AVG Avingtrans Plc

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"), thanks to 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 uncertainties - 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, Infrastructure and Medical markets, 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

 

Advanced Engineering Systems (AES): AES 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. In the USA, Hayward Tyler ("HT") is actively developing solutions for new nuclear technologies and other low carbon energy sources, like concentrated solar power, to leverage the global energy supply transition.  In the period, HT secured significant contracts, including additional pumps for the next generation nuclear business, TerraPower, in the USA and a further life extension equipment for the Forsmark nuclear power station in Sweden. The HT strategy is strengthened by crucial partnership agreements with companies like Shinhoo, expanding our product portfolio and creating cross-selling opportunities. The acquisition of Slack & Parr further enhances our global specialist pumps footprint.

 

An important target for AES is to establish a comprehensive offering in the nuclear decommissioning and waste management 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 valued at up to £70m and is still yet 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 of door frames having commenced in the period. Ormandy's market position in HVAC has been strengthened by the HES/HEVAC acquisition in early 2023, with a resulting wider product proposition. AES continues to benefit from a robust prospect pipeline, positioning it well to bid for new opportunities as they arise.

 

Medical and Industrial Imaging (MII): Following the Magnetica acquisition in 2021 and the acquisition of the remaining shares in Adaptix in 2023, the focus for the highly experienced management teams in 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 and non-destructive evaluation. 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. Adaptix's 3D X-ray technology is being developed in parallel to Magnetica's MRI technology and, as we envisioned, the two businesses are working in an increasingly complementary manner.

 

Across the Group's customers, we are capitalising on the 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 evergreen Pinpoint-Invest-Exit strategy, Avingtrans demonstrated its commitment by raising its stake in Magnetica to over 75% during the period. Additionally, we successfully completed the 100% acquisition of Adaptix, as mentioned earlier. The Group invested over £11.3m in Magnetica and Adaptix (post acquisition) in the period, as both businesses press ahead, to complete the development and commercialisation of their disruptive imaging products.

Our focus on other strategic acquisitions was sustained, with the addition of specialist pumps manufacturer Slack & Parr, for a total consideration of £4.1m which is already contributing positively to Group results, after a smooth integration process.

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 national governments to review energy security.

Markets - Energy

 

The global demand for energy remains relentless and we anticipate sustained 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. The energy hungry deployment of AI and growth in data centres will further increase world energy consumption. 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 AES division is 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 waste management. 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 93 reactors generating around 30 percent of the world's nuclear electricity. Coupled with the heritage Westinghouse technology operating in Europe and Asia, the 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 AES division is well positioned to support operators in addressing this critical risk.

The UK remains pre-eminent when it comes to decommissioning nuclear facilities and subsequent waste management, in terms of innovative technology and overall spend. The Group is embedded in the future manufacture of waste containers for Sellafield and NRS (formerly Magnox) 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 AES division. 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 and Eastern Europe. AES has optimised 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 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 relatively 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 $55.4billion by 2030 according to Grand View Research, a compound annual growth rate of 4.9%. 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 2021, we merged Magnetica with Scientific Magnetics (UK) and Tecmag (US) and we have continued to invest in Magnetica. In the period, we acquired 100% of Adaptix, for £7.2m, including absorbed and repaid debt. 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 suppliers, 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, the rising incidence of chronic diseases and increasing companion animal ownership.

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 2024, 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 is important to note that the actual addressable market is likely 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, for imaging at the point of care.

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. Notably, our strategy is to attack the markets in smaller "point-of-care" locations, where the main players (eg GE) are not present, since they are generally focused on whole body systems located in hospitals. Additionally, our systems are designed to eliminate circa 90% of the infrastructure costs, which severely limit where whole body systems can be sited.

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.

Infrastructure and Security

Global safety and security concerns, as well as risk mitigation on large infrastructure projects, are key drivers for growth at Booth and we are cultivating these opportunities carefully. Thus far, the vast majority of Booth's sales are in the UK but the business is building up a prospect pipeline overseas. We have also continued to build the aftermarket order book, with good prospects.

Threat detection standards for baggage handling at airports and package scanning have been tightened everywhere around the world - especially in Europe and the USA. With many millions of bags and packages flowing across border crossings every day, screening devices have to comply with threat detection standards without impacting throughput. Rapiscan, the biggest customer for Composite Products, is a market leader in this sector, whose presence is increasing as new standards are rolled out.

Following the acquisition of Adaptix, we are exploring various possible security applications of their 3D X-ray technology products as tools in various Non-Destructive Evaluation (NDE) markets, with an estimated addressable market of c$1.4bn.

 Operations

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

 

		2024	2023
·	Percentage of total continuing revenue deriving from aftermarket (AM) sales (%)	38.2	39.5
·	Customer quality - defect free deliveries (%)	89.0	91.3
·	Customer on-time in-full deliveries (%)	73.6	79.9
·	Annualised staff turnover including restructuring (%)	15.8	18.5
·	Health and Safety incidents per head per annum	0.07	0.08
·	Environmental incidents per annum	0	0

 

Aftermarket sales increased in value by £6.2m (13.4%) however there was a strong return of OE Revenue during FY24, reducing the overall AM percentage of sales.

The defect free delivery percentage decreased in FY24 to 89.0% (2023: 91.3%). The percentage is typically linked to the stage/type on some of the key contracts. In FY23, we were primarily engaged in the developing of new designs, which have transitioned to production during FY24.

Customer quality and on time in full (OTIF) deliveries both reduced in FY24, mainly due to the initial poor performance at Slack & Parr, following its administration process, leading to operational challenges, including supply chain disruptions and internal restructuring, which affected our ability to deliver products on schedule. Performance since acquisition has shown steady improvement.

Annualised staff turnover fell to 15.8% in FY24 (FY23: 18.5%), mainly driven by a reduced number of employees taking retirement (FY24: 6, FY23: 22).

H&S incidents per head per annum was down very slightly at 0.07.

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

AES Division - Energy and Infrastructure

The AES division comprises: Hayward Tyler (HT), Energy Steel (ES), Booth, Metalcraft, Ormandy and Composite Products, with Slack & Parr being added in the period.

The division's results were materially improved in the period, both for OE and aftermarket sales.

For Hayward Tyler ("HT"), the main priorities remain to strengthen its aftermarket capabilities and to maximise opportunities in the nuclear life extension market. HT was able to deliver a robust result in the period, the best outcome since acquisition, with a strong order book and prospects for the year ahead.

 

At HT Luton, aftermarket activities remain the focus, including the servicing of third-party equipment. A follow on £3m contract in Sweden with Vattenfall for the Forsmark plant (for nuclear life extension) commenced in the period. Further defence orders have also been received from Rolls Royce and are being executed as planned. Hydrocarbon related orders from the UK North Sea sector remained steady.

 

Regarding the HT Luton site redevelopment, there has been limited recent progress, as the increase in interest rates in the UK has dampened construction interest for the time being. Therefore, we have currently paused the sale of the site.

The HT Fluid Handling business in Scotland has been a consistently good performer and has fitted well into our ambitions to build a wider nuclear capability. The business has maintained a strong order book and the Transkem industrial mixers product line has again contributed positively.

 

HT Inc in Vermont (USA) continues to see solid order intake in the nuclear life extension market in the USA. HT Inc's new R&D opportunities in next generation nuclear power have made good progress, with a further $10m design and development TerraPower contract booked in the period and progressing to plan.

 

HT Kunshan (China) has developed a healthy order book, including an improving position in the aftermarket business, with new orders coming from Chinese electricity producers working on reducing the environmental impact of electricity production.

 

In India, the local team again delivered a solid annual performance, as India's energy requirements continue to expand.

 

Energy Steel ('ES') in Michigan (USA) made headway in the period, though the business did suffer from various order delays in orders, which impacted performance this year.

 

Metalcraft has made good progress with Phase 2 of the Sellafield 3M3 ("three-cubic-metres") box contract and confirmed additional nuclear decommissioning orders of over £14m in the period, including the first contract from NRS (formerly Magnox). The next follow-on 3M3 box contract tender, expected to be worth over £900m, is expected to be tendered in 2025 by Sellafield. The apprentice training centre in Chatteris continues to build momentum.

 

Ormandy achieved a record performance in the period, with a robust order book, moving into FY25. Ormandy has made excellent progress in building its aftermarket business, with aftermarket now comprising 13% of revenue.

Booth Industries maintained its strong growth trajectory. Booth has a record order book, including the £36m order for HS2 cross-tunnel doors, which was not affected by the HS2 phase 2 cancellation. The business completed and installed the giant proscenium doors for "The Factory" entertainment venue - the biggest doors ever made by Booth. We continue to make good progress in building an aftermarket business at Booth, where we see strong growth potential.

 

Composite Products had a solid year, boosted by new orders from Rapiscan.

 

Slack & Parr made a positive start to life within the Group and, pleasingly, was able to deliver a modest profit at EBIT in its first year with Avingtrans - a commendable outcome. Their specialist gear metering pumps are sought after worldwide, for a variety of applications, including the precision production of high-end fibres - eg spandex.

MII - Medical Division: Magnetica and Adaptix

 

Magnetica, Scientific Magnetics (SciMag) and Tecmag are working effectively together to make good progress on our exciting development of compact, superconducting, helium-free MRI systems entirely in-house. Magnetica was able to exhibit its prototype system in the period and the FDA 510(k) approval is now anticipated in H1 2025. The delay is mainly due to significantly increased demands by the FDA regarding cyber security. The business also appointed its first US distributor, Televere Systems, in the period.

 

Our initial estimate of the addressable MRI orthopaedic imaging market is circa £1.7bn p.a. (by 2030). This is assuming a capital sale model. Our intended longer term "pay per scan" business model could mean that the opportunity is significantly larger. It is more difficult to quantify other potential market segments (e.g. veterinary imaging) at this stage because equivalent, dedicated products do not exist. Avingtrans has further increased its investment in Magnetica, bringing its shareholding to over 75% of the issued share capital. We believe that materially reducing the size and total costs of these dedicated MRI systems, coupled with them being much easier to set up in a variety of locations, as well as increasing the scan rate by up to 300%, will produce a compelling sales proposition, ratified by interest from Key Opinion Leaders at the prestigious Radiological Society of North America conference, in Chicago. In addition, these dedicated systems could free-up capacity on the existing MRI system installed base, which should be a major benefit to healthcare organisations.

 

SciMag and Tecmag will rebrand in due course, to present a seamless image for the business. However, there is still merit in continuing with various existing products and services at SciMag and Tecmag, so long as they do not detract from our core vision for MRI, which holds out the prospect of materially increasing the value of Magnetica over the coming years. Orders for existing SciMag and Tecmag products were solid in the period.

 

As noted above, Avingtrans acquired the remaining 82% of the share capital of Adaptix, Oxford, UK in 2023. Adaptix launched its compact 3D x-ray system for orthopaedics in the USA. Adaptix has also launched its veterinary version of the 3D x-ray product and initial orders for a non-destructive evaluation (NDE) product were also booked in the period. We estimate that the Total Addressable Market value of these three segments is $6.8bn pa. Adaptix also appointed Televere Systems as its first US distributor.

 

The strategies of Magnetica and Adaptix are convergent and we see potentially large benefits in combining their approaches to market in technology, software and distribution channels, amongst others.

 

 

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").

 

Revenue: 17.3% increase - underlying organic growth continues

 

Group continuing revenue increased to £136.6m (2023: £116.4m), with organic growth of 9% in the AES division. Revenue included £10.3m from Slack & Parr and Adaptix, both acquired in the period.

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

 

Group gross margin reduced slightly to 32.2% (2022: 32.9%) partly due to the relatively higher percentage of OEM sales in the year, versus FY23.

 

Profit margin: Ahead of expectations

 

Adjusted EBITDA (note 2) increased to £14.0m (2023: £13.7m). The result was better than expected, given the forecast investment in the MII division. AES recorded robust results across the division, which boosted the overall Group performance. Slack & Parr recorded a creditable, albeit small, positive EBIT result in its first year with the Group.

Operating profit was £5.6m (2023: £8.0m), predominately due to £3.7m EBIT loss at Adaptix and higher exceptional costs for acquisition and restructuring offsetting an 8% increase in AES.

Tax: Future profits and cash protected by available losses

 

The effective rate of taxation at Group level was a 24.4% (2023: 16.7%) tax charge. The utilisation of brought forward tax losses in the UK (note 3) kept the charge lower than expected. The tax position will be aided further in the coming years by utilisation of losses in the UK and US. We continue to be cautious, not recognising all of the potential trading tax losses in the UK.

Adjusted diluted Earnings per Share (EPS) reduced due to investments in the Medical division

 

Adjusted diluted earnings per share from continuing operations (note 4) decreased to 18.5p (2023: 23.4p) reflecting the investment in Medical and higher tax charge offsetting underlying growth in AES results. Adjusted diluted earnings per share attributable to shareholders reduced to 18.5p (2023: 19.9p), with FY23 including 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 11.1p (2023: 15.7p) and to 10.9p (2023: 15.3p), as above, due to the investment in Medical and higher tax charge offsetting underlying growth in AES results.

Funding and Liquidity: Modest net debt position, post recent acquisitions

 

Net debt (including IFRS16 debt) at 31 May 2024 was £11.8m. Excluding IFRS16 debt, Net debt was £6.1m, (31 May 2023: Net cash (including IFRS16 debt) was £9.1m and excluding IFRS16 debt was £13.0m). The cash flows generated from the strong underlying profits were subdued by a £9.0m working capital outflow, due to the delayed timing of various contracts, working capital outflow for the S&P and Adaptix acquisitions and increased revenue in AES, resulting in an operating cash inflow of £1.3m for the year (2023: £9.6m). As expected, there was significant investment in product development during the period with £8.4m invested, primarily in relation to Magnetica's compact helium-free MRI system £3.6m, Adaptix's disruptive 3D X-ray technology £2.4m and next generation nuclear pumps at HTI £1.8m.  A further £4.0m was invested into property plant and equipment, £0.8m lease renewals at Tecmag, manufacturing set up at Adaptix £0.9m, alongside the initial net £1.5m cash cost of the acquisitions. To support the significant investment in the business, the group drew down £7.7m net of repayments from its supportive banking partners (including new lease at Tecmag £0.7m), leaving the Group in a strong position to pursue its strategy. The Directors consider that the Group has sufficient financial resources to deliver its strategy, so the Group continues to actively look for further value enhancing opportunities.

Dividend: Progressive dividend policy continues

 

A final dividend of 2.9p per share is proposed, making a total dividend of 4.7p per share (2023: 4.5p). The dividend will be paid on 20 December 2024, to shareholders on the register at 8 November 2024.

People

 

There were no personnel changes at Board level. However, at Board level, we have now set up an ESG Committee, chaired by Jo Reedman.

 

At divisional management level, we merged the EPM and PSRE divisions to create the AES division. Consequently, Austen Adams, formerly the managing director of the PSRE division, assumed leadership of this newly integrated division. The Board would like to extend its sincere best wishes and gratitude to Mike Turmelle, the former head of the EPM division, who has stepped down from his role and left the Company. His contributions during his tenure at Avingtrans are highly appreciated.

 

 

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 four pillars of this regime are governance, strategy, metrics and targets, and risk management.

Governance

 

During the financial year, the Group established an ESG Committee. The main responsibilities of the ESG committee are to:

·      Assist the Board in defining and regularly reviewing Avingtrans' ESG strategy.

·      Oversee the setting of objectives and KPIs for ESG matters and ensure that key metrics are reported on.

·      Develop and review regularly the policies, practices, targets and initiatives relating to ESG activities, ensuring they remain effective and up to date and consistent with good industry practice.

·      Provide oversight of Avingtrans' management of ESG matters and its compliance with relevant legal and regulatory requirements, including applicable rules and principles of corporate governance, and applicable industry standards.

·      Report on these matters to the Board and, where appropriate, make recommendations to the Board.

·      Report as required to the shareholders of the Company on the activities and remit of the Committee.

Jo Reedman (Non-Executive Director) is Chair of the ESG committee, which meets on a quarterly basis.

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 two 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 division operating in the energy sector (AES) we monitor carbon emissions per £m of revenue. The Medical division (MII) 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:

	2024			2023
	AES	MII	Group	AES	MII	Group
Scope 1:
Gas	715	38	753	623	21	643
Oil	427	-	427	386	-	386
Distribution	27	1	28	16	2	18
Company vehicle travel	20	-	20	15		15
	1,190	39	1,229	1,040	23	1,062
Scope 2 - Purchased electricity	1,307	230	1,537	843	203	1,046
Total emissions tCO2e	2,497	269	2,766	1,882	226	2,108
Total energy consumption mWh	11,684	755	12,439	9,459	544	10,003
Intensity metrics:
Average employees	840	93	941	673	59	732
Emissions tCO2e per employee	3.0	2.9	2.9	2.8	3.8	2.9
Revenue (£m)	132.9	3.7	136.6	112.8	3.6	116.4
Emissions tCO2e per £m of revenue	18.8	73.1	20.2	16.7	62.2	18.1
UK proportion of:
Total emissions tCO2e	81%	34%	76%	79%	21%	73%
Total energy consumption mWh	81%	59%	80%	77%	46%	75%

 

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 AES division division's intensity target is to reduce its tCO2e per £m of revenue. The figures above include the Slack & Parr business which was acquired during the financial year. Presenting on a like for like basis:

	2024	2023	Movement	Movement %
Total emissions tCO2e	2,001	1,882	119	6%
Revenue	122.9	112.8	10	9%
Emissions tCO2e per £m of revenue	16.3	16.7	(0.4)	(2%)

On a LFL basis the Group has delivered a 2% improvement Emissions tCO2e per £m of revenue. This improvement has been delivered through a combination of energy reduction initiatives, and delivery of an increased revenue without the need to expand our manufacturing footprint.

The MII division's intensity target is to reduce its tCO2e per employee. In the year tCO2e per employee has reduced to 2.9 (2023: 3.8).

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.

Nuclear energy and decommissioning represent 23% 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 and the USA, 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 rolled-out "dignity and respect" training programs 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 2024, the Group had 32 apprentices in the UK.

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 9). Health and Safety incidents per head per annum fell to 0.07 in the year (2023: 0.08). There were 68 incidents in the year requiring first aid or hospital attention. Excluding the new acquisition incidents per head per annum would have remained flat at 0.08. 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 tried and tested '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 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 both of its divisions, with a particular 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 progressing well, albeit delayed by additional FDA requirements. The expected launch of the orthopaedic product is now anticipated in the first half of 2025, subject to FDA approval in the USA. This activity is fully complemented by the acquisition of Adaptix and its disruptive 3D X-ray technology, with products addressing the orthopaedic, veterinary and non-destructive evaluation markets. The Slack & Parr acquisition is progressing well and we anticipate a strong recovery in profit there over the next two years. As anticipated, the Group is now in a modest net debt position, following recent acquisitions. Our value creation targets continue to be accomplished as planned and are underpinned by our conservative approach to debt.

The AES division has a strong emphasis on the thermal power, nuclear and hydrocarbon markets and aftermarkets. The MII 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 is still a risk factor. However, we have taken effective cost and impact mitigation actions, to limit any potential downside and we will continue to be vigilant.

Despite the on-going global macroeconomic uncertainty, 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
24 September 2024	24 September 2024	24 September 2024