Avon Technologies Plc (AVON.L) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Avon Technologies Plc 2025 for your Results Investor Presentation. [Operator Instructions]. Before we begin, I would like to submit the following poll. I would now like to hand you over to CEO, Jos Sclater. Good afternoon to you.

Hello, and good afternoon, everybody. We're just going to go through a cutdown version of our results back and then what we really like is questions, so please save your questions for later. Our results actually are video and the whole script and video is available on the website. If anyone wants more information that we can give in the time we've got available on this call. So last year was a good year from a financial perspective. Revenue and profit both grew very well. Revenue is actually probably a bit above expectations and actually we ended up the year overall a bit above expectations. Our strengthened system, which is our version of the Toyota production system that tailored for our own needs, continues to deliver sustainable competitive advantage for us. That's helped us drive improvement in productivity, reduced scrap rates and improved inventory turns or less cash tied up in inventory. We are also nearly through our transformation program, which we set out in 2023. We've got a bit more to do this work -- this year with a couple of projects. But the main heavy lifting has now been completed. We have closed the factory in California and built a new factory in Cleveland and have ramped up production nearly to where we need in Cleveland with a bit more to do this year. We have increased our investment into R&D during the last financial year, which has led to some exciting new products and new markets opening up to us, which we'll talk more about later. And we have, over the last 3 years, developed a business improvement system, which we believe can be used to improve not only our own businesses, but any industrial business. And therefore, we are starting to get our head up and think about how we can augment our organic growth with M&A opportunities as well. That is not an immediate pivot. We just want to signal that over the next 5 to 10 years. We see this as a company that will continue to grow organically as well as through small bolt-on acquisitions over time. Overall, we have actually exceeded all of the targets that we originally set a 2027 apart from margin and margin, we expect to achieve those targets this financial year. So with that, I'll hand over to Rich, and he will take you through the numbers.

Thanks, Jos. As you can see, the headlines demonstrate [indiscernible] pretty solid progress. The order book, up 16% at a record $263 million leaves us pretty well covered going through FY '26 on both elements and respirators. So that's a great move in the right direction. Revenue growth of 14% was as Jos alluded, slightly slower than people expected. And that dropped through to operating profit, which was up 31% in the year to $40.3 million. And the third area of focus is return on invested capital. That came in at 18.6%. Our very strong progress was made reducing the average working capital [indiscernible] in the business. I [indiscernible] probably come back and talk about that a bit more later. Cash conversion 90% is another good year even after a pretty [indiscernible] burst in deliveries in Q4 let us find a bit of a receivables over going into the new year. That receivables overhead has now evaporated. We haven't paid for all of those procedures. So that's good progress again. And net debt average is in a very strong position despite actually quite considerable investment into the business through the year. So revenue growing cash conversion and leverage are now all better than our medium-term targets, which were originally slated to be achieved by 2027. And actually, operating margin is well on its way, and we'll [indiscernible]. Moving on to P&L. As you can see, order intake in the year was very healthy at $352 million, book-to-bill 1.12x. Orders were slightly lower -- slightly lower year-on-year in [indiscernible], reflecting very high pull-offs against U.S. Department of [indiscernible] programs in 2024. So coming off a very high base. But you can see that the book is still very well covered going into '26. Actually, those [indiscernible] will be reasonably lumpy. It's just an [indiscernible]. The record closing order book of $263 million is so strong, particularly [indiscernible], where actually the U.K. and international orders were incredibly strong. Revenue of 14% revenue growth reflect very strong performance across the board with [ AM Protection ] up 16% at [indiscernible], up 12% year-on-year. Operating profit, as I said, of $40.3 million is over 30% higher than the prior year, resulting in a margin of 12.8%, which is 130 basis points higher than 2024, and it is a very helpful step on the road to achieving our medium-term target of 14% to 16%. Net finance costs reduced by 16% to $5.4 million, largely driven by lower average net debt and the tax charge of $8 million represents an effective tax rate of 23%, which is where we think it will stay over the next few years, absent any further changes to the tax regime. All of that are up to adjusted basic EPS of $0.92 per share, 35% up year-on-year despite the step-up in tax rate from last year's 17% where we benefited from some more one-off divestments. Quick [indiscernible] through the divisions. [indiscernible] has actually had an [ autumn ] year. Order intake up 18%, order book up 63%, revenue up 16%, operating profit margin of 160 basis points of almost 20%. This does show the ability of the business to lead into a strong demand environment to drive cost growth. The growth in orders and in order and backlog has been not only driven by strength in international markets, as I said, offsetting a slightly softer year in commercial Americas, which actually saw a very strong year in 2024. Ukraine related demand now accounts for just $13 million in that order book. And we've always seen Ukraine-related demand as something of a [ unicorn ]. It won't be around forever. But what is interesting is that partly even after stripping that out, order book is growing very nicely. And actually, where we are seeing strong demand, which one could argue is Ukraine related is countries that are peripheral to Ukraine and Russia, where clearly governments are concerned the Russia's ambitions might not just stop in Ukraine. Revenue growth in the year was driven largely by Australian FM 54 deliveries, strong demand for [ CBRN ] boosting glass format customers and I say some prior with another good year for rebreathers. The excellent [indiscernible] margin was helped by operational gearing, improved productivity and sales mix. And actually, given the strength of the order book, over protection is exceptionally well positioned to drive further growth in 2026. As I said, order intake in team [indiscernible] was a little bit softer year-on-year, but the backlog remains robust and the strengthened product portfolio is driving an excellent pipeline of opportunities as we enter the new year. Revenue growth of 12% was driven by further growth in military ECH2 deliveries moved towards full rate production and actually we saw further strong demand for [indiscernible] and for a number of customers, but particularly the U.S. Air Force and Navy. Operating profit margin nudged 4 to 4.6% from 3.9% the year before, which is a good improvement, but it's still somewhat of [indiscernible] internal ambitions. But we are confident to further progress in '26 as we demonstrate the sustainability of the production rate increases that we saw in the last quarter of '25. And as the benefit of cost reduction largely through the transition from California to Ohio comes through to the bottom line. As a reminder [ ACH2 ] will grow further in 2026 as we step up the production rate again. And whilst it is profitable, it will remain dilutive at the margin level. But notwithstanding this, we do expect further progress on margin as we go through the new year. So just moving quickly on to the outlook for the year before I hand back to Jos. We do expect further good growth in helmet deliveries, as I said, as we finish the [ CH2 ] ramp-up. And we also expect good growth in Avon Protection underpinned by the very strong order book in the business. These factors combined will equate to what we expect to be a high single-digit revenue growth at the group level. We do expect the financial benefits of the transformation program to drop through this year with a modest weight into the second half. And even after the additional dilution from the growth in lower margin ACH sales, we are confident that we can deliver our operating margin within our target range of 14% to 16%. As highlighted, given the call on Wednesday, we do expect transformation investments to drop to around $6 million in 2026, and we expect return on invested capital will progress nicely as well. And just addressing 1 of the questions that was pre-submitted, it was pointed out that we have made $20 million of adjustments to operating profit around $15 million of which relates to the transformation. The question was when can we expect these translation adjustments to come to an end, and the [indiscernible] is 2026. '26 represents the last year for transformation adjustments coming below the line. And finally, we expect cash conversion to remain above 80% despite further increases in investment in the business to drive future organic growth. So I think '26 show have to be quite a positive one.

Yes, absolutely. Thank you, Rich. So we continue with our Star strategy, which was set up written in 2023. Though it's not a static thing. Every year, we set new initiatives for the year ahead, and we've already done that for 2026. But the big picture remains the same. We have our strengthened system that we use to continually improve the business, that will continue forever, and we still see plenty of opportunities to improve our businesses and therefore, drive cash flow and free our resources to invest in the business. Our transformation program is nearing its end. And this year, as Richard said, is the last year. In advance, we are investing more into R&D. Most of that we expense, so it does impact our profit in the year we spend it. We think that means that we have good discipline around spending our money wisely. And in revolutionized, we continue to work on new products, which will support growth in the long term, and we are starting to look at opportunities to acquire other companies to accelerate that growth and that is a slight refinement of our revolutionized [indiscernible]. This slide shows our business improvement system, starting with strategy. We are unusual in many ways. One of them is the way we do strategy. We actually teach and coach our businesses on how to set strategy but we want them to set their own strategies because our view is that they're much more likely to actually execute on their strategies, and we build where most strategies fall down is that they go and actually get done and translated into action. We translate our strategy into action through an objective and key results setting process where we cascade the objectives all the way through the organization to align every single employee to our strategy. We have our own proprietary STAR Academy to build capability in our people A lot of that is actually focused around how you continually improve business and the tools that enable you to do that. And this year, we sold 30 people to Japan, to Milan from people like Toyota that have been doing it for 50 or 60 years. And actually, next week, we're sending another 20 people to Japan. We feel it's a worthwhile investment in people development. And then our strengthened system continues to deliver results, and we continue to improve. We build out the system of staff. These are our key operating metrics. Our view is that if we improve these metrics, the profit will follow. Since we originally launched the strengthened system, we've improved productivity 28% obviously more than offsetting inflation. We've reduced scrap by 62%, and we've improved inventory turns by 46% and we see more to come on inventory terms, bring up more cash to invest in the business. Over the summer, we needed to increase production in our Cleveland factory to meet customer demand. We have considerable demand for helmets, actually from all around the world, but particularly the Department of War in the U.S. It's a [ micro ] to have to have too much customer demand, but those also cause challenges. I was actually increased them for 2 months myself, and we ran 14 improvement projects over 2 months with a view to increasing production. And over that time, we actually tripled production on our 2 main Department of War lines as this chart show. Avon Protection also had a great year on using our strengthened system to improve its business. We could have used any number of examples, but there's just a few on this page. In [indiscernible], improved productivity by nearly 80%. We reduced scrap by over 50% and in boots and gloves which, it's not a product line we talk about very much, but it's actually been wildly successful. We've got enormous demand for our chemically resistant boots and gloves, so much demand. We've actually got 2 years order backlog on that. So we also needed to increase production there. We managed to increase production rates 47% in the year without really adding a lot of presses, we are now adding 4 extra presses to increase production even more, although we managed to get those secondhand from a company that's scaling back their rubber production. If you actually look at our results as a area of the transformation of our U.K. site, -- it's actually the only 1 we did a time lapse of which is shame because the other side would have shown something similar. But as well as the [ watch ] for those who are interested, the point we're trying to make is that our factories have changed almost every single week as we move them from batch manufacturing to flow. One of the reasons we are very happy to talk about our strengthened system and I think a copy of our book on the strength in system is available on our website because it is one thing to know how to improve the factory. It is quite another thing to actually do it. And the point we're trying to get across is how much is involved in actually moving a factory from batch supply. This year, it is a pivotal year in the sense that we are moving from the fixed stage of our strategy to both are entirely on growth. We have very good markets. They provide a tailwind. We certainly think it's better to be seeing with the current and against it. Defense spending is going up. The threat of chemical attack is going up considerably. We were told by someone from the Ukrainian front line only last week actually, the Russians have had 5,000 gas attacks over the last year against the Ukrainian trips, all those trips need gas mask and everybody proximate to Russia. So many of the other countries on the fringes of the Russian border are also stocking up on gas mask for the same reason. And numbers of military personnel are increasing, and they all need resistance against chemical weapons and gun crime in the U.S. continues its long-running trend of increasing, unfortunately. We're increasing investment into innovation. We do that by using our strength and system to free up cash and resources, some of which we then put back into the business in the form of investment in engineering. And we now have an ability because of our rock solid balance sheet to accelerate through inorganic growth as well or acquiring as a company. Last year, Avon Protection saw a 63% increase in its order book. It's pipeline of opportunities beyond that was also losses out demand is for masked from the U.S. Military and Australia, which is a new military that we won a year ago, was it? We continue to sell mask under our NATO framework contracts and are now up to how many countries? 16 countries buying boots and gloves and masks and filters under the NATO framework contract. We won 3 new navies last year for rebreathers. We bid for 2 more and hope that we will win one of those or both of those this year. And looking a bit further out, we're still working with the Department of War on filters, although our filters line actually are maxed out at the moment on one shift, but we could add another shift if we can win more work from the Department of War and we are expecting to win more from them this year. Our new [indiscernible] mask and goggles, we are actively working with 4 out of 5 of the special forces groups across the 5 stations and typically general purpose trips tend to follow special forces. And then ensemble, we have interest from the Middle East, Europe and America on our chemically resistant suits. We developed the [indiscernible] using our own money. But interestingly, we've now won 2 programs of record from the Department of War to take the [indiscernible] system forward and add functionality to it, like hot swapping filters, filters that mold closer to your face so that you can get a better achieved on rifles, new client communications system and increased protection generally. The important thing is that they are actively trialing our products, giving us feedback on it and paying for the development of that system to meet their needs, which increases the likelihood that they will then take it up and purchase it once we finish the development stage. And [indiscernible] one, there's a couple of pieces of good news. The first is that our strategy of selling complete systems involving chemical-resistant boots and gloves and suits and masks and Power & Air Systems has paying off. We have won orders with Turkey for that system. And we are working actively at the moment with the U.S. Department of War on 2 suit programs, well, 1 suit program, but they're looking at 2 of our suits as potentials to sell into the U.S. military and they're actually funding a testing program with us at the moment, which will run through this year, we hope could possibly result in the sale of around 700 suits this year. It could be less depending on how we get on in the first phase of that project. We did lean forward and spend more on R&D during the year. We've spent $14 million on R&D, up a couple of million dollars. With that money, we developed a new generation of our [ CS paper ] system, which is multimode. When you don't -- when there's oxygen in the environment, it will pump air through our filters into the mass where that enables users to breathe more freely and exhale -- they're able to exhale more than they would be briefing through normal gas mask. But in addition to that, they suddenly find themselves in an area with no oxygen, they can switch to supply our systems and carry on our activities. We've also developed a new communication system for our market. It actually goes across all of our masks and enables users to project their voice out to an audience very useful, for example, for riot police. It also connects to their communication systems so that they can talk to other people wearing our systems. In [indiscernible], we are working on a shallow water [indiscernible]. We're also working with various militaries to try and get some more funding for that development and we are working on a novel new filter, which actually replaces 3 existing filters with 1, considerably reducing the logistics burden for people using our mask. In Team Wendy, we've got plenty of demand for the [ IHPSalmer ] for our general purpose summit for the U.S. military and for [indiscernible] from the Australian forces. One of the other things we probably haven't talked enough about is we sell a very large amount of bump permits to the U.S. Navy, which they deploy across the fleet to users. In fact, if you do -- if you see an aerial view of an aircraft carry out U.S. Navy, you'll see each team has different colored [indiscernible], and we make those helmets. We actually sold 25,000 of them last year to the U.S. Navy. And looking forward, we've got good demand for our [ Epic ] helmets, from militaries internationally and from police and first responders in the U.S. We launched a brand new helmet last year called [ Rifle tech], and we're seeing good demand from that. From foreign military is, when we say foreign, we mean non U.S. but also interestingly from [ fee sources ] in America, which is a bit of a surprise to us because it's reassuring the expenses on that. And we are gaining market share in the U.S. [indiscernible] market. Last year, we were up 15% in that market, and the market was probably up 4% or 5%. This is a new [indiscernible]. It's innovative in many ways. It can stop an AK-47 bullet muzzle velocity. It also has an innovative path system, which makes it cooler to wear and also more comfortable. It's so comfortable that when we were testing it, some deep have got to take it off at the end of their shift and went home with it on their head. It also looks great, which is very important, one of the first rules of being in the military is the look cool and the second role is not to get lost. And the third rule is if you do get lost to make sure you look cool. So [indiscernible] will say does meet on those requirements. Well, I'm not sure how people not get lost, but the other [indiscernible]. We continue to invest in helmets much of the future. We are being funded to carry out research on how you minimize traumatic brain injury, including from glass, for example, from improvise bonds. What does all that add up to? So in 2023, we set up targets originally actually for 2027 where we certainly thought we could grow the business on the top line by more than 5%. We said we thought we could get margin to 14% to 16%. So we get ROIC or return on invested capital above 17%, we thought we could deliver about 80% to 100% cash conversion over that period and we thought we could get leverage below or within a range of 1 to 2x of profit. We've actually ticked all of those 2 years early, apart from the margin one, while we've got a little way to go. In fact, if we were to look at the exit rate for the last quarter, we would have been pretty well there but we think we'll get there for the full year in 2026. So we will have delivered every target at least the year early most than 2 years. So in risk, well, yes, we're unusual. I think possibly still unique. I'm still hoping someone might copy us, but they haven't yet as far as I know. But we are quite front and center of our risks and opportunities. We think that every business has risks and opportunities. In our case, the thing we're still worrying about most is how do we successfully increased production yet again in Cleveland. That means we've got to swap the assets there, we've got to run the lines faster. We need to avoid having to rewire gaming products. We need to make sure that quality is 100% baba. We have struggled to recruit the people we need. We've recruited 300 people in the last year. Many of them are amazing. Some of them perhaps are not what we want. So there will be some selective increases in capability as we go through this year. So I think that's probably our biggest risk. The other reps are a bit more minor. We are seeing a new entrant potentially into the IEP program and irritating in us actually nothing to do with us. Our competitor failed to pass first half the testing first time round and the Department of War was very keen to have 2 suppliers, so they actually funded another supplier to get them into the program. That hasn't yet, first test [indiscernible] they are in testing. So we'll see if they get that. We don't expect it to have a big impact on our volumes over the next couple of years. On the opportunity side, we still see plenty of opportunities to expand our homeless internationally, and we do see opportunity to [ for ] further margin expansion. If the strengthen system continues to deliver as well as it has been we could see some upside there. Similarly, volumes were a bit higher than we expected, we guess and drop through and that would help on margins. So with that, well, over to you guys -- oh, no not with that. There's a summary. And the summary, we are coming to the end of the transformation stage of our strategy. We have fantastic world-beating products and we are investing in technology to deepen the competitive moat around the business, and we continue to invest in patents. We are increasing market share and we have supportive growing markets and we have a business improvement system, which we think is a recipe for success both in our own businesses and if we were able to acquire in our business. So with that, I hand over to you, guys.

[Operator Instructions]. I would like to remind you that a quarter of this presentation, along with a copy of the slides and the published G&A can be accessed via your investor dashboard. And Jos, Rich, as you can see, we have received several questions throughout this presentation. And if I may now hand back to you and kindly ask you to read out the questions, were appropriate to do so, and I'll pick up for you both at the end.

Well, the first question in front of us is how do we balance product development between meeting known program requirements and pursuing disruptive innovation. I think in general, we try to deeply understand the needs of our customers. The U.S. Department of War is particularly helpful in that they run events that they invite us to where we can show our prototypes to the users, and they will actually trial them sometimes for 2 or 3 days, and we get feedback on them that enables them to improve them. We don't have always develop stuff in response to programs of record. But we generally do develop things in response to a customer need. Good examples of that of [indiscernible] actually originally a program that the Department of War never actually went forward with, but we thought the idea was good, and we thought the need was real, so we developed that with our own money. That's been interesting to us because once they've seen the product we've developed, they now have funding for its development to go further. Similarly, chemically resistant suits. We knew there was a program in America. We weren't on it but we thought we could make a better suit. We understood the customer need very deeply. We developed the suits with our own money but now the Department of War has invited us to submit that suit in response to bids because they can see the technology we've got. So I think overall, to spend money wisely, we'd like to make sure we're very close to the customer, but we will leave forward ahead of the program record. The next question is how much of the current backlog benefit from contractual inflation pass-through? Well, I mean there'll be a bit of inflation about 3%, I guess. Not much.

Not much is a short answer.

Yes. How much competition do we have for our various products? It very much depends on the products. In masks, there isn't a lot of competition for masks as high-end as ours. In filters that the bin was theoretically to suppliers, although the other supplier at [ 3M ] appears to [indiscernible], that's built a line. We're not too sure whether they're going to compete with us going forward. There are 2 Chinese filters and probably from other countries as well. However, they're not built for military applications are not as robust as our filters, so I wouldn't advise anyone to buy them. In [indiscernible] is one of the 2 competitors, although none of them have our technology, and we have a pan moat around our [ rebreather ] that makes it pretty hard perhaps impossible for anyone else to catch up with us. In Helmet, there's a lot more competition, especially at the lower end of the market, lots of people can make [indiscernible]. Quite a few people can make polyethylene helmets, which is what we make, how the [indiscernible]. There's only one manufacturer that can make a rightful resistant helmets and that's a company called [ Gentex ] who we respect a lot. They're very good, although we would say that [indiscernible] helmet isn't as good and doesn't look as cool. What else that --

Yes, that's [indiscernible]. And the next question is linked. I mean, what are your current market shares and what do you think are realistic market share targets over the next few years? I mean if you just split the business in 2 and look at respiratory on gas masks. We have a pretty strong market share currently. Our market share in North America is probably around 91%, 92%. And in Europe, it's pretty high between 60% and 70%. And the reason why it isn't higher is because a number of nations choose to buy domestically sourced product, which is entirely understandable. I'm not going to put the market share target for [indiscernible], but I can guarantee that it's unlikely to go much above 100%. So if we're looking to grow respiratory, we need to not just grow market share but also grow wallet share, which we are seeking to do and Jos touched on a few of the innovations that we've come out with around boots and gloves, suits, powered and supplied our products, so that's how we're continuing to grow that business. On rebreathers, we -- our market share, I don't actually know the answer to that question, but it probably isn't that high. [ Rebreathers ] getting installed into the market and then they last quite a long time. We're a relatively new entrant to that market, probably having sold our first rebreather in about 2018, 2019. But what I will say is that all of the business that we have entered in the last 5 years. We've only lost one and it was quite small. So that market share is growing very, very nicely. And then in helmets, just looking at the U.S., our market share is probably 25% or thereabouts within the U.S. military, it's growing from around that level to 50% over the next few years based on contracts we are already supplying under. We have seen market share growth in U.S. commercial, as Jos alluded to. But our [indiscernible] business is largely U.S.-centric. And so market share outside the U.S. is minimal. But we do think that there's huge opportunities to grow that over time. So we've been investing in sales and marketing activities, quite heavily in 2025, we will continue to do so in '26. And hopefully, we'll be able to report back with some market traction outside North America when we talk to you next year, of course.

Thank you, Rich. Next question is there a [ show slide for the permits]. The answer is yes. Well, they're warranted for a period, it depends a bit on the home actually. Sometime it's warranted for 5 years, some for 10, [indiscernible] actually wanted to [ turn]. In America, especially, they won't use the helmet beyond the warranty period because they're worried about liability. However, some countries will refurbish helmets. Australia is a good example. They have a very good refurbishment program for our [ xFi ] helmet that we sell them. That's also good for us. So they're bringing them in after 5 years. They sound [indiscernible], they've repaid them and they've got new pass in them, maybe new retentions, and we make parts and retention. So we got after market on them. And actually, we are expanding that into, masks as well. We've got -- we've just done a deal actually with UK Police Force where after 5 years, they're selling the mask back to us and we refurbish them, make them as good as new and sell it to them again. Next question is when the Department of War funds development, do they only IP? The answer to that is a benefit on the contract. Sometimes, they will own the IP that they have paid for, but they never own the IP that we've already developed, what we call background IP. [ Mike ] is a good example of the [indiscernible]. So we develop [indiscernible] on our own dime. If they pay us to develop a new communication system or something that might be at least shared with them, but they can't make the mask, but as we already developed that before we started working with them.