Avon Technologies Plc (AVON) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. I'm Paul McDonald, CEO of Avon Rubber, and I'm here this morning with Nick Keveth, our CFO. And we're absolutely delighted to be hosting this call to announce the proposed acquisition of Team Wendy. This marks a further chapter in the strategic transformation of Avon Rubber and strengthens our position as a leading provider of life-critical personal protection systems. The acquisition will create a global leader in military and first responder helmets, adding a high-quality and highly complementary business to the group. We have agreed to purchase Team Wendy for a cash consideration of $130 million, which represents a 9.7x trailing EBITDA multiple. Team Wendy has a track record of profitable growth and delivers attractive financial returns that are higher than the group average for Avon. Alongside the acquisition and as part of our long-term capital structure planning, we've also entered into a new $200 million credit facility to support our medium-term growth opportunities and future M&A. For our presentation this morning, I will add further color on the strategic rationale for the acquisition, provide you with an introduction to Team Wendy, the strategic benefits they will bring to the group, how Team Wendy fits within the wider portfolio of products. Nick will cover the financial aspects and the timetable for our acquisition before I will finish with the key takeaways. Nick and I will then be available for questions from those of you that have dialed into the conference call, followed by questions from those of you who've logged into the webcast at the end. As I talk through the strategic background for the transaction, it only feels right that we start with some historical context. We have been successfully executing our stated strategy by growing the core, maximizing revenue from our current portfolio and improving our operational efficiency, pursuing selective product development to maintain and expand our leading product positions and targeting value-enhancing acquisitions to further accelerate growth and add value to the group, which has transformed the business into a leading provider of life-critical personal protection systems. This started with the revised strategy for the group that we launched in 2017. And since then, we've achieved a series of important milestones across the group. We launched the M69 aircrew mask and M53A1 mask and powered air system in early 2018 and were subsequently awarded the long-term DoD framework contracts to solidify our position as the principal choice of CBRN respiratory protection. Last year, we made our first significant acquisition of our Helmets & Armor business. And earlier in 2020, we announced the sale of our milkrite | InterPuls business. So we're delighted to announce the proposed acquisition of Team Wendy this morning, which creates a global leader in military and first responder helmets. I would like to give you an introduction to Team Wendy. It's a unique name with a unique story. The business was founded in memory of Wendy Moore who suddenly passed away following a traumatic brain injury suffered during a skiing accident, and the business was created as her legacy. Team Wendy is therefore focused on designing and developing head protection systems to prevent traumatic brain injury. They are a leader in liner and retention systems with world-class products. It's a family-owned business operating from one site in Cleveland, Ohio, with approximately 130 employees and an experienced management team that has successfully grown this business. Importantly, they have established positions in the rest-of-world military and first responder markets, creating a highly diversified customer base and a strong record of delivering international growth. Team Wendy is dedicated to the pursuit of improving head protection research. Their original focus on the helmet was to protect from the inside out, and they have developed many of the helmet liner and retention systems specified by the U.S. DoD. Over the last 8 years, Team Wendy has developed a comprehensive helmet portfolio, which includes a range of tactical bump helmets, ballistic combat helmets as well as search and rescue helmets. The addition of Team Wendy will provide a wider product portfolio to support the rest-of-world military and first responder markets and is highly complementary to the extensive U.S. DoD helmet range within our current portfolio. Team Wendy has all the commercial attributes that we look for in an acquisition: a strong brand, proprietary technology and an experienced management team with a track record of growth whilst bringing a diversified customer base from over 50 countries. So we're very excited about what we can achieve together and how we can bring value to this business. As you will see from the slide, Team Wendy has a strong track record of revenue and profit growth, with high recurring EBITDA margins and a financial profile consistent with our strategic objectives and investor proposition. It's a great set of numbers that will be value-enhancing for the group. Combining Team Wendy with our existing Helmets & Armor business will create a global leader in military and first responder helmets, with a broader product portfolio and stronger capabilities and routes to market. The existing Helmets & Armor business is focused on the next-generation soldier protection systems with the U.S. DoD and will be complemented by the Team Wendy liner and retention systems. Team Wendy brings established positions in rest-of-world military. And the combined business will benefit from a well-established global footprint with significant business development opportunities over the medium term. Team Wendy will continue to operate from their site in Cleveland, Ohio on a stand-alone basis. And we look forward to working with Jose and his capable management team to help grow this business. The enlarged helmets business will be better positioned for investment in next-generation products whilst also establishing a broader platform into which other technologies can be incorporated. The combination of Avon's ballistic shell forming capabilities and Team Wendy's liner and retention system technology will result in a broader military and first responder helmet portfolio to meet the needs of the U.S. DoD, rest-of-world military and first responder markets. Together, Avon Protection and Team Wendy will bring together 2 leading brands, creating a strong product range of respiratory, ballistic and impact protection products and broaden our position as a leading provider of life-critical personal protection systems. Having covered the strategic rationale, I'll now pass you over to Nick to run through the financials.

Good morning, everyone, and thank you, Paul. Team Wendy is another attractive value-enhancing acquisition, in line with our stated financial criteria. The acquisition provides a compelling opportunity to reinvest part of the proceeds from the milkrite | InterPuls divestment into a higher growth and margin protection business at a lower EBITDA multiple than obtained for milkrite | InterPuls. The purchase price of $130 million represents a multiple of 9.7x Team Wendy's trailing 2019 EBITDA of $13.4 million. The revenue growth, margins and cash conversion profile of Team Wendy meets our KPIs of 3% plus revenue growth, 20% plus EBITDA margins and 90% plus cash conversion. And as you will have already seen in Paul's introduction to Team Wendy, the business has a track record of delivering strong revenue and profit growth and high recurring EBITDA margins with a margin of 30.3% in 2019. And Team Wendy has continued to perform well in 2020, continuing to win numerous orders from its diversified customer base with further revenue growth in the year to July. We expect the business will be earnings accretive in the first full year after completion, both on a stand-alone basis and after the completion of the milkrite | InterPuls divestment. We are forecasting that Team Wendy will generate return on invested capital in excess of our current WACC within the first 2 years of ownership. And following completion, we will be able to generate a higher return on capital employed than prior to both transactions. So I hope you now see why we see this as a compelling opportunity to create value for shareholders whilst leaving us with a strong balance sheet to support further growth. The purchase price and deal costs totaling $138 million will be financed from the milkrite | InterPuls net proceeds of GBP 140 million. In the event the acquisition completes before the proceeds are received, the new $200 million bank facility will be used to provide bridging finance in the short term. Once both transactions have completed, the RCF will be repaid, and we anticipate being in a small net cash position. So our strong balance sheet following these 2 deals, together with the new $200 million bank facility, which is for 3 years with 2 1-year extension options, will provide medium-term firepower to fund our growth strategy, including further value-enhancing M&A in due course. The acquisition is a Class 1 transaction under the U.K. listing rules and is therefore subject to shareholder as well as U.S. antitrust and foreign ownership approvals. We are targeting to issue the shareholder circular containing further details of the acquisition by this Friday, the 11th of September, with a virtual general meeting planned for later in the month on the 28th of September. Following shareholder approval, we expect to complete the acquisition in the first quarter of our 2021 financial year once the U.S. regulatory approvals have been received. Finally, a quick word on the milkrite | InterPuls process. Good progress has been made as expected with the required competition approvals. So as previously announced, the divestment remains firmly on track for completion in the first quarter of our 2021 financial year. Thanks very much. I will now hand you back to Paul.

Thanks, Nick. I want to leave you with a summary of why we think this acquisition is compelling for Avon Rubber and marks another step in our strategic transformation. It's another significant acquisition and further strengthens our position as a leading provider of life-critical personal protection systems. Combining a high-quality, complementary business like Team Wendy with Helmets & Armor will create a global leader in military and first responder helmets with a broader product portfolio and stronger routes to market. We are delighted to have identified another opportunity that will create value for our shareholders, providing us with attractive financial returns and recycling the proceeds from the milkrite | InterPuls divestment. Additionally, our new $200 million revolving credit facility will provide us with additional funding for our medium-term growth objectives, including future value-enhancing M&A. We're targeting to release the circular by the 11th of September, and the general meeting to approve the deal is planned for the 28th of September, following which we look forward to welcoming Team Wendy to the Avon Rubber family. Ladies and gentlemen, that's it from us. I'd like to thank you for listening, and both Nick and I will be available for questions shortly. Just as a reminder, we'll take questions from the conference call first. And then for those who've submitted questions via the webcast, we'll read them out and answer them. We'll now take questions from the conference call. [Operator Instructions] I'll now hand back to the operator. Thank you.

[Operator Instructions] We will now take our first question from Henry Carver from Peel Hunt.

Yes, just a couple from me. First of all, the EBITDA margin just over the last 3 years, it's a little bit variable. I just wondered what that -- what was driving that and if that's -- that will smooth out going forward? And then just secondly, on the rest-of-the-world piece, could you broadly sort of split that into where that is? Is that predominantly Australia? Or is there some Northern European names in there as well? I'm looking at sort of opportunities for cross-selling there.

Yes. Go ahead.

So in terms of the margin, yes, it has been a bit variable, as you said, Henry. I think we've got to remember, this has been a privately held business that's been investing and growing for the longer term rather than managing results in one particular reporting period. The underlying margins of the -- gross margins of the products have been very stable, and you see them as being very sustainable going forward. There was in 2019 some sort of step-up in investment in overhead infrastructure recognizing the growth in the business, which had an effect on that, particularly here in 2018. And yes, so going forward, we see a sustainable high EBITDA margin that will continue into the future.

Henry, if I take the sort of the sales split, so they currently sell to sort of 50 different countries across the world. So they've got quite an established platform where they are the sort of helmets of choice for police departments or sort of smaller military operations in those countries. And they have sort of shown quite a significant track record. So what I would say is sort of quite a lot of this business, probably sort of 2/3 of this business are on that sort of run-and-repeat model that we see very similarly with our first responder outfit, smaller continuing sort of orders that come through. And then there are sort of few larger countries like Australia where they're actually the provider to the ADF defense force and have got a multiyear contract that's in there. So there is a little bit of a blend in there. In terms of sort of where they are, it really is a global approach for them. What this really gives us is that sort of mid-tier pricing point, particularly for sort of rest of world where it's not top-end technology, but they want something that works at a fair and reasonable price. So we really now have that complement with both our Ceradyne helmets, which are more top end, plus the Team Wendy helmets that sort of give us that full portfolio effect. And what I would say is sort of as we now start to look at sort of the replenishment cycle with our customers, Europe is starting to come back on stream, and we've seen the NATO contract that we've supplied there. We will also be looking at sort of supplying helmets alongside those, and we've now got the portfolio that meets all the requirements.

[Operator Instructions] There appears to be no further questions at this time. I would like to turn the conference back to Mr. McDonald.

Thank you very much. We've actually got quite a few questions coming through from the webcast. So the first is from Andy Douglas at Jefferies. He said, please, can you expand upon your comments about next-generation products, product developments? Are we on the cusp of new products, new customer needs? So in terms of that, so the Ceradyne business is on the soldier protection system. So the next sort of 5 years of fielding with that technology is about to go through. Where Team Wendy has been working on in a lot of their R&D is the sort of static sensors embedded within helmets monitoring traumatic brain injury and concussions and how you can basically utilize real-time data to let the person know whether they're suffering from sort of impeded or restricted performance. So what we are sort of seeing is a complement of Ceradyne has the sort of capability of the harder shell forming on the outside of the helmet. Team Wendy really offers that sort of inside of the protection to the user and the protection in the impact on the brain. So we really do see a combination of the 2 coming together. And then it's sort of as we build that into the wider system, how do we use that data, how do we display that data to the end user, which is very consistent with what you're seeing in our sort of wider respiratory business. The next question that was also from Andy was, does Team Wendy have long-term contract order books? If so, how are they looking? We will obviously have more information that will come out in the circular to meet the Class 1 requirements. In terms of order books, they actually do have a couple of months of visibility. As I said earlier, with Henry's question, there's -- sort of 1/3 of the business has the long-term contracts that you expect like our military. So we've got multiyear visibility. A lot of that business, 2/3 of that business is sort of a shorter cycle with recurring customers. So we know that we've got the footprint, and it's sort of how we see the churn and burn on that.

And very similar to our -- in that profile to our existing first responder business.

Yes. The other third question from Andy is, do you envisage any issues with regulatory approvals?

No, it requires U.S. antitrust and U.S. foreign controlled ownership approvals. Given that we went through the foreign controlled ownership process last year to acquire Helmets & Armor, we don't envisage any difficulty with this process. And similarly, because the portfolios are complementary with limited overlap, we don't see any major issues with the antitrust process either.

We've got a question from Sanjay Jha at Panmure. Sanjay said, could you please help with the peer group? Which are the primary competitors for Team Wendy? Does it have long-term contracts with U.S. military? So the -- in terms of the helmet systems, sort of it competed on a global basis. In the U.S., it was sort of competing against the Ceradyne business, but it had no direct sort of U.S. DoD contracts, which is why we don't believe that there's an issue with competition on that front. In rest of world, they competed against sort of Galvion, which is the new name of Revision. They compete against Gentex. So it's becoming a consistent peer set. And this is where we'll then have the sort of rest-of-world product portfolio to combine the brand going against the competition. So they're the main players that we're competing against in that market. And then the next question is from Anthony Plom at Berenberg. Anthony says, 4 questions, please. Interested in how the deal with Team Wendy came about. Have you been speaking to them for a while? Was it a competitive process? Any details around that would be interesting. On synergies, feels like Team Wendy have a good foothold with rest-of-world customers, which would be useful for Avon in terms of revenue synergies. Interested on any potential cost synergies you see. Maybe a bit too early at this stage. And then predominantly, U.S. business now going to report in U.S. dollars, too. Have you -- would you consider a U.S. listing as well? And then the final one, we're being worked this morning, Nick. The $200 million RCF is fairly sizable. You mentioned it provides capacity for M&A. How does that pipeline look? And are there more Team Wendy, Ceradyne size acquisitions out there?

Do you want to deal with deal origination whilst I think about the others?

No problem. I'll deal with deal origination. So we've been looking at the helmet markets for a couple of years now obviously, and the sort of investments that we've made in there reflect that. So I was well aware of Team Wendy. Dan Moore who own the company, I'm sure Dan will be listening this morning, is an absolute super guy. The circumstances that he started this business were tragic, but he built an absolute fantastic business in his daughter's legacy. When I met with Dan, and I met with Dan sort of early February, understanding how Avon thinks, its focus towards its customers, how we look at improving technology to improve their performance and capability was a real fit with Team Wendy. And I think what was clear to Dan is that he wanted this business to go to the right owner. And he was absolutely clear in the way that he ran that process. So it wasn't a competitive process. It has been a private deal, but it's been very much about the legacy of what we can create as a combined deal that's done that. And obviously, in the current environment, it's been a bit more challenging. We've also had to use some of our wider team for site visits and things like that. So it's taken us a little while. We have been looking at this deal for some time, but we're very pleased that we've reached this point. In terms of synergies and -- do you want to take that? Or do you want me to...

No. Yes. I think from a synergy perspective, we -- this deal is not constructed around synergies. It stands up on its own merits. Without that, the complementary nature of the business and our intention to run this on a stand-alone basis alongside our existing Helmets & Armor business, we haven't built any cost synergies into our model. I think the comment that Anthony has made around, in the medium term, this provides wider opportunities for the enlarged group in rest of world and first responder is, I think, fair. But again, we've been prudent in terms of not building anything into our model at this stage. In terms of the M&A landscape question, the sizing of the facility, we really -- I guess there are 2 factors which we took into account sizing the facility. One was the size of the bridge finance that we needed given difficult to judge the timings of the regulatory approvals on both milkrite | InterPuls divestment and this acquisition. And so we needed to make sure we had the flexibility to manage through that. And then similarly, we've been talking for some time about being comfortable with leverage of sort of 2x EBITDA, net debt 2x EBITDA being our sort of ceiling around that. So we wanted to put in place a facility for the medium term that enabled us to maintain that flexibility and that capacity to do more M&A. I think it's fair to say that having done 3 big deals in -- or announced 3 big deals in the space of 13, 14 months and obviously spent quite a bit of time over the last 18 months on those, we see a period now of consolidation and sort of just working through the sort of various transition projects that we have. And so we're not anticipating any major M&A in the near term. But obviously, we have a pipeline. We'll continue to work that pipeline for future for 2021 and beyond. When the right deal comes along with the right criteria, as you've seen before, we will make sure that what we do fits with our criteria that we shared with the marketplace. So it was about -- the size was to do -- to ensure we could cover both the medium-term financing and the bridge. U.S. listing, it's not on our agenda at the moment at all. First time I've been asked that question in a while. And so we're very happy with our U.K. listing and our international shareholder base that we have.