There are significant medium term growth opportunities for both Avon Protection and milkrite | InterPuls. I am confident that our strong foundations for growth provide us with the ability to continue delivering value to our customers, our people and our shareholders in the future.
I am delighted to report on another strong set of results which confirms the progress of our growth strategy. We have built momentum with a continued focus on growing the core revenue of the business to deliver sustainable and improving operating profits and cash flows.
Our ability to generate cash has allowed us to increase our investment in product development to support future growth. Investing in our product portfolio enables us to maintain the competitive advantage of our existing range and to develop new products that meet the future needs of our widening customer base.
We have made a conscious effort to enhance the predictability and sustainability of our business. This has resulted in us growing our order book in 2018 to establish strong visibility that will enable us to target new contract opportunities whilst retaining the flexibility to manage scheduling and timing effectively.
We continue to explore acquisition opportunities where we see the potential to complement our existing businesses and to deliver additional growth opportunities to create further value for our shareholders. Our strong balance sheet will enable us to execute on acquisition opportunities meeting our clear investment criteria.
There are significant medium and long-term growth opportunities for both Avon Protection and milkrite | InterPuls. I am confident that our strong foundations for growth provide us with the ability to continue delivering value to our customers, our people and our shareholders in the future.
The updated strategy, launched last year, is based upon creating shareholder value through three key elements:
- growing the core by maximising organic sales growth from our current product portfolio and maximising the operational efficiency of our existing facilities;
- pursuing selective product development to maintain our innovation leadership position; and
- targeting value enhancing acquisitions to complement our existing businesses and add additional growth opportunities for the Group.
Strong growth in Military and Law Enforcement has resulted in Avon Protection delivering another record year through our continued focus on expanding our customer base and product offering to provide a broader portfolio of products and extracting more value from our existing customers.
Expanding our global Military customer base
Our world leading expertise and reputation for quality in respiratory protection systems has been recognised by the UK Ministry of Defence (‘MOD’) through the signing in February of a five year contract for the resupply and in-service support of its General Service Respirator (‘GSR’).
Since re-establishing our relationship with the UK MOD through the GSR contract, we have been able to demonstrate to them our technical capabilities and track record of service and delivery that meets the most exacting quality standards of our Military customers. We anticipate that in time this will generate further opportunities to deepen our relationship with the UK MOD.
The launch of our MCM100 underwater rebreather has provided further opportunities to establish and strengthen relationships with a number of European and Rest of World Militaries and demonstrate our innovation and delivery capabilities.
Our strong relationship with the US Military has enabled us to develop a broad product portfolio ranging from our general service respiratory systems through to complex integrated and modular powered and supplied air systems. As a result of the modularity of our product offering, we can offer a bespoke solution to meet the budgets and differing usage requirements of potential Military customers.
With a breadth of product offering, and ongoing investment in research and development, we are in a strong position to deepen our existing customer relationships and pursue the new opportunities that our world leading reputation is creating.
Growing the Law Enforcement market
This year has seen a greatly expanded market demand for our protection products as the needs of the Law Enforcement community to meet the diverse CBRN threats has increased. This has been reflected in the significant sales momentum in the US market for our range of supplied and powered air products, following NIOSH safety approval in March of this year, and the strong sales performance of hoods and mask systems in Europe, the Middle East and Asia.
We have seen good market penetration with US Law Enforcement municipalities, where we have been able to leverage our differentiated modular product range to grow our market share. In the medium term, we expect our share of the law enforcement market to grow in both the US and other jurisdictions as we take advantage of our product innovation leadership position.
Reshaping our Fire strategy
The Fire market has seen tougher trading conditions through the year as customers have delayed purchasing commitments on older legacy ranges in advance of the arrival of the new 2019 National Fire Protection Association (‘NFPA’) compliant products. The launch of products compliant with the 2019 NFPA standards is later than expected due to delays at the NFPA in finalising the standards.
The market for self-contained breathing apparatus (‘SCBA’) in the Fire sector remains highly competitive and includes a fragmented customer base. We continue to see opportunities in this segment with our upgraded Magnum SCBA range, designed to comply with the new 2019 NFPA standards, which we expect to launch in the spring of 2019 and we have revised our sales strategy for the Fire market to ensure we return to growth in the short-term.
The argus thermal imaging camera technology has made a significant cumulative contribution to Fire market sales. During the year, we launched the NFPA certified Mi-TIC E L camera, which can now be sold into the US market. This model of the thermal imaging camera is the most cost effective entry-level solution for Fire services, without compromising on technology or quality. The argus range is a trusted brand for firefighters and this latest approval adds more options and variety for our customers and will help to maintain Avon Protection’s position as a leading global supplier of certified thermal imaging cameras.
Continuous focus on operational efficiency
Building on our existing manufacturing and service operation is a constant focus for Avon Protection to maximise the service delivery for our expanding customer base and widening product portfolio. Our well established and efficient manufacturing operation has enabled us to maintain excellent product quality control and reliability across our product range. As we move up the value chain in respiratory protection, with greater focus on more technical solutions for mask systems and supplied and powered air products, we are focused on ensuring that we maintain high productivity levels whilst being able to meet all of our customers’ requirements.
To achieve a greater level of production efficiency, during the year we relocated our West Palm Beach, Florida electronics assembly facility to our main US manufacturing facility in Cadillac, Michigan. This is part of our commitment to continually improve our production processes and to deliver scale efficiencies.
During the year, working with a local partner, we installed a production assembly line in Kazakhstan for the production of escape hoods primarily for the oil and gas sector. We will continue to explore additional opportunities, where appropriate, to deploy flexible manufacturing solutions, including local assembly operations to support regional customers, and optimise our production cost base to meet our future growth aspirations.
We have maintained our focus on expanding our position as milking point experts across each line of business for milkrite | InterPuls. The growing demand for dairy foodstuffs underpins medium and longterm opportunities for broadening the geographic reach of our products through the enhancement of our dealer network and the growth of Farm Services.
Retaining our Interface leadership
We have a global market-leading position in Interface, with our Impulse and Impulse Air ranges designed to maximise animal health and milking efficiency. Our innovation in Interface products ensures that we maximise our competitive advantage and counter competitor challenge. In addition, we remain committed to expanding the global dealer network to maximise our market coverage and access new customers.
Expanding Precision, Control & Intelligence (PCI) distribution
We have an advanced range of PCI products and our emphasis is on the technical dealer network to provide an upgraded sale and support capability to our customer base across all geographies. During the year, we have added technical sales specialists to our North American team to leverage our Interface platform and align the more technical solution the PCI products can deliver to the benefits they can bring to our customers in the performance and efficiency of milk production.
Growing the Farm Services lease ownership model
We have once again seen very strong growth in Farm Services as a wider base of our customers sees the benefit of accessing our product range on a lease hire basis. The Cluster Exchange Service (‘CES’) in both US and European markets has performed strongly and the sales strategy is focused on delivering on the opportunities to grow Pulsator Exchange Service (‘PES’) and Tag Exchange Service (‘TES’).
This ultimately provides us with the future delivery platform for ever increasingly advanced products, which provides a direct contact for service and support with our customers.
Continued investment to expand our product range
We have made a substantial investment this year in enhancing the technical capability of our existing portfolio and developing new products that will deliver future growth for the business. The majority of our development pipeline is designed in partnership with our customers to ensure that their performance requirements are met whilst ensuring the highest commercial returns on our investment are delivered.
The development expenditure in the year has predominantly focused on Avon Protection, with significant investment in the UK GSR, MCM100 and next generation hood programmes. We also invested in obtaining NIOSH safety approval for our supplied and powered air range and preparing our upgraded Magnum SCBA for NFPA verification. Development expenditure for milkrite | InterPuls included the upgraded Milk Meter equipment and subsequent ICAR approval together with the PCI heavy duty equipment for North America to meet the needs of our larger industrial farm customers.
In 2018 we invested a total of £9.7m, representing 5.9% of revenue, in research and development. Over the medium-term we expect to maintain the current level of funding for product development. This reflects our confidence in our ability to innovate to meet the future technical needs of our customers thereby generating profitable revenue growth.
Building on our long-term partnership with DOD
We have continued to work with the DOD on a number of potentially significant new platform programmes including the M69 aircrew mask, the M53A1 mask and powered air system and a follow on M50 mask system contract.
We currently expect to enter into multi-year contracts with the DOD for the M69 aircrew mask and the M53A1 mask and powered air system in the new financial year with production commencing in the second half of the year. We are also in discussions with the DOD to put in place a follow on contract for the M50 mask system following the conclusion of the initial 10 year contract in July.
We intend to complement the organic growth strategy described above with carefully selected value enhancing acquisitions within both Avon Protection and milkrite | InterPuls. Acquisitions are intended to complement and extend the reach of our existing businesses. This will have the effect of building a more robust and diversified business, whilst retaining the benefits of our technology expertise and strong customer relationships.
As part of our acquisition strategy, we also review our existing market segments to ensure that they still meet our core strategic objectives. The divestment of AEF, the US based manufacturer of hovercraft skirts and bulk liquid storage tanks, reflects this focus on growing the core business in our chosen market segments.
milkrite | InterPuls acquired the Merrick’s calf nurser product line for a total cost of $2.1m in June this year. milkrite | InterPuls has been the long-standing manufacturer of the rubber component of the calf nurser product and the acquisition enables us to take full control of the distribution of this product.
We continue to explore other acquisition opportunities where we see the potential to deliver significant strategic and financial value. We have a strong balance sheet, including net cash of £46.5m, together with undrawn bank facilities of $40m, and a cash generative business. This financial position, as well as our willingness to extend leverage up to two times EBITDA, means we are well positioned to pursue potential acquisitions that meet our criteria and act decisively where we find them.
Last year saw a significant transition of leadership within the Executive leadership teams of both businesses, and I have been very pleased that these changes have resulted in a clearer strategic direction and alignment for the Group.
In recognition of the extensive Military growth opportunities within Avon Protection, I am delighted to welcome James Wilcox to the Executive leadership team to lead our global Military business. James is an internal appointment from within the Avon Protection business and has many years of experience developing and marketing products to our Military customers. I believe that having specific sector leadership for Military, with Leon Klapwijk continuing to lead Law Enforcement and Fire, will greatly enhance our strategic delivery in Avon Protection to support our ambitious and exciting growth strategy for the future.
Our opening order book of £37.8m provides good visibility as we enter the new financial year, and we are well positioned to continue our strong momentum into 2019.
Within Avon Protection, first deliveries of the M69 aircrew masks, the M53A1 mask and powered air system and the UK General Service Respirator to the UK MOD will be made in 2019. The revenue opportunities from new products and customers is expected to offset the impact of the anticipated reduction in M50 mask system volumes. Alongside this, we expect continued sustainable growth from the widening customer and product base in Law Enforcement and, following the launch of our upgraded Magnum SCBA, we expect a stronger performance in the Fire business. There also remains a healthy pipeline of potential further contract opportunities.
Dairy market conditions have remained stable, although there has been some recent market caution around expectations for future feed prices. In this environment, we currently anticipate that the growth trends experienced by milkrite | InterPuls in 2018 will continue in the new financial year.
We have created a strong foundation to deliver further growth in 2019 through delivering against our three strategic priorities of growing the core, selective product development and value enhancing acquisitions.