HighCom Limited (HCL) Earnings Call Transcript & Summary

Okay. Let's kick off. Good morning, everyone, and thank you for joining us for HighCom Limited's Half Year Results Presentation. I am Ben Harrison, the Chairman of HighCom, and I'm pleased to welcome investors and our shareholders, as we provide an update on the company's performance over the past 6 months and discuss our direction for the rest of FY '25 and beyond. Before we move into the results, I'd like to take a moment to introduce our new Chief Executive Officer, Todd Ashurst. Many of you would already be familiar with Todd, who's been an integral part of HighCom, as our Chief Operating Officer with a deep understanding of our business and a proven track record in operational leadership, Todd is well positioned to drive the next phase of our company's growth and strategic initiatives. So obviously welcome, Todd, and congratulations on the appointment. We'd also like to acknowledge our CFO, Jacqui, whose leadership and financial stewardship continue to ensure HighCom's strong financial position and disciplined approach to growth. Just quickly in terms of the agenda for today's presentation, we'll try to keep things to about 20 to 25 minutes. I'll spend the first part of the presentation just walking through the executive summary and some highlights of the results. And then we'll turn over to Jacqui to run through the financial performance. And then Todd will basically take carriage of the balance of the presentation going through each of the business units and providing a bit of an update on how those business units have performed, as well as some detail around inventory and an update on the XTclave recommissioning. We have posted an e-mail for Q&A for the presentation. We haven't been inundated with questions. So if we don't get any questions in the meantime, I think we'll pause the Q&A session. And obviously, we'll make it or encourage people to e-mail to the investors at website if there are other questions that people want to ask post the results presentation. So with that, let's get started. If you just want to flip slides, please, Sharon. Next slide. Next slide, please.

Yes. [ I don't know ], why you can't see it. [indiscernible].

Okay. Perfect.

Can you see it?

No, I was just looking around, maybe just -- that's it. Perfect. Perfect. So revenue for the first half was $26.6 million, was up 78% on PCP and EBITDA was $1.9 million, which obviously was a big turnaround on the first half result in '24. For the half year-ending the 31st of December, the net operating profit was $1.2 million, and that included a reversal of inventory impairment, and we'll probably talk a bit more about that, but I think that was really a fantastic result. We obviously had taken that large impairment in the first half last financial year. We outlined a strategy that we were going to implement that would see that stock move, and we've been able to execute on that successfully, which resulted in a small write-back of that impairment. So that was a great result. Cash for the half was $8.4 million with no debt. There's about $3 million worth of undrawn facilities at the moment. And there was about $1.2 million worth of CapEx that related to the XTclave recommissioning. So -- and we'll go through a cash flow waterfall a bit later on with Jacqui, but it's important to note there that there was ongoing investment into the business during the period. Inventories were $15.6 million, so that was down $2.2 million from the full year result at 30 June. Again, Todd will go into a bit more detail around what we're doing around inventory and what those trends look like. But we're obviously focused on reducing that inventory back to that $10 million target over the long term. I know we've seen some kind of questions and comments historically on inventory. So hopefully, Todd can provide a bit more context for shareholders and investors as well around the inventory. So in terms of H2, obviously, the business -- while we're very, very pleased with the results and the turnaround in the business compared to the PCP, I think there's still some work to be done and a lot of focus this half on improving sales function. We've got a number of new products that are going into development and certification. We've got factory optimization, which continues to happen. And as you guys are all aware, it's the recommissioning of the XTclave facility as well. So that's probably the key strategic focuses for the Board and the management team for the rest of this financial year. So on that basis, I'll hand over to Jacqui now to run through the highlights. Sorry, there's one more slide. The -- so just in terms of the state of play, this is a slide that we've been addressing, I guess, since the original downgrade 12 months ago and it just provides a very good clear snapshot of where we're at in relation to those objectives that we wanted to execute on. So we've made some changes. We've obviously made some progress and a number of those are complete. So what we've done there is, obviously, the need for greater visibility. We've completed that in terms of the reporting to the Board and kind of getting that structure right. So that's complete and will come off the list. Cash management, we've given that a green light. The cash position had improved, but the business remains focused on monitoring cash flow for the second half. The inventory reduction, we've given that a green light as well. I think that's on track. We've made good progress. I think that while we've got some work to do, it's not quite yet a green tick, but it's certainly tracking in the right direction, which is a big positive. And I guess that's highlighted by the write-up of the inventory by $700,000 in the first half. I guess 2 amberlites, which still continue to be a work in progress is the sales -- sales strategy and sales approach. So that's something that we're working on this half, as well as the manufacturing as well. So we've done a pricing review to get a better understanding of the cost base in the factory, but there are ongoing improvements in terms of driving greater efficiencies within the factory. So again, that's a second half strategy. So we're hoping that those move to kind of the green traffic lights over the coming periods. And then the last 2 are kind of well versed. I mean, the closure of Adelaide, that's done, so that will drop off. And then hopefully, shareholders will see that there's been a big reduction in that cost and overhead. So there's been a big reduction down 42% on PCP for overheads and consulting costs. So we think that's a green tick as well. Thank you. So just in terms of the corporate snapshot, the -- we're still keeping that share count consistent at around just over 100 million shares. The share price has kind of been quite volatile, but sort of trading at around $0.20. We've got cash at bank and no debt with some facilities still on foot that we can draw on. Okay. I'll now leave it over to you, Jacqui.

Okay. Thanks, Ben. Yes. So this slide is really designed to show some of the trends over the last 4.5 years. So particularly when we look at the comparison of H1 FY '24 to the first year -- first half of H1 FY '25, the profit turnaround is pleasing. I think it shows that we are heading in the right direction. We've still got a lot of work to do, but certainly, the trend is getting us back on track. So the profitability of the $1.9 million EBITDA, yes, is pleasing. We did have some one-offs in that as well in terms of the inventory, but that's expected, and Todd will talk more about the inventory on some further slides, but there's certainly more capacity there to achieve even more in that space. I think with the sales volume was showing good improvement. But again, I think the nature of this business is you get volume, the profit will come with that volume as well. And I think we're very well positioned now to be able to move forward in that way. So the slide there on the divisional attribution, you can see the split between the Armor and the Technology divisions. So again, we'll talk -- and Todd will sort of take you through some of the detail of both of those divisions. So we'll go to the next slide, which is really the cash. So this cash forecast -- cash waterfall is showing that we're moving the cash position, and we've really got our eyes on that cash to make sure we're maintaining. It's pleasing that we've still got the undrawn facilities of $3.8 million, but you can see the movement through from $6.2 million in cash to the $8.4 million in that 6-month period. So obviously, the profit does contribute to that. The movement in inventory has seen an inflow. Other minor movements there through the other items, but then also the $1.2 million in the CapEx, which is primarily the recommissioning of the XTclave, so showing the investment that's also going into that period. Okay. And so, I will hand over to Todd now to take you through more of the detail of the performance of the divisions. Thank you.

Thanks, Jacqui. Just as an oversight, again, the group's intent is to provide trusted high-quality specialist products and tailored solutions for military, law enforcement and government agencies, while growing our long-term shareholder value. We execute this through our 2 divisions, HighCom Armor and HighCom Technology. In a nutshell, HighCom Armor's goal is to be the global leader in advanced ballistic protection, ensuring the safety of those who protect us through continuous innovation and excellence in product quality. For HighCom Technology, their goal is to be the trusted partner of choice, supplying, supporting and integrating capabilities for use by defense, security and law enforcement agencies in Australia and around the world. For half 1 financial year '25, HighCom Armor contributed 79% of the group's revenue with HighCom Technology contributing 21%. The segment by country shows our largest market remains North America at 67% of sales in half 1. Slide, please. HighCom Armor's facility is in Columbus, Ohio and the United States and contains our research and development manufacturing facility, logistics, distribution and sales staff across key locations in the United States, Australia and international. International sales are based here out of the Canberra office. Our Ohio facility also contains a showroom, which local law enforcement first and first responders can come and visit and try on our products. Meanwhile, we continue to build our brand domestically and internationally. And we are actually one of the few manufacturers that is actually retailing and selling our products commercially as well. We continue to receive comments and questions from shareholders, who aren't 100% clear on our current capabilities and what we produce. Our Columbus facility produces our classic range of hard and soft armor helmets and ballistic plate carriers for sale at the moment. So there is a working facility producing and selling product in the United States right now. With the movement of the XTclave to that existing facility, we will also begin to manufacture what we're terming our superior range of ballistic hard plates and helmets from the same facility. So we'll be manufacturing 2 different product ranges from the same facility once the XTclave is completed. We have recently brought on our new Director of Research and Development, and he has commenced with us, and this will allow us to accelerate our design of our new superior range for manufacture, as soon as the XTclave has completed commissioning. Slide, please, Sharon. HighCom Armor sales, $20.9 million included monthly domestic U.S. run rate and a larger $8.9 million from a military customer that we delivered in half 1. To the end of the period, the order backlog is in excess of $6 million, and we continue to receive consistent run rate sales from the U.S., all of which is expected to be delivered in H2. Our focus remains on building our run rate and sales growth to ensure we build that sustainable customer base. And we are obviously always continuing to look for those opportunities for any of those larger orders that may appear based on the strategic circumstances at the time. For financial year '25 plus, the sales strategy continues to be diversify, and modernize, including e-commerce modernization. We have now delivered a B2B portal, a business-to-business portal that has been established to enable quick and easy ordering from our partners to enable that to become a quicker, more seamless transaction and easier for them to do business with us. And we've also rebuilt our website to be able to expand our business-to-consumer model to support increased direct selling to law enforcement and first responders. The government business development team remain fully engaged with U.S., international and international militaries and U.S. federal law enforcement, who are keenly anticipating XTclave product with several significant opportunities to work closely with government agencies have been identified, and we are working hard to secure those, which is a pathway to long-term contracts, quite frankly. The short-term trend has been severely -- has been impacted by the U.S. election. This has seen a trend in decreased order sizes and volumes challenging sales efforts. What has occurred is that trend is the orders are still coming in, but they're coming in, in smaller packets. So it might be a larger order, but it's broken up into smaller packets with approvals for each separate order. What this is doing is this is just the customers actually being cautious in relation to the strategic settings that we've seen. So the long-term outlook remains positive. We do see growth in the ballistic market continuing. It is just the nature of how they are starting to purchase is changing in the current strategic circumstance. Slide, please, Sharon. The recommissioning of the XTclave. This is a photo of the clave in the Columbus facility that was taken just a few weeks ago when I was there. We remain on schedule for quarter 2 of this calendar year. The initial XTclave operational testing has occurred with fluid circulation pumps, new cooling system tested, all while in unpressurized state. I was present for it. It was impressive, and it was exciting to see how quickly the future is accelerating and coming towards us. The initial programming of the XTclave system has commenced in anticipation of the new pressure vessel arriving. The new pressure vessel has completed construction. It is remaining offsite for independent testing and final fabrication works. Design and development of new products has commenced, as I alluded to, which sees a new line of superior ballistic armor and helmets being developed, which will be sold in conjunction and as a separate product line to our classic armor line. Slide, please, Sharon. Inventory. As Ben mentioned, the company remains focused on reducing our inventory towards our longer-term target of $10 million. However, I would like to draw your attention to the diversity of supplies and products required to support our broad product range of products, including hard armor, soft armor, helmets, carriers for ballistic products and other accessories. This does require us to carry a variety of raw materials or completed products especially if the lead time for those materials are challenging. To assist in achieving the Board's intent, what we have done is we've standardized the design of many of our ballistic products to utilize as many common raw materials as possible. This has also provided us greater economies of scale when we procure. A product review was conducted in H1 to reduce our current classic product range in terms of size, targeting low-selling product for removal, including the associated raw materials, and this has supported the inventory reduction project. It has also driven a focus on ensuring we have sufficient stock to meet immediate customer demand for volume selling items. This actually remains a key strength of HighCom is our ability to meet orders in a relatively short time frame is a key strength for us in the marketplace. HighCom has implemented targeting marketing campaigns and discounts on discontinued product lines and ran sale campaigns during trade shows. These efforts have led to strong sales of slow-moving or excess inventory, resulting in a $0.7 million profit in H1. These products have been well received in the marketplace and have greatly assisted in building our name recognition, as a trusted supplier of high-quality ballistic armor. These efforts are also making room for the XTclave superior product line that will be produced in conjunction to our classic range that we currently make in the factory using traditional manufacturing methods. I will flag this may necessitate a rise of inventory before the end of H2, as we commence stocking the new raw material, which is different to the raw material we currently use to make our classic line. And we may have to then obviously produce XTclave product and may -- and we intend to hold some completed inventory available for sale at that time. Slide -- one final point. Current inventory is at 53% raw materials and 47% finished product. Slide, please. On to HighCom Technology, co-located with the corporate headquarters here in Canberra. Obviously, we're focused on manufacturing, supplying the Australian Defense Department security agencies with world-leading products, including systems, software and support. Slide, please. During the half year period to 31 December, that's -- we actually had HighCom Technology successfully delivered a variety of engineering, maintenance and logistics support services under [ the ] existing contracts that we have with the Commonwealth of Australia's Department of Defense for small unmanned aerial systems. By the end of the reporting period, orders in hand for H2 financial year '25 worth over $7 million. So that's a good outcome for the Technology business. In November '24, we negotiated with AeroVironment, and we managed to expand HighCom's exclusive reseller agreement from not only small UAS, but also to include the medium UAS systems. And AV have released a number of new products in both of these ranges, which we're excited to now represent and show to our clients. This has greatly broadened our customer range, and it also provides greater integrated capability options for our clients. HighCom Technology continues to invest in business development efforts to increase sales and service to existing customers and to identify and assess new opportunities related to adjacent technologies for our defense and civilian markets. So again, just as a highlight, we're booked to attend the Avalon Air Show coming up in a few weeks, where we'll not only be showing -- working with AV, but we'll also be highlighting HighCom Armor products at that show. Slide, please, Sharon. Back to you, Ben.

Thanks, Todd. So I guess now just to kind of focus back on the strategy and the outlook for '25. Obviously, the positive macro is still there around ongoing geopolitical tension and increasing commitment by countries to increase defense expenditure. And we obviously saw the U.K. government recently commit to move to 2.5% of GDP by 2027. So I think as an overall concept, we're still very positive and bullish on the outlook for the overall industry despite the fact that we have had some changes to sales ordering, as Todd alluded to earlier. The focus is really clear for us this half, and I've touched on these points earlier. But what we're focused on for this half is looking at improving the sales function, working through that product development phase, optimizing the factory and recommissioning XTclave. So with those initiatives having been undertaken and dealt with, we're very positive on the future outlook for FY '26 and beyond. But we just want to kind of really leave it with shareholders and investors that, that remains the focus for the rest of this financial year. In terms of the broader strategy, we've talked about these 3 points around reinforcing success, seek adjacencies and create our future. We are doing all those things already. In terms of those other broader strategic objectives, it's really then ensuring that the XTclave has got the contracts and the customers to really push the volumes through once that is successfully recommissioned in the second quarter of this calendar year. Next slide. I won't dwell on these next couple of slides. We'll just leave them there. There's something that we included in the last update and the last pack. But really, it's just highlighting the positive trends and outlook around defense and improving expenditure by governments globally on the back of the setting geopolitically. Next slide. Next slide. So just to quickly wrap things up, the financial result was very positive. We were pleased with the return to profitability. That was obviously driven by increased sales, the cost reductions that we've been implementing in the last 12 months, as well as the rewrite of the impaired inventory as well. So the Board is very pleased with the financial result. We've obviously got a great management team. We've got a good sales outlook in terms of the opportunity around the market more broadly. And then we've got some really exciting technology coming down the pipeline. There's obviously new -- the classic range that Todd referred to. We're going through a process of certifying that to the new standard, but we've also got the superior range, which will be coming out. And it can't be understated how much engagement we're having with large customers around that capability and the types of products that we can produce out of that technology. So we're very excited and eagerly awaiting that recommissioning to happen towards the end of this financial year. So the Board continues to be focused on improving the sales function, driving new product innovation, continuing the factory optimization and recommissioning the XTclave. So that's the kind of focus for us. Obviously, thank you, everyone, for your support. It's been a challenging period of time, obviously, but the executive is doing an outstanding job with the direction that we're providing to them with turning the business around and getting it into a position that we all should be proud of. So I think we'll leave it there. On the basis that we don't have any Q&A, we'll close the session there. Obviously, encourage everyone to -- if you do have questions to log that at the investors at e-mail address, and we'll get back to you. But again, thank you, everyone, for your support, and thank you, Todd and Jacqui, for joining us. And thank you, Sharon.

Thank you.

Thanks, everybody.