Ab Dynamics (LSE:ABDP) — Half year results

0:01 Good afternoon, ladies and gentlemen, and welcome to the AB Dynamics PLC Interim Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and could be submitted at any time via the Q and A tab that's just situated on the right hand corner of your screen. Please simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all of the questions submitted today and publish responses where it's appropriate to do so. These will be available via your investor meet company dashboard, and

0:32 we will notify you by email when these are ready for your review. Before we begin, I would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. I'd now like to hand you over to CEO, James Ruth. Good afternoon, sir. Good afternoon, everyone, and welcome to the AB DYNAMICS half year results presentation. So today, I'm gonna take you through an overview of the results plus a review of our ESG position. Sarah, the one our CFO, will then give a review of the financial results, and then I'll take over again and give you an overview of where we are for each of our primary sectors of track testing and lab testing and simulation. Then we'll give an overview of our strategy update, including a review of our ABD solutions business, followed by an overall summary and outlook.

1:24 In summary, I'm really pleased to report that the group delivered a strong performance in the first half of the year, delivering revenue growth of 39% to 38 37,800,000 or 41% on a constant currency basis, albeit against a weaker COVID affected prior year comparator. The revenue growth was across both of our primary sectors, and I'll provide more detail by sector later in the presentation. We delivered a significant improvement in h one operating profit to 5,700,000, a growth of 63% compared to last year, predominantly due to the drop through of the increase in revenue whilst maintaining our strong gross margins of circa 58%. We've been able to successfully mitigate the impacts of input cost increases through an across the board price increase as we've strongly differentiated products and services in which we can control and command strong market pricing.

2:21 This all translated to a 230 basis point increase in operating margin to 15.1% and a 52 increase in the adjusted diluted EPS. We continued our progressive dividend policy, increasing the interim dividend by 10%. And our net cash increased 24% to as compared to the FY '21 year end position to circa 28,000,000, with the group delivering strong operating cash and good working capital management.

2:50 And that strong cash position enables us to continue to invest in our strategic priorities such as r and d and further value enhancing acquisitions. From an order standpoint, we delivered another period of strong order intake with a firmly positive book to bill ratio during the period, providing good confidence for delivery of h two expectations, which means that we upgraded our previously stated expectations, and we now expect to achieve results slightly ahead of market. In terms of further overview of the results, the overall revenue of 37,800,000 in the first half is split broadly 80% track testing and 20% laboratory testing and simulation as compared to an FY '21 full year result, which was split seventy five twenty five. And that's predominantly due to the strong growth seen in the track testing sector.

3:39 In terms of geography, we've seen growth in all our primary territories with a particularly strong performance in Asia Pacific, increasing revenue by 80%. That was dominated by good performance in China and Japan. We also saw The UK and Europe grow by 20% with a recovery in Germany versus a very weak prior period comparator. And The US delivered moderate growth of around 12% against a much stronger prior year comparator. The revenue split by customer shows sales dominated by automotive OEMs at 70%. That's as compared to our normal numbers, which are around 50 to 55% OEM. There's no particular reason for that, just the timing and phasing of particular orders and when they came in. The remainder is around 25% for service providers.

4:26 So these are customers that run test facilities and proving grounds, and then the remainder, tier one suppliers and technology companies. Really pleasing again to see that we've increased our proportion of recurring revenue, increasing from 31% a year ago to 41% and compared to 35% at the end of FY twenty one. That's predominantly due to the contribution from the acquisition of Vardatec, which happened in h two last year, and we now expect that level to normalize as we launch new products until sorry, until we launch new products such as our software as a service version of our RF Pro simulation software. I'm just gonna now hand over to Sarah, and she's gonna give an overview of the financial results. Thanks, James.

5:11 As James has already mentioned in the highlights, despite the continuing challenges of supply chain disruption, we delivered strong revenue and profit growth against the COVID impacted prior period and continued to invest in new product development, capability, and capacity to support future growth. Continued improvement in customer activity and the acquisition of Vardatech resulted in growth in revenue of 39%, albeit against a weak comparative period. Organic revenue increased by 18%. The gross margin was maintained at the same level as the prior period despite despite inflationary cost pressures. Price increases for new orders have been implemented to mitigate cost increases. Adjusted operating profit increased by 63%, and margin increased to 15.1% from 12.8% due to operational gearing from the increase in activity levels against the prior period despite the continued investment in overhead infrastructure.

6:12 And we expect margins for the full year to remain at around this level and then increase incrementally as the investment in organic growth starts to deliver contribution. The effective tax rate increased from 14.7 to 18% due to a change in the geographic mix of profit, And this dropped through to a 52% increase in diluted earnings per share. Strong cash generation of 8,500,000 and cash conversion of 116% leaves us with significant cash resources to enable us to continue investment in the business. Against half two last year, which is a more comparable period coming out of COVID, revenue increased by 3% on a constant currency basis, with track testing up 6%, offset by a reduction in lab test revenue due to the lumpy revenue profile of the contracts.

7:15 The revenue bridge illustrates the growth across both track testing and lab testing and simulation. Demand for driving robots has continued to grow as has revenue for ADAS platforms with the trend towards multi object testing and higher speed platforms leading to increased opportunities. BARDA Tech, which was acquired in March 2021 at the beginning of half two last year, added 5,400,000 of revenue in the period. And together, this gave rise to a 45% increase in track testing revenue. Lab testing revenue was up 17% with higher simulation revenue due to increased demand for our software, mainly by motorsport customers, but also for the ADAS market. Turning to operating profit. The improvement in organic sales volume and mix has been supplemented by the contribution from the acquisition of Vardatech, as you can see in the first four boxes there.

8:12 This is partially offset by the impact of investments in overheads with the return of some discretionary spending on travel and conferences, the investment in our operational and commercial platforms and ABD Solutions, our new market facing business unit that develops solutions to automate vehicle applications. We expect the majority of the benefit of price increases to come through in half two to mitigate inflationary pressures and to support the margin.

8:43 Turning to cash flow. Operating activities generated cash inflow of 7,900,000, and our focus on working capital management has delivered a reduction in working capital of 600,000 despite funding a 2,800,000 investment in inventory to secure our supply chain. This has been achieved by focusing on improving commercial terms in our contracts. After tax payments of naught 700,000, we invested 700,000 in CapEx and also paid 700,000 in dividends. This leaves us with closing net cash of 27,700,000, giving us flexibility to mitigate potential supply issues and inflationary pressures and to support our future growth opportunities in ABD solutions, new product development, and acquisitions.

9:32 At constant currency, revenue and profit were naught point 7,000,000 and naught point 1,000,000 higher than reported, respectively. With around 55% of revenue in dollars, euros, and yen, had currency moved by 10%. This would have an impact of £2,000,000 on half year revenue and naught point £3,000,000 on half year profit.

9:59 In summary, the recovery in demand has enabled us to deliver strong revenue and profit growth in half one. The majority of half two revenue is covered by our existing order book, giving us confidence for the remainder of the year. Our differentiated products give us the ability to mitigate inflationary pressures through price increases, And our strong operating cash generation supports our robust balance sheet, which enables investment in continuing to strengthen the business. I'll hand back to James for the business review. Thank you, Sarah. So I'm now just gonna give a brief overview of the performance by sector. So overall, our track testing sector grew revenue grew by 45% to 30,400,000, which was also up on our strong h two last financial year.

10:46 Testing services increased 236. That was due to the acquisition of Vardatech completed in h two last year, leaving overall organic constant currency revenue increasing by 23%. We saw strong growth of 39% in our ADAS test products. These are the low profile platforms used for testing ADAS systems, mostly driven by sales of our Launchpad product and our Guided Soft Target product. And we're now delivering our new Launchpad 80 and GuidedSoft target one twenty. So these are the highest speed variants of those products to our customer base following strong order intake in h two last year. It was particularly pleasing to see our driving robot sales start to increase again, seeing a 7% growth to 9,700,000, and order intake for driving robots has continued strongly with a positive book to bill ratio in h one.

11:37 As we can see from the bar graph in the center of this slide, our half yearly track testing revenues are now up to beyond pre pandemic levels, and we're set for further growth in this sector. And to support that growth, we're now increasing our manufacturing capacity to ensure we can deliver against the increased demand. Finally, for track testing, we remain active in new product r and d and are set to launch some new track testing products later this calendar year. Then moving on to our laboratory testing and simulation sector. Delivered good growth of 17% to 7,400,000 for the half, driven by strong growth in simulation of 26%, and that was through a combination of growth in our simulator deliveries, our full motion platforms, and very strong performance from RFPro selling its physics based simulation software suite.

12:25 In addition to sales to its traditional motorsport customers, RFPro is now selling more into mainstream automotive, which we expect to continue, particularly when our software as a service version of RFPro is available in 2023. We have a solid order book for our AVDS simulators, and we're nearing completion of the AVDS mark two simulator under development with a major automotive OEM. This new variant will drive increased sales into automotive customers where vertical motion, for example, for the use of SUVs, is an important parameter. We also see continuing increased levels of inquiries across the board in the field of simulation supporting our decision to invest in this area a couple of years ago. We saw broadly flat revenues in sales of our suspension parameter measurement machines, SPMMs, in h one, and that purely relates to revenue recognition phasing on large contracts.

13:18 So although h one this year, the lab testing is behind h two last year, we often have a weighting towards h two, and we expect a stronger second half of the year based on our current order book, which covers the remainder of the financial year and into FY '23. So moving on to strategy update. I think we're gonna start with ESG. And just a brief reminder for those that don't know our business, we are ESG is an intrinsic part of our business model and stated purpose, and that we naturally support the mission to reduce road traffic deaths and injuries while simultaneously assisting the automotive industry to successfully deploy electric vehicles. And as you can see from the statistics on this slide, improvements of road safety are vitally important with one point three five million road deaths each year and the vast majority of those being in low and middle income countries.

14:10 We also thought it'd be useful to just demonstrate how AB DYNAMICS is aligned to ESG megatrends by using the UN sustainability goals. I don't intend to go through this in any detail on this on this particular presentation, but it clearly demonstrates our strong ESG messaging and how we're addressing global sustain sustainability challenges. And it's our intention to expand on this more when we do our full year reporting at the end of the year.

14:36 The next slide shows our overall business model and strategy in those two circles in the center there and how that achieves delivery of our purpose. Since we launched ABD Solutions, which is our new business that leverages our core capabilities into adjacent markets, we've increased our address estimated addressable market to 6,200,000,000, and the combined market now has an estimated compound annual growth rate of around 24%. We continue to invest in the core areas of the business focusing on product development, capability improvement both in terms of technology and talent, and delivering on our service and support element that drives recurring revenues in the business. The addition of ABD Solutions has provided an opportunity for the group to build a broader based business and diversify across a wide range of industrial sectors and has the potential to drive significant future organic growth.

15:29 So while we're talking about organic growth, we thought it would be useful to lay out what are the drivers of our organic growth and our inorganic approach. So our overall approach is to deliver consistent, strong organic growth compounded through value enhancing acquisitions. On the organic side, growth is driven by continual investment in new product development and patentable IP that differentiates the group from the competition and captures market share of an already growing market. In parallel, we need to continue to invest our internal capabilities. So that includes people and talent, our systems and processes to ensure we have a strong foundation as a platform to deliver the future growth. We focus on our operational strategy to drive operating efficiencies in terms of design for manufacturing assembly, supply chain, manufacturing processes to drive additional value through increased gross margins and reduced operating costs.

16:24 Our overall core organic growth will also be supported by delivery of our diversification strategy through ABD Solutions, where we have the opportunity to rapidly drive revenue growth by leveraging those core technologies and capabilities. And the move over the past couple of years to a direct sales model in key markets ensures we maximize margin, support our customer base, and deliver enduring customer relationships that drive ongoing growth. The external growth drivers continue to be the regulatory environment driving ever increasing requirements for improvements in road safety, and those statistics bear those out, typically through the use of ADAS, so driver assistance systems or active safety systems on vehicles. This is compounded by consumer based bodies such as Euro NCAP, who test and rate car safety systems and drive consumer buying behavior, ultimately influencing the automotive OEMs.

17:18 In addition, there are many new vehicles in development with many variants of each model, which increases the volume of vehicles being tested, particularly due to the prevalence of new hybrid and fully electric cars. On top of that, the sheer number of tests required for each vehicle is rapidly increasing, which drives the need for additional test equipment. The number of test scenarios that need to be tested per vehicle was dramatically increased from around 80 in 2016 to around four fifty in 2023, over five times the number of tests. This is set to continue as Euro NCAP and others move towards their 2030 roadmaps with new plans for incremental additions of ADAS systems. If we include the requirements now for commercial vans, which didn't exist in 2016, the 2023 number of tests increases to nearly 600, nearly seven times as many tests as there were in 2016.

18:12 And there's clearly an intent to include more commercial vehicles in the NCAP road map and assessment. Also, the specific requirements for these tests will also drive the need for differing variants of our products, including driving robots and ADAS targets, and that aligns with our overall product and technology road map. So there are kind of three elements there that I want to emphasize. There's the the number of vehicles coming to market, new models and variants. There are this number of tests required per model and variant to actually certify a vehicle or rate a vehicle. And then finally, there's the ever evolving requirements for incremental addition of ADAS, which requires new products for track testing purposes. Then, of course, there is general megatrends of electrification and autonomy driving vehicle development, and hence the need for simulation and testing.

19:01 And finally, automation of vehicle applications in non road applications is a rapidly developing area, delivering improved productivity, efficiency, as well as safety.

19:14 From an inorganic perspective, our approach is to target acquisitions that facilitate or accelerate our strategic priorities, such as new products and technologies, geographic coverage, expansion of our addressable market, delivery of our diversification plans, so things that would support development of ABD solutions, and increasing our proportion of recurring revenue through service and software based contracts. We have clearly defined and disciplined capital allocation policy, which I'll describe on a later slide. And in terms of acquisition criteria, we focus on businesses that have a track record of growth, have strong, stable management, good gross margins, and are cash generative. So now just a brief update on where we are with ABD Solutions. Some of you may know we launched this at the end of the year last year.

20:05 And as a reminder, ABD Solutions is developing retrofittable automation solutions to manually driven vehicles using our core capabilities of driving robotics, positioning control, coupled with sensor integration for object detection as well. We are initially focusing on mining and defense sectors where safety and productivity productivity are the key drivers, and the volumes are relatively low with a high price point. The other two market sectors we've been looking at are agriculture and materials handling. That will come later because those are much higher volume and lower price point markets. We're making very good progress with ABD Solutions. We've recruited and built out a highly capable technical team with strong leadership. This team has delivered good early results with customer demonstrations of our object detection and sensor capability already showing a completely working system. So essentially, we've derisked the technical side of ABD Solutions very early in its development.

21:03 During the first half, we were awarded an eighteen month r and d contract from a major Japanese mining customer for the conversion of large mining trucks for the Japanese market. And we're already talking to end user customers on detailed applications and potential future equipment orders. During the period, we also delivered full scale product demonstrations to both UK and German defense based customers where we successfully converted an in an in service Wolfhound military vehicle, which you can see on on the slide, to fully automated operation. The defense based customers were blown away by how quickly we can convert and automatically operate a vehicle when they've spent many years attempting to develop autonomous based systems. On this slide, we thought it'd useful just to lay out our capital allocation policy, which shows our disciplined approach to investment, returns, capital efficiency.

21:55 Our first area of investment is organic growth of the core business through funding of r and d and new product development to drive revenue growth, but also to deliver the required capability in the business, including investments to drive operating efficiencies. The second priority area for capital investment is into ABD solutions, which helps drive further organic growth through our diversification strategy.

22:17 And the third area are bolt on acquisitions to accelerate our strategic pro progress and compound our organic growth. And our approach to acquisitions is detailed in a bit more on the next slide. And then finally, we'll apply our capital to our progressive dividend policy, which was paused briefly during the COVID pandemic. So in terms of our approach to acquisitions, it's to select targeted acquisitions from a relatively large and fragmented market. There are many small to medium sized businesses operating in and around our markets, and we identify them through direct contacts and relationships, referrals, and we're also engaged in the m and a broker network, which means we get good sites of information memoranda as they become available. As mentioned earlier, any acquisitions contribute to one or more of our stated strategic priorities and will be value enhancing from completion.

23:08 In terms of the acquisition process, we have central resources to identify targets, negotiate deal structures, complete DD, and manage the post acquisition integration. For the acquisition criteria, we're looking for that track record of sustainable growth, good capable management, cash generative, and strong gross margins because strong gross margins indicate a competitive market position providing differentiated products and or services. Post acquisition, we operate a hybrid model whereby the acquired companies operate as independent businesses of brands, but with with independent local p and l ownership, but then coupled with the synergistic benefits of being part of a larger group having central support for things like IT, HR, finance, and legal. In terms of progress during 2021, we acquired BARDA Tech Group.

23:56 For those that don't know, that provides on road testing and evaluation services to predominantly electric vehicles in the Asia Pacific region. So we conduct that testing in China, Japan, and now South Korea. And the integration of ABDOTECH is complete. We now have our senior leadership based in Singapore to take ownership for the whole Asia Pacific region as it's one of our largest regions, and it's performing in line with our expectations. At present, we have a promising pipeline of present potential acquisition opportunities at various stages of the process. And, of course, we'll provide updates as and when those come to fruition. So now over to summary and outlook. So overall, we are very pleased to have delivered another strong set of half year results following the prior year COVID impacted period period.

24:45 Obviously, right now, the markets are very unpredictable, but we've successfully navigated these difficult conditions in terms of supply chain disruption and inflation through proactive management of supply chain and through price increases. We're able to push through these price increases due to our robust business model and differentiated products and services offered to the market. And of course, we'll continue to monitor this situation closely and dynamically adjust pricing accordingly. Particularly pleasing with the strong recovery in track testing revenues across all product lines, now delivering above pre pandemic levels, and we continue to see strong order intake in track testing. Order order intake overall remains buoyant with a positive book to bill ratio across all product lines during h one and a solid order book providing confidence in our h two outlook and beyond.

25:33 We continue to deliver against our strategic priorities with a strong focus on new product development, operational capabilities, and development of our talent. As regards a ABD solution, they are delivering their modular technology in line with our plans, having built out the technical team, and we're very pleased to get our first major development contract for mining in Japan. So in terms of outlook, it remains positive as the ongoing regulatory and structural growth drivers that support our business remain supportive of our continued market growth, and our order intake and trading momentum gives us confidence in delivering the full year results and beyond. Our continued strong balance sheet and positive net cash position also enables us to continue to invest for future organic growth and deliver further value enhancing acquisitions as they become available.

26:22 So that brings the presentation to an end. I'd now like to open up for any q and a. James, Sarah, that's great. And thank you very much indeed for your presentation this afternoon. Ladies and gentlemen, please do continue to submit your questions just by using the Q and A tab that's situated in the right hand corner of your screen. But just while Sarah and James take a few moments to review those questions submitted already, I would like to remind you that a recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard. James, Sarah, we did receive a number of presubmitted questions from investors as well as as

26:54 as you can see, a number that have come through during the live meeting itself. Firstly, may I thank all investors for submitting their questions? And, James, sir, if I could please hand back to you just to run through that q and a tab, and where appropriate to do so, if you could read out the questions and give your response, and then I'll pick up from you at the end. Thank you. Thanks. So the first question is, what impact will inflation have on your business? Okay. I'll answer I'll start answering that one. No doubt Sarah will help me on that one. So so clearly, we've seen an impact on the supply chain, which started around the back end of calendar twenty twenty one. We have seen input cost increases moderately low, actually, compared to many. We monitor that input those input cost increases very closely.

27:41 We implemented a price increase around the early part of twenty twenty two, and that price increase more than covers those input cost increases. Just to be clear, the h one numbers that are in this presentation do not have any impact of that price increase because, obviously, it takes time for those orders to come in and then with the lead time of delivery of products. So we expect to see the impact of the price increases come through in h two. But as we've maintained our strong gross margins, thing it shows that we've made able to manage those input cost increases. In terms of supply chain impacts, which is related to this point, like most businesses, we have seen delays in delivery of certain components and products, which have impacted our operations, but not in any material way. We've been able to manage those through active scheduling of of build slots.

28:34 And we've also been doing a lot of active kitting work of our build slots to make sure we kit well ahead of time so we can see if there are any component shortages. So a somewhat practical and pragmatic way of looking at it, but it certainly works for us. The other side of inflation, of course, is salary inflation and, you know, cost of living increases for our staff. And we typically look at that on an annualized basis in January. So we put through our usual cost of living increases in January, but we are now gonna pull forward our January 23 salary increases into the summer this year, and we're weighting that very much towards those at the lower end of the salary spectrum where this cost of living crisis has the greatest impact. K. The next question is what margin do you expect to achieve? So I'll pick up on that one. As we said, for the full year this year, we're expecting margins to be around the 15% mark and then expecting that to increase incrementally as we go forward.

29:37 We're a long way through the investment in the commercial and operational platform investment, and we should start to see operating leverage starting to drop through from that. But we are investing in ABD solutions, which will dilute the margin for the next couple of years until we start to see the revenues and contribution coming through from that. But should but, certainly, the target is to get back up to the high teens margins over a period of time. And next one is how active is your acquisition pipeline? I'll take that one. So it's it's very active. We have a a very positive acquisition pipeline.

30:24 We've been looking at a number of companies over the last twelve months. We have seen an increase in expectation on valuations. We're being very disciplined about how we approach that. We're not getting involved in some of these very high valuation businesses. So our criteria are quite clear. It should be earnings accretive, should be cash generative, and we're looking at maintaining our discipline in terms of reasonable valuations. But the the pipeline is quite active right now, and we expect to be able to update in due course. I think those are the main thrust of the questions. Sarah, James, thank you very much indeed for taking the time to address all of those questions that have come through. Of And, course, if there are any further questions submitted today, we'll make these available to you for your review after the presentation has ended. And ladies and gentlemen, we'll publish all those responses where it's appropriate to do so on the investment company platform. I'm also notified by email when these are ready for your review.

31:25 James, perhaps we're redirecting investors on the call to provide you with their feedback, which I know is particularly important to yourselves and the company. If I could ask you just for a few closing comments to wrap up with, that'd be great. Thank you. I think I just want to to close by saying thank you all for your attention this afternoon and allowing us to present our the the progress we've made with the business. And just to reiterate that, we've had a very strong first half, and we see the outlook as very positive. So thank you for your time. We really appreciate it. James, that's great. Thank you very much indeed for taking the time to update investors today. Could I please ask investors not to close this session? It shall now be automatically redirected for the opportunity to provide your feedback in order that the management team can better understand your views and expectations. It's gonna take a few moments to complete, and I'm sure we'll be greatly valued by the company. On behalf of the management team of AB Dynamics PLC, we'd like to thank you for attending today's presentation.

32:16 That now concludes today's session. So good afternoon to you all.