AVA Risk Group Limited (AVA) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the 2022 Annual General Meeting of Ava Risk Group Limited. My name is David Cronin, and it's my privilege to serve as Chairman of the Ava Board. I declare that a quorum is present. Accordingly, I declare the meeting open. I would like to thank each of you for your attendance today via the Lumi online technology. This allows shareholders, proxy holders and guests to attend the meeting virtually. All attendees can watch a live webcast of the meeting. In addition, shareholders and proxy holders have the ability to submit questions and votes. Questions can be submitted at any time. [Operator Instructions] Please note that whilst you can submit questions from now on, I will not address them until the relevant time in the meeting. Please also note that your questions may be moderated, or if we receive multiple questions on 1 topic, amalgamated together. Finally, due to time constraints, we may run out of time to answer all of your questions. If this does happen, we will answer them in due course via e-mail or on our website. In the event that I am disconnected from the meeting and cannot immediately rejoin due to technology failure, Mark Stevens will assume the role of Chair of the meeting. Voting today will be conducted by way of a poll on all items of business. In order to provide you with enough time to vote, I will shortly open voting for all resolutions. At that time, if you are eligible to vote at this meeting, a new polling icon will appear. Selecting this icon will bring up a list of resolutions and present you with voting options. To cast your vote, simply select one of the options. There is no need to hit a submit or enter button as the vote is automatically recorded. You do, however, have the ability to change your vote up until the time I declare voting closed. Let me begin by introducing each of your directors in attendance today. With us today, we have Rob Broomfield, Executive Director and Chief Executive Officer; and Mark Stevens, Nonexecutive Director. Mike McGeever, Nonexecutive Director, is unable to join us today and sends his apologies. I would like to introduce Neville Joyce, Ava's Chief Financial Officer and Joint Company Secretary; and Kim Clark, Joint Company Secretary, who are also in attendance. In line with the Corporations Act, our auditors, Ernst & Young, are present and are represented by Richard Bembridge. They will be available to take questions on the audit report later in the meeting, if so required. On behalf of my fellow directors, I would like to welcome you to the Ava Risk Group Annual General Meeting, and thank you for taking the time to join us virtually today. Firstly, I would like to thank Rob Broomfield, our Group CEO, our senior leadership team and all of our employees for their efforts and dedication during FY 2022 to deliver shareholders some fantastic progress despite continued challenging conditions. The Ava Group continued its transformation during FY 2022, focused on the development of its world-leading fiber-sensing and access control technologies. Notwithstanding the lingering business interruptions related to COVID-19, particularly with respect to critical supply chains and project-related delays, the group achieved a number of significant milestones. Successful divestment of the Services division in October 2021, resulting in net proceeds to the Ava Group of $41.9 million, representing a circa 587% net cash investment return. We made distributions of $38.8 million to Ava Group shareholders by way of special dividend and capital return. I'm very pleased that the company has managed to distribute more than $46 million to shareholders over the past 2 years. We grew our sales order intake by 13% for our leading fiber sensing and access control technologies when excluding the Indian Ministry of Defense contract. This is reflective of our investment in Ava Group's business development capabilities. We made significant progress on the development road map of Aura IQ, our conveyor Condition Monitoring solution, completing successful proof-of-value trials on a number of operating mine sites. This resulted in the receipt of the first commercial order for Aura IQ in July 2022 from a leading global manufacturer of conveyor systems. Execution of a global framework agreement for the supplier BQT products to dormakaba International, a global leader in security access control systems. We also had continued focus on growing recurring revenue via long-term support contracts to the FFT installation base. At the end of FY 2022, 52 systems were covered under these agreements. The financial performance of the group remains strong. Profit after tax in FY 2022 was $33.1 million, underpinned by the gain on the disposal of the Services division, which was $31.9 million. The financial result demonstrates the value that Ava Group was able to unlock in the Services division while under its stewardship. Earnings before interest, tax, depreciation and amortization from continuing operations in FY 2022 was $0.8 million compared to $9.2 million in the previous year. The reduction is primarily due to nonrecurring licensing revenue from the Indian Ministry of Defense contract of $7.8 million, which was recognized during FY 2021. Ava's group cash position remained strong. The balance at 30 June 2022, was $15.2 million after the distribution of $38.8 million to shareholders. The company has no borrowings and is well placed to support its next phase of growth. Ava's group strategic direction remains consistent with that identified following the divestment of the Services division to grow its market-leading, fiber-sensing and access control technologies by increasing market share and developing new adjacent markets. Subsequent to 30 June, we have made 2 announcements which will accelerate progress against our strategy. On 1 August 2022, Ava Group announced the acquisition of leading U.K. security technology supplier, GJD Manufacturing. GJD is an award-winning security equipment developer and manufacturer, specializing in optical-based intrusion detection systems. The transaction unlocks strategic value for both FFT and BQT by providing a complementary product and technology portfolio while also providing access to an established go-to-market capability in the U.K. and Western Europe. On 4 October 2022, the company announced the appointment of Mal Maginnis as Chief Executive Officer, replacing Rob Broomfield, who will retire as CEO and Director. Mal will commence as CEO on 9 January 2023. Mal brings extensive experience as a leader of global technology businesses with more than 35 years of experience in the defense, security, safety and technology industries. He's exceptionally well regarded within the industry, and will be valuable in strengthening our partnerships, developing strategic alliances and expanding our international sales presence. I'm confident he's the right leader to drive the next growth phase of our business. I would like to take this opportunity to thank Rob Broomfield for his enormous contribution to Ava across several critical roles over a number of years. Most recently, Rob led a significant reshaping of Ava's technology business, FFT and BQT, and oversaw the acquisition of GJD. He has been central to expanding our international footprint and development of technologies across multiple platforms. He leaves the business in great shape. And on behalf of the Board and shareholders, I wish Rob well in his retirement. The Board is committed to having the right skills and expertise within the business to support our growth ambitions. Mal's appointment continues to grow the capability within the group. Jim Viscardi joined Ava Group in July 2021 and has recently been promoted to Group Executive Vice President, Global Security Sales, Marketing and Support. Neville Joyce commenced in November 2021 as Group Chief Financial Officer and Company Secretary. Both of these appointments have strengthened our sales, business development and commercial support within the group. And myself, I have witnessed their impact that it has had on the organization. Ava Group continues to develop new sensing capabilities to support applications in adjacent markets. Aura IQ was successfully integrated with fire detection fiber optic cable, an important milestone, which now enables the company to efficiently deploy its Condition Monitoring solution, which is particularly attractive to end users in the mining industry. Revenue from Condition Monitoring has already commenced in FY 2023. We continue to complement our revenue model with recurring revenue and other predictable revenue streams. We have invested in machine learning capability, an essential feature of future long-term customer support contracts. The global supply agreement with dormakaba provides BQT an opportunity to increase the volume of its smart locking solutions sold via a major global distributor. These initiatives have built a platform to enable Ava Group to build on its core project-based revenue with more predictable long-term revenue streams. Rob will discuss the company's great progress in growing the number of systems on long-term support contracts in FY 2022 is his address shortly. The Board is committed to conducting business in accordance with high governance standards. We continually review policies and procedures to ensure that they fulfill Ava Group's regulatory and compliance obligations. We also ensure that the group's technology development road map is consistent with our strategic direction and meets market expectations. Finally, I would like to thank you, our shareholders and associates, for your continued support and engagement with the Ava Group as we build a world-class sensing business. I also thank the management team for their hard work, dedication and achievements throughout FY 2022. I'm sure you'll share my optimism that Ava Group's strategy, people, performance and technology road map will drive future growth. I welcome the customers and staff from GJD to the Ava Group, and I look forward to their contribution to the ongoing success of the company. I will now ask Rob Broomfield to address the meeting.

Thank you, David, and good morning. I'm pleased to update on the -- David's presentation and provide you with an update on our activities during FY '22 and areas of strategic focus before sharing an outlook for the first half of FY '23. Firstly, I'd like to recap on what we do and how we've been building our growth platforms. As you all know, Ava protects high-value assets and critical infrastructure. The group has technologies that apply to entry and access points on buildings, advanced sensing technology that protects the perimeter of infrastructure and long linear buried infrastructure, such as data cables, power cables and pipelines. Ava solutions include the advanced fiber optic-based centers developed and manufactured by Future Fiber Technologies, or FFT, in Melbourne, and generating 90% of its revenues from outside Australia. We recently acquired GJD Manufacturing who are based in the U.K. And GJD develop and manufacture optical sensors and illuminators with its sales primarily into the U.K. and Europe. Our smart locking and access controls business BQT offers world-leading locking and access reader solutions. And based in New Zealand, BQT readers are especially well known in Australia, and their locks are distributed primarily into ANZ, the U.K. and Europe. We currently protect a range of critical infrastructure, such as large-scale manufacturing, mining, energy generation and transmission, transport, including airports, ports and rail, and of course, government and military. In addition to the advanced technologies that we've developed, the group has evolved specific go-to-market models for each of these technologies, including models that will provide a strong recurring revenue base for the future. The Ava Group is truly global. And on this slide, you can see a few examples of the global industries and applications that Ava has deployed in recent years. Most of the group sensors are for outdoor applications and have been successfully deployed in very challenging sites everywhere from Alaska through the Middle East, in the tropics of Asia and South America, and essentially nowhere on the globe that Ava technologies cannot be successfully applied. Our solutions are deployed in more than 70 countries with thousands of fiber-sensing systems and thousands of access control products on sites. Our track record at the operating level is very strong. The Ava Group has strong margins. We have strong cash generation. We have an exceptional customer base. We have deep domain expertise and intellectual property, including artificial intelligence and deep learning. And we have the ability to leverage past investments in our IP to move into new markets, along with the appropriate go-to-market strategies. We also have a global footprint and no constraints really on the practical size of the markets and applications that we go into and all along with a proven management team, which was strengthened in FY '22, as David explained, and will be further strengthened in FY '23. So where are we heading? Ava Group and our technology companies have been actively providing solutions for everything you see on this infographic and more. We're taking further steps to move beyond security-specific applications, building on early successful deployments in rail, power cables, pipelines and conveyors. In these deployments, we've demonstrated how we can use existing fiber optic infrastructure installed for communication and convert this into an extremely sensitive intelligent sensor, providing advanced situational awareness that is both accurate and actionable and can be extended to provide predictive capabilities. We're also building on the company's deep domain expertise from thousands of real world deployments globally and our ongoing research and development into artificial intelligence and deep learning. At last year's general meeting, I spoke about the early success the company had in the international power market and the significant opportunity to leverage future investments in major new power cable corridors in Europe and North America. And I'm really pleased that through this program of work, we've secured our new head of Global Condition Monitoring Solutions, Pietro Corsaro, who will start his new role with Ava next month. Pietro brings more than 25 years of deep global expertise in the high-voltage cable industry and Condition Monitoring technologies. In addition, he has a number of years direct experience of FFT's Aura platform being applied to Condition Monitoring applications. Pietro is currently Vice President and CEO of NKT Photonics, which he joined in early 2019. And previously, he was CTO of Brugg Kabel in Europe, and also has held numerous technical and commercial positions with Pirelli Cables now known as Prysmian, where much of his work focused on developing and promoting Condition Monitoring Solutions. Pietro holds a master's degree in nuclear engineering, PhD in Energetics, both from the Polytechnic of Turin, Italy and is currently based in Germany. From the work we have undertaken over the past years to develop our solutions, we've established a platform for ongoing scalable and profitable growth. We'll leverage our existing capabilities for growth, especially increasing high-visibility revenue streams from OEM and distribution and high-margin recurring revenue from multiyear support agreements and licensing, which will complement our project-based product sales. We believe this platform can provide revenue growth to $70 million to $100 million in the coming years while maintaining our gross margin. And revenue growth of more than 200% to 300% can be supported with incremental investment in the operating expense of around 50% to 70%, which highlights the significant EBITDA leverage within this business. So larger industry trends and how is Ava addressing and leveraging these industry trends. Across the globe, industry and government investment in securing critical infrastructure is growing and will continue to grow, as highlighted again by recent incidents in Europe. Meanwhile, expanding global connectivity creates growing risk for companies which must be managed and provides the opportunity for Ava technologies to mitigate these risks, but it also provides a platform for Ava to grow recurring revenue services that we can deliver through this expanding connectivity. Our solutions are growing to meet the demands for greater situational awareness, including increased predictive capabilities from ever-increasing sensing and artificial intelligence capabilities. We've established already the platforms, the solutions and the proven go-to-market strategies to leverage these long-term trends for both existing and new applications and customers globally. At last year's AGM, I discussed the growth initiatives underway and expected results in FY '22, and I'll provide an update on our progress. Firstly, we received our first order for our conveyor monitoring solution, Aura IQ, in Q1 of FY '23, which was later than expected. And after a successful mining trial during FY '21 and purchasing approval was underway, a global -- this global mining company asked FFT to integrate and validate Aura IQ using the same cable we are planning to use and deploy for their fire detection systems. We successfully completed the approvals earlier this year, and we're very confident of further orders into FY '23 from all our previous proof-of-value trials. Our targeted investments into the U.S. security market successfully achieved sales growth in the U.S. in FY '22. And we've continued this recently with further investments. We also signed another licensing agreement for Brazil, and we'll expand this into other Latin American countries. Although we're not expecting large revenues from each licensing program in year 1, they are expected to grow each year as our partner invests in their ongoing business development. During the year, good progress was made growing our long-term support agreements and associated recurring revenue. It's important to note that the growth of 50 to 50 systems, 5 to 50 systems was achieved without any dedicated sales resources or the fully formed product we've recently released. We signed our global dormakaba contract, and we've supplied initial stocking orders. And although the formal release of this program into the EU countries within FY '22 did not occur as planned, we remain very focused on completing this in the current quarter in order to start growing material revenue from this significant agreement. So building on the progress achieved in FY '22 and continued into early FY '23, we have clear plans to drive ongoing growth and profitability. Our existing installed base will develop -- will be developed for the expanded technology and solutions. We're further developing and extending partnerships with partners such as Mining3 and Universities to create innovative solutions for our target markets. We have targeted go-to-market models for specific regions where the classic go-to-market approach is not suitable, such as licensing in Latin America. We'll deliver growth from OEM contracts with global distributors such as dormakaba, and Bosch with GJD. And building on the recurring revenue we've been developing from the existing FFT installed base and which we expanded during the financial year '22, we will add recurring revenue streams to new installations as we integrate our cybersecurity program and world-class deep learning artificial intelligence into our product offering in this area. This will create a compelling value proposition for our customers because it creates higher performance and higher security each year of their program. This morning we released a trading update for the first quarter to the ASX, and we're pleased to continue to grow our sales order intake. Total orders received in Q1 were $7.8 million, which represents a 55% growth in Q1 in FY '22, including GJD, and 28% growth, excluding GJD. As I noted earlier, Q1 sales included our first commercial order for our conveyor monitoring application. We've provided revenue guidance for the first half in the range of $13 million to $15 million. We have not provided revenue guidance for the full year due to uncertainty on the timing of product orders. However, we are very clear on our expectation that second half revenues will grow in the first half due to a number of catalysts, including the 6 months contribution from GJD compared to 5 months during the first half, growth in OEM and distribution channel revenues, and growth in Condition Monitoring orders based on the successful proof-of-value trials and our opportunity pipeline. The Ava Group's strategic objectives are both clear and achievable. We'll grow security sales, particularly in the U.S. with our increased sales capacity, and in the U.K. and Europe with our increased regional capabilities. We are growing margins and recurring revenue from both current and new product installed base while leveraging our artificial intelligence and cyber capabilities. We're expanding on top of our strong security position into Condition Monitoring applications with our existing platforms. And we'll use our financial strength to further invest in our growth capabilities. So to reflect again on the Ava Group. We have strong IP, large addressable markets where we have a very healthy and strong margins. We have strong cash generation. We have a proven team, and we have a well-defined execution plan to grow our market share, generate recurring revenues and deliver profits. We have further strengthened the management team in the coming months with our new Head of Ava Condition Monitoring Solutions, Pietro Corsaro, and our new Ava Group CEO, Mal Maginnis. And you'll know from the recent announcement that Mal's exceptional global experience and success in growing security technology and services will add significant capabilities to Ava. As this will be my last AGM address, I'd like to sincerely thank our supportive shareholders, directors and the hardworking teams within the Ava Group, for what they've achieved so far and what they're doing to create a strong future for the group. I'm really excited that Mal will be joining to lead Ava in January, and I look forward to remaining a committed and supportive Ava shareholder well into the future. I'll now hand back to David to continue the meeting. Thanks, David.

Thanks, Rob. You're really smashing it on the way out. Now on some really exciting things going on within the group, and thanks again for all of your dedication and hard work. Kim, have we received any questions in relation to the Chairman or CEO address?

We have. We've got a couple of questions. The first one from CTHD Investments who queries the company's 3-year growth ambition, and asks that the company please elaborate on the plan. Will we see most of the revenue step up in FY '24/FY '25? And how much of the $10 million to $12 million operational expenses step up does the company plan to implement between FY '23, '24 and '25? And what will drive that decision?

Okay. Yes. Thanks for that. And I think our gross margins across our business are quite well known, and our cost base is also quite well known. And what we've developed here is a platform for an exceptionally scalable business model. We don't require a lot of additional OpEx or CapEx to really significantly expand our revenues in terms of our 3-year growth plan. But in direct answer to the question, it will be a linear approach. So you can expect a certain amount of growth in this year. Rob's given our half year guidance, and we've certainly given guidance that the second half will be bigger than the first half. And you could expect that growth to continue in FY '24 and FY '25 and beyond, really, to probably a similar level. There are some strategic drivers that might accelerate that, but it's probably a little bit too early to pick whether or not they'll fall in 1 financial year or another. And you could expect, from a cost perspective, that the cost will also go up as revenue increases. We won't be looking to put on a lot of additional costs prior to the revenue increasing. We will increase the costs once the revenue has increased. Hopefully, that answers your question. Rob, did you want to add anything to that?

No, I would agree. It's been pretty linear on both rather than a step at this stage. Obviously, if opportunities come up where a step investment will give a step return in terms of that growth, management will do it. But we're looking at a more linear approach at the moment.

Yes. And as we continue to execute our strategy, and you heard Rob talk about the great success we've had in building recurring revenues over the last 12 months and we really see that continuing, that mix of revenue and the margin that, that delivers will become more apparent, and we'll obviously keep shareholders well updated on that progress against that plan.

We'll now proceed with the consideration of the financial and other reports followed by the formal resolutions. And as is customary, there will be time for shareholders to ask questions. So please bear with me while we get to the formalities of the meeting, the more boring stuff. We will now proceed with a discussion on the proposed resolutions, including questions from shareholders about each resolution. The notice of meeting dated 20 September 2022, was dispatched to all shareholders. I propose that, with your agreement, the notice of meeting be taken as read. Shareholders who wish to inspect Ava Risk Group's register may contact our share registry, Boardroom Proprietary Limited. As I propose each resolution, the screen will reflect the total number of valid proxies for that item and the manner in which they have been directed. These figures will be as at the closing time of receipt of proxies, which was 11 a.m. on 25 October 2022. These figures may be varied if a shareholder who submitted a proxy is attending the meeting and has revoked their proxy. We'll now proceed with the general meeting -- the general business of the meeting. I'll now also open voting on all resolutions. Financial statements and reports. Item 1 of the agenda deals with the receipt and consideration of the financial report, the directors' report and the auditor's report for the year ended 30 June 2022. No shareholder vote is required in relation to this item of business. However, shareholders now have the opportunity to ask questions or have a discussion on these matters. Ava Risk Group's financial report, directors' report and auditor's report for the year ending 30 June 2022 are incorporated in the 2022 annual report, which has been sent to all shareholders who have requested the report. I would encourage any shareholder who has a question on these reports to raise them now. There is also the appropriate time to raise any questions you may have of the auditor, which are relevant to the conduct of the audit and the preparation and context of the audit report. Kim, have we received any questions in respect to this item of business?

No, we have not, David.

Thank you. Are there any oral questions from shareholders on this item of business?

No, there are none.

Okay. Given there's no questions, I'll move on to consider the formal motions of the meeting. Resolution 1, the remuneration report. I refer you to resolution 1 of the notice of meeting in respect of the approval of the remuneration report of the company. This is a nonbinding resolution. The company's remuneration report is contained in the 2022 annual report and is available on Ava Risk Group's website. The screen shows proxies received for and against this resolution. And at the proxy's discretion, including me as Chairman to vote in accordance with my stated voting intention in favor of the resolution. I'd highlight that in accordance with the Corporations Act, no vote may be cast on this resolution by or behalf a member of the company's key management personnel or their closely related parties. I'll refer to these people collectively from now on as prohibited voters. A prohibited voter may vote directed proxies where they do so for another person who is not themselves a prohibitive voter. As Chairman, I may also vote undirected proxies for a person that is not a prohibited voter in accordance with my stated voting intention to vote all available proxies in favor of this resolution. For the purposes of this resolution, I prepared that a voter includes a member of the key management personnel named in the remuneration report. Before opening this to discussion, I would like to mention that in the interest of corporate governance, the Ava Risk Group Board have abstained from making a recommendation in relation to this resolution. Kim, have we received any written questions in respect to this item of business?

No, David, and there are no more questions.

Thanks, Kim. As there is no further discussion, I propose the resolution that the company adopt the remuneration report for the year ended 30 June 2022 in accordance with Section 250R(2) of the Corporations Act. Please submit your votes in respect of this resolution. [Voting]

Okay. We now move on to Resolution 2, reelection of Mr. Mark Stevens. I refer you to Resolution 2 of the notice of meeting in respect of the reelection of Mr. Mark Stevens as a Director of the company. Mr. Stevens retires in accordance with Rule 19.3 of the company's constitution and Listing Rule 14.5. Mr. Steven's biography is included within the explanatory memorandum accompanying the notice of the meeting. The screen shows proxies received for and against this resolution. And at the proxy's discretion, including the Chairman, to vote in favor of the resolution. The Ava Risk Group Board, with Mr. Stevens abstaining, unanimously recommends that you vote in favor of this resolution to approve the election of Mr. Stevens as a Director of the company. Kim, have we received any written questions in respect to this item of business?

No, David, we have not. No verbal questions either.

Thank you. All right. I will now propose the resolution that Mark Stevens, who is retiring in accordance with Clause 19.3 of the constitution and Listing Rule 14.5 and who offers himself for reelection, is reelected as a Director of the company. Please submit your votes in respect of this resolution. [Voting]

Resolution 3, ratification of prior issue of 11,807,894 shares. I refer you to resolution 3 of the notice of meeting in respect to the ratification of prior issue of 11,807,894 shares. The terms and details of the allotment of these shares are contained within the explanatory memorandum accompanying the notice of meeting. The screen shows proxies received for and against this resolution, and the proxy's discretion, including how -- including to the Chairman to vote in favor of the resolution. The Ava Risk Group Board unanimously recommends that you vote in favor of this resolution. Kim, have we received any written or verbal questions?

No written or verbal question, David.

Thank you, Kim. I'll now propose the resolution that for the purposes of Listing Rule 7.4 and for all other purposes, approval is given for the ratification of the prior issue of 11,807,894 fully paid ordinary shares, which were issued pursuant to the sale and purchase agreement between the company and the shareholders of MTD Holdings Limited, as announced to the ASX on 1 August 2022, and on the terms and conditions set out in the explanatory memorandum. Please submit your votes in respect of this resolution. [Voting]

Resolution 4, approval of 10% placement facility. I refer you to Resolution 4 of the notice of meeting in respect of the approval of the 10% placement facility. The terms and details of the allotment of these shares are contained within the explanatory memorandum accompanying the notice of meeting. The screen shows proxies received for and against this resolution. And at the proxy's discretion, including the Chairman to vote in favor of this resolution. The Ava Risk Group Board unanimously recommends that you vote in favor of this resolution. Kim, have we received any written or verbal questions?