M&A Announcement

Aug 7, 2019

Good morning. I'm Paul McDonald, CEO of Avon Rubber, and I'm here with Nick Kvett, our CFO. We're delighted to be hosting this call this morning to run you through the acquisition of 3 ms's ballistic protection business. This marks the largest acquisition in Oven's history and is in line with the acquisition criteria we set out in 2017. We have agreed to purchase the assets of 3 ms's ballistic protection business, which is a leader in ballistic helmets and body armor protection with multiyear contracts with the U. S. DoD for the next generation soldier protection system. The acquisition is subject to regulatory approval and is expected to close during the first half of our twenty twenty financial year. In financial year 2018, the business delivered revenue of $85,000,000 and EBITDA of $10,800,000 and we're expecting to deliver $5,000,000 of further cost synergies. The initial consideration is $91,000,000 with a contingent consideration of a further $25,000,000 depending on the outcome of pending tenders for legacy products. The consideration will be funded from existing cash at an increased committed bank facility of $85,000,000 This morning, I will add further color for the strategic background to the acquisition, provide an introduction to the business, their product range and the strategic benefits it brings to the group. Nick will take you through their financials and the deal structure, and I'll finish with the key takeaways followed by the question any questions you may have. As you know, we've been exploring acquisition opportunities for some time. We have maintained a very clear focus on capital discipline, ensuring that any opportunity meets our strict financial and commercial criteria. And we believe this acquisition does exactly that. We had identified and we're tracking this business for a while, so the alignment with our strategy should be no surprise. Its core strengths, which are outlined on this slide, share many similarities with our Avon Protection business. A strong brand, a leader in ballistic protection, significant relationships with the DoD, a proven R and D capability with an attractive financial profile and track record. So we're very excited about what we can achieve together and how we can bring value to this business. The acquisition creates a number of significant strategic opportunities for us, including widening Avon Protection's product range in the personal protective equipment segment, deepening our presence in the U. S. And relationship with the U. S. DoD as a key supplier of next generation ballistic helmets and body armor for the soldier protection system, placing Avon Protection at the forefront of technological development across both CBRN and ballistic protection, allowing Avon Protection to expand the business' reach, opening opportunities to cross sell its products into our broader rest of world military and law enforcement customers, and enhancing both the group's R and D and manufacturing capability and providing capacity to support further growth and broaden the combined future product range. Therefore, we look forward to welcoming this business into the Avon Rubber family at completion. I'd now like to spend some time giving you an introduction to the business. The business is a leading provider of ballistic helmets and body armor, mostly to the US DoD, as well as being a supplier of helmets and body armor to a smaller number of rest of world military and law enforcement customers. They operate from 3 manufacturing sites in the U. S. With approximately 280 employees and across 3 product segments, helmets, body armor and flat armor, which I'll come to talk about in a moment. Crucially, it's high quality, safety critical business with proven R and D capability backed by proprietary technology. To explain the background to the deal, we see that helmets and body armor will further complement our existing business with our key customer, the U. S. DoD. The multiyear programs with the U. S. DoD for the Soldier Protection System or SPS program provides a lighter weight next generation product to meet the individual soldiers' needs, where we are the sole source provider for the ballistic helmet and body armor low rate initial production. And one of 3 suppliers awarded a full rate production contract for body armor with a collective ceiling value of $704,000,000 over a 4 year period. In addition, they are well positioned to be a full rate production supplier for the next generation helmet. These programs will provide mid term growth for the business and additional visibility of the future revenues for the combined group. Additionally, there are several other major market opportunities I want to talk about. Firstly, the acquisition has a strong position with the U. S. DoD that has limited market penetration in rest of world military and law enforcement markets, which Avon Protection already benefits from. Given our established and growing customer base in these markets and geographies, there is a clear opportunity to accelerate non U. S. Military sales. Secondly, the acquisition provides us with both an enlarged product range and enhanced R and D capability, which we believe will put us in a strong position from which to capitalize on these market trends. The acquisition significantly strengthens our technology and personal protection offering, with the core product range being ballistic helmets and body armor to complement our existing products. The key products to pull out here are the integrated head protection system helmet, which is the bottom right helmet and the vital torso protection body armor, both of which are part of the soldier protection system and provide the next generation technology to the U. S. DoD. As part of the product range, they also manufacture flat armor for fixed and rotary wing aircraft. So that's protection for seating, cockpits and engines, which provides an interesting addition following our M69 aircrew mass program and will give us direct access to the various aircraft manufacturers. So when looking at the combined range of high end safety critical products, this combination will significantly strengthen our technology and our personal protection offering to an enlarged customer base and thereby accelerate the medium term growth prospects for the combined group. There is also a clear cultural fit with employees who understand the demands of supplying the U. S. DoD as their number one customer and the similarity of business models. I'll now pass you over to Nick, who will run through the financials. Good morning, everyone. Following on from Paul, I want to first quickly take you through our financial criteria, which we have strictly applied in evaluating this acquisition. The business fulfills all of our criteria, as you will see on the slide. And to reiterate Paul's introduction, the key point to get across here is that we've taken a disciplined approach to the use of capital on this deal. We expect the acquisition to be significantly EPS enhancing immediately and to deliver a return on investment exceeding our WACC in the 1st 4th year of ownership. This is a great asset and the right use of our cash to generate value. So let me take you through the financials for the year ended 31 December 2018. Revenue was $85,400,000 EBITDA 10.8 percent profit before tax 3.3 percent with gross assets of $45,200,000 We expect to deliver $5,000,000 of annual net cost synergies in the 1st full year of ownership from integrating back office and IT systems. The one off investment costs to deliver this are expected to be around $10,000,000 The transition from low rate initial production to full rate production for both helmets and body armor will naturally impact on revenue growth in 2020 2021 before delivering in line with our strategic growth objective thereafter. Based on the contracts secured to date and current fielding expectations, the combined group's performance is expected to deliver in line with our existing strategic objectives in respect of organic revenue, margins and cash conversion. Quickly running through the terms. The acquisition is for an initial consideration of $91,000,000 with a contingent consideration of $25,000,000 which I will come back to shortly. The acquisition will be funded from our existing cash and an updated 3 year revolving credit facility of $85,000,000 which will leave us in a comfortable net debt position of less than 1 times EBITDA post acquisition. As I mentioned earlier, there is a large potential contingent consideration of up to $25,000,000 This relates to the outcome of legacy product tenders that will impact short term revenue. All I can say is the more we pay, the more we will benefit. And we will update you regarding outcome of these tenders as the results are known. Finally, we're expecting the deal to complete in the first half of our twenty twenty financial year once U. S. Regulatory approvals have been received. Paul will now finish off with a summary ahead of questions. Thanks, Nick. As you can tell, we're very excited about this deal. We believe the acquisition is transformational and further demonstrates the execution of the group strategy by providing organic growth opportunities, enhancing our product portfolio and R and D capability, broadening our addressable markets to generate further shareholder value. We're delighted to have identified an opportunity that fits our clear commercial and financial criteria with a strong cultural fit. And in the short term, we will be focusing on ensuring a successful and efficient integration of the 2 businesses. We look forward to continuing to make further strategic progress over the remainder of the year. And as we stated in our announcement today, trading in our second half of the financial year has continued in line with expectations. So we remain confident of achieving full year expectations. Ladies and gentlemen, that's it from us. I would like to thank you for listening and would like to open the line for any questions you may have. Thank We'll take our first question from the line of Henry Carver from Peel Hunt LLP. Your line is open. Please go ahead. Thanks. Good morning, guys. Just a couple of sort of broader queries. I just wondered if you give any sort of detail on primarily where the synergies are coming from. First off, is that all back office or is there some sort of opportunity for manufacturing synergy? And then secondly, the soldier protection system, could you just sort of briefly outline what else falls within that? I mean, obviously, the helmets and respiratory protection and flat jackets. But is there any sort of other obvious bits and pieces within the Soldier Protection System that you are now is now on your list? Henry, it's Nick. In terms of synergy, the number that we talked to in the presentation is derived from sort of back office process, IT system consolidation, integration, bringing that all together. We haven't baked in any sort of revenue synergies or manufacturing synergies into that number at all. I think there will be some opportunities there, but it's largely different from the back office side. If I take the Soldier Protection System, Henry. Soldier Protection System is a program that the U. S. DoD identified. They wanted to review the sort of the protection they provide the war fighter and particularly trying to lower weight and also make it more accessible for more female serving officers in a combat environment. So the program developed a new generation of body armor, similar protection factor to the previous version but lighter, a similar helmet with higher protection factor and also lighter. And the third part of that is a new transitioning lens. So instead of it being a standard glass, it actually is a liquid crystal display, which immediately transitions. So when we identified on our Capital Markets Day what we call integrated solutions, this is where we saw growing complexity about how you can protect, how you can improve the communication, how you can improve the visibility, how you integrate respirators with a wider system of sensors, of helmet technology and the communication devices. We really see this as a step in that direction over the next 10 years. So it obviously gives us further opportunities. And I think the other side of our primary focus is integrating this acquisition. But once we've done that and we've brought it into the group, I think this does broaden and widen the further opportunities that we now have in the group for the future with wider M and A for the future also. That's great. And is there more scope for perhaps non wearable protection system? I'm just thinking that flat armor, presumably that isn't part of the seat, not something you wear. Is that a direction that could be further explored? At the moment, it pretty much is sort of under seat protection and the engine and stuff like that as a standard requirement. But equally, there's opportunities where, particularly with the powered air, as we start to protect the battery power infrastructure that, that also carries, that's where we probably have to protect that further. So it is starting to give us a wider combination of technologies that we can also bring into the core Avon Protection offering at the same time. Perfect. Thanks very much. Our next question comes from the line of Andrew Douglas from Jefferies. Your line is open. Please go ahead. Good morning, gents. Three quick questions for me, please. We see that the North America is still about, I think, 90% to about 3% of group sales and I think about rest of the world before. Given Avon and others heritage outside of the defense, do you how confident are you that you can kind of really kind of wrap up the rest of the world, the elements to the story? Clearly, we've got the low rate production on a couple of platforms that you should hopefully give you good growth over the kind of medium term. What's the how confident are you on the rest of the world, please? And then just quickly on some numbers for Vic. I mean, you've talked about split between cash and some debt through RCF. Can you give us a rough split of that so you can try and fluctuate your interest charge? And also just on completion, I'm assuming that there's no kind of concerns that you clearly need to put upon approval. Should we be thinking kind of 3 to 6 months? Is that fair? Yes. Perfect. Andy, if I take the first one. This business has got a significant heritage. They've been the main supplier to the U. S. DoD for a number of years, both pre 3 ms ownership and post. What that has done is given them a technical lead with the most demanding customer in the world. Very similar to what you see in Avon Protection, people see that as the sort of standard bearer. It's then about bringing that into that wider rest of world infrastructure. Over the last sort of 5 years, Avon has successfully invested in its wider infrastructure distribution channel, sales team carrying that rest of world military. The current infrastructure within this business is very little. So we immediately will start to bring their product range into our wider rest of world military customers. So I'm very confident that they have a product that meets the technical requirements of those customers. I'm confident in a number of areas that they also have the price points that will allow us to be successful, and I'm confident that we have the infrastructure and sales resource in place to be able to achieve that. I think the second point that I would say is with our core Avon Protection business, we've also said that over the next 5 years, we believe that there will be a growing opportunity, particularly within Europe, where that sort of generational change is coming for customers to be upgrading their respirator. The respirator also has to fit with the helmet. So naturally, the helmets and the respirator get considered together. And this is where we've got a wider opportunity with those same customers to bring that broader product portfolio right at the front end of that technology. So I'm really happy. And I think the second side is given our dominance in law enforcement sector for respirators and how wide we access that market and the engagement we have with those customers, it would also be then bringing this particularly for the sort of SWAT teams and the high end police response units. So we also should be able to expand that channel considerably from where it is today. I guess your two questions are sort of interlinked, Andy, in terms of timing and splitting cash and debt. We've sort of said in the statements first half of our 2020 financial year. But I think realistically, that's more likely to be Q2, somewhere between January March, sort of 6 months sort of away from where we are now. And in that kind of window, we're talking about 60% coming from cash, 40% being financed of debt of the initial consideration. So that's it depends on the speed of which the various U. S. Government bodies move through the regulatory process. But that's as good as we can guide at this stage. But there's no concerns about approval? No. No. No. Cool. Okay. It's yes, we're obviously an existing supplier into the USDOD. It's a complementary products with limited overlap. This transaction doesn't change the competitive dynamics. It's not reducing the amount of suppliers within the U. S. Again, we are a very credible supplier with a significant track record of a long period of time. So we believe it's a matter of just going through the process, getting the required regulatory approvals. But the items of concern we see is very low risk. Okay. Perfect. That's really helpful. Thank you. And I think the final side, just on timing, which you also asked for. We think it's going to be about 6 months for all of that, but obviously, we'll give the updates as we go through that process. Okay. Yes. Okay. Thank you. We'll take our next question from the line of Andrew Chambers from Dyson. Your line is open. Please go ahead. Good morning, chaps. Can you hear me okay? Yes, good morning. Yes, glad and clear. Good morning. You just answered my main questions whether there's any CFIUS concerns, but just 2 other things as well. Firstly, in terms of the $25,000,000 of revenue, how many sort of tenders does that involve? Is that before or is it a host of things? So we're not in a position to disclose the detail of the tenders and the consistency relates to. We will be in a position to share more about that as those processes progress. They are for legacy products that have short term periods of time. So they're not linked to the long term next generation programs that Paul has been talking about. And then in terms of CFIUS, we obviously go through the process and follow the process, but there's no significant risks that have been identified in our diligence around that. And just one technical thing, but I haven't got any slides in front of me, but do you know what the D and A is? If you between $2,000,000 $3,000,000 Okay. Thank you. It appears there are no further questions at this time. Thank you, everyone, for listening. We're absolutely excited about this deal. And if there's any further questions, please feel free to follow-up with our brokers or ourselves.