27 September 2023

Avingtrans Plc

("Avingtrans" or the "Group")

Preliminary results for the year ended 31 May 2023

Avingtrans PLC (AIM: AVG), which designs, manufactures and supplies critical components, modules, systems and associated services to the energy, medical and industrial sectors, is pleased to announce its preliminary results for the year ended 31 May 2023.

Financial Highlights

·      Revenue from continuing operations increased by 17.5% to £116.4m (2022: £99.1m)

·      Gross Margin reduced slightly to 32.9% (2022: 34.1%), driven by changes in the OEM/AM mix

·      Adjusted¹ EBITDA from continuing operations increased by 10.6% to £13.7m (2022: £12.4m)

·      Adjusted¹ PBT from continuing operations increased by 11.1% to £9.0m (2022: £8.1m)

·      Adjusted¹ Diluted earnings per share from continuing operations increased by 8.3% to 23.4p (2022: 21.6p)

·      Net Cash (excluding IFRS16) as at 31 May 2023 of £13.0m (31 May 2022: £16.7m) following investments in the Group

·      Final Dividend 2.8p per share (2022: 2.6p) resulting in a total dividend for the year of 4.5p (2022: 4.2p)

 

 ¹ Adjusted to add back amortisation of intangibles from business combinations, acquisition costs and exceptional items 

 

Operational Highlights 

Energy

·      Revenue increased 16.8% to £112.8m (2022: £96.6m)

·      Metalcraft contract to supply the Sellafield 3M3 boxes is on-going in phase two of the programme

·      Booth completed the HS2 door designs and will commence manufacture in FY24

·      Hayward Tyler and Energy Steel again won multiple nuclear bids, including next generation enabling contracts

·      Acquired HES/HEVAC for £0.9m 30 December 2022 and integrated into the Ormandy Bradford site

·      Post period end, completed the acquisition of Slack and Parr, a manufacturer of specialist pumps and supplier of high-precision gear metering pumps, hydraulic flow dividers and industrials pumps for a total consideration of up to £4.9m

 

Medical

·      Revenue increased 44% to £3.6m (2022: £2.5m)

·      Compact helium-free MRI system making good progress - expected to launch in Q4 calendar 2023, with US 510(K) approval to follow in H1 2024

·      Post period end acquisition of remaining issued share capital of 3D X-ray leader, Adaptix, in Oxford, UK, for a total consideration of £8.1m including absorbed and repaid debt.

·      Adaptix has launched its veterinary product and was awarded its 510(K) to FDA in USA for orthopaedics 

·      Potentially significant market opportunities in the target imaging markets for both businesses

Current Trading & Outlook

·      In the quarter since 31 May 2023, the Group has performed in line with management expectations with the momentum of FY23 continuing into FY24

·      The Board remains confident about the current strategic direction and potential future opportunities across our markets, though mindful of market conditions

·      We will continue to refine our business by pinpointing specific additional acquisitions as the opportunities arise, to generate superior shareholder value, whilst maintaining a prudent level of financial headroom.

 

Commenting on the results, Roger McDowell, Chairman, said:

 

"We are delighted to report a robust set of results. It has been a challenging year in many ways however Avingtrans has again delivered and met market expectations. We used our strong balance sheet wisely in the year and bought HES/HEVAC, which is already successfully integrated with Ormandy. Post year end, we acquired the assets of Slack and Parr, a specialist pump manufacturer and also completed the acquisition of X-ray specialist Adaptix, as well as further investing in Magnetica's novel MRI systems. We entered FY24 with a healthy order book and we look forward to further progress across the Group this year, with macro developments in the energy, infrastructure and medical markets being tilted in our favour."

 

Enquiries:

Avingtrans plc	01354 692391
Roger McDowell, Chairman Steve McQuillan, Chief Executive Officer Stephen King, Chief Financial Officer
Singer Capital Markets (Nominated Adviser and Broker)	02074 963000
Shaun Dobson, Alex Bond, Oliver Platts
IFC Advisory (Financial PR)	020 3934 6630
Graham Herring, Tim Metcalfe, Zach Cohen

 

About Avingtrans plc:

Avingtrans designs, manufactures and supplies original equipment, systems and associated aftermarket services to the energy, medical and industrial markets worldwide. 

Business units

Hayward Tyler - Luton, East Kilbride & Nottingham, UK, USA, China and India Specialises in the design, manufacture and servicing of performance-critical motors and pumps for challenging environments.  Energy Steel, Inc - Rochester Hills, Michigan, USA Provider of custom fabrications for the nuclear industry, specialising in: OEM parts obsolescence; custom fabrications; engineering design solutions; product refurbishment; on-site technical support.  Stainless Metalcraft Ltd - Chatteris, UK Provider of safety-critical equipment for the energy, medical, science and research communities, worldwide, specialising in precision pressure and vacuum vessels and associated fabrications, sub-assemblies and systems.  Booth Industries - Bolton, UK Designs, manufactures, installs and services doors and walls which can be tailored to be: blast and explosion proof; fireproof; acoustically shielded; high security/safety; or combinations of the above. Ormandy Group - Bradford, UK Design, manufacturers and servicing of off-site plant, heat exchangers and other HVAC (heating, ventilation and air conditioning) products.  Composite Products Ltd - Buckingham, UK Centre for composite technology, parts and assemblies, serving customers in industrial markets. Adaptix Ltd - Oxford, UK Adaptix has developed novel 3D X-ray for Orthopaedic and Veterinary applications amongst others. Commercialisation of this system (and others) is on-going.   Magnetica Ltd - Brisbane, Australia Magnetica Limited specialises in the development of next generation MRI technologies, including dedicated extremity MRI systems and MRI system components. Magnetica has successfully built and tested a compact, integrated 3 Tesla orthopaedic MRI system, demonstrating clinical-quality imaging. Commercialisation of this system (and others) is on-going. Magnetica's structure now includes two other business units:  Scientific Magnetics - Abingdon, UK Designs and manufactures superconducting magnet systems and associated cryogenics for a variety of markets including MRI and provides services for Nuclear Magnetic Resonance instruments. Tecmag Inc - Houston, USA Designs, manufactures and installs instrumentation, including consoles, system upgrades, and probes, mainly for Magnetic Resonance Imaging (MRI) and Nuclear Magnetic Resonance (NMR) systems.

Certain information contained in this announcement would have constituted inside information (as defined by Article 7 of Regulation (EU) No 596/2014) ("MAR") prior to its release as part of this announcement and is disclosed in accordance with the Company's obligations under Article 17 of those Regulations.

Chairman's Statement

 

The latest financial year has been marked by the Group's commendable performance in the face of well documented ongoing global disruptions. Despite these challenges, the Board is pleased with the Group's achievements, with strong organic revenue growth, robust adjusted EBITDA note 2 from continuing operations and a stable net cash position at the year-end. Notable investments in Magnetica and HES/HEVAC have contributed to the favourable results, even amidst supply chain disruptions and customer order delays. As we look ahead to FY24, our order book position is very healthy.

 

Our Pinpoint-Invest-Exit ("PIE") strategy was again successfully deployed, reinforcing our investments in medical imaging at Magnetica and the 3D X-ray business, Adaptix, which we have now acquired 100% (post period end). Both ventures continue to make strides in developing disruptive and complementary medical imaging products, particularly for orthopaedic applications. Furthermore, the acquisition of HES/HEVAC and its integration into Ormandy has bolstered the market standing of that business unit. Post period end, we also completed the significant assets acquisition of Slack and Parr, another specialist pumps and hydraulics manufacturer to capitalise on its global footprint, combined with its well-invested operational capability, powerful brand, highly skilled workforce and large installed base.

 

Despite the challenging external economic landscape, our divisional management teams have demonstrated agility and resilience, building strong business platforms. Aftermarket growth in Engineered Pumps and Motors (EPM) and Process Solutions and Rotating Equipment (PSRE) has remained steady, supporting our value propositions to OEM and end-user customers. The positive sentiment in the nuclear and oil and gas sectors has resulted in increased orders in those areas. Our focus on end-user access continues to drive improved profitability and underpins our product and service development.

 

The EPM division's performance improved over the year, despite supply chain disruptions and order placement challenges, to end the year with a strong order book. Energy Steel showed further improvement, with promising aftermarket prospects and new customers placing orders with us.

 

The PSRE division also made solid progress, notably at Booth, which demonstrated continued operational strength and sustained record orders. Meanwhile, at Metalcraft, the substantial 3M3 box contract with Sellafield continues in the volume production phase. Our apprentice training school at the Chatteris site currently has 18 apprentices in house, with further expansion to come. Combining Ormandy with HES/HEVAC has strengthened both businesses and we expect to see an improvement in performance in FY24, as a result.

 

The acquisition of Adaptix and further investment in Magnetica has firmly established the Medical and Industrial Imaging (MII) division as a new niche imaging systems supplier, with promising X-ray and MRI products in the pipeline. The Board is enthusiastic about the division's potential, expecting long-term positive returns for the Group, albeit perhaps via a different vehicle, to maximize returns.

 

In view of the encouraging overall results, the Board is proposing a final year dividend of 2.8 pence per share, resulting in a total dividend of 4.5p. With a robust balance sheet, the Group remains vigilant in seeking shareholder value-enhancing M&A opportunities, while also being cautious and selective in the current manufacturing sector climate.

 

Lastly, I extend my appreciation to all Avingtrans employees, both existing and new, for their dedication and resilience in navigating these challenging times.

 

 

Roger McDowell

Chairman

26 September 2023

 

 

Strategy and business review

Group Strategy

 

Our core strategy is to buy and build engineering companies in niche markets, particularly where we see turnaround and consolidation prospects; a strategy we call Pinpoint-Invest-Exit ("PIE"), through which we have had a strong track record in returning significant shareholder value over the past decade.

With an increased presence in our target markets, a focus on aftermarkets, strength in depth of the management teams and a lean central structure, the Group continues to grow profitably - despite the effects of macroeconomic disruptions - and the Board is focused on seeking additions to the Avingtrans value-add proposition.

The majority of the Group's adjusted key financial metrics trended positively in the period, despite the ongoing impacts of the Russia-Ukraine conflict and the related global financial stress.

The Group is focused on the global Energy and Medical markets, both of which play into some of the world's mega-trends, such as: urbanisation; an ageing population; and an accelerating transition towards a cleaner and healthier planet.

Divisional Strategies

 

Engineered Pumps and Motors (Energy - EPM): EPM continues to strengthen its nuclear installed base, focusing on civil, defence, and national security applications, particularly for life extension purposes. The business also explores opportunities in the hydrocarbon market sectors. Energy Steel, acquired in June 2019 and specialising in nuclear life extension, has shown consistent recovery in North America. Furthermore, EPM is actively developing solutions for new nuclear technologies and other low carbon energy sources, like concentrated solar, to leverage the global energy supply transition. Throughout FY23, EPM secured significant contracts, including additional pumps for the next generation nuclear business, TerraPower, in the USA and further life extension equipment for the Forsmark nuclear power station in Sweden. The EPM strategy is strengthened by crucial partnership agreements with companies like Shinhoo, expanding our product portfolio and creating cross-selling opportunities. The post period end acquisition of Slack and Parr further enhances our global specialist pumps footprint.

 

Process Solutions and Rotating Equipment (Energy - PSRE): A primary target for PSRE is to establish a comprehensive offering in the nuclear decommissioning and reprocessing markets, building on long-term contracts for nuclear waste storage containers and the existing equipment installed across the vast Sellafield site. During the period, Metalcraft and Sellafield Limited continued with the contract to provide high integrity stainless steel storage boxes for Sellafield. The 3M3 ('three metre cubed') box contract is currently now valued at up to £70m and is still to complete. The division's nuclear credentials were again enhanced by Booth Industries' strong performance, expanding our market reach into Critical National Infrastructure (CNI). Booth's multi-year contract with HS2, initially worth £36m, is progressing well, with manufacturing expected to commence in FY24. Ormandy's market position in HVAC has been significantly strengthened by the HES/HEVAC acquisition, with a resulting stronger product proposition. PSRE continues to benefit from a robust prospect pipeline, positioning it well to bid for new opportunities as they arise.

 

Medical and Industrial Imaging (Medical - MII): Following the Magnetica acquisition in January 2021 and the post-period end acquisition of the remaining shares in Adaptix, the focus for the medical division is to become a niche market leader in the production of compact helium-free MRI systems and 3D X-ray systems, for applications such as orthopaedic and veterinary imaging. This is an exciting opportunity for the Group. In support of the core strategy, the division will continue to work on niche Nuclear Magnetic Resonance (NMR) and scientific magnet products and services, since these are complementary technologies. During the year, Adaptix, based in Oxford, UK, received its 510(k) approval from the FDA, to enable sales of its orthopaedic product in the USA. Adaptix's 3D X-ray technology is being developed in parallel to Magnetica's MRI technology and, as envisioned, the two businesses are working in an increasingly complementary manner.

 

Across the Group's customers, we see continued pressure on aftermarket expenditure, where operational efficiency, reliability and safety are paramount.  Customers are looking for reliable supply chain partners, to provide long term support of both new infrastructure and legacy installations.

Pinpoint-Invest-Exit

Continuing with our successful Pinpoint-Invest-Exit strategy, Avingtrans demonstrated its commitment by raising its stake in Magnetica to 71.7% during the period (at 26 September 2023 74.8%). Additionally, post period end, we successfully completed the 100% acquisition of Adaptix, as mentioned earlier. During the period, we also exited from Metalcraft China, selling the business for £1.0m to a local manufacturer. After our interest in MRI component manufacture ended as planned, there was no viable strategic reason to keep this business unit in China. However, we were pleased to find a good home for it, to ensure that all our employees there continued to enjoy gainful employment.

The focus on other strategic acquisitions remained strong, with the addition of HVAC specialist HES/HEVAC, for a total consideration of £0.9m, already contributing positively to Ormandy's market strength, after a smooth integration process. Post period end, the acquisition of the assets of Slack and Parr, in the UK, USA and China, for a consideration of up to£4.9m, added another specialist pumps and hydraulics capability to the Group.

The ongoing progress at previous acquisitions, Booth and Energy Steel, was again pleasing, as both businesses contributed strongly to the results of their respective divisions.

The Group remains confident about the current strategic direction and potential future opportunities across its chosen markets. Some of our market sectors (eg Nuclear) benefitted from the global disruptions seen in the period, which drove higher energy costs and caused governments to review energy security.

Markets - Energy

The global demand for energy remains relentless and we anticipate a sustained period of growth in the coming years. The aftermath of the Covid pandemic spurred a push towards enhanced efficiency and decarbonisation. However, the Russia-Ukraine conflict subsequently raised political awareness regarding the importance of energy security, leading to a recalibration of the rush towards renewable energy in the short to medium term. This situation could potentially benefit our businesses, particularly in the nuclear sector.

End User/Aftermarket

Operators and end-users demand a blend of quick response through local support and a requirement to drive improvements through equipment upgrades and modernisation. Facilities are being operated for much longer than their intended design lives, resulting in a strong demand for solution providers in the supply chain to partner with end-users for the longer term. The Avingtrans energy divisions are well positioned to grow in this end-user market space.

Nuclear

Nuclear energy as a low carbon, baseload power source remains an asymmetric market with respect to future growth. Almost all the 1GW+ new build opportunities are in Asia, with the exception of the limited UK programme. However, we are still experiencing buoyant market segments, including supporting the operational fleet, continued safe operation and life extensions, decommissioning and reprocessing. We are also working on the long-term development of the next generation of technologies - i.e. Small Modular  or Advanced Generation IV Reactors - e.g. with TerraPower and GE-Hitachi. In addition, these segments all have the backdrop of a consolidating supply chain and paucity of expert knowledge.

The USA still operates the biggest civil nuclear fleet in the world, with 92 reactors generating around 30 percent of the world's nuclear electricity. Coupled with the heritage Westinghouse technology operating in Europe and Asia, the EPM division's long-standing position in this market provides opportunities for further growth. Obsolescence and life extension are key issues for nuclear operators worldwide and the Avingtrans Energy Divisions are well positioned to support operators in addressing this critical risk.

The UK remains pre-eminent when it comes to decommissioning nuclear facilities and subsequent reprocessing, in terms of innovative technology and overall spend. The Group is embedded in the future manufacture of waste containers for Sellafield and will continue to expand its presence in the UK and globally in the longer term. The development of new nuclear technologies is ongoing, with activity in the UK, South Korea, the USA and China dominating development activity. The Group views these new technologies as an attractive route forward for nuclear and is well positioned to develop as a global industry partner.

Power Generation

The world continues to electrify, with an increasing amount of primary energy going to the power sector, which remains a key focus across the Group's energy divisions. Aside from nuclear, the main sub-sectors are as follows:

·    Coal - the Group continues to see good aftermarket activity from coal fired power stations even though the demand for new power stations is in decline. Opportunities still exist in India, China, Southeast Asia, Eastern Europe and the Middle East. EPM is optimising its product line, to take market share and to create new opportunities - e.g. in products to remove toxins from the exhaust stacks of power stations.

·    Gas - natural gas, primarily in the form of combined cycle gas turbine power plants has been a growing market space, primarily in the West, albeit disrupted by the Russia-Ukraine conflict. The Group continues to develop this market with both existing and new product lines.

·    Renewables - renewable technologies and their supporting infrastructure are a growing market globally. The Group has a range of products that can be applied directly to this market segment and also has expertise that can be used to develop new products for niche parts of this market, such as molten salt pumps for concentrated solar applications.

 

Hydrocarbons

The ongoing conflict in Ukraine resulted in a surge in European gas prices, leading to unprecedented levels of volatility in the energy market. Our Hayward Tyler businesses have long been associated with providing top-notch subsea and submersible pumps and motors to the oil and gas fields of the Norwegian Shelf. Recently, we have experienced a significant boost in demand for both new equipment and aftermarket services, as the market seeks to maximise supplies from this region. The current situation, coupled with informed forecasts, indicates that the demand for our products and services is likely to remain strong. This presents a promising opportunity for our business to further capitalise on the evolving energy landscape.

Markets - Medical

The Diagnostic (medical) and molecular imaging markets are large global sectors, dominated by a few large systems manufacturers. The total Medical Imaging Market is expected to reach $47.4 billion by 2030 according to Grand View Research, a compound annual growth rate of 4.8%. The largest market is the USA, followed by Europe and Japan. The fastest growing markets are China and India. Following the acquisition of a majority stake in Magnetica (AUS) in January 2021, we merged Magnetica with Scientific Magnetics (UK) and Tecmag (US) and we have continued to invest in Magnetica. Post-period end, we acquired 100% of Adaptix, for £8.1m, including debt absorbed and repaid. Adaptix is an emerging medtech leader in the field of 3D X-ray equipment. The objective of this acquisition activity is to create innovative, niche MRI and X-ray systems supplier, which can address specific parts of the market, not well served by dedicated products at present. This includes orthopaedic and veterinary imaging. The development paths of Magnetica and Adaptix are convergent, which enables both businesses to benefit from efficiency and cost gains, as well as optimising the route to market - especially in orthopaedics. Market drivers for these segments include an ageing global population and the rising incidence of chronic diseases.

The growing prevalence of chronic diseases, especially in older populations, is increasing demand for medical imaging in hospitals and other diagnostic settings. Technical innovations, including advances in artificial intelligence, have increased the reliability and accuracy of medical imaging, thus driving further demand in global healthcare. Conversely, the market is somewhat inhibited by the high cost of current medical imaging systems.

In 2023, X-ray systems held approximately 32% of the market share, while MRI systems accounted for around 18%. Our estimates indicate that over 20% of all diagnostic imaging scans are related to limbs. As a result, the combined addressable market for Magnetica and Adaptix in medical imaging is approximately $3 billion, in theory. However, it's important to note that the actual addressable market is smaller, since both businesses have chosen not to target sales to hospitals. Instead, they are focusing on deploying their products in specialised clinics, where the product attributes align closely with the specific needs of these establishments.

Additionally, both Magnetica and Adaptix have plans to expand into other imaging markets, notably the veterinary sector. This is in response to the lack of dedicated products in this area, which has hindered the widespread use of imaging systems in veterinary practices. By targeting these specialised markets and addressing their unique requirements, both companies aim to further grow their market share and create a disruptive impact in the medical and veterinary imaging industries.

End User/Aftermarket

Diagnostic imaging is dominated by a handful of manufacturers, including GE, Siemens, Philips and Canon, who account for circa 80% of revenue globally. These players also dominate the aftermarket, though there are a few independent MRI service businesses in existence. Avingtrans is not present in the imaging aftermarket at this time.

Operations

 

Operational Key Performance Indicators (KPI's) for continuing operations

	2023	2022
Percentage of total continuing revenue deriving from aftermarket (AM) sales (%)	40.5	42.0
Customer quality - defect free deliveries (%)	91.3	93.6
Customer on-time in-full deliveries (%)	79.9	80.5
Annualised staff turnover including restructuring (%)	18.5	17.4
Health and Safety incidents per head per annum	0.08	0.07
Environmental incidents per annum	0	0

 

Although total AM sales increased strongly in the period, the percentage of total sales was reduced, due to a much larger increase in OEM sales in FY23.

Customer quality and on time in full (OTIF) deliveries both dipped slightly, as supply chain disruptions continued to impact our operations in all countries. These disruptions have led us to carry more stock than ideal, to mitigate delivery delays. There are some early signs of this situation easing in the new FY.

Annualised staff turnover went up slightly, driven mainly by a larger than average number of retirements in the year.

H&S incidents per head per annum was up very slightly at 0.08. The increase was due to a number of minor incidents at HES/HEVAC post-acquisition. After we integrated the business into Ormandy's main site, H&S incidents reduced back to normal levels.

As in 2023, there were zero environmental incidents recorded in the Group.

EPM Division - Energy

The EPM division, comprises Hayward Tyler (HT) and Energy Steel (ES), with Slack and Parr being added post period end. The main divisional priorities remain: strengthening the aftermarket sales and capabilities and; maximising opportunities in the nuclear life extension market.

The division's results further improved in the period, though there was a notable increase in OEM sales. Some adverse supply-chain disruption effects continued throughout the year but the impact was less pronounced than in the prior year.

At HT Luton, our aftermarket activities are experiencing significant demand, notably in servicing of third-party equipment. In the hydrocarbons sector, elevated enquiries and orders continued throughout the year. HT Luton received a follow up £3.3m contract from Forsmark nuclear power station in Sweden and other nuclear life extension orders have followed elsewhere. The team also secured further defence related orders from Rolls Royce, for the UK MoD.

Regarding the HT Luton site redevelopment, there has been little recent progress, as the increase in interest rates in the UK has dampened construction interest for the time being.

HT Inc, located in Vermont (USA), has maintained a strong order intake in the nuclear life extension market, both domestically in the USA and with KHNP in South Korea. Despite the challenges, HT Inc is making significant progress in exploring new R&D opportunities, particularly in the field of next-generation nuclear power. These endeavours are advancing steadily, and we have secured further orders from TerraPower after the close of the previous period. This indicates the positive direction our Company is moving towards, reaffirming our commitment to innovation and growth in the nuclear industry.

Our Fluid Handling business in Scotland maintained its consistency, with another good performance in the period. The Transkem mixer business, acquired in the prior year, contributed strongly to the results.

The acquisition of the assets of Slack and Parr, in Kegworth, UK (post period end) adds another significant specialist pumps capability to the divisional armoury. S&P specialise in precision gear pumps, used in a variety of applications - eg - in the production of textile fibres. Initial activities will focus on stabilising S&P's UK operations, which are disordered and inefficient, following the administration process.

HT Kunshan (China) had another good year, with a number of new orders being received and delivered and a strong pipeline, resulting from the Chinese government initiative to reduce emissions from coal fired power stations. This has given HT a new product line to pursue in the short to medium term.

 

HT India had a better year, having previously suffered from disruptions due to Covid-19. So, the business performance was back to normal in the period.

Energy Steel ('ES') in Michigan (USA), delivered an improved set of results from the previous year. The business has been winning new orders from a broader market footprint, including first orders from TerraPower. ES has also improved its on time delivery performance in the year.

PSRE Division - Energy, safety and security

PSRE had another very solid year, albeit still impacted by supply chain disruptions and order delays, as seen elsewhere in the Group.

Booth performed well and has sustained a record order book, including the HS2 £36m contract, which has now entered the production phase. We have successfully rebuilt Booth into a leader in its high integrity doors market niches, both in the UK and internationally. We continue to make good progress in building an aftermarket business at Booth, where we see strong growth potential.

Metalcraft's progress with the Sellafield 3M3 boxes was good overall, as the production phase two of the contract continues. The contract value was boosted to £70m in phase two (previously £50m) with circa 1,000 boxes to be delivered over the next six years. Metalcraft is the only supplier to transition to phase two of the contract. Frustratingly, the next 3M3 box contract tender remains on the horizon, with uncertain timing but we are very well placed to pursue this contract and it does not impact on our forecasts. Metalcraft China was sold to a local Chines manufacturer for, £1.0m, at the end of the period. Following our exit from MRI third party component manufacture, we did not have a strategic use for this facility but we were pleased to secure this sale and sustain the employment of all of our former colleagues there.

Ormandy's management team was strengthened during the year and, as a result, its performance measurably improved. During the second half of FY23, we acquired the assets of local competitor HES/HEVAC for £0.9m and transferred its 30 employees mainly into Ormandy's Bradford site. The integration has gone smoothly, and the enhanced market offering of the combined business, reinforces Ormandy's prospects, with a strong order book already evident.

Composite Products had a solid year, with stable deliveries to Rapiscan for package scanning equipment and post period end secured further orders for Rapiscan.

The Group continued to invest in Magnetica in the period and, as at 31 August 2023, currently owns 74.8% of the business. Magnetica is continuing to work towards new niche products in Magnetic Resonance Imaging (MRI) We are making good progress on this exciting project, with the first orthopaedic product expected to be launched during FY24 and 510(k) market entry approval from the US FDA to follow in the first half of calendar 2024. Magnetica will also continue to work on products for the adjunct Nuclear Magnetic Resonance (NMR) market, via Tecmag Houston and on superconducting magnets for physics applications, via SciMag in the UK.

During the period, we made a further investment in Adaptix (Oxford, UK) worth £4.0m in total. Post period end, we agreed to buy the remaining shares in Adaptix for £2.7m and also took on existing debts of £2.1m, repaid debt of £3.3m.

The plans of Adaptix and Magnetica are convergent. We are seeking to exploit this parallel track, to optimise costs in both businesses and to improve market penetration. In the period, Adaptix began to place first products in the veterinary imaging market and also received its 510(k) approval from the FDA, to allow sales of its product for the orthopaedic market in the USA.

Financial Performance

 

Key Performance Indicators

The Group uses a number of financial key performance indicators to monitor the business, as set out below (all items are "from continuing operations", after restating for discontinued Metalcraft China in FY23).

 

Revenue: 17.5% increase - underlying organic growth continues

Overall, Group continuing revenue increased to £116.4m (2022: £99.1m), driven largely by organic growth in the EPM and PSRE divisions. Revenue included £2.9m stemming from HES/HEVAC, acquired in the period.

Gross margin: Stable despite some OEM/AM mix effects in the year.

Group gross margin reduced slightly to 32.9% (2022: 34.1%) partly due to the relatively higher percentage of OEM sales in the year, versus FY22.

 

Profit margin: Another improvement in results, despite global disruption

Adjusted EBITDA (note 2) increased to £13.7m (2022: £12.4m). PSRE was boosted by strong results across the division, with robust results at Booth. The profit margins in the EPM division also continued to improve, as market conditions stabilised somewhat. In FY23, the overall increase in revenue resulted in a slight decrease in the split of AM and OE, with a corollary slight reduction in EBITDA margin percentages, along with the initial HES Revenue being just above break even.

Operating profit was £8.0m (2022: £7.2m), in line with the EBITDA improvement seen above, and lower exceptional costs.

Profit was suppressed by £0.4m in the year, by the Board's proactive decision to make an ex gratia payment of £500 each to all employees in December 2023, to help with the cost of living in various countries.

Tax: Future profits and cash protected by available losses

The effective rate of taxation at Group level was a 16.7% (2022: 13.9%) tax charge. A US tax rebate in FY23 (note 3) kept the charge lower than expected and the use of brought forward losses in the UK. The tax position will be aided further in the coming years by utilisation of losses in the UK. We continue to be cautious, not recognising all of the potential trading tax losses in the UK.

Adjusted diluted Earnings per Share (EPS) increased

Adjusted diluted earnings per share from continuing operations (note 4) increased to 23.4p (2022: 21.6p) reflecting the underlying growth in results, offset by a higher tax charge due to the increase in the UK tax rate (FY22 had a lower overall tax charge following a US tax rebate). Adjusted diluted earnings per share attributable to shareholders reduced to 19.9p (2022: 21.8p), due to the discontinued losses for the trading and disposal of Metalcraft China.

Basic and diluted earnings per share attributable to shareholders from continuing activities decreased to 15.7p (2022: 18.9p) and to 15.3p (2022: 18.3p), due to the discontinued losses for the trading and disposal of Metalcraft China.

Funding and Liquidity: Ongoing strong net cash position

Net cash (including IFRS16 debt) at 31 May 2023 was £9.1m. Excluding IFRS16 debt, Net cash was £13.0m, (31 May 2022: Net cash (including IFRS16 debt) was £13.3m and excluding IFRS16 debt was £16.7m). The cash flows generated from the strong underlying profits were subdued by a £2.3m working capital outflow, mainly due to the delayed timing of various contracts, carrying increased stock due to supply chain disruption and working capital outflow for the HES/HEVAC acquisition, resulting in an operating cash inflow of £9.6m for the year (2022: £3.7m). In addition to £4.0m invested in Adaptix, £5.3m was invested in development costs primarily in relation to: Magnetica's compact helium-free MRI system £3.7m; HTI Bearings £1.1m.  A further £3.3m into property plant and equipment, £1.5m lease renewals at Magnetica, HTI and Kunshan, FH Doosan machine £0.2m) and loan repayments of £2.8m, with the Group still in a strong net cash position. The Directors consider that the Group has sufficient financial resources to deliver strategy, so the Group is actively looking for further value enhancing opportunities.

Dividend: Progressive dividend policy continues

A final dividend of 2.8p per share is proposed, making a total dividend of 4.5p per share (2022: 4.2p). The dividend will be paid on 8 December 2023, to shareholders on the register at 27 October 2023.

People

 

There were no changes at Board, or divisional management level in the period.

The next tier management teams in each of the three divisions continue to be strengthened, with a number of key appointments being made in the year, notably in Medical, which is growing quite quickly. Skills availability remains a challenge. However, we do not expect to be unduly constrained by shortages, although the global economic situation caused wage inflation across the Group and made recruitment more difficult. We continue to invest significant effort in developing skills in-house, through structured apprenticeship programmes and graduate development plans. The Group continues to be recognised nationally for the strength of its apprenticeship training schemes.

Environmental, Social and Governance (ESG) Report

Avingtrans believe that operating in a safe, ethical and responsible manner is at the heart of creating sustainable value for all our stakeholders.

Environmental

 

As the Group is listed on the LSE AIM market, we fall within the newly introduced Climate-Related Financial Disclosures ("CRFDs") regime. The 4 pillars of this regime are governance, strategy, metrics and targets, and risk management.

Governance

Our Board oversees our approach to sustainability, including climate change. Under the board sits a Sustainability Committee represented by employees from across the Group. The Committee is responsible for promoting and implementing environmental programmes and collecting and monitoring environmental data. The Sustainability Committee provides regular updates and briefings to the Board.

Strategy

In 2021, we reassessed our approach to sustainability, with a view of integrating a sustainability strategy into our core business activities, aligning ourselves with the UN's Sustainable Development Goals (SDGs). From our sustainability assessment we identified 2 principal areas of environmental focus, these are:

·      Operational eco-efficiency

·      Development of new technologies

Operational eco-efficiency looks at improvements we can make at a site level, including reducing the manufacturing footprint of our sites, investment in improvements, and establishing a culture which promotes carbon reduction.

Development of new technologies allows us to  benefit from opportunities designed to mitigate  issues associated with climate change. The Group can benefit from its advanced engineering capabilities and world-class technologies to develop new products and services that support low carbon or reduced emissions requirements.

Risk management

Our approach to identifying, assessing and managing environmental risks, including climate related risk, is embedded within our approach to risk management. Environmental risks may present as financial or non-financial risks depending on the extent to which their impacts can be quantified, and how they have been classified.

Climate change and environment is a principal risk for the Group.

Climate-related risks and opportunities

A summary of the climate-related risks and opportunities identified as having a potentially material impact on the Group, and our associated controls, includes:

Shift to renewables

Most countries we sell into are moving away from fossil fuels towards renewables.

Demand for our hydrocarbon range of products could be adversely impacted. Conversely, we could see greater opportunities for our nuclear products.

The Group has been investing in products for next generation nuclear, including fusion, molten-salt fast reactors, and small modular reactors.

Extreme weather events

Disruption could be caused by a range of events, for example, flooding, extreme temperatures, and drought.

Extreme temperatures will increase the energy required to heat or cool our facilities and in extreme cases may cause site closures and a range of logistical issues.

We have seen such issues rising across the Group in recent years, for example record levels of smog in Delhi, India, because of drought and industrial emissions.

Levels of regulation

The Group operates in a highly regulated environment across many jurisdictions and is subject to regulations relating to environmental factors including, but not limited to, climate change, therefore consideration of current and emerging regulation within our environmental management system is key to mitigating risk. Identified regulatory risks include energy-related taxes and the increased costs of compliance with energy-related schemes.

Statement of carbon emissions -compliance with Streamlined Energy and Carbon Reporting (SECR)

We report greenhouse gas Scope 1, 2 emissions in line with the Streamlined Energy and Carbon Reporting (SECR) regulations.

Given the Group makes regular disposals and acquisitions we do not consider absolute carbon emissions to be an appropriate method for tracking emissions, instead we focus on carbon intensity ratios.

We have adopted a portfolio approach to tracking carbon emissions. For the divisions operating in the energy sector (EPM and PSRE) we monitor carbon emissions per £m of revenue. The Medical division has a greater focus on product development, so instead we focus on emissions per employee.

Sites track their energy usage from a number of sources, including meter readings, mileage reports, and invoices, then converts these inputs to energy (kWh) and carbon emissions (tCO2e) using relevant conversion factors. Conversion factors are published by the UK Department for Environment, Food and Rural Affairs and the US Environmental Protection Agency (EPA).

Our energy usage and carbon emissions are:

 

	2023			2022
	EPM & PSRE	MII	Group	EPM & PSRE	MII	Group
Scope 1:
Gas	623	21	644	863	26	889
Oil	386	-	386	605	-	605
Distribution	13	2	15	30	-	30
Company vehicle travel	14	-	14	13	6	19
	1,036	23	1,058	1,511	32	1,543
Scope 2 - Purchased electricity	843	203	1,046	901	204	1,105
Total emissions tCO2e	1,879	226	2,104	2,412	236	2,648
Total energy consumption mWh	9,441	544	9,986	11,204	560	11,764
Intensity metrics:
Average employees	673	59	732	634	44	678
Emissions tCO2e per employee	2.8	3.8	2.9	3.8	5.4	3.9
Revenue (£m)	112.8	3.6	116.4	96.6	2.5	99.1
Emissions tCO2e per £m of revenue	16.6	62.7	18.1	25.0	94.4	26.7
UK proportion of:
Total emissions tCO2e	79%	21%	73%	81%	25%	76%
Total energy consumption mWh	77%	46%	75%	80%	50%	79%

 

In compliance with the SECR guidance, electricity emissions are based on grid averages from the regions we operate. As entities within the Group have transitioned to obtaining their power through renewable energy providers our actual electrical emissions will be lower.

The PSRE and EPM division's intensity target is to reduce its tCO2e per £m of revenue. In the year tCO2e £m of revenue improved by 33% to 16.6 (2022: 25.0). We expect to reduce revenue intensity further in the next financial year.

The MII division's intensity target is to reduce its tCO2e per employee. In the year tCO2e per employee has reduced 29% to 3.8 (2022: 5.4).

Integration of environmental considerations into our Pinpoint-Invest-Exit strategy

The Group has expanded upon its environmental due diligence procedures, which historically used to focus on potential environmental liabilities. The focus has now shifted towards identifying opportunities to improve business performance through energy reduction initiatives.

We strongly believe that investing in next generation manufacturing facilities and development of new technologies is key to generating a sustainable business for the long term. Demonstrating to potential buyers our environmental credentials and technological capabilities is a key component of our Exit strategy.

Progress in the year

Operational eco-efficiency

A significant proportion of the Group's energy consumption is spent heating premises over the winter months. At some of the older facilities energy in the winter months (December, January and February) can be as much as 4 times higher than over summer (June, July and August). A focused effort has been made to reduce winter energy consumption. This includes the installation of new boilers, additional insulation, automatic timers on heating, as well as reducing the manufacturing footprint.

We carried out a Carbon whole life cycle impact assessment also known as the LCA to measure embedded carbon in some of our key products. This process was guided by the ISO 14067 Lifecycle Carbon Assessment ("LCA") to measure and investigate improvement opportunities that can cut carbon emissions. On the back of this research, we have implemented a number to our products and processes including:

·      Selection of higher quality materials designed to increase the useful life of products and reduce maintenance.

·      Introduction of reusable packaging and packaging which can be fully recycled.

·      Negotiating with customers to make fewer, larger shipments of products in order to reduce delivery emissions.

 

Development of new technologies

Next generation nuclear: Molten Chloride Fast Reactor

Our US Hayward Tyler business has been developing high-temperature molten salt pumps, destined for a state-of-the-art Integrated Effects Test (IET) facility, under development by Southern Company and TerraPower, to advance development of the Molten Chloride Fast Reactor (MCFR). This is a transformational, fourth-generation, molten salt nuclear technology, designed to enable low-cost, economywide decarbonization. Located at TerraPower's Everett, Washington facility, the IET is a non-nuclear, externally heated multi-loop system, intended to test and validate integrated operation of MCFR systems, as well as demonstrate multiple auxiliary MCFR functions.

During the year, the Group secured an extension to for the continued development of next generation molten salt pumps, under the Advanced Reactor Demonstration Program.

Nuclear energy and decommissioning represent 27% of the Group's revenues in the year. The Group believe that working on next generation nuclear projects including MCFR in the US, ITER in France, and Small Modular Reactors ("SMRs") in the UK, will strengthen the Group's long-term position in the nuclear industry.

Helium-free magnets

Existing MRI systems rely on liquid helium, to cool the superconducting magnets at the heart of each system. Helium is a scarce, non-renewable resource, mostly obtained as a by-product of oil extraction. Therefore, in our new compact MRI designs, we are seeking to take advantage of the smaller system footprint, to enable us to rely on mechanical cooling only, thus virtually eliminating use of helium in these systems. 

An update on the status of the progress on the MRI development can be found in Medical Division review on page 10.

Social

Social Responsibility

It is paramount that the Group maintains the highest ethical and professional standards across all of its activities and that social responsibility should be embedded in operations and decision making. We understand the importance of managing the impact that the business can have on employees, customers, suppliers and other stakeholders. The impact is regularly reviewed to sustain improvements, which in turn support the long-term performance of the business. Our focus is to embed the management of these areas into our business operations, both managing risk and delivering opportunities that can have a positive influence on our business.

Employees

The Group places considerable value on the involvement of its employees and has continued to keep them informed on matters affecting them directly and on financial and broader economic factors affecting the Group. The Group regularly reviews its employment policies. The Group is committed to a global policy of equality, providing a working environment that maintains a culture of respect and reflects the diversity of our employees. We are committed to offering equal opportunities to all people regardless of their gender, nationality, ethnicity, language, age, status, sexual orientation, religion or disability. We believe that employees should be able to work safely in a healthy workplace, without fear of any form of discrimination, bullying or harassment. We have been rolling-out a "dignity and respect" training program across the Group. We believe that the Group should demonstrate a fair gender mix across all levels of our business, whilst recognising that the demographics of precision engineering and manufacturing remain predominantly male, which is, to an extent, beyond our control.

Apprenticeships and training

All larger group locations are running apprenticeship schemes for young people, both to act as socially responsible employers and to optimise the demographics of our workforce over the mid to long term.

The apprentice training school, based at Metalcraft, Chatteris is now fully operational. We are partnered with West Suffolk College (WSC) as the operator and training provider at the centre, which plans to take on between 80 and 130 students each year. Construction of the centre was funded through a £3.16 million grant from Cambridgeshire and Peterborough Combined Authority.

The Group continues to be recognised nationally for the strength of its apprenticeship training schemes. At 31 May 2023, the Group had 29 apprentices.

Health, safety, and wellbeing

The Group takes H&S matters and its related responsibilities very seriously.

As regular acquirers of businesses, we find different levels of capability and knowledge in different situations. A frequent investment need in smaller acquisitions is to spread H&S best practice from other Group businesses and bring local processes up to required standards. Larger acquisitions usually have well developed H&S processes and we seek to learn from these in other business units.

Employee equality, welfare and engagement are critical for developing our key asset. We focus on pro-active actions, including, internal training, certifications, and employee engagement through listening, survey and involvement.

Our Health and Safety KPIs can be found in the key performance indices section of the strategic report (page 8). Health and Safety incidents per head per annum rose to 0.08 in the year (2022: 0.07) driven by the acquisition of the HES/HEVAC businesses. Excluding the new acquisition incidents per head per annum would have remained flat at 0.07. At Board level, Les Thomas has H&S oversight and he conducts inspections with local management, as appropriate.

During the year, there have been no fatalities or serious injuries at any of our sites.

Ethical policy

The Group complies with the Bribery Act 2010. We do not tolerate bribery, corruption or other unethical behaviour on the part of any of our businesses or business partners in any part of the world. Employee training has been completed in all areas of the business to ensure that the Act is complied with.

Outlook

Avingtrans is a niche engineering market leader, principally in the Energy and Medical and Industrial sectors, with a successful profitable growth record, underpinned by our 'PIE' strategy. Recent acquisitions will provide further opportunities for the Group to build sustainable value for investors in resilient market niches. We will continue to be prudent and seek to crystallise value and return capital when the timing is right, as part of the PIE strategy implementation. Our PIE strategy has served us well in the current crisis and could result in further opportunities to grow shareholder value.

The Group continues to invest in its three divisions, with a focus on the global energy and medical markets, to position them for maximum shareholder value, via eventual exits in the years to come. Magnetica's MRI product development is proceeding to plan, with an expected launch of the orthopaedic product later in 2023, subject to FDA approval in the USA, expected during FY24. This activity is fully complemented by the post-period end acquisition of Adaptix and its disruptive 3D X-ray technology. The earlier acquisitions of Booth and Energy Steel continued to recover well, as demonstrated by the results in the period. The Group is in a strong net cash position, so we are proactively pursuing potential PIE prospects, with the ability to capitalise on any suitable strategic opportunities. Our value creation targets continue to be accomplished as planned and are underpinned by a conservative approach to debt.

The energy divisions have a strong emphasis on the thermal power, nuclear and hydrocarbon markets and aftermarkets. The medical division is focused on compact, helium-free MRI systems and compact point of care 3D X-ray systems, which the Board believes could create significant future shareholder value. To drive profitability and market engagement, each division has a clear strategy to support end-user aftermarket operations, servicing its own equipment and (where pertinent) that of third parties, to capitalise on the continued market demand for efficient, reliable and safe facilities.

The Russia-Ukraine conflict and resulting inflationary effects on the global economy is still a significant risk factor. However, we have taken effective cost and impact mitigation actions so far, to limit any potential downside and we will continue to be vigilant.

Despite the current global macroeconomic environments, our markets continue to develop and M&A opportunities remain a priority for us. Businesses like ours can command high valuations at the point of exit. The Board remains cautiously confident about the current strategic direction and potential future opportunities across our markets. We will continue to refine our business by pinpointing specific additional acquisitions as the opportunities arise, to create superior shareholder value, whilst maintaining a prudent level of financial headroom, to enable us to endure any subsequent headwinds.

The Strategic Report was approved by the Board and signed on its behalf by:

 

 

Roger McDowell	Steve McQuillan	Stephen King
Chairman	Chief Executive Officer	Chief Financial Officer
26 September 2023	26 September 2023	26 September 2023