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

Good morning, everyone, and welcome to the Ava Risk Group FY '23 Results Webinar. [Operator Instructions] The call is being recorded. I will now turn the webinar over to David Cronin, the Chair of Ava Risk Group.

Good morning, everyone. Thank you for joining us to hear about the FY '23 results for Ava and probably as importantly, to hear about the outlook for the coming financial year and beyond. On the call today are Mal Maginnis, our Group CEO. Mal has been with us now for 8 months, and he's made a fantastic impact on our organization. You'll hear a lot from Mal today not only about the result but also about the plans that he has put in place to grow the company over the coming years. Neville Joyce is also on the call, our Group CFO and Company Secretary; Jim Viscardi and Rob Wilson, who you can see there, our depth of our senior management team, not on the call today. But as you can see, one is based in the United States and one in the United Kingdom, which gives us great global reach in our executive management team to really harness the global opportunity that we have. Corporate snapshot, no great surprises here. Market cap of $52.4 million, 56.4% in the top 20. We have a diverse yet extremely loyal and supportive group of top 20 shareholders, which we're very pleased to have around. And as most of you will know, more than $46 million has been distributed to shareholders via both special dividends and capital returns since 2020, something that the Board and management team are quite proud of and something that we'd like to reward shareholders with in the future. Today, you'll hear about the FY '23 performance, very solid performance. Great to see from the Board's perspective that, that key KPI of sales order intake is growing and growing in the second half and in the fourth quarter quite consistently, which is resulting in a very healthy growth in revenue. The guys will also take you through the FY '23 financials and very importantly, the strategy and outlook. I'll now hand over to Mal Maginnis. We look forward to taking questions from you at the end of this presentation. Thank you.

Thank you, David, and good morning, everyone. It's lovely to be talking to you for my second results webinar. So if I just want to take you back a little bit to reemphasize the new structure in the business because you're going to hear that through most of the presentation. So I just want to remind everyone, I restructured the business into 3 market functioning businesses rather than the stand-alone companies. So the first one being Detect, which is the fiber optic sensing business, primarily looking at protecting long linear objects and it's a core program business. So a little bit longer in its cycle -- its sales cycle, but it's the major business that we have. The second business is Access. It's high security access control technology, primarily locks and readers, a world leader, outstanding business for us. And the business we acquired last August, the Illuminate business, primarily security and intruder detection equipment, outdoor security sensors, off-the-shelf products. Both Access and Illuminate, primarily distribution businesses, so faster sales cycle and a really good support into Detect. So I'll go now to some operational highlights. Not surprisingly, I'm first as an operational highlight. But more importantly was the fact that we have completely restructured the commercial side of the business in a 5-month period. That has been an enormous effort for the business. I think everyone on the call will understand how tough the employment market is at the moment. I'm delighted to say with the support of Neville and Jim Viscardi, we've been able to achieve that in 5 months, which is a great result. We saw good growth in both Detect and Illuminate segments, which I'm very happy with. I've also been focused on launching products to support the business. So the launch of Aura Ai-X, which is our deep learning AI product for Detect, has been very successful. And as we announced in April, we had our first large sale into that into critical European border. We've seen really good geographical growth, 81% growth in the United States. This was really important to us because it is a core market. And of course, we've seen a lot of growth in Europe, that, of course, is linked primarily to the Illuminate acquisition, but that gives us a really good base in the U.K., Europe to grow the business. So that's where our group CTO is now based. And that gives us a leverage now into that market space, which was a bit under sold before. So the creation of the Illuminate business is also important. It's the second distribution business, but it also has an opportunity to grow with the main Detect program business in integrated platforms. And I'm also delighted to show and announce that our Access Group has launched new products and successfully certified them, and I'll talk about that a little bit more in a moment. So let's go some -- now get into some of the numbers before Neville does. So if we look at first growth in sales order, $30.9 million. That is up 71% year-on-year, and that's an excellent result. 36% if the acquisition of GJD is excluded. The Detect order intake, the program business, is $20.7 million, up 55%. That is really important because it builds the strength of backlog, which is fundamental to us being able to achieve growth. The Illuminate order intake of $6.3 million was in line with expectations, and the Access order intake of $3.9 million was again in line. So no surprise, the sales order intake should return to revenue, which it has successfully done. Revenue of $28.6 million, up 54% on prior year, and as I said, consistent with the growth in the sales order intake. Underlying EBITDA was $2 million, up 150%, but that excludes the one-off costs of about $0.7 million during FY '23 second half, and we'll talk a little bit more about that later. We were able to maintain the gross margin at 64%, and that was underpinned by an excellent effort by Detect in its supply chain and logistics management in a very, very complex environment with supply chain, the team did a fabulous job of maintaining and supporting margins with careful supply chain and operational management. And we have, as we said in February, a focus on growing the recurring revenue, we were able to add an additional $400,000 this year, bringing us $1.6 million. And that's a really important growth factor for the business, and I'll address that a little bit more in the growth outlook. And I will hand over now for the difficult part of the presentation, the financial numbers, to Neville. Neville?

Thanks, Mal, bringing endorsement. Good morning, everyone. Look I'll run through a few slides which talk a little bit more detail to the results and elaborate a little bit on what Mal has touched on. So yes, the results for the year just ended, significant revenue growth, really driven by the 2 drivers that Mal alluded to, the 55% increase in order intake in Detect has driven additional revenue in that segment, and the acquisition of the Illuminate segment has also sort of added to that growth. Pleasingly, gross margin has been maintained. Again, particularly strong performance in Detect. The Illuminate business is a distribution business and is inherently lower margin. Its gross margins are around about 48%. So the addition of a lower margin revenue stream and still being able to maintain our gross margins at a consolidated level is a pleasing outcome. Look the underlying EBITDA of $2 million is effectively returning EBITDA margin of 7%, right? That's virtually double what we did last year, right? And that really reflects the ability to scale our cost base as we put more revenue through the top line. And Mal will talk about that a little bit more when we talk about outlook for the next 2 to 3 years. Just so it's very clear, the difference between the underlying EBITDA and the reported EBITDA is a removal of around about $700 million of operating costs associated with one-off costs occurred during the second half year. That primarily relates to termination costs and some employee costs that were associated with the realignment of the business that Mal spoke about at the beginning of his presentation. The profit after tax or -- loss after tax of $1.1 million is $400,000 higher than the previous year and really reflects some additional depreciation and financing charges associated with the acquisition of GJD. Look, I'll let you touch briefly on the segment piece because Mal largely spoken to this, but you can see clearly in terms of the profile of the uplift in the Detect business, the addition of the Illuminate business in FY '23. And Access business had a reasonably solid year, but significantly made a lot of progress in terms of getting product certifications in place for our key distribution channels, which leaves us really well placed to see an acceleration of revenue through that segment in FY '24. Yes, geographically, we have a really strong global footprint operating in sort of the key geographies that are outlined there. With the addition of the Illuminate segment, that's obviously expanded our footprint in U.K. and Western Europe, and that was one of the key attractions of that business from an acquisition point of view. Look, we continue to still see significant growth in the U.S. And as a reminder, it is the biggest market in the world. But we have significant opportunity to continue to see much further expansion in the U.S. market. And from a segment level, yes, the segment still skews -- the revenue profile still skews towards the Detect segment and really is reflected in the fact that during the past year, we've been able to get significant growth in the Detect segment, which has driven the revenue growth from a group point of view. Here's the balance sheet. And effectively in this presentation, I tried to strip out the acquisition of GJD to get to sort of what the underlying movement in our balance sheet has been year-on-year. A couple of key points to make here. At the end of the year, we carried a higher receivables balance, and that really just reflects the timing of some certain jobs in the Detect segment. You will have seen back in March, we announced that we won a significant contract to secure a European border. We largely fulfilled that job through May -- April, May and June, and a chunk of that is still -- was outstanding at 30 June and is being progressively collected as commissioning milestones are being delivered. Also a buildup in an increase in inventory. Look, that increase in inventory has been quite deliberate. Part of the reason why we're able to maintain our margins in the Detect segment, in particular, is because we did buy critical componentry and long lead items to both secure the supply but also lock in prices. And we have seen the benefit of that manifest itself in being able to hold and grow our margins in the Detect business. The last thing to point out in the current year is we now have some borrowings associated with the Illuminate section -- segment, which came out of the acquisition of GJD and effectively some debt facilities that they had in place, and we continue to use as we move forward. Group cash flow. Look, the key things to point out here is a significant investment in the past year that the organization has made both in terms of the acquisition of GJD, but also the ongoing development of our technology. So a significant portion of that $2.4 million in development and capital expenditures is embedded in the Aura platform. Part of that is Ai-X that, as Mal mentioned, was launched in the second half of the year and it's a significant milestone in terms of being able to have leading products in the market. The other sort of key investment is around working capital. And as I mentioned, when we look at the balance sheet, that really is driven by carrying higher inventories to support the growth that we saw through the second half year but also into the future and ensure that we've got our critical component secured and at pricing in that business to maintain those margins. So with that, I'll pass back to Mal and he can talk through FY '24 and beyond.

Thanks, Neville. In February, we talked to you all about our plan for growth, which obviously, I've only been here some 5 weeks. So what I wanted to do here was to give you confidence that, that plan to grow is fundamentally sound and more detail in that plan. Now the plan to grow for the next 3 years is underpinned by the financial year '23 results. If we hadn't achieved the growth in the second half, then I wouldn't be as confident about the next 3 years. However, that excellent sales order growth and the revenue growth has given me confidence of being able to plan for the growth over the next 3 years. And you see there that our range that we're saying is in the next year, 36 to 45, growing to 50 to 70 and the 70 to 100. The core leverages for these are the OEM and distribution channels for Access and Illuminate. The distribution business is a good, stable underpinning business and in geography and programs in Detect. If we're going to grow the business, we need to win more of the large programs and deliver those and execute effectively. There will be some additional operating costs. That will be fundamentally in the areas of service programs, applications and continued work on AI and deep learning models to fit to the application. But I think that is well within our capability to manage. Also, I'm targeting to get a recurring and OEM distribution revenue grow to around 60% of the group revenue base. This will assist in smoothing out the natural program lumpiness that you get out of large program business. So let me look now at the growth catalysts that underpin that 3-year plan. So if we look at Detect, the critical one is Aura Ai-X. That is the solution of choice for customers. It provides excellent low alarm rates. It also provides us with an application flexibility to use it in other areas, where in the past, the alarm rates or the just performance may not have been good enough. But the deep learning model gives us the ability now to expand into those. The second one is Access. Tremendous effort this year by the team to launch the new Cobalt 2 lock. We are basically certified. We have a couple of things I've asked the team to do in August and September, just to fully round out that product. And the major part there is we've completed our work with dormakaba a major channel network partner. And the success with that is we're now fully inside their system and their approach at which we needed to do, and that's showing already good results. We've had our first sales after the end of financial year in both Canada and the U.S. through that platform and channel approach. And Illuminate, one of the issues here, although it's a distribution business, it has some really good linkage into the Detect business. And so cross-selling a combined Illuminate into Detect business will give us a growth catalyst. And because the markets are relatively similar in North America and Asia Pacific to U.K., our intention is to expand first into those 2 markets because we have the in-place commercial group with Access already who can do that. So let's now go to the 3 critical drivers for growth. And I'll start at technology. I was delighted to appoint Dr. Rod Wilson, my CTO, during this year, the second half. Rod has an outstanding background in product and technology development and particularly in integrating complex platforms together. So in Detect, the whole technology is focused on the deep learning and performance in various applications. In Access, it's the new Cobalt 2 and YG80 Orca and particularly focused on the linkage with our main channel partners. And as I said, I'm delighted that we've achieved the first major sales in dormakaba and particularly in the United States and Canada. These are new geographies for this product line and extremely pleasing result. In Illuminate, we're going to launch the LoRa long-range wireless solution, particularly integrating to D-Tect laser with our Detect fiber solution, combining the 2 of them in long linear assets. That will be launched in around September. And the final part of the technology is what Rod is doing is looking at our entire platform and making them integrated together and able to work together. That's very important for us to be able to exercise part of this growth. Now the second part we've talked about before is geography. Small businesses generally struggle with geography. David mentioned right at the start, I've consciously ensured that a senior manager is located in each region. So Jim Viscardi located in the Americas. Rod Wilson, the CTO, located in Britain. myself based in Singapore; Neville based in Melbourne; and Matthew Nye Hingston based in Auckland, New Zealand. So that gives us senior management spread across the globe, able to immediately support the commercial group and customers in their time zone and in their culture. In Americas, we've seen some really good growth in the correction side of the business and continued growth in energy. Middle East and North Africa, it won't be a surprise to all of you that there is huge infrastructure growth going on in those sectors, and we found some very good opportunities in border protection and critical infrastructure. In Europe, sub-Saharan Africa, in that area, because we now have a base in the U.K. with senior managers and an operational platform and a new sales and marketing group, we'll be able to expand our sales into Europe, which I think has been an underdone market for us in the past. And in Asia Pacific, I've been delighted with the market expansion in all areas with growth in Australia, India and Singapore going forward. We've also been successful in our first sales for a major partner in South Korea, and we also have growth opportunities in New Zealand. So our geographic reach for a small company is significant, and it's really underpinned by the skill level of the team that is based in each region. Now the third critical part of driving for growth is the commercial capability. If you have technology and you have geography, but you have a weak commercial team, you won't be able to achieve our growth. I'm delighted with the changes that have occurred in the commercial team. We've restructured the core team across all the regions, successful recruitment of key resources, as I said before, in a challenging recruitment market. We focused on customer network in each region. And one of the delightful things is the new team are bringing their own clients and commercial networks from their general security or technology background. I've also focused on upskilling our applications and programs group. As we grow the business, we need to be able to support the customers and the commercial team with these more complex sales, and that's specifically what applications achieves. I also need to put better resources into programs. There's no point of selling the large efforts if we can't actually execute and complete. So that's a core part of this expanded capability. And the final one is service. We've invested a lot in staff training and regional support, again, focused on the customer, more than double the service group and integrating all of the businesses into one service group. That's going to underpin the recurring revenue part of the business. So that summarizes down to a very simple set of messages. The driving for growth comes from customer outcomes, which FY '23 has proven, and I'm delighted with the way that is working with the commercial team. Delivering revenues is based on winning a sales order and converting it to a closed deal and delivering the revenue. And expanding our technology reach, we have a great foundational technology, but we can do more now with integrating the technologies and with the leadership of the new CTO. So in closing, it's a compelling case for investment. We have a track record of growth and results. FY '23 sales order up 71%, underpins that. High gross margins, even with the acquisition of a business with a slightly lower margin with good management, well done by the operations and supply chain group we've been able to maintain those gross margins. And we have trusted partners in the blue chip and government environment. I believe we had a very strong competitive advantage. All 3 of our technology platforms are market leaders and we compete extremely successfully against the rest of the market. And that's because we have this customer-centric focus. The last 6 months has shown what we can achieve with the revitalized team and the focus on the customer. I'm pleased to tell you that it is a highly scalable model. Fundamentally, our operations teams in the 3 countries of U.K., Australia and New Zealand are able to expand their production to support sales with minimal overhead growth. We will, of course, as I said, have to put some investment into the areas of service, program and application and in some of the technical areas. But the rest of the model is absolutely scalable. And global opportunity, as I said before, for a small company to work effectively globally gives us tremendous opportunities to hit the growth numbers and it's a core part of our compelling case for investment. So with that, I think that's enough for you to hear from me. I'm going to hand back to Alexandra and we'd be delighted to take any questions from people, and thank you for listening.

Thank you, Mal. As a reminder, this presentation is being recorded and will be made available on the website later on. [Operator Instructions] The first question is whether you are comfortable that margins are holding up and on Ava's pricing power and the inflationary environment? And on the flip side, in a depressed economic environment, why do you expect demand for Ava's product mix to hold up?

Thank you. The critical issues on that, yes, I believe we can hold up the margins in the market even with the inflationary pressures. Two ways we address that. One is to continue driving our cost base with the supply chain and operations, which, as I said, is highly scalable. And the second part of that is by introducing new products, you're able to adjust your pricing position to hold up the margin, and that's exactly what we're doing. On the second part of the question, I believe that we will be able to continue to grow even in a depressed market because of the sheer scale of the addressable market, it's a very large market across the globe. And in my view, we are currently only addressing a relatively small part. Aura Ai-X gives us an opportunity to grow the application base, which is fairly exciting. David, did you want to add anything to that?

No, I think that's spot on, Mal. And I think the point of global critical infrastructure is quite a healthy sector to be in. There still is a significant upgrading and new construction in global critical infrastructure and certainly, the hardening of security is a theme that will continue for many, many years, if not all years into the future. So we're well positioned to harness that with the team that's in the hot seat at the moment.

Thanks, both. What is the key metric for your team, which shows the underlying success of the business segments, i.e., is it installations of our Aura AI per month, is it revenue growth per quarter or instead something related to profitability? And finally, when do you plan to be profitable?

The key focus of the team is on the growth of revenue and EBITDA. It's as straightforward as that. And that's underpinned by the group of products, but more importantly, by the efforts of the commercial team in each of the regions. And they're straight incentivized on that growth, and we monitor that as a management team every month.

The next question is, how is the recurring revenue line growing? Noting previously, there was the ambition to achieve in time, $5 million of annual maintenance support revenue from just 10% of the 2,500 installation system base, and the Aura IQ Conveyor Belt system was expected to add to recurring revenue?

Thank you for that. Yes, the critical issue is the deployment of large programs with Aura AI. Aura Ai-X has in-built requirements for both installation, deep learning model review and support. And in all of the opportunities that we've worked with, including the ones we've closed, there is a recurring revenue path. That, of course, takes a little bit of time because we've got to actually complete the sale into large program business and then install and accept and then convert into warranty and service. But we've seen a very strong growth in the second half and that will continue.

Alexa, I think we skipped over the question around profitability. So I might just point shareholders to Slide 18, the clear path to deliver growth, and you'll see the revenue range, the gross profit margins and then the OpEx range there will deliver profitability in the current year that we're in. And if you look at the margins that we achieved last year and the growth in bookings, you can kind of back solve to see that we're on that path to profitability quite meaningfully.

Thanks, David. Perhaps following on from that, we've had a question on EBITDA margins and whether for FY '24, it's realistic to expect 14% EBITDA margins for that period?

I'm happy to answer that.

Thanks, Neville.

Yes. So look, if we -- again, the slide that David referenced, at revenue between $36 million to $45 million, we should be seeing EBITDA margins solidly in double digits and certainly around that 14%, 15%. In the year just gone, we're seeing EBITDA margin for the underlying business move from 4% to 7%. And as I said, if we can maintain the gross margin at 60% to 65% on all the incremental revenue that we bring in those targets, while minimizing additions to the operating cost base, that leveragability will significantly drive EBITDA margins upwards.

And if I could just add to Neville's point on that, the 2 distribution businesses were flat this year in their EBITDA approach. But the core effort that we put in was to underpin the foundational technology, and we have seen already in July and August, a solid result with both of those businesses. So I'm looking forward to a good year with them. And as Neville said, as we grow the revenue across the business, we'll grow the EBITDA.

Has the company made progress in winning further high-margin licensing sales agreements after the Indian Department -- Ministry of Defense, large contract and some of the other Latin American licensing agreements?

Yes. My focus has been on large programs with the team. There aren't a lot of those style of license agreements across the world, but there are a lot of other really high-end large programs. So the focus is on large programs, but I am not chasing one-off approaches. It's a comprehensive effort in the sales side to the large programs working with Detect and Illuminate and delivering those. And there are some very good opportunities, as I said, in infrastructure across the globe.

Just on the Detect business, how many systems are under an annual support program? And has there been any change to this in the last 3 months?

Yes. So I'm happy to answer that.

Thanks, Neville. Go for it.

Previously, I think we reported that we had 52 systems under those arrangements. That number is now in the mid-60s, right? So a couple of comments I'll make on that. The 52 that we have -- that we had previously, yes, they were a range of different agreements. The basic math that we had put out is that we should be attracting about $20,000 per annum per system. Those previous -- or the previous 52 range from that value to something quite lower based on the historical services that were being sold. What's really important in what we've seen over the last 3 to 6 months with the launch of Ai-X is that embedded in with that Ai-X product is an upgrade path for customers and they sign on as we have seen to anywhere between a 3- and 5-year support agreement. We are clearly -- the customers are clearly seeing the value and they are more than happy to pay around that $20,000 mark per system per annum for anything that is going under a long-term service agreement.

The Access segment was originally expected to grow in FY '23. Understanding that it took time for accreditation to be achieved, but further from that, is there any other possible delays for FY '24 growth?

Yes, thank you. That's a really good question. When we launched a new product, Cobalt 2 in March, we were comfortable that we would be able to get certification reasonably quickly. We did underestimate the challenges that the laboratories are facing at the moment. Post-COVID, there's an enormous backlog of products waiting for certification. There's also been some changes to the certification rules. For example, the U.K. moving out of CE and moving to its own AC format. These were challenges that we were not able to predict. I'm pleased to say that we are fundamentally through all of them. We have a couple of minor ones to do in September, and those ones don't prevent us selling. And as I've said, we've actually achieved our first major sales with our channel partner in America and Canada. So I see Access coming into a very good growth opportunity in this year. And so I don't see any further limitations caused by the certification or launches.

In the next 3 years, do you expect to pay dividends?

Yes. So Ava has a stated dividend policy. And obviously, as we move into consistent profitability and as our profitability margins increase, there's no doubt that we will be paying dividends over the next 3 years.

Thanks, David. The next question is on the valuation of the company. Do you think the market is appropriately valuing the group? And is there anything that you think the market might be missing in that?

Okay. Well, I mean, the market is the market, right? So we always have to take the value of the shares because we have to assume that it's a willing buyer and willing seller that sets the price of that. But that said, from a valuation perspective, many people have pointed out that the company is undervalued. And we just hope that with these consistent growth in revenue and improvement in profitability and a very clear plan, a world-class team to execute on that clear plan that as we educate people on what we do and what we are doing that will also result in a re-rating of the stock from an ASX market point of view to obviously better reflect the opportunity that this company has in front of it.

Thanks, David. There are no further questions. I'll now hand back to Mal for closing remarks.

Thank you, Alexandra. Everyone, again, thank you for listening today. It's a very exciting time for us. We have shown the growth that we're able to do even while doing a transformation exercise in the business. And I'm particularly excited about going into FY '24. I'm seeing some great work from the commercial group, excellent technology work and great support from the manufacturing and operational base. My thanks to the team for putting up with all of this and me for the first 6 months, and I look forward to real growth in financial year '24. Thank you very much.

That concludes the webinar for today. Thank you for participating. You may now disconnect.