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Edited Transcript of AVON.L earnings conference call or presentation 13-Nov-19 10:59am GMT

Full Year 2019 Avon Rubber PLC Earnings Presentation

Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Avon Rubber PLC earnings conference call or presentation Wednesday, November 13, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Nicholas James Keveth

Avon Rubber p.l.c. - CFO & Director

* Paul McDonald

Avon Rubber p.l.c. - CEO & Director

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Conference Call Participants

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* Andrew Chambers

Edison Investment Research Limited - Analyst

* Andrew Douglas

Jefferies LLC, Research Division - Equity Analyst

* Henry Carver

Peel Hunt LLP, Research Division - Analyst

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Presentation

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Paul McDonald, Avon Rubber p.l.c. - CEO & Director [1]

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Good morning, ladies and gentlemen. I'm Paul McDonald, CEO of Avon Rubber, and welcome to our 2019 year-end results presentation.

For our presentation this morning, I will start with the key highlights. Nick Keveth, our CFO, will present the 2019 financial review and 2020 outlook, whilst I will close this by summarizing the key takeaways from today's results.

It's been another strong year for the group. We delivered a record set of results and consistent delivery throughout the year has transformed our midterm outlook. We were delighted to announce the milestone acquisition of 3M's ballistic protection business. We secured $340 million of key long-term contracts for M53A1 and M69. Strategically, this means that Avon will be the sole source provider of general purpose masks, the M50s; tactical purpose masks, the M53A1s; Powered Air, the MP-PAPRs; and tactical self control -- tactical self-contained breathing apparatus, the ST54s, across the entire Department of Defense. These are significant successes and support the transition of our military portfolio away from being historically focused on the M50 to being a multiproduct portfolio and providing the ability to capture greater value for the future.

Alongside the excellent progress with the U.S. DOD, we have also continued to make progress with the U.K. General Service Respirator with the first orders and deliveries expected shortly. However, like all businesses, there is always a combination of successes and challenges during the year. We saw difficult dairy market conditions at the start of the year but, importantly, have seen improved conditions from late spring, giving us confidence for the growth expectations of milkrite | InterPuls in the year ahead.

We have undertaken a strategic review of our SCBA portfolio, and we have made the decision to exit the Fire SCBA market and focus on our core markets of Military and Law Enforcement, which I will talk about in more detail later.

So in summary, it's been a year during which we've transformed the group. We have again delivered against our growth strategy, have clarity regarding the medium-term contract outlook and are confident in our 2020 expectations and our future outlook beyond.

In 2017, we launched the updated investor proposition and said, these are the KPIs you should measure us against. As you can see, it's another great set of numbers, and we remain confident in our ongoing commitments across these targets.

With that, I'll hand over to Nick.

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Nicholas James Keveth, Avon Rubber p.l.c. - CFO & Director [2]

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Thanks, Paul, and good morning, everybody. So now turning to our year-end numbers and our outlook for next year.

I'm delighted to present another set of record results today. Now because the U.S. constitutes over 70% of the group, our reported performance, as expected, has benefited from the weaker pound during the year with a dollar rate of 1.28 compared to 1.35 last year.

So as usual, this morning, I'm going to focus on our constant currency performance, which eliminates the benefit of exchange movements. Order intake, up 1.4%, has supported a 4.2% increase in revenue and contributed to a healthy opening order book of GBP 40.4 million for 2020.

Moving further down the slide, you will see that we have grown our profit ahead of revenue with an adjusted EBITDA of GBP 39.5 million, up 7.7%, and an improved EBITDA margin of 22%. That's 70 basis points up on last year. Adjusted EPS increased by 14.1% due to the EBITDA growth and from the release of tax provisions following the successful resolution of a number of historic issues. This has resulted in an adjusted effective rate of tax of 11%, down from 14% in 2018. We expect a normalized tax rate of around 21% post completion of the acquisition of 3M's ballistic protection business.

Our ability to generate strong returns on capital employed continued with another excellent return of 23.9%. As I highlighted last year, we have continued to see the impact of our strong cash balance holding back our returns. But with the acquisition of 3M's ballistic protection business, we can look forward to stronger returns as we put that cash to work next year.

Underlying operational cash generation has continued to be strong at 98%, but the timing and fulfillments of the $16.6 million Rest of World contract reduced the headline number to 63.5%. Our strong cash position of GBP 48.3 million provides the funding to complete the acquisition in the first half of 2020 and enables us to continue to invest in product development to maintain our innovation leadership in both businesses as well as the ability to continue to pursue further acquisition opportunities.

Reflecting our confidence in the transformed outlook for the group for next year and beyond, we have proposed a final dividend of 13.89p per share, resulting in total dividends of 20.83p per share, that is, once again, up 30% on last year and in line with our progressive dividend policy.

I now want to talk more about our constant currency revenue growth. Our revenue increased by 4.2%, following a strong second half, in line with our guidance in May, with Avon Protection delivering excellent growth, up 5.9%, and milkrite | InterPuls, impacted by the difficult dairy conditions in the first half, down marginally 0.3%.

In Avon Protection, excellent Military growth of 26.1%, that's up GBP 18.1 million on last year, was the result of higher Rest of the World revenues of GBP 32.3 million compared to GBP 13.4 million last year, driven by the $16.6 million mass contract and the Norwegian MCM100 order.

DOD revenues increased to GBP 54.8 million from GBP 52.7 million last year as the first M53A1 and M69 deliveries and growing sales of spares and accessories offset the expected lower M50 revenues. The U.S. government partial shutdown earlier in the year particularly affected Law Enforcement, contributing to the decrease in revenue against a strong comparator in 2018. The shutdown impacted the timing of our U.S. Law Enforcement business due to delays in our customers obtaining government funds, preventing them from placing orders. From Q4 onwards, we have seen improved momentum in our U.S. Law Enforcement business which bodes well for next year.

The timing of receipt and conversion of orders also contributed to a reduction in our Fire revenues. However, orders were up 5% in the year, ahead of the 5.3% revenue decline.

As I previously mentioned, the difficult market conditions we experienced in the first half impacted all lines of business within milkrite | InterPuls. Improving farmer confidence in the second half of the year supported the return to growth in the second half, with revenue for the year as a whole down 0.3%.

So now moving on to talk about our cash conversion. We delivered below our target of converting 90% of adjusted EBITDA into cash with cash conversion of 63.5% in the year. As I said earlier, the Q4 shipment of the $16.6 million Rest of World contract meant that the cash wasn't received before the end of September and negatively impacted the cash conversion.

It's important to note that outside of this one-off impact, our underlying cash conversion remains strong. And as I said, adjusting for this one-off item, underlying cash conversion was 98%. The timing of the contract receipt, in addition to our increasing dividend payments and GBP 2 million of cash costs related to the acquisition, has meant that there was a smaller increase in net cash this year of GBP 1.8 million, up to GBP 48.3 million at the year-end.

So finally, on this slide, just a few words on CapEx. We remain committed to investing for growth and developing the next generation of products to maintain our market-leading position for innovation in both businesses. As you can see, we've continued to invest in CapEx with GBP 7.9 million of spend in the year, the most significant investments have been finalizing the manufacturing line and tooling equipment for the U.K. GSR contract, further enhancing the capability of our MCM100 underwater rebreather as well as continuing to develop the next generation of escape hoods.

Okay. I'd now like to return to looking at Avon Protection in a bit more detail. Order intake was broadly flat with the first M69 and M53A1 orders and growth in Rest of the World offsetting the absence as expected of U.S. DOD M50 orders in the year. The continued focus on building and maintaining a strong order book has supported our flexibility in managing order fulfillment to deliver revenue growth of 6% and adjusted operating profit ahead of revenues at 17.6%. The first deliveries of the new commercially priced M53A1 contract combined with the growth in Rest of the World revenues and lower DOD M50 revenues drove a strong increase in EBITDA margin to 24.5%, that's up 160 basis points on last year.

The strong opening order book of GBP 36.7 million for 2020 provides us with excellent visibility of revenues and profits for next year. And finally, as Paul mentioned earlier, we've made the decision to exit the Fire SCBA market. Revenues from the sale of original SCBA equipment in the Fire market was GBP 6.3 million in 2019. This exit has resulted in an exceptional noncash impairment of GBP 5.4 million being included in our reported operating profit.

I now want to turn to milkrite | InterPuls. milkrite | InterPuls has performed well despite the difficult market conditions in the first half. And importantly, as I've already said, we continue to see a stabilizing market, driving increased farmer confidence in the second half. This farmer confidence translated into strong order intake in the second half of the year, resulting in orders received up 4.5% for the year as a whole, well ahead of revenue. And this contributed to an increase in the order book of 48% over this time last year.

However, revenue and operating profit were down 0.3% and 9.5%, respectively, reflecting the impact of that tougher trading in the first half and the cost of consolidating our European operations into Italy.

Just to say a little bit more about current conditions we're seeing in the dairy market. The dark gray line in the graph shows that we began the year with downward momentum in milk prices. And this combined with a strong expectation that feed prices, the light gray line, would also increase created a squeeze on profit -- farmer confidence during the first half.

During the year, annual milk production growth has been moderate at less than 2%. As indicated by the red bars, the moderate growth in production helped to create upward pressure on milk prices which, as you can see, started to come through from January onwards. Following the sharp rebound in milk prices, farmer confidence recovered as the year progressed. These more stable conditions have helped improve farm profitability and increased farmer confidence supporting the improved order intake we've seen in the second half, and this gives us confidence that milkrite | InterPuls will deliver revenue growth for the year as a whole in 2020.

I now want to talk to you in more detail about the strength of our GBP 40.4 million order book for 2020. Our Military order book of GBP 29.4 million provides a strong opening position for 2020 with the next M69 and M53A1 shipments, together with a strong pipeline of Rest of the World orders, giving us excellent visibility for the new financial year. Going forward, we will report on a combined Law Enforcement and Fire line of business, which we will call first responders. You will see on the slide that the first responders' order book grew strongly with a GBP 2.2 million increase over last year to GBP 7.3 million. The growth in order book in Law Enforcement reflects strong order intake in Q4

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the GBP 3 million relates to our continuing product lines being thermal imaging cameras, mask spares and accessories.

Finally, milkrite | InterPuls added GBP 1.2 million to their order book during the year, benefiting from the stabilizing market dynamics and growing farmer confidence in the second half.

I don't normally talk about accounting standard changes in my financial review for the year, but the new lease standard, which comes into effect next year, does change some of our key financial metrics, which I wanted to talk to you about this morning. This means that from the start of this year, 2020, all of our operating leases will be brought on to the balance sheet for the first time, and there will be changes to the presentation of our profit and loss account. The operating leases principally relate to our leased manufacturing facilities. And from the start of 2020, we will add GBP 6.5 million to our assets, and we will see a GBP 10.2 million reduction in our net cash. Currently, these lease costs are included in our EBITDA, but these will now be included as a finance cost. This will improve our EBITDA by GBP 2 million, increasing the margin by approximately 1%. There are no changes to our cash flows, and this will not impact our earnings per share.

So before I hand back to Paul, I'd like to finish with a summary of our outlook for 2020. We are confident in delivering our 2020 expectations, and this is supported by our strong opening order book at GBP 40.4 million, military revenue underpinned by long-term contracts, a return to growth for Law Enforcement and the improved dairy market conditions we're seeing, all of which will more than offset the loss of the Fire SCBA revenue of GBP 6.3 million and will ensure we deliver revenue growth in line with our investor proposition.

We also expect an improved product mix to drive improved EBITDA margins. We're also on track to complete our acquisition of 3M's ballistic protection business during the first half of the year. When all of that is taken together, it sets us up for another record year in 2020.

Thank you very much, and I'll now hand you back to Paul.

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Paul McDonald, Avon Rubber p.l.c. - CEO & Director [3]

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We have delivered a strong set of numbers in 2019 and has -- and have positive momentum as we start 2020. As Nick has already provided the outlook for 2020, I would like to spend some time to discuss the future direction and focus of Avon so you can better understand the midterm opportunity from our strategy rather than having to look at one year to the next as we have in recent years.

We're 2 years into our growth strategy based on creating value through 3 key elements: growing the core by maximizing sales from our current portfolio and improving our operational efficiency; pursuing selected product development to maintain and expand our leading product positions; and targeting value-enhancing acquisitions where they complement our existing businesses and add value to the group. The strategy is consistent, and we have been consistently building a track record of delivering against it. This has transformed the group.

So I'd like to take you through a framework for the sorts of things you should be considering when thinking about Avon over the midterm. During last year, we've transformed the outlook of our Military business. The contract awards for M69 and M53A1 have confirmed the status of Avon Protection as the sole source provider for respirators, Powered Air and tactical SCBAs across the entire United States Department of Defense.

M53A1 is a minimum 5-year framework contract with a maximum value of $246 million. M69, which is pictured on the slide, is also a minimum 5-year contract that expands our product reach by taking us into the aviation sector for the first time. The MCM100 is undoubtedly our most advanced product, which we launched last year. Having delivered the first large order to the Norwegian military, we're able to demonstrate our technology to customers and have a number of significant opportunities, notably the U.S. Navy, who are currently trialing 7 evaluation units.

We are extremely excited about the growth potential for MCM100 and its contribution to the future success of the group. We have undertaken a strategic review of our participation in the Fire SCBA market and decided to exit this product line. Avon has a small market position in Fire SCBA, and we're competing against much larger competitors who are more strategically focused on the Fire market, and we generate returns below our strategic targets. We believe we can deliver both higher growth and margins by focusing on our Military and Law Enforcement customers. Therefore, we've taken the decision to exit the Fire SCBA markets but will maintain the production capability and will focus our attention in the areas where we're clear market leaders and can add greater value for the future.

I'd now like to talk to you about our Military outlook and how you should be thinking about our portfolio over the midterm. The ongoing service life of the M50 remains very important to the group, and we are continuing to discuss the new sustainment contract with the U.S. DOD and expect to announce a new 5-year sole-source contract under commercial pricing during 2020. This should contribute GBP 25 million to GBP 35 million of orders on an annual basis from the installed base of over 2 million masks. M53A1 and M69 are both minimum 5-year contracts and are expected to deliver combined orders of between GBP 30 million to GBP 40 million. We have been developing the next generation of escape hoods during the last 3 years and are excited to bring this one-size-fits-all compact design into our portfolio. The next generation escape hood is commercially priced and should contribute GBP 5 million to GBP 10 million of orders each year with the U.S. DOD.

As we've previously stated, we believe the Rest of World customers will provide a strong midterm opportunity as they start to replace the old generation of products we supplied in the early to mid-1990s. We're seeing a more visible pipeline of opportunities with the Rest of World customers, which could contribute between GBP 25 million to GBP 35 million of orders each year. The key takeaway is that during 2019, we delivered GBP 87.2 million of military revenue. And as you can see, this is both sustainable and provides upside potential for the future.

Our strategy has focused on delivering organic growth and margin accretion across the business, which we believe has further upside potential from the current levels. The existing Avon Protection business delivered 24.5% EBITDA margin in 2019, and we see this improving to above 25% over the medium term. The main drivers for this are the mix impact from the commercial pricing for M53A1 and M50, with additional growth coming from Law Enforcement and Rest of World, whilst also benefiting from exiting the lower margin Fire SCBA product line.

When considering milkrite | InterPuls, in 2019, our margins moved backwards, and we further streamlined the operational structures during the more difficult dairy market conditions. We expect this focus on operational efficiency and customer service will support improved margins to above 22% over the medium term.

Finally, moving to the bottom of the slide. During 2018, 3M's ballistic protection business achieved reported margins of 12.6% EBITDA. When we announced the acquisition, we highlighted the $5 million of cost synergies, largely from back office costs, which will improve the margin to 18.5% on a pro forma basis at a one-off cost of $10 million. For the midterm, we believe over 20% is achievable as the business benefits from further growth.

This brings us to our continued investment in product development, which has been the beating heart of the strategy over the last 5 years. For those of you that are new to Avon, we're a customer-centric business. In our minds, this means looking at our customers, understanding their needs and identifying the technologies that do not yet exist to further enhance their capability and effectiveness. And we maintain our competitive advantage by continuing to develop the next generation of technology in partnership with our customers to meet their future operational needs. Over the last 10 years, we have, on average, spent over 5% of revenue on R&D investment, and we're committed to continuing this level over the medium term.

This brings us to our milestone acquisition of 3M's ballistic protection business. This acquisition accelerates the long-term growth prospects for Avon Protection, significantly broadens our product portfolio and technology base and further deepens our relationship with the U.S. DOD. This business will add 2 further framework contracts for the next generation of ballistic helmet and body armor, and we look forward to welcoming them to the group upon completion.

Avon Protection is positioned as a significant system supplier for a life critical protection portfolio, providing most of the hardware to protect each soldier from the waist up. This is visibly highlighted by the combined product portfolio of respirators, Powered Air and Supplied Air products for CBRN protection and helmets and body armor for ballistic protection. Whilst the portfolio is well embedded with the U.S. DOD user groups, the strategic focus is to sell this wider portfolio to our existing customers through our comprehensive network of distributors and provide further midterm revenue upside.

In short, we will be focused on ensuring a successful and efficient integration of 3M's ballistic protection business, including the realization of the identified synergies. Over the midterm, we will continue to further explore other acquisition opportunities to accelerate growth, but only when we believe they will complement our existing businesses and add further value to the group. This means we're in a strong position to pursue other opportunities, and we have significant firepower at our disposal for further M&A. We continue to see an even greater number of opportunities in the pipeline but will only proceed when we believe the criteria will be met and the timing is right for the group.

We have transformed the outlook of the business in 2019, and the picture on the slide reflects the transformation of the group. We believe our future performance is sustainable is highly visible and has a wider range of medium and long-term opportunities. Our products have high barriers to entry with significant advantages over our competition. We are committed to product development in partnership with our customers to develop the next generation of products and have maintained a full pipeline of R&D. We believe maintaining competitive advantage is critical to our strategy, along with further complementary M&A that will lead to further value creation for the future and with all of the above points supporting our confidence for 2020 and the group's medium-term outlook. When considering all of this, I hope, like us, you are equally excited that the next 3 to 5 years will be very positive for the group.

Ladies and gentlemen, that's it. Thank you for listening, and we're ready to take any questions.

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Questions and Answers

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Henry Carver, Peel Hunt LLP, Research Division - Analyst [1]

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It's Henry Carver from Peel Hunt. Just one on the MCM100. Obviously, you've got these units with the DOD now. That's potentially quite a substantial order. What sort of capacity have you got for delivering those in terms of the production line? How many can you get done in a year? And will that be enough to satisfy an order?

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Paul McDonald, Avon Rubber p.l.c. - CEO & Director [2]

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Yes. Good question, Henry. I think we've put a facility in at Melksham in the U.K. We've delivered just under 100 units from that this year. So it's really about producing for batches rather than annual capacity. We probably could make 400 to 500 a year if we have to, but equally, if we had a bigger order, a small investment would increase the capacity and allow us to be able to accommodate, Yes.

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Nicholas James Keveth, Avon Rubber p.l.c. - CFO & Director [3]

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Capacity is not an issue.

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [4]

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It's Andrew Douglas from Jefferies. Can we just talk briefly about the R&D pipeline? Clearly, we've had a lot of new products coming through in the last couple of years, and we've got the benefits of that to come through over the next couple of years. In terms of the next generation, is this an evolution of the current product portfolio? Are you taking into new markets? And also if you could just talk briefly about competition, clearly you're exiting Fire, competitive markets, substandard margins for you and -- to how you think. Has there been any change in the landscape that you see from your kind of current business going forward? And that's both divisions, I guess.

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Paul McDonald, Avon Rubber p.l.c. - CEO & Director [5]

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So if I take R&D, we continue to invest in all of our product lines. I think what you have seen over the last sort of 10 years is significant investment, particularly around the respirator side of things. We added Powered Air, but that was the first time we'd organically done it. The -- so this year, we've got quite a lot of excitement towards the escape hoods. And I think you should be expecting at least one product per year coming out. We've also got the ST54 coming out, which is the upgraded version of the Military SCBA capability. So we should start to see that. I think there is a number of sort of in-cycle product upgrades. There are also new products, new concepts broadening the expansion. And as we then take the helmets and body armor, I think you'll see a wider integration play over the next sort of 5 years. So if I do that, I think if I talk about Fire, the real challenge we had in there is that we're seeing businesses -- our competitors are really investing in wider M&A, building a greater portfolio. So they're starting to block the distribution channels, and they've made it very hard for us as a small player to be able to penetrate those. We don't have those issues within Law Enforcement and Military. We are the go-to product. We are the leading product. And that's really been the sort of focus of where can we maximize the value's returns in growth, and there the decisions that we've made. So in our sort of -- in our core businesses, we've not seen sort of any significant moves from the competition. We're already staying ahead of them, and we'll stay further ahead of them. And I think over the next sort of 5 years, you'll also see another broadening of our organic products.

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [6]

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And one quick follow-on. Probably, it's slightly unfair, but I'll ask it anyway. 3M's ballistic protection hope to come on really soon. You've kind of had a look at it from a closer perspective now. Any kind of change of thoughts on the upside potential, maybe Rest of the World or anything else that you found over the last kind of couple of months since you last spoke to the market, probably helpful.

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Paul McDonald, Avon Rubber p.l.c. - CEO & Director [7]

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So as part of the sort of process, I've ended up to the meeting probably about 90% of all of the employees face-to-face. I think what struck me is actually the similarities of their business versus our business and how close they are. The best way of explaining is we've probably found our long lost twin, I think, is my view. But it's not surprising. We've both been shaped by the same customer. We both have the same sort of operational processes. We both have the same structures. So it may not be any surprise. But I'm really, really comfortable with the cultural fit of the 2 organizations, and we just need to get through completion. Once we're into completion, we can then start to discuss the sort of wider longer-term strategy of Rest of World markets, how we bring them out, but they're already placed with their key customer, the DOD, for the next generation. It's then sort of additional upside is further opportunity in the future.

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Unidentified Analyst, [8]

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Just 2 questions, please. Firstly, on the M69, M53A1 in terms of we're going now into our first full year of full production. Anything we've learned in the last few months, anything we need to think about going forward?

Secondly, on farm services, a bit of a pause there. Is that a pause? Is there any -- is that going to sort of pick up? Or is it -- because part of it was services adds predictability to it. It's become a little bit less predictable. So if you can give us some thoughts around the dynamics there, that would be great.

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Paul McDonald, Avon Rubber p.l.c. - CEO & Director [9]

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I think if I deal with sort of M69, M53A1, we -- obviously, it's the first time we'd ever made those products to make all of them in the second half. It was a bit of a challenge for the business, hence the strong H2. We produce them. We're into the cycle of production. So I think you're now seeing that as normal run and repeat business. It's really just a full year impact rather than any significant changes. It's in line with our expectations, and you've seen it come through in the numbers in the second half.

In terms of farm services, I think the challenging dairy markets caused some of that pause. Since the milk price has started to recover, we've started to see business is normal in farm services. And actually, in some of the other downturns, we saw a similar thing, flattish growth during that period. You saw it come back onstream afterwards. So I think we're just starting to see that natural cycle again.

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Andrew Chambers, Edison Investment Research Limited - Analyst [10]

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Just ask about the pace of margin development -- sorry, Andy Chambers from Edison. Can I ask about the pace of margin development? You've obviously given some medium-term guidelines there. But as we look into fiscal year '20, there seem to be a number of issues, not issues -- sorry, positive factors coming through, including full production on the mask systems recovery in the milkrite margin, presumably the dairy market stabilizes. You actually did a very good margin development in the fiscal year '19, considering a very tricky first quarter anyway. Should we expect the margins to develop organically at the same rate as we saw in fiscal year '19? Or are there other factors that I'm not taking into account in that?

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Nicholas James Keveth, Avon Rubber p.l.c. - CFO & Director [11]

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Yes.

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Paul McDonald, Avon Rubber p.l.c. - CEO & Director [12]

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So you mind taking that?

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Nicholas James Keveth, Avon Rubber p.l.c. - CFO & Director [13]

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So we -- the margin -- EBITDA margin grew by 70 basis points in '19. We would expect a similar size improvement in 2020, yes.

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Andrew Chambers, Edison Investment Research Limited - Analyst [14]

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And just because I'm stupid, I am sure everybody else in the room understands this, how much revenue drop do you expect in the M50 in '20 compared to '19?

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Nicholas James Keveth, Avon Rubber p.l.c. - CFO & Director [15]

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We did about 90,000 units last year, we're forecasting 50,000 for next year, as we've said -- guided, but we will get commercial pricing on that. So we lose about GBP 10 million. Yes.

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Andrew Chambers, Edison Investment Research Limited - Analyst [16]

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Can I just follow-up on the M50 longer-term outlook? Obviously, there is a bit of a shortfall in this year. It's, obviously, the start-up 10 years ago, started relatively slowly in gathered pace. And I think I'm just trying to get a feel for long term. I mean the assumption always was 2 million installed base, 10-year average life, 10-year average sort of service of a typical U.S. armed forces person. So I mean I guess the question is how it's -- surely 50,000 a year is unsustainable for them to keep on, it's got to be more than that longer term. Is that -- can you add any color around that as to how it can stay that low? Or will it not?

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Nicholas James Keveth, Avon Rubber p.l.c. - CFO & Director [17]

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I mean I think we have a pretty good view of demand in the short term and the 2 million was a ramp-up. So the peak sort of fulfillment was sort of 3 to 5 years ago. So I think there will be years when it's more than 50,000. That's -- I think that's clear. But in the short term, we are now replacing -- the demand is to replace a kit that was put in 10 years ago, and an initial sort of ramp up where there were lower than average volumes over that 10-year period. So we'll go through a period now. But I think that there is definitely upside potential there.

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Andrew Chambers, Edison Investment Research Limited - Analyst [18]

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Yes, okay. So it's several years?

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Nicholas James Keveth, Avon Rubber p.l.c. - CFO & Director [19]

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It's a few -- yes, couple of years away.

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Paul McDonald, Avon Rubber p.l.c. - CEO & Director [20]

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So that's it. Thank you very much. Thank you, everyone.