# Strategic report

_Source: `DeepSeekOCR_Ardian_pruned_1k/consumer-cyclical-auto-parts/LSE_ABDP.L_2020/LSE_ABDP.L_2020.mmd` · pages 1-7_

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Strategic report
1 Highlights of 2020
2 At a glance
4 Chairman's statement
6 COVID-19
8 Chief Executive Officer's review
12 Business model
14 Our markets
18 Our strategy
20 Key performance indicators
22 Operational review
28 Financial review
31 Sustainability
43 Risk management
45 Principal risks and uncertainties

Governance
48 Board of Directors
50 Chairman's introduction to corporate governance
51 Statement of corporate governance
56 S172(1) Statement and Stakeholder Engagement
58 Nomination Committee report
60 Audit and Risk Committee report
62 Remuneration Committee report
66 Directors' report

Financial statements
68 Independent Auditor's report
72 Consolidated statement of comprehensive income
73 Consolidated statement of financial position
74 Consolidated statement of changes in equity
75 Consolidated cash flow statement
76 Notes to the consolidated financial statements
98 Company statement of financial position
99 Company statement of changes in equity
100 Notes to the Company financial statements

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## Operational highlights

> Strong first half performance, offset by more challenging trading conditions in the second half due to the COVID-19 pandemic

> Long-term, sustainable structural and regulatory growth drivers remain intact

> Solid performance from companies acquired during 2019, including significant growth of track testing services in the USA

> Strong geographic growth in the USA and Japan following the successful establishment of new sales and support offices

> Successful launch of new products including Halo driving robot, aNVH, Guided Soft Target 120 and Radar Cart

> Further development of the simulation sector with new products including Static Simulator, Data Farming, Linux OS version and highly accurate digital twins

> Growth in recurring revenue to 28%, up from 10% of Group revenue through acquired businesses and increased sales of service and support contracts

> Continued investment in management capability, processes and systems, including progress towards implementation of a Group-wide ERP system

> Construction of the new Engineering Design Centre nearing completion

## Financial highlights

![](images/2_0.jpg)

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* Adjusted to exclude amortisation of acquired intangibles, inventory impairment, acquisition related charges and restructuring costs. A reconciliation to statutory measures is given on page 30. Prior year comparatives have been restated to reflect the inclusion of share based payment charges which were previously reported as an adjustment.

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# Driving sustainability
across our market sectors

Our products and services enable the development of safer vehicles through the testing and simulation of active safety, automated driving functions and vehicle dynamics.

## Our sectors

![](images/3_0.jpg)

## Track testing

Track testing products and services represent 84% of total Group revenue and include products used for the test and verification of Advanced Driver Assistance Systems (ADAS), autonomous systems and vehicle dynamics. Vehicles and ADAS platforms, such as the Guided Soft Target (GST) and Launchpad, are controlled using complex control software for accurate control and synchronisation of multiple test objects.

This enables our customers to conduct complex, multi-object test scenarios with a simple-to-use software interface to satisfy internal or external regulatory test requirements.

The Group also provides test track services including the provision of ADAS and vehicle dynamics tests through a comprehensive test facility based in California, USA.

Read more on pages 22–23

Revenue contribution to the Group

![](images/3_1.jpg)

£51.8m
+4%

Group revenue

84%

![](images/3_2.jpg)

## Laboratory testing and simulation

Laboratory testing and simulation represent 16% of total Group revenue and include products relating to simulation, noise and vibration and the assessment of kinematics and compliance in vehicles. Simulation includes products such as the Advanced Vehicle Driving Simulator (aVDS), the Static Simulator, Axle Level NVH (aNVH) and the Fpro physics-based simulation software environment. AB Dynamics products are used to evaluate vehicle dynamics, noise, vibration and harshness and autonomy across a wide range of applications including conventional vehicles, motorsport and automated/autonomous vehicles.

Read more on pages 24–25

Revenue contribution to the Group

![](images/3_3.jpg)

£9.7m
+18%

Group revenue

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## Our investment case

With a track record of revenue growth and strong margins, we deliver sustainable value for our stakeholders through our market-leading engineered products and services. Our strong balance sheet enables us to invest for future growth.

## Global sales revenue

![](images/4_0.jpg)

UK/Europe

Asia Pacific

North America

Rest of World

28%

45%

25%

2%

## 1. Structural and regulatory growth drivers

We are a leader in structural long-term growth markets, supported by favourable regulatory environments and global focus on active safety and autonomous systems development

Our offering spans both physical and simulated testing across ADAS, autonomous vehicle R&D and vehicle testing
We have a global presence and diverse geographic end markets

The proportion of recurring revenue continues to grow as we increase our service and support offering and software sales

Read more on pages 14–17

## 2. Strong margins

> Differentiated products and strong, long-term relationships with customers underpins strong margins

> Continued investment in product innovation drives strong gross margins

> Investment in people, business systems and capacity will deliver future efficiencies and margin expansion

## 3. Strong balance sheet

Our strong balance sheet gives the financial flexibility to enable ongoing investments in innovation and business infrastructure for the next phase of growth. This will ensure the business is well positioned to capitalise on market recovery

With capex expected to peak in 2021, free cash generation is expected to step up significantly post investment

Our ability to deliver strategically compelling and accretive acquisitions further supports the growth strategy

## 4. Sustainability and resilience

The resilience of our business model enabled us to continue investing in the business during the COVID-19 pandemic. While there has been a short-term impact on demand, structural and regulatory drivers remain intact

The wider focus on road safety and reduction in accidents is an important long-term trend that will support growth

We actively focus on the wellbeing of our workforce through a strong health and safety culture and employee engagement and assistance

Our global diversified customer base provides resilience. With direct sales and support facilities in the UK, Germany, Japan and the USA and indirect sales channels in all other key customer territories we are well placed to deliver support where our customers need it

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# Progress in a
challenging year

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Anthony Best, Non-Executive Chairman

## "The Board is confident the Group can continue to deliver on its strategic priorities"

## Overview

I am pleased to report that the Group has delivered a robust performance for the year despite the challenging global trading conditions caused by the COVID-19 pandemic, which impacted the second half of our financial year. After the very high growth of the previous two years, reported revenue grew moderately to £61.5m and there was a reduction in adjusted operating profit against the prior year to £11.3m.

The disruption due to COVID-19 forced some of our customers to reduce their track testing activities and a number to delay their anticipated purchases of our higher value laboratory testing and simulation equipment. This resulted in Group revenues for the second half of the year being approximately 18% lower than the comparative period in 2019. Nevertheless, the final quarter saw improving levels of confidence and the Board anticipates that this will be reflected in an increased order intake during our new financial year. Our end markets are supported by powerful long-term structural and regulatory growth drivers, and we remain well positioned to serve our customers as they invest in the development of the increasingly sophisticated ADAS and semi and fully autonomous vehicles that will be required in the future. Our strategy and the results for the year are discussed in detail in the Chief Executive Officer's Review on pages 8 to 10 and in the Chief Financial Officer's Review that follows on pages 28 to 30.

## Staff

I would particularly like to congratulate the executive management team this year for maintaining our manufacturing operations with only minimal interruption whilst ensuring the safety and wellbeing of all of our employees. I would also like to add my special appreciation to all our staff who have readily adapted to new working practices and new technology that has also allowed us to work productively from home. At its heart, AB Dynamics is a people business and it is the contribution and performance of our talented employees that continues to underpin our confidence in an exciting future for the Group.

Read more on pages 35–40

## International footprint and manufacturing facilities

During the year we have continued to invest in our manufacturing capacity and international footprint, and also our capabilities and our people. Work on the new Engineering Design Centre, which is adjacent to our existing headquarters in Bradford-on-Avon, began at the end of last year and has continued with only a relatively short interruption due to COVID-19. We expect to be occupying this important new facility, which will house our simulation facility and our talented engineering teams, in Q1 2021.

## Board changes

We have continued to review and refresh the Board to ensure we maintain the right mix of skills and experience for the future.
On 4 November 2019, Sarah Matthews-DeMers joined the Board as Chief Financial Officer. Sarah was Group Finance Director of Carclo plc and had previously been Director of Strategy and Investor Relations at Rotork plc and prior to this Deputy Group Finance Director at Avon Rubber plc.

Louise Evans joined the Board as a Non-Executive Director on 6 April 2020 and took over as Chair of the Audit and Risk Committee. Louise is a qualified Chartered Accountant and was previously Group Finance Director of Williams Grand Prix Holdings plc, and most recently Braemar Shipping Services plc and now serves as a Non-Executive Director for a number of companies.

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Dick Elsy joined the Board on 1 August 2020 as a Non-Executive Director and Chair of the Remuneration Committee. Dick is presently the Chief Executive of the High Value Manufacturing Catapult, which has the highest concentration of advanced manufacturing research capability in Europe. Dick is a veteran of the automotive industry, with the bulk of his career spent at Land Rover and then Jaguar, where he was Engineering Director.

I am delighted to welcome Sarah, Louise and Dick to AB Dynamics.

Bryan Smart, Matthew Hubbard and Graham Eves stepped down from the Board during the year. They each played significant roles in the growth of AB Dynamics from a small privately owned business to the Group we see today. In particular, Graham and Bryan were instrumental in our IPO in 2013 and Mat played a key role in the development of many of our core technologies. I would like to express my sincere thanks to each of them for their years of service and their dedication and contribution to the success of AB Dynamics to date.

## Corporate governance

The Board is united in its view that robust corporate governance and risk management are essential to maintaining the stability and growth of the Group and its financial health. I am pleased to confirm that AB Dynamics is in compliance with the Quoted Companies Alliance ('QCA') Code as required under the AIM Rules. I report separately on the Group's approach to governance and its procedures in my Corporate Governance Statement which can be found on pages 50 to 54 of this Annual Report.

## Dividend

Against a background of significant macroeconomic uncertainty, the Board took the decision in April 2020 to suspend the interim dividend pending the conclusion of the financial year. The Board has reviewed the position in light of our results for the year and is recommending a final dividend of 4.4p per share, resulting in an unchanged total dividend for the year. It is the Board's intention to pursue a sustainable and growing dividend policy in the future having regard to the development of the Group.

## Outlook

AB Dynamics operates in long-term growth markets and has established a unique position as a leading designer, manufacturer and supplier of advanced testing and measurement solutions to the global automotive industry. We expect simulation to play an increasingly important and critical part in the development of semi and fully autonomous vehicles in the future, as manufacturers will need to test their vehicles extensively against a significant number of scenarios to provide a safe environment for all road users.

We continue to invest heavily into new product development, which is critical to our future success and it is particularly pleasing therefore to report that we received an order for our new axle Noise Vibration and Harshness (aNVH) testing machine which we

## Driving change
Our cultural change journey

The Group has rapidly developed and expanded from a single UK based entity to a global group of companies. In response to this change, the Group has mapped out a cultural change programme that addresses commercial focus, leadership, ownership and accountability, code of conduct, innovation, business process excellence and talent management. This has led to a restructuring of the senior management team and a focus on demonstrable leadership behaviours to take ownership of the delivery of cultural change, which will result in strong, scalable foundations for ongoing sustainable growth.

![](images/6_0.jpg)

expect to deliver in early 2021. We will continue to invest in our capabilities, systems and business infrastructure, which will constrain our operating margins over the near term.

The substantial long-term regulatory and structural growth drivers continue to provide a supportive backdrop for future growth and the Board remains confident the Group can continue to deliver on its strategic priorities.

## Anthony Best

Non-Executive Chairman

25 November 2020