Avingtrans Regulatory News (AVG)

Avingtrans plc

("Avingtrans" or the "Group")

Preliminary Results for the year ended 31 May 2015

Avingtrans plc, which designs, manufactures and supplies critical components, modules and associated services to the aerospace, energy and medical sectors, today announces its preliminary results for the twelve months ended 31 May 2015.

Financial Highlights

· Revenue decreased by 4% to £57.8m (2014: £60.3m)

· Adjusted EBITDA decreased by 6%, to £5.3m (2014: £5.6m)

· Adjusted Profit Before Tax decreased by 16%, to £2.9m (2014: £3.5m)

· Adjusted Diluted earnings per share decreased to 10.1 pence (2014: 13.7 pence per share)

· Cash generated from operating activities £1.6m (2014: £1.6m)

· Continued investment in capability and capacity: £2.4m (2014: £4.3m)

· Net debt increased to £5.9m (31 May 2014: £3.6m). Gearing was 17% (2016: 11%)

· Increased final dividend of 2.0 pence per share, Full year total 3.0 pence (2014: Final 1.8 pence per share, Total 2.7 pence), an increase of 11%

Operational Highlights

Aerospace revenues restricted, with a decrease of 7% versus 2014

· Results hampered by first half customer destocking, second half stabilised

· Restructuring of operations and closure of the Derby site

· New contract wins with Airbus/PFW (£25m/10yr) and Sonaca (£5m/5yr)

· Acquisition of RMDG assets for £1.2m from Tricorn plc boosted market share

· C&H maintained strong performance

Energy and Medical division revenues flat, constrained by low oil price, EBIT recovered in H2

· Divisional restructuring implemented

· Exciting £47m, 10-year contract win with Sellafield Ltd

· EBIT losses significantly reduced, with a second half profit demonstrating progress

· Crown's markets continued to improve and the business remains profitable

· Quality & Delivery performance maintained across the Group, despite new IT system implementation programme

Post Year End

· Aldridge building sold for £1.1m net proceeds

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

"As previously communicated, the oil price collapse took its toll on Group results and we were further buffeted by aerospace customer destocking in our first half. We reacted quickly to mitigate the effects of these challenges, limiting the revenue decline to 4% and the decline in EBITDA to 6%. Adjusted diluted earnings per share correspondingly decreased to 10.1 pence. Despite continuing investment of £2.4m and the £1.2m acquisition of the assets of RMDG from Tricorn plc, group net debt only increased to £5.9m - lower than market expectations - with gearing at a modest 17%. Our aerospace orders have since stabilised, but the oil sector remains depressed. Therefore, we have turned our attentions elsewhere, with an impressive sign of the future coming from our £47m, 10 year contract win with Sellafield Ltd. Our robust position has enabled the Board to propose a 2.0 pence per share final dividend, making 3.0 pence for the year, an increase of 11%."

Enquiries:

About Avingtrans plc:

Avingtrans has become a significant organisation in the design, manufacture and supply of critical components, systems and associated services to global industrial markets from two divisions: Aerospace and Energy and Medical.

Aerospace

Sigma Components Ltd - UK and China

Energy and Medical

Chairman's Statement

This has been a challenging year for the group and we have coped with some strong headwinds in the period and have responded quickly to changing market conditions. As previously reported, we were impacted during the year by the oil price decline. This is an on-going issue and we have taken strong remedial action to contain this problem. We are also very grateful to our newest non-executive director, Les Thomas, the CEO of Ithaca Energy Inc, who arrived during the year in the teeth of the storm and helped us to successfully navigate choppy waters.

Simultaneously, in our financial first half, we suffered from a material decline in aerospace output, due to customer programme volume changes and destocking. Whilst this challenge has not fully abated, it has reduced markedly and we have had success in restructuring our aerospace division and in winning new business, to mitigate the effect on profit. Notably, we won a £25m, ten year contract with PFW (part of Airbus) to produce parts and assemblies for the A350, from our Farnborough facility. As expected, the RMDG business (Swadlincote) whose assets were acquired from Tricorn plc for £1.2m in the period - made a £0.3m loss, which also affected the outcome for the year.

The run rate revenues in our financial second half returned to the level of the previous period. However, we were unable to make up for the first half shortfall, so that the overall result was a decline in both revenue and profit over the full twelve months, albeit broadly in line with revised market expectations. This is frustrating, but the actions we took steadied the ship and prepared us for a growth path once again in the FY16 year. Whilst we made good progress with our restructuring programme in both divisions (Aerospace and Energy and Medical), it was not possible to complete this activity and some residual restructuring will spill over into the current financial year (FY16).

Post year end, we sold the freehold of the Maloney Metalcraft building at Aldridge for £1.1m, net of costs, which further reduced the run rate cost of that operation, in a continuingly depressed oil and gas market. On the other hand, the Energy and Medical division was boosted by the win of a £47m, ten year contract with Sellafield, for the provision of 3M3 (three-metre-cubed) boxes, for the storage of intermediate level nuclear waste. This contract, together with a parallel contract awarded to another vendor, is the first step in a commercially significant programme by the UK government, under the auspices of the Nuclear Decommissioning Authority (NDA), to repackage the legacy nuclear waste for long term storage. Metalcraft is well-placed to be a key partner for Sellafield in this programme, over the next 30 years.

Therefore, despite some setbacks, our passion for the Aerospace, Energy and Medical markets is undimmed and these markets still provide strong medium-term prospects for growth.

We continued to invest in new skills in both divisions, driven by the government sponsored "Sharing in Growth" (SiG) programmes, where we are an active participant. It wasn't the best year to make big investments, but we continued to invest in new technology - particularly in composites - assisted by some grant funding. We also invested £1.0m in new capex, production IT systems, etc, as part of an on-going journey towards world-class manufacturing capability.

Given the challenges faced in the year, we were satisfied with the Aerospace recovery in the second half and with the year on year progress in Energy and Medical, oil price notwithstanding. Both divisions have to do better, but we have solid foundations to build on. The second half improvement allowed us to deliver a result close to revised expectations, with revenue down 4% versus the previous period and adjusted EBITDA also down by 6%, bearing in mind that EBITDA was negatively affected by RMDG. Orders and prospects remain at a high level, except for oil and gas, where the prospect bank is depressed. With a less favourable tax position this year, adjusted diluted earnings per share declined by 26%, to 10.1 pence. Gearing rose to 17% on Net debt increasing by £2.3m, to £5.9m, though half of the increase was attributable to the RMDG asset purchase. Therefore, the balance sheet remains in good shape, despite the investment in the year, of £2.4m.

Please rest assured we do not intend to hide behind external market change factors, however convenient that may be. We know our performance must improve and we believe it can do so - significantly. Accordingly, the Board has declared an increased final dividend, of 2.0 pence per share, rendering a full year total of 3.0 pence, once again underlining our commitment to consistently improve returns to our shareholders.

Finally, I would like to take this opportunity to thank our employees for their hard work and dedication to deliver excellent quality engineering products and services, especially in the difficult circumstances of the last 12 months.

Roger McDowell

Chairman

29 September 2015

Strategic Review

Group Performance

Strategy

We are a precision engineering group, operating in differentiated, specialist niches in the supply chains of many of the world's best known engineering original equipment manufacturers, for example: Rolls Royce, Siemens and Safran. Our core strategy is to build market-leading niche positions in our chosen sectors of Aerospace, Energy and Medical and our acquisitions have enabled Sigma and Metalcraft to develop the critical mass necessary to achieve leadership in their respective sectors. 

Our core businesses have the capability to engineer products in Europe and produce those products partly or wholly in Asia, allowing us and our customers to access low cost sourcing at minimum risk, as well as positioning us neatly in the development of the Chinese and Asian markets for our products. Sigma and Metalcraft are both well established in China, providing integrated supply chain options for our customers.

Niche Market Positioning

Aerospace: Our strength lies in civil aerospace, where we produce pipes for a number of aero-engine suppliers into the large civil airliner market; and where we enjoy market leadership in Europe, as well as a leading position as an independent supplier globally. In addition, we are building a position in assemblies and fabrications beyond pipes - e.g. in ducts, nacelles, etc - that will allow us to access an even larger market. We also have UK market leadership in the domain of aerospace component polishing and finishing through Sigma's C&H subsidiary.

Energy and medical: We are developing our position as a leading European supplier of energy industry process modules, vertically integrating this capability with the vessel manufacturing capability at Metalcraft. This same vertical integration capability lends itself to the "new nuclear" and nuclear decommissioning markets, as well as a variety of other niches in the renewable energy sector and emerging markets like shale gas.

Metalcraft's cryogenic vessel manufacturing pedigree, spanning over 40 years, makes us a supplier of choice to OEMs in markets where this capability is critical; notably in magnetic resonance imaging, or related sectors. We enjoy a global market leading position in this particular supply niche.

We have strengthened our capability to manage sophisticated outsourced manufacturing programmes for our customers, thus accessing business of enduring value, with the prospect of further sales growth. We remain focused on markets where we can sustain a significant competitive, long term advantage and where the regulatory and technical requirements provide competitive barriers to entry.

Operations

Aerospace Division (Sigma)

Operational Key Performance Indicators (KPIs)

The divisional quality and delivery performance were sustained in the year, despite the implementation of new IT systems and the introduction of the RMDG performance into the statistics. Underlying staff turnover is higher than ideal, though turnover in China is partly responsible for this and our staff retention there is above average for the region. Health and safety incidents showed a welcome positive trend.

The civil aerospace market remains robust, as evidenced at the Paris air show in June 2015. Between them, Airbus and Boeing have a backlog of circa 12,000 commercial jet orders to deliver and their 20 year demand projections remain at record levels. So, overall market trends are still positive for Sigma, although, in contrast, we saw output reductions in the early part of the year.

The acquisition of RMDG was challenging, since this business was underperforming and loss-making on acquisition and its arrival into the group coincided with a critical destocking decision by key customers. This issue was acutely seen in our first financial quarter, after which volumes stabilised. However, the damage was done to the year's result, since it is not easy in aerospace to replace lost volume quickly. Therefore, divisional restructuring plans were accelerated to mitigate the damage and the benefits of this action are anticipated to be seen in the financial year ended 31 May 2016. The division sustained its leadership position in the aerospace pipes market niche.

Operations (continued)

Aerospace Division (continued)

Despite the first half setback, we continued to invest in our new composite pipe technology and the prototypes we produced created a buzz at the Paris air show amongst customers and competitors alike. We secured further grant funding for composites technology in the period and continued our internal investment programme.

Prudent capital expenditure at Sigma continued, as we rolled out our new Epicor manufacturing IT systems, to underpin our aspiring world-class supplier status. Our OEM partners appreciate the improvements in quality, delivery and capability that our focus is bringing.

The Q1 blip drove down annual sales by 7%, to £35.9m, or an underlying 13%, when first year sales from RMDG are excluded, as compared to the prior year. Our order book is still strong, with new long term agreements secured with PFW/Airbus for A350 parts (worth £25m over 10 years) and with Sonaca (worth £5m over 5 years). These contracts help further diversify our customer portfolio, whilst also better balancing airframe vs engine applications.

Overall EBIT Aerospace margins were down significantly to 8%, driven by the Q1 destocking issue, losses at RMDG and our decision to continue with the composites investment programme. We expect to eliminate two of these three drag factors in the current financial year, so margins should rebound to prior levels. However, on-going investment in new technology is expected, since we see this as an essential longer-term differentiator.

Briefly summarising the main developments at the Aerospace sites:

· Hinckley's performance was severely impacted by Q1 destocking events, though matters improved in the second half. Hinckley is becoming the pipe production centre of excellence for the division.

· We exited the Derby site during the year and transferred its production to Hinckley and Swadlincote (RMDG). We will conclude the lease arrangements for this site in the current financial year.

· Swadlincote (RMDG) had a challenging first year in the group and we have worked hard to stabilize volumes and margins there. As expected, the acquired business made a loss in the year of £0.3m.

· Farnborough's performance continued to improve in the period and the site is consistently profitable. Delivery and quality are close to normal levels of aerospace customer requirements. This site joined the Sharing in Growth (SiG) programme in the year.

· Chengdu's sales growth was curtailed by the associated Hinckley Q1 sales reduction, though output had stabilised by year-end. The capacity of the site will be increased this year, in anticipation of further customer demand and the need to expand pipe production in China.

· Buckingham (Composites) saw development expenditure and investment and, therefore, losses increase in the period, as we focused on new customer development and new technology composite pipes. This technology is exciting and has applications in a number of sectors.

· Sandiacre (C&H) had another strong and consistent year, with the barrel-type polishing equipment investment paying dividends and we anticipate further capital expenditure of this sort in the FY16 year.

Energy and Medical Division (Metalcraft, Maloney Metalcraft and Crown)

Operational Key Performance Indicators (KPIs)

The divisional quality and delivery performance were sustained in the year, despite disruption coming from the implementation of new IT systems. Staff turnover reduced and is at an acceptable level for this type of business. Health and safety incidents showed a welcome positive trend.

The abrupt reduction in the oil price shattered the nascent recovery at Maloney. The prospect bank that we had been carefully nurturing evaporated, as customers delayed, or cancelled their investment decisions, in response to the sharp drop in expected returns. This reaction was quite universal, with relatively few projects surviving once the smoke cleared. In consequence, we took swift action to downsize the Maloney business and exit the Aldridge manufacturing site. The sale of the building was completed just after our year-end and we achieved a sale price for the freehold of £1.1m, net of costs.

Operations (continued)

Energy and Medical Division (Metalcraft, Maloney Metalcraft and Crown) (continued)

The oil price shock meant that our growth intentions gave way to control of costs and the division scarcely grew at all, with revenue up by only 1% over the prior year. Although we still recorded a small loss for the year, the division did make a modest profit in the second half and the -1% EBIT overall was much improved over the previous twelve months. This loss included the anticipated on-going start-up costs at our Metalcraft China facility, where the build-up of MRI business from Siemens and others has been slower than we would like. Crown continued to grow and made a profit again, as transport infrastructure business gradually returned and as we worked on an exciting new product for a new customer in the recycling arena.

World energy consumption drivers continue to be positive overall, given increasing globalisation and the demographics of an ageing world population are encouraging for the medical imaging and diagnostics market. However, the most significant development for Metalcraft recently has been the award of the £47m /10 year contract with Sellafield Ltd to produce 3M3 (three-metre-cubed) boxes, for the storage of intermediate level nuclear waste. This contract was awarded with a parallel contract to another vendor. This represents the first step in a commercially significant programme by the UK government, under the auspices of the Nuclear Decommissioning Authority (NDA), to repackage the legacy nuclear waste for long term storage. Metalcraft is well-placed to be a key partner for Sellafield in this programme, over the next 30 years, during which time the total value of similar equipment required is likely to exceed £1bn, according to Sellafield's own estimates.

Summarising developments over the year at the Energy and Medical sites:

· Metalcraft, Chatteris: business with Siemens and Cummins in the UK was steady. Site delivery and quality consistency improved and we began to see the initial growth of other repeat customers. Key customer Heatric (Meggitt) saw the downside of the oil price and hence, there was less business from them in the year. The site rolled out the Epicor IT systems and this has been bedding-in reasonably well over the last few months. The exciting nuclear decommissioning contract win from Sellafield will result in site preparations in the current financial year, but very little volume of business, as the ramp up is quite slow. Further prospects in the sector are now in view.

· Metalcraft, Chengdu: as previously reported, start-up losses have been higher than in our original plans for the facility, but they are predictable and containable, as we seek to win business from a broader customer set. In that respect, progress is heartening.

· Maloney Metalcraft, Aldridge: as noted above, the oil price shock killed the prospects for the business and forced us into a rapid cost base rethink. Whilst some restructuring costs have spilled over into the new financial year, the project to reshape the business is proceeding well and the sale of the building just after year-end is an important piece of the plan to complete. A deal with the new owners of the building means that we are able to retain the engineering offices on a lease and thus avoid a disruptive relocation of the technical team. The win of the $3m Samsung Algerian gas field project in the second half proved that the sector is not dead - just hibernating.

· Crown grew once more, with transport infrastructure sales increasing from a low base. There was also good progress with the first project for a new customer involved in the recycling market. Prospects for this technology seem very encouraging, thus broadening the strategic options for Crown.

Financial Performance

Key Performance Indicators

The Group uses a number of financial key performance indicators to monitor the business, as set out below.

Revenue: sales decline arrested in second half

Full year Group revenue was down by 4%, to £57.8m (2014: £60.3m). Aerospace saw a 7% decline, including the revenue from RMDG, driven by customer destocking in H1. Energy and Medical saw marginal 1% growth, with the oil price severely holding back the division's progress.

Profit: underlying margins stable on lower volumes

Adjusted EBITDA was down by 6% (note 2), to £5.3m (2014: £5.6m). Aerospace profits were held back by expected losses at RMDG and by the reduced first half revenue from customer destocking. Energy and Medical made a modest profit in H2, after making a small loss in the first half, thus recording a marginal loss for the year.

Gross margins were 25% (2014: 24%), holding up reasonably in adverse conditions.

Financial Performance (continued)

Tax: less favourable position this year

The effective rate of taxation was 5.3%, whereas 2014 was a 15.3% tax credit. During the year we benefited from the release of an IBA deferred tax liability on the Maloney site and have continued to benefit from Research and Development tax credits in the UK and losses utilised in China. The tax position will "normalise" in the coming years, though we anticipate some on-going benefits - e.g. R&D tax credits.

Earnings per Share (EPS): back to "normal"

With a less favourable tax position, adjusted diluted earnings per share declined by 26% to 10.1p pence per share (2014: 13.7 pence per share), based on 28.0 million shares (diluted weighted average).

Funding and Liquidity: Balance sheet still strong

The net cash inflow from operating activities was £1.6m (2014: £1.6m).

Net indebtedness (note 7) at year end stood at £5.9m (2014: Net indebtedness: £3.6m). Balance sheet gearing was 17% (2014: 11%). Although we should note that around half of the increase is attributable to the acquisition of RMDG assets from Tricorn plc in the period.

Dividend: steady progress

The Board again voted to underline our progressive dividend policy and we are pleased to be able to recommend at the AGM an improved final dividend of 2.0 pence per share (2014: 1.8 pence per share). This will be paid on 11 December 2015, to shareholders on the register at 6 November 2015.

The Group continues to focus on exciting trading opportunities in the Aerospace and Energy sectors and we see further prospects to develop our offering, which should deliver long term growth and shareholder value. The continued backing of our investors, coupled with a positive relationship with the Group's principal bankers, means we expect to have more than adequate financial resources to continue to invest in the business. We also continue to develop relationships with an array of potential stakeholders, assisted by our consistent dividend track record.

People

During the year, we strengthened our leadership team, with the appointment of Les Thomas, the CEO of Ithaca Energy Inc, to the plc Board, underlining our commitment to the Energy market.

There were no other Board or top team management changes in the period, but we continued to reinforce our management teams in both divisions. Each of the businesses deepened its base of skilled engineering and technical personnel, with intellectual property development becoming more important to our future. Skills availability remains challenging, in a tightening labour market, but we do not expect to be unduly constrained by any shortages and we continue to invest in skills - e.g. through apprenticeships - at several locations. Both divisions significantly reduced headcount in the last year, following the oil price and aerospace destocking issues detailed elsewhere.

Outlook

The group is a niche engineering market leader in the Aerospace, Energy and Medical sectors. With attractive structural growth markets and durable customer relationships, we remain cautiously confident about the future of Avingtrans. The oil price shock has shown that we can cope well with downturns and we have the agility and credibility to switch to other pertinent markets to sustain our businesses. In particular, prospects for Civil Aerospace and Nuclear Decommissioning are highly attractive.

Our strategy continues to produce significant new business wins that support our results and provide good visibility of longer term earnings. We have an excellent customer base which we can build upon and differentiated product niches to exploit. We remain well placed to benefit from further market consolidation.

The RMDG acquisition again emphasised our intention to build shareholder value through targeted merger and acquisition activity. Although we cannot state that this will result in any further transactions during the current financial period, we will pursue further opportunities to enhance long-term value.

Sigma and Metalcraft are clear leaders in their chosen niche markets, providing customers with consistent quality as part of a world class supplier journey. Our growing Chinese presence is providing a crucial competitive advantage. Investors are asked to endorse our strategy and join us in developing a great British engineering story. As ever, we are grateful for your support.

Consolidated statement of Comprehensive income

Cash flows from operating activities:

for the year ended 31 May 2015

Notes to the Preliminary Statement

31 May 2015

1 Segmental analysis

Aerospace results include a business combination acquiring certain of the trade and assets of RMDG Limited (note 5) which contributed £2,314,000 and a loss of £275,000 to Group revenue and profit after tax respectively. 

Energy and Medical results includes the acquisition of the Exterran UK limited (renamed Maloney Metalcraft) which contributed £6,686,000 and £2,195,000 to Group revenue and loss after tax respectively, which was offset above by the £2,615,000 bargain purchase on acquisition (note 5).Notes to the Preliminary Statement (continued)

31 May 2015

Geographical

The Group has Aerospace revenue of £12,744,000 (2014: £13,314,000) and Energy & Medical revenue of £7,228,000 (2014: £7,597,000) with single external customers under common control, which each represent more than 10% of the Group's revenue.

2 Adjusted Earnings before interest, tax, depreciation and amortisation

The Directors believe that the above adjusted earnings are a more appropriate reflection of the Group performance.

3 Taxation

Notes to the Preliminary Statement (continued)

31 May 2015

4 Earnings per ordinary share

Notes to the Preliminary Statement (continued)

31 May 2014

5 Acquisitions

Business combination - Sigma Swadlincote

On 11 August 2014 the group acquired the trade and certain business assets and liabilities relating to the manufacture of aerospace components of RMDG Aerospace Ltd. The acquisition was made to enhance the Group's position in the aerospace market. The provisional net assets at the date of acquisition were as follows:

Management did not identify any intangible assets on acquisition of this business which was in a distressed state.

Acquisition costs arising from this transaction of £68,000 have been included in administration expenses before operating profit.

Business combination - Maloney Metalcraft

On 3 July 2013 the Group acquired 100 percent of the issued share capital of Maloney Metalcraft Limited (formerly Exterran (UK) Limited). The acquisition of this business resulted in a gain on acquisition of £2,615,000 as a consequence of buying the business in a distressed state. The gain on bargain purchase was separately presented in the income statement before operating profit.

6 Events after the balance sheet date

On 1 July 2015 Maloney sold its freehold site for £1.1m net of costs resulting in a profit of £0.5m.

Notes to the Preliminary Statement (continued)

31 May 2015

7 Net Debt and gearing

8 Preliminary statement

This preliminary statement, which has been agreed with the auditors, was approved by the Board on 29 September 2015. It is not the Group's statutory accounts within the meaning of Section 434 of the Companies Act 2006.

The statutory accounts for the two years ended 31 May 2015 and 2014 received audit reports which were unqualified and did not contain statements under s498(2) or (3) of the Companies Act 2006. The statutory accounts for the year ended 31 May 2014 have been delivered to the Registrar of Companies but the 31 May 2015 accounts have not yet been filed.

9 Annual report and Accounts

The Report and Accounts for the year ended 31 May 2015 will be available on the Group's website www.avingtrans.plc.uk on or around 7 October 2015. Further copies will be available from the Avingtrans' registered office:

Precision House, Derby Road, Sandiacre, Nottingham, NG10 5HU.

10 Annual General Meeting

The Annual General Meeting of the Group will be held at The Holiday Inn, Bostocks Lane, Sandiacre, Nottingham NG10 5NL at 11.15 a.m. on 11 November 2015.