG IHPS programme into sustainment post-2028 and an extension has been indicated for the ACH GEN II helmet programme. We have continued our strong partnership with the US Navy supplying our EXFIL LTP bump helmets to US Naval Air Systems Command with a $6.7m order this year. Our EPIC helmet, ideal for first responders, has also been popular with US police forces, but sales in 2024 were hindered by long lead times caused by raw material shortages. We are making progress with our suppliers to solve this issue. In pads, we had good success with the DOD, which has chosen our Cloudline pad system as an accessory to the NG IHPS helmet. We plan to increase US commercial sales by offering faster lead times and expanding our growing EPIC customer base, launch a new rifle rated helmet to meet customers' needs in the US commercial and international markets, refresh our EXFIL range and develop a new bump helmet. 4. Revolutionise Revolutionise is about driving long term growth by using our powerful customer relationships to increase co-funding and develop innovative products for the future. We are continuing to invest in long-term research and development (R&D) with $11.4m invested in R&D (FY2023: $10.2m). We made further progress on several DOD development programmes and are expanding our portfolio of co-funded new product programmes, these include: three new DOD development programmes for a new Hood Mask Interface programme; DOD funded programmes to deliver next generation filters that enhance user protection; development of a new diving mask with funding from DSTL; expansion of helmet performance capabilities and pad systems while minimising weight and maximising protection; and integration of head and respiratory protection, which we are currently seeking funding for. 9 Risks and opportunities We aim to reduce our risks through excellent programme management and improved people capability but the current main risks, as we see them, are: The ramp-up of the IHPS programme and the ramp-up of ACH and EPIC following the closure of Irvine will be challenging. We will need to work hard to control scrap and rework and to ensure we have the raw materials we need. Recruiting and retaining good operators remains a challenge, though we are making progress here. We do not currently have an order for filters from the DOD. We remain hopeful that this will come, but for now DOD filter demand is very low. We have recently seen increases in US healthcare costs and Employer National Insurance contributions in the UK. These are real costs for us and will impact margins if we cannot offset them through our CI initiatives. There are, however, several additional opportunities which are not currently factored into our medium-term strategic plan, which include: accelerated international growth, particularly in commercial markets; increased DOD demand in both SBUs; and additional unplanned cost reductions and operational efficiencies through continuous improvement. Summary and outlook We have made excellent progress creating a high-quality growing business and this year demonstrated: We have developed a recipe for success that is driving growth, margin, cash generation and ROIC. Our transformation programme remains on schedule, and the progress made to date can already be seen in our strategic and financial KPIs. We have a record closing order book which gives us excellent visibility. We have a stable recurring revenue base, which will grow further as we deploy rebreathers, masks into Australia and helmets into the US police and SWAT teams. Our leading technology and long-term contracts provide us with a strong competitive moat which we continue to believe will support strong margins and returns on capital. We therefore remain confident that Avon is well positioned to deliver exceptional shareholder value: Our focus on CI is already delivering results, with the total cash costs of transformation operational expenditure now expected to be covered through lower working capital. Further transformation activities are in the planning and execution stage, driving acceleration of operational and financial returns. We expect continued growth in FY25, alongside consistent returns as we implement the key actions in footprint and manufacturing optimisation programmes. These factors give us increased confidence and we now see the potential to reach our medium-term operating profit margin and ROIC targets in 2026, a year earlier than expected. These would be delivered against a backdrop of revenue growth exceeding 5% per annum and continued strong cash generation. 10

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