Company description: Seven years that changed Avon
During the seven years under the leadership of former CEO Peter Slabbert and CFO Andrew Lewis, Avon Rubber has been transformed to emerge a strong, global leader in its chosen niches in respiratory protection and dairy milking markets. With new CEO Rob Rennie due to embark on the next stage of development for the group, we review the progress and positioning as it continues to accelerate growth. This strategy has delivered total shareholder returns of 2,872% since 2009. Development can be summarised as follows:
Phase 1 – Turnaround (2009-11): initial focus was on transformation, outsourcing European dairy manufacturing to the Czech Republic and establishing the Cadillac manufacturing facility while the pension deficit and long-term debt facilities were also addressed.
Phase 2 – Investment (2012-14): Avon entered an investment phase with additional R&D and business development resource to develop new products and market expansion. This phase is ongoing with new international markets being addressed and Project Fusion in Protection and Impulse Air and Cluster Exchange in Dairy having been delivered to date.
Phase 3 – Growth Opportunities (2013-16+): Avon has demonstrated rapid growth in targeted new products and markets such as the Impulse Air vented liner, Cluster Exchange Service, CS PAPR combination system and Deltair SCBA. Organic developments have been supplemented by acquisitions, funded by the strong cash generation resulting from successful execution of the investment phase. With substantial new product introductions and opening of geographic markets, further top-line growth and margin progression should be witnessed.
Avon has demonstrated that it has been able to identify, execute and deliver opportunities to enhance shareholder value through consistent and reliable management. It is indicative of the group that CFO Andrew Lewis stepped into the Interim CEO position until Rob Rennie’s arrival on 1 December, supported by a senior management team that have been instrumental in the strategy.
High performance products that are leaders in their field
Avon Rubber provides respiratory protection equipment for military and other markets. In addition, it is the market-leading manufacturer of consumable milk liners and a broadening range of associated products for the dairy market. Avon’s expertise lies in product design, materials specification and manufacturing efficiency while it is also introducing innovative new service solutions.
Protection & Defence (74% of FY15 revenue)
Avon’s respiratory protection products are sold direct to military markets where their primary customer is the DOD (Army, Navy, Marines, Coastguard and Air Force) as well as approved governments globally. Other significant markets are first responders including the police and other emergency services, addressed either directly or through distribution channels. SCBA and thermal-imaging equipment is targeted at fire services and other industrial users, primarily through a US distribution network. All products are safety-critical and markets are consequently highly regulated with approval standards creating significant barriers to entry with long product cycles.
Avon’s P&D business consists of a growing range of respiratory products. The main products are respirators or gas masks (M50, C50, ST53, M53 and FM12) together with a range of spares and accessories; the NIOSH-approved emergency hood (NH15); rebreathers for escape and underwater use; and SCBA (primarily the Deltair product range). Consumable filters used by these products are manufactured along with the recently acquired thermal-imaging camera equipment. The respirators and escape hoods offer breathing protection to varying degrees against CBRN threats while the SCBA offers protection in oxygen depleted environments. Avon also has a flexible fabrications business, AEF, which manufactures fuel and water storage tanks and hovercraft skirts.
Dairy (26% of FY15 sales)
The Dairy business designs, manufactures and sells products and services used in the automated milking process, primarily rubberware such as liners and tubing. These consumable products come into direct contact with the cow and the milk and are replaced regularly to ensure product hygiene, animal welfare and to maximise milk quality. The €30m acquisition in 2015 of InterPuls, a milking components specialist in electromechanical components, such as pulsators, milk meters, automatic cluster removers, milking clusters, washing systems, vacuum pumps, bucket milkers and pipeline system components has added significantly to the product range, making Avon the complete milking point solution provider. Avon’s products are sold through distributors under the Milkrite and InterPuls brands while they also manufacture a decreasing proportion for major OEMs.
The global market is concentrated in high consumption automated milking markets in North America and Western Europe where Avon has significant market shares. Potential exists outside these traditional markets, in particular in China, India, Russia, Eastern Europe and South America, all of which are currently experiencing rapidly increasing demand for dairy products which is being satisfied through mechanised milking. The acquisition of InterPuls will broaden Avon’s geographic reach, while the addition of InterPuls’s established distribution relationships in emerging markets should accelerate growth in these regions.
Strategy delivering broadened range and higher margins
Avon’s strategy is to target its core market niches, expanding its product offering, developing its own trusted and recognised brands, securing routes to market and delivering an increasing proportion of higher value, higher margin products and solutions to its customers as shown in Exhibit 1 below highlighting the stepped approach to expansion pursued by management.
Exhibit 1: Avon Rubber’s strategic roadmap
Source: Edison Investment Research
In addition to organic growth, the group has demonstrated its ability to identify, pursue and close value-enhancing acquisitions addressing specific technology gaps in the portfolio. With a strong balance sheet, a clear strategic vision and further systems and service based growth opportunities, we believe that the strategy will continue to deliver shareholder value for the foreseeable future.
Targeted acquisitions playing an increasing part
Avon has trailed that it is seeking value enhancing acquisitions to support technology development and market positioning and a number of such targeted acquisitions have recently been completed:
VR Technology: Re-breather technology opened new opportunities
Avon acquired VR Technology in 2013 to accelerate rebreather technology. Originally focused on personal dive computers (a device to monitor divers’ air consumption and ensures correct decompression stops during a dive), VR subsequently developed rebreather designs of their own.
The underlying technology for both products is a suite of control electronics, gas sensors and control valves that manage the diver’s breathing air and maintains oxygen and carbon dioxide levels within the correct range. Now rebranded Avon Underwater Systems, it is designing a product range for military use, developing a multi-capability mine counter-measures rebreather.
Hudstar Systems: Software control brought in-house
Hudstar Systems purchased for $5.1m in 2015, designs and manufactures electronics hardware and software for the fire service industry, including head-up displays, wireless communication systems, personal alert safety systems, pressure transducers, telemetry systems and remote air management systems. It manufactures electronics equipment for Avon’s Deltair product, principally the console unit.
The acquisition reduces supply chain risk due to the vertical integration of this key supplier for the Deltair, safeguarding production capability and reducing production costs. It also provides a route to in-source other components purchased across the rest of the product range, for example circuit boards for dive computers and rebreathers further improving margins.
As well as reducing costs, Hudstar also provides access to a number of different technologies (some of which are patented) that could be used across the rest of the product range and in future product development, for example, in telemetry and more complex in-mask heads up displays. The added electronics capability also providing added electronics expertise within Avon’s engineering skill base that can be used to improve existing products and services.
e2v’s thermal imaging business: Enhancing the systems based approach
After the year end the Group announced the acquisition of Argus, the thermal imaging camera business of e2v for £3.5m. This further strengthens Avon’s product range in the fire and first responder markets and has several benefits, reflecting the group’s strategic approach:
Complementary product addition to Avon’s current NFPA compliant first responder offering; Deltair SCBA, providing the ability to leverage and expand current fire distribution network within the Americas through a broader product portfolio.
Immediate access to the first responder market that demands a NFPA 1801 compliant thermal imaging camera allowing increased penetration with Avon’s current strategic Law Enforcement distributors/agents and installed customer base.
InterPuls: Moving up the food chain
In August 2015 Avon made the significant strategic acquisition of InterPuls for a total consideration of €29.75m. This acquisition, combined with existing activities, makes Dairy a leading international provider of milking point technology, providing complete teat to pipeline solutions for the sector:
InterPuls adds high technology products providing the farmer with a range of high margin technical solutions including pulsators, milk meters, automatic cluster removers and vacuum pumps, enabling customers throughout the world to configure state of the art milking systems.
InterPuls is expanding beyond traditional milking components into high technology sensors and devices to monitor the life cycle of a cow, analysing milk production, reproduction and health data to provide critical management information to increase operational efficiency of the farm.
The combination of the largely non-overlapping sales force of InterPuls with Milkrite should drive higher sales growth than either company could have achieved alone by extending international reach and cross fertilising product ranges. The larger business combination will also increase Avon’s market profile in the higher margin market sectors targeted for expansion.