AVON Avon Protection Plc

News Release

 

17 November 2015

AVON RUBBER p.l.c.
("Avon", the "Group" or the "Company")

Audited results for the year ended 30 September 2015	30 Sept 2015 £Millions	30 Sept 2014 £Millions
REVENUE	134.3	124.8
ADJUSTED EBITDA (*)	27.3	22.9
ADJUSTED OPERATING PROFIT (*)	20.2	17.0
ADJUSTED PROFIT BEFORE TAX (*)	19.8	16.6
NET (DEBT)/CASH	(13.2)	2.9
EARNINGS PER SHARE:
Adjusted basic (*)	56.1p	43.7p
Basic	45.4p	36.2p
Adjusted diluted (*)	54.6p	42.3p
Diluted	44.2p	35.0p
DIVIDEND PER SHARE	7.29p	5.61p

 

FINANCIAL HIGHLIGHTS:

•     Revenue growth of 8% to £134.3m

•     Operating profit growth of 19% and profit before tax increased 20%

•     Return on sales (EBITDA divided by revenue) improved 2% from 18% to 20%

•     Diluted earnings per share increased 29%

•     119% conversion of operating profit to operating cash

•     Dividend of 7.29p per share increased 30%

 

OPERATIONAL HIGHLIGHTS:

•     Acquisition of InterPuls and Hudstar

•     Strong DOD sales, excellent year at AEF and continued commercial progress

•     Market share growth of Impulse Air to 25% in the US

•     Cluster Exchange servicing 430,000 cows on 1,262 farms across US and Europe

 

(*) Note:

The Directors believe that adjusted measures provide a more useful comparison of business trends and performance. Adjusted results exclude discontinued operations, exceptional items, the amortisation of acquired intangibles and defined benefit pension scheme costs. The term adjusted is not defined under IFRS and may not be comparable with similarly titled measures used by other companies.

 

All profit and earnings per share figures in this news release relate to adjusted business performance (as defined above) unless otherwise stated.

 

A reconciliation of adjusted measures to statutory measures is provided below:

 

	Statutory	Adjustments	Adjusted
Group EBITDA (£m)	27.0	0.3	27.3
Group operating profit (£m)	18.9	1.3	20.2
Other finance expense (£m)	0.9	(0.7)	0.2
Group profit before taxation (£m)	17.8	2.0	19.8
Taxation (£m)	2.7	0.2	2.9
Group profit for the year (£m)	13.7	3.2	16.9
Basic earnings per share (pence)	45.4	10.7	56.1
Diluted earnings per share (pence)	44.2	10.4	54.6
Protection & Defence EBITDA (£m)	21.4	0.2	21.6
Protection & Defence operating profit (£m)	15.3	0.6	15.9
Dairy EBITDA (£m)	7.5	0.2	7.7
Dairy operating profit (£m)	5.6	0.8	6.4

 

The adjustments comprise:

§ amortisation of acquired intangibles of £1.0m

§ defined benefit pension scheme credit of £0.3m, which relates to a scheme closed to future accrual and therefore do not relate to current operations

§ exceptional items of £0.6m relating to executive search fees and acquisition costs

§ tax effect of adjustments of £0.2m

§ loss on discontinued operations of £1.5m relates to dilapidations costs of former leased premises of a business which was disposed of in 2006.

 

Further details are provided in note 3.

Commenting on the results Andrew Lewis, Interim Group Chief Executive, said: 

"2015 has been an excellent year reflecting the strategic decisions made over the last three years to invest in innovative new products and technologies while expanding our international markets. Together with the integration of the technology, customers and people from our recent acquisitions, this provides us with the opportunity to continue to grow our business, this year and beyond."

For further enquiries, please contact:

Avon Rubber p.l.c.
Andrew Lewis, Interim Group Chief Executive	020 7067 0700
Sarah Matthews-DeMers, Associate Group Finance Director	020 7067 0700
Jo Wotton, Group Public Relations Manager	01225 896 563
Weber Shandwick Financial
Nick Oborne	020 7067 0700

 

 

Note to editors: The Group has transformed itself over recent years into an innovative design and engineering group specialising in two core markets, Protection & Defence and Dairy. With a strong emphasis on research and development we design, test and manufacture specialist products from a number of sites in the US and Europe, serving markets around the world. We achieve this through nurturing the talent and aspirations of our employees to realise their highest potential.

 

Avon Protection Systems is the recognised global market leader in advanced Chemical, Biological, Radiological and Nuclear (CBRN) respiratory protection systems for the world's military, homeland security, first responder, fire and industrial markets. With an unrivalled pedigree in mask design dating back to the 1920's, Avon Protection's advanced products are the first choice for Personal Protective Equipment (PPE) users worldwide and are placed at the heart of many international defence and tactical PPE deployment strategies. Our expanding global customer base now includes military forces, civil and first line defence troops, emergency service teams and industrial, marine, mineral and oil extraction site personnel. All put their trust in Avon's advanced respiratory solutions to shield them from every possible threat, whether land, air or sea based.

 

Our world-leading Dairy supplies business and its Milkrite and InterPuls brands have a global market presence. With a long history of manufacturing liners and tubing for the dairy industry, we have become the leading innovator and designer for products and services right at the heart of milking. The acquisition of InterPuls in 2015, a milking components specialist in electromechanical components such as pulsators, milk meters, automatic cluster removers, milking clusters, washing systems, vacuum pumps, bucket milkers and pipeline systems, makes us the complete milking point solution provider.

 

Working with the leading scientists and health specialists in the global dairy industry we continue to invest in technology to further improve the milking process and animal welfare. Our products provide exceptional results for both the animal and the milker, making the milk extraction process more efficient. As our market share and milking experience continue to grow, so does our global presence.

 

For further information please visit the Group's website www.avon-rubber.com

 

 

 

 

 

 

INTRODUCTION

In 2015, Avon's business strategy has delivered strong growth for the third year in succession with operating profit increasing by 19% on the previous year and diluted earnings per share increasing by 29%.

 

We have further strengthened our business, both organically and through two strategic acquisitions completed towards the end of the year. We continue to maintain our focus on creating a robust and sustainable business and, by investing in and integrating technology in both divisions, we are creating exciting future international growth opportunities.

 

Continuing sound operational management has both improved our margins and delivered strong operating cash flows, enabling us to fund the recent acquisitions whilst retaining a robust balance sheet.

 

ACQUISITIONS

We made a significant strategic acquisition in InterPuls, which was completed in August 2015 for a total consideration of €29.75m, including the assumption of InterPuls's net debt of €4.0m. This acquisition, combined with our existing activities, makes our Dairy business a leading international provider of milking point technology, providing complete teat to pipeline solutions for the dairy sector.

 

InterPuls meets our criteria for adding high technology products that can be sold under the Milkrite-InterPuls brand. This provides the farmer with a range of high margin technical solutions including pulsators, milk meters, automatic cluster removers and vacuum pumps, enabling customers throughout the world to configure state of the art milking systems.

 

In addition to traditional milking components, InterPuls is expanding into high technology sensors and devices to monitor the life cycle of a cow, analysing milk production, reproduction and health data to provide critical management information to increase the operational efficiency of the farm.

 

The combination of the largely non-overlapping sales forces of InterPuls with Milkrite should drive higher sales growth than either company could have achieved alone by extending international reach and cross fertilising the product ranges. In combination, the larger business created will increase Avon's market profile and the customer awareness of Milkrite-InterPuls's technical lead in the higher margin market sectors which we have targeted for expansion.

 

In June 2015 the Group also completed the acquisition of Hudstar Systems Inc. for $5.1m in cash. Hudstar designs and manufactures electronics for breathing apparatus for firefighters and this acquisition both secures the supply chain for some key components of our Deltair products and provides electronics expertise with applications across the rest of our product range.

 

After the year end the Group announced the acquisition of Argus, the thermal imaging camera business of e2v plc. This further strengthens our product range in the fire and first responder markets.

 

GROUP RESULTS

Group revenue increased 8% to £134.3m (2014: £124.8m) with Protection & Defence higher by 7% at £98.8m (2014: £92.8m) and Dairy up 11% to £35.5m (2014: £32.0m). Operating profit before depreciation and amortisation (EBITDA) rose 19% to £27.3m (2014: £22.9m) and operating profit rose 19% to £20.2m (2014: £17.0m).

 

The progressive strengthening of the US dollar during the year gave the Group a foreign exchange translation tailwind. The US $/£ average rate was $1.54 (2014: $1.65) and this 11 cent tailwind was equivalent to £7.2m at a revenue level and £1.0m at an operating profit level.

 

 

SEGMENTAL PERFORMANCE

PROTECTION & DEFENCE

Protection & Defence represented 74% (2014: 74%) of total Group revenues. The business saw revenues increase by 7% from £92.8m to £98.8m. The growth was due to strong performance in all areas of the business.

 

Operating profit grew strongly to £15.9m (2014: £13.6m) up 17.0% and EBITDA was £21.6m (2014: £18.5m), representing a return on sales (defined as EBITDA divided by revenue) of 21.9% (2014: 20.0%). Our DOD, Fire and AEF businesses have all grown, while our non-DOD mask volumes have reduced slightly, as expected given the strong 2014 comparative in this area. Our margins have improved due to efficiencies and increased prices under our long-term DOD contract.

 

Under our DOD long-term M50 mask contract we supplied 240,000 mask systems during the financial year, bringing the total to over 1.4m systems so far under this contract. Having received orders for 172,000 mask systems during the year, this left us with an order book of 50,000 systems as we entered our 2016 financial year. Further follow-on DOD M50 orders are expected in the first half of our next financial year as 2016 DOD budgets are released.

 

The filter requirement has less short-term visibility, but we expect this consumable item to be a good source of repeat revenue in the long term as more masks enter service. As expected, the DOD qualified a second source to provide filters during 2015 and in the second half of the year we received our first order under this new arrangement for 124,000 filter pairs.

 

During the year the Joint Service Aircrew Mask (JSAM) programme design, development and testing work progressed well. This will provide respiratory protection to a wide range of operators on the DOD's fleet of fixed wing aircraft. As previously announced, the DOD has extended its testing phase of this development contract which is now due to conclude at the end of our 2016 financial year and should lead to a production contract which could be worth in excess of $70m.

 

Sales to US law enforcement and non-US military and law enforcement were £27.7m (2014: £31.0m) as a result of a good performance from the underlying portfolio and a 10,000 C50 delivery to a customer in the Middle East. This was a small decrease on the strong comparator period as 2014 included two large such deliveries.

 

Our industrial portfolio launched in 2014 continued to make good progress with particular successes in the oil and gas market and with further product enhancements in the pipeline, there is potential to continue to develop this area of the business.

 

We saw growth in sales to the North American Fire market this year following the release of our new NFPA-approved Deltair SCBA. Our product, which is designed to meet the new US regulations and to deliver enhanced operational performance, has been well received by the market and remains one of only four units to receive approval to date.

 

AEF grew strongly in 2015, winning hovercraft skirt and fuel and water storage tank orders as we have successfully rolled out our non-DOD sales strategy to this area of the business.

 

DOD spares sales have reduced slightly this year, as expected given the volatility of DOD ordering patterns in this area. Long term, as the installed base of masks grows so will the DOD's requirement to fill its supply chain.

 

DAIRY

Dairy revenues increased by 11% to £35.5m (2014: £32.0m) (with a contribution of £1.0m from InterPuls which was acquired in August 2015). The organic growth was achieved despite markets in Europe softening in the second half of our financial year, reflecting the success of our Cluster Exchange service and growth of the higher margin, technology leading Milkrite products. Operating profit increased by 12% to £6.4m (2014: £5.7m) which arose solely from our existing business as, given the timing of the InterPuls acquisition and the Italian summer holiday season, the acquired business did not contribute to divisional operating profit in 2015. EBITDA was £7.7m (2014: £6.6m), giving a return on sales (as defined above) of 21.7%, up from 20.7% in 2014.

 

At the start of the year, market conditions improved as global milk prices were at acceptable levels and farmer input costs were favourable meaning there was less pressure on farmer revenues and margins and therefore normal levels of demand for our consumable products. Towards the end of the year, markets softened as these pressures increased due to lower milk prices in some regions. Russian import controls and the removal of quotas have also affected European markets.

 

Our Cluster Exchange service was launched in the US and Europe at the end of 2013 and growth rates continue to exceed our initial expectations. By the end of the year it was servicing 430,000 cows on 1,262 farms in the US and Europe. This added-value service enhances the value of each direct liner sale we make and has delivered a more robust and sustainable business model. Under this programme farmers outsource their liner change process to us, which we deliver through service centres established in our existing facilities, with the support of our dealers and third-party logistics specialists.

 

Milkrite sales increased as a proportion of total revenue providing a richer sales mix. Only five years ago Milkrite customers represented 53% of our revenue; at the end of this year this had risen to 72%, reflecting the success of the higher margin Milkrite brand and some OEM re-sourcing. With the integration of InterPuls we expect the proportion of own brand revenue to increase further.

 

In Europe, Milkrite's market share has increased as a result of the investment we made in our increased sales force, enhanced technical support and a larger distributor network. Our Impulse Air mouthpiece vented liner, first launched in Europe late in 2013, continues to gain traction, with its market share increasing to 3.5% (2014: 2.6%).

 

In the US, the Milkrite Impulse Air mouthpiece vented liner continued to perform well, with its market share increasing to 25% (2014: 21%).

 

This success has given us the confidence to invest further in product development resource and to commence work on the next generation of products, the first of which, our Milkrite claw, was launched in the final quarter of the year. The InterPuls acquisition further adds to our product portfolio and product development capability, the benefits of which we expect to see in future years.

 

In China, year on year revenue grew strongly as the industrialisation of the milking process continues apace, creating excellent long-term potential for our consumable products.

 

In South America, where we opened our sales and distribution facility in the first half of the year, we have started to make good progress in establishing a strong dealer network and expect to see growth in this region.

 

In many other emerging markets, including India, the number of dairy cows being milked using automated milking processes is growing strongly. This is adding to the market potential for the consumable products we sell. We plan to harness this potential using the distribution network which InterPuls has already established in these regions.

 

FINANCE EXPENSES

Net interest costs reduced to £0.2m (2014: £0.3m). Other (non-cash) finance expenses associated with the unwinding of discounts on provisions were £0.2m (2014: £0.2m).

 

TAXATION

The statutory tax charge totalled £2.7m (2014: £3.1m) on a statutory profit before tax of £17.8m (2014: £13.9m). In 2015 the Group paid tax in the US, but not in the UK due to brought forward tax losses. The effective tax rate for the period is 15% (2014: 22%), reflecting a more favourable geographic mix of profits and the recognition of a deferred tax asset in the UK in respect of accelerated capital allowances and short-term timing differences, as UK tax losses have now been utilised and the UK trading company is expected to be tax-paying in the future.  

The adjusted effective tax rate, where the tax charge and the profit before taxation are adjusted for exceptional items, the amortisation of acquired intangibles and defined benefit pension scheme costs is 15% (2014: 21%). In 2015 the US federal tax rate was 34% and the Group's effective tax rate reflects the predominance of US revenues and earnings and the availability of previously unrecognised tax losses in the UK. Whilst the acquisition of InterPuls has not had a significant impact on the Group tax rate in the current year, with a combined federal and regional Italian tax rate of approximately 31%, the Group effective rate of tax is likely to increase in future years.

Unrecognised deferred tax assets in respect of tax losses in UK non-trading companies amounted to £0.3m (2014: £1.4m).

 

EARNINGS PER SHARE

Basic earnings per share were 56.1p (2014: 43.7p) and diluted earnings per share were 54.6p (2014: 42.3p).

 

NET CASH AND CASHFLOW

Net debt at the end of the year was £13.2m (2014: net cash of £2.9m). At the year end, total bank facilities were £26.4m, which are US dollar denominated and committed to 30 November 2018.

 

In the year we invested £21.2m in the acquisitions noted above and £6.2m (2014: £6.8m) in property, plant and equipment and new product development. In the Protection & Defence business this focused on our new product development programme, Project Fusion. In Dairy we invested in the development of our new claw and the hardware required to support our Cluster Exchange service offering.

 

Operating activities generated cash of £24.1m (2014: £26.5m), representing 119% of operating profit (2014: 156%). Through sound operational management the Group has driven strong conversion of profits into cash. The timing of shipments to customers can impact all aspects of working capital and at the 2015 year-end inventory was higher from a combination of foreign exchange translation, acquisitions and the launch of our Fusion products. Receivables decreased as in the prior year a large order was shipped immediately prior to year end. Lower advanced receipts from customers, cash outflows in relation to the prior year restructuring provision and timing of payments to suppliers following the acquisition of InterPuls resulted in cash outflows in respect of payables.

 

UK RETIREMENT BENEFIT OBLIGATIONS

The balance, as measured under IAS 19 (revised), associated with the Group's UK retirement benefit obligation, which has been closed to future accrual, has moved from a £16.0m deficit at 30 September 2014 to a £16.6m deficit at 30 September 2015.

 

This movement has resulted from an increase in liabilities as the AA corporate bond rate has fallen, partially offset by strong performance from our return-seeking assets and Liability Driven Investment.

A settlement gain of £0.7m (2014: nil) was realised following a trivial commutation exercise.

During 2015, the Group paid total contributions of £0.8m (2014: £0.5m).

The last triennial actuarial valuation took place as at 31 March 2013. That valuation showed the scheme to be 98.0% funded on a continuing basis and under the deficit recovery plan, the payments for the Group financial years ending 30 September are as follows: 2016: £0.7m, 2017: £0.7m and 2018: £0.7m.  These amounts include £0.3m p.a. in respect of administration expenses.

 

RESEARCH AND DEVELOPMENT

Intangible assets totalling £41.3m (2014: £17.2m) form a significant part of the balance sheet as we invest in new product development and acquisitions. This can be seen from our expanding product range in both Protection & Defence and Dairy. The annual charge for amortisation of development costs was £1.9m (2014: £1.5m). 

 

Our total investment in research and development (capitalised and expensed) amounted to £7.1m (2014: £7.0m) of which £3.9m (2014: £4.5m) was customer funded and has been recognised as revenue. 

 

In Dairy we have started to expand our product range under the Milkrite brand beyond liners and tubing into non-rubber goods such as liner shells and claws. 

 

We have started to see the benefits of these efforts, which underpin the long-term prosperity of the Group, during our 2015 financial year. 

 

DIVIDEND

Based on the Group's improved profitability, cash generation and the confidence the Board has in the Group's future prospects, the Board is pleased to propose a 30% increase in the final dividend to 4.86p per ordinary share (2014: 3.74p). This, combined with the 2015 interim dividend of 2.43p, results in a full year dividend of 7.29p (2014: 5.61p), up 30%.

 

OPPORTUNITIES

Last year we highlighted that our strong balance sheet would support complementary acquisitions which could deliver synergistic benefits. We have successfully identified a number of businesses meeting this criterion across both sides of the business and completed the acquisitions of InterPuls and Hudstar during the year. Since the year end we have announced the acquisition of the Argus thermal imaging camera business from e2v plc. Looking forward we see these acquisitions, together with our existing growth strategies, enhancing our global market leading positions which will deliver further opportunities for growth. We will continue to invest in innovative new technologies and products and in building our brand and market reach to bring these opportunities to fruition.

 

BOARD CHANGES

After serving as a Non-Executive Director since March 2005 Stella Pirie stood down at the AGM in January 2015. Pim Vervaat was appointed on 1 March 2015. Pim is Chief Executive of RPC Group Plc, the UK based manufacturer of rigid plastic packaging and a FTSE 250 listed company.

 

After fifteen years with the Group, the last seven of which have been as Chief Executive, Peter Slabbert stepped down from his role as Chief Executive and retired from the Company on 30 September 2015.

 

The Board is immensely grateful to Peter for the contribution he has made during his time with Avon Rubber. Early on he was an instrumental part of the successful transformation of the Group, helping to build the foundations that have led to the recent consistent record of growth in profits. He leaves behind a strong executive team which the Board is confident will continue to grow the Group.

 

We look forward to welcoming our new Chief Executive, Rob Rennie on 1 December 2015. Rob joins Avon having held a number of senior positions at Invensys plc. His most recent role was President of the Energy Controls group, a division with annual sales in excess of $400m. This group included Eurotherm, the global supplier of industrial and process control, measurement and data management solutions, where Rob started his career and was ultimately appointed Managing Director. Rob was the driving force behind the evolution of Eurotherm and, as a member of the Invensys Executive Committee, was part of the team that successfully sold Invensys to Schneider Electric in 2014.

 

OUTLOOK

Our strategy of integrating new technologies from product development and acquisitions has provided strong results in 2015 and increased our future opportunities.

 

In our global Protection & Defence business we have good visibility of DOD revenues for 2016 and a strong underlying portfolio of non-DOD business which we expect to be enhanced by the increasing impact of the recently launched new products and supplemented by impact orders, although the timing of these remains difficult to predict.

 

While the year end softness in milk prices has continued, the acquisition of InterPuls provides the Dairy business with both new products and access to new markets through the integration of the sales and distribution channels of the two businesses.

We remain confident in our strong and proven management team's ability to maintain the momentum of growth in our business.

 

 

                            

David Evans                                                        Andrew Lewis

Chairman                                                            Interim Group Chief Executive

17 November 2015                                          17 November 2015