Avon Rubber has now released its interim results for the year ending 2016.
Revenues increased when compared to the first half of last year with a £3.1M growth in dairy revenue following the acquisition of InterPuls, and a £356K increase in defence revenue. Cost of sales grew more modestly so the gross profit was up £3M. Depreciation increased by £549K, other selling and distribution costs were up £705K, and underlying amortisation increased by £150K. We also see a £703K detrimental movement in the pension cost, a £1.5M growth in the amortisation of acquired intangibles following the acquisition, and a £508K integration cost. After other general and admin costs were up £1.1M, the operating profit declined by £2.3M. The increase in loan interest was broadly cancelled out by a fall in the pension interest cost and a lower unwinding of the discount on provisions. There was a tax rebate this time due to the deferred tax impact, which represented a £2.1M positive movement over the first half of 2015 which meant that the profit for the period came in at £6.5M, a decline of £187K year on year.
When compared to the end point of last year, total assets increased by £7.3M driven by a £4.2M growth in intangible assets, a £3.7M increase in inventories and an £882K growth in property, plant and equipment, partially offset by a £1.9M decline in receivables. Total liabilities also grew during the period as a £2.1M increase in pension obligations due to a fall in AA corporate bond rates, and a £1.9M growth in current tax liabilities was partially offset by a £1.4M decrease in bank loans. The end result was a net tangible asset level of £2.4M, a growth of £1.5M over the past six months.
Before movements in working capital, cash profits increased by £532K to £12.7M. There was a cash inflow from working cap and a £1.7M tax rebate as opposed to a £1.2M tax payment last time so the net cash from operations was £15.6M, a growth of £6M year on year. The group spent £2M on property, plant and equipment, £1.8M on development costs and £3.5M on acquisitions to give a free cash flow of £8.3M. Of this, £1.5M was spent on dividends, £1.8M on the purchase of the group’s own shares and £4.6M was used to pay back loans. The end result is a cash flow of £422K and a cash level of £823K at the period-end.
In protection and defence, revenues for the first half of the year were weighted towards US DOD sales as planned with an additional order for 167,000 M50s, giving a strong order book for DOD mask systems. There is also a growing pipeline of higher margin non-DOD opportunities in the Americas and the Middle East and although the timing of order receipts is unpredictable, the board believe the time horizon for some of these orders is shortening. In dairy, whilst market conditions have reflected cyclically low milk prices, the own brand Milkrite products and Cluster Exchange service have continued to gain market share.
The operating profit at the Protection and Defence division was £5.3M, a decline of £963K year on year due to higher amortisation of acquired intangibles and integration costs that didn’t occur last year, discounting these, the operating profit rose by £201K to £6.6M. The underlying increase arose from the mix of products shipped, an improvement in DOD pricing and operational efficiencies. M50 respirator sales to the DOID were 107,000 compared to 112,000 in the first half of last year. During the period the group received a further order of 167,000 mask systems which means they exit the period with mask order coverage well into 2017 under this sole source long-term contract.
The group delivered 36,000 M61 filter pairs during the period compared to zero last time, and have secured an order for a further 85,000 pairs which they expect to deliver in the second half of the year. In the long term they believe the end user demand for this product will grow as fielding of the mask continues but the board recognise that in the current DOD procurement environment, obtaining short term visibility of future filter spares remains challenging.
Sales to foreign military, law enforcement and first responder customers increased year on year as the underlying portfolio continues to grow. In addition, the board have been encouraged by the level of international enquiries for their respiratory protection products and although the timing of converting some of the larger opportunities has not been in the first half of the year, they believe that the conversion timeline for some of these opportunities is shortening.
The group saw growth in sales to the fire market following the acquisition of Argus and the launch of the new Mi-TIC storm thermal imaging camera which has now received NFPA and CE approval. Other DOD spares sales were higher than in the same period last year, reflecting variability in the timing of orders and delivery schedules. AEF has experienced a softer first half, reflecting the variability in timing of certain DOD procurement programmes for hovercraft skirts and fuel and water storage tanks. Order intake for the first half totalled £55M compared to £47M last time and of the closing order book of £30M, £22M is for delivery in the second half of the year.
The funded development programme with the US Air Force to design and test the MM53 Joint Service Aircrew Mask has progressed well. This will provide respiratory protection to a wide range of operators on the DOD’s fleet of fixed wing aircraft. The testing phase of this development contract is expected to conclude at the end of this year and should lead to a production contract starting in 2017 which could be worth more than $70M.
The operating profit at the dairy division was £2.6M, a decrease of £709K due to an £871K amortisation of acquired intangibles following the acquisition that did not occur last year (although of course, profits from the acquired business were included this time). The modest increase in underlying profit was due to an increasing proportion of sales being the higher margin Milkrite profit and service sales.
Market conditions for dairy farmers, particularly in Europe, have been weak as milk prices have been low. This typically cyclical market dynamic has reduced demand for the group’s consumable products as farmers extend the life through over using the products. The capital nature of the InterPuls products makes the replacement cycle longer, meaning the business is more affected by the cyclical market dynamics than the group’s other businesses (not sure it was great timing on that acquisition, then!)
The existing dairy business has become less dependent on OEMs in recent years as it continues to grow sales of the Milkrite branded products and services which continues to increase market share. In Europe, where Avon-manufactured liners have a 61% market share, Milkrite’s market share has increased to 23% due to growth in traditional Milkrite products and the success of the Impulse Air mouthpiece vented liner, first launched in Europe in 2013. This product continued to gain traction, with its market share increasing to 4% from 3.5% at the year-end and 3% at the same period of last year. In the US, where Avon-manufactured liners have a 63% market share, the Milkrite Impulse Air mouthpiece vented liner also performed well with its market share increasing from 22% to 28% year on year.
The take up by farms of the Cluster Exchange Service, launched in 2014, remains at encouraging levels in both North America and Europe. By the end of the period it was servicing 446,000 cows on 1,411 farms, up from 342,000 cows and 1,100 farms at the same point of last year. This service enhances the value of each direct liner sale the group makes and should lead to a more robust and sustainable business model with the potential to grow a significant recurring revenue stream in the years to come as more farms continue to sign up. The board are pleased with the integration of InterPuls, acquired in August 2015, and are on track to realise the long-term strategic benefits that have been identified, in particular the sales synergies available in the North American market.
Plans for the rollout of InterPuls products in the US are underway, with dealers being trained, samples being issued through the extensive distributor network and products launched at the recent World Agricultural Expo in Tulare, California, positioning the business to start delivering additional revenue in 2017. The sales and distribution operations opened in China and Brazil are progressing to plan as the dealer and distribution networks are built up in these regions.
There was a £400K tailwind from forex translations but this was mostly offset by transactional losses where transactions covered by forward contracts at rates higher than the period rates gave rise to mark to market forex losses of £300K. If the currently stronger US dollar were to continue throughout the rest of the year, it would create further translation tailwinds for the full year with a 5c movement in the $/£ exchange rate giving rise to a £700K impact on operating profit.
During the period there were integration costs of £508K relating to the integration of Argus business and the relocation of the manufacturing to the Melksham site. The group also enjoyed some tax revenue as opposed to expense during the period as they were able to take the benefit of certain deductions allowed by legislation enacted after the 2015 financial statements were approved following the finalisation of the 2015 tax returns.
In October the group acquired the Argus thermal imaging business from E2V for a consideration of £3.5M, generating goodwill of £500K and other intangible assets of £2.3M. The business is a designer and manufacturer of thermal imaging cameras for the first responder and fire markets and strengthens the group’s product range and distribution capability in these markets.
In Dairy, whilst market conditions have reflected cyclically low milk prices, the own brand Milkrite products and Cluster Exchange service have continued to gain market share. Trading is normally second half weighted in the defence business and this is likely to be the case again this year. There is a strong forward order book for DOD M50’s and a growing pipeline of non-DOD opportunities. Going forward, the board expects to make progress as the year develops and meet market expectations for the full year.
After a 30% increase in the interim dividend, the shares are now yielding 0.9% which increases to 1.1% on the full year forecast. The current PE ratio is 19.7 but this reduces dramatically to 12.9 for 2016, partly as a result of the big reduction in tax charges. At the end of the period the group had a net debt position of £8.4M compared to £13.2M at the end of last year and there remains £21.1M of undrawn facilities available, although I have to say if this was all drawn down, the balance sheet would be looking rather stretched in my view.
Overall then this was a solid update given the circumstances. Profits declined slightly year on year but stripping out the non-underlying items it increased somewhat. Net assets improved but the balance sheet remains fairly weak and the operating cash flow increased aided by the tax receipt, generating plenty of free cash. The defence and protection business benefited from a better product mix and improved DOD pricing and the DOD mask orders seem well covered. It is encouraging to see an increase in sales to non-DOD applications and the MM53 mask project looks promising.
Underlying profits in the dairy division increased modestly due to higher sales of the Milkrite branded products. Reading between the lines, it seems that Interpuls may not be contributing much to the group at the moment in a very difficult dairy market. The net debt is coming down and the forward PE of 12.9 looks decent value although the yield of 1.1% is not that exciting. On balance I think these results were better than I was expecting so I have bought back in here.
On the 9th September the group announced a trading update covering the five months to August. Overall the board expect full year profit to be in line with current market expectations. In protection and defence, the CBRN/CO Escape Hood has received NIOSH approval and the group have received an order worth $9M from a major US city police department for this new product, the majority of which will be delivered this year.
Mask systems production has been focused on fulfilling deliveries to the US DOD but there are a number of export opportunities that are being progressed, although the timing of orders is unpredictable with the board expecting to receive them in 2017.
General market conditions for dairy farmers have been week for the majority of the period, as milk prices have been low. This has reduced demand for the consumable products as farmers look to extend the life of their current products. This has been more noticeable in the Interpuls business where the nature of the product is more capital than consumable. Milk prices in the major markets do seem to be starting to improve in Q4, however.
The programme for the roll out of InterPuls products through existing Milkrite distribution in the US has started with the first revenues seen in Q4. This, together with the expectation that the recent improvement in the milk price will continue leaves the board confident of the ability of the dairy business to make progress next year.
Overall this is a pretty decent update, but nothing really to get all that excited about.
On the 19th September the group announced that non-executive director Petrus Rudolf Maria Vervaat purchased 1,000 shares at a value of just under £10K.