Gross profit margins increased to 28.8% (22.6%, 2010).  Are you expecting further margin improvement in the second half of your current financial year?

SK – If I’m being frankly honest, I would say not. We are delighted with 28.8% for the half year but we have a couple of contracts in the second half with a higher material content, therefore we would expect to be around 28% for the full year.  However, this is still a very respectable gross profit margin and would represent a further increase if you look at the five year history.

What are the aspirational gross profit margins within these businesses long term?

SMQ – As a Board, we are targeting margins above 30% in the near term.  We think this is achievable and indeed sustainable in the long run.  Naturally, this is based on the existing businesses that we have today and as I’ll go into later, this dynamic could change over the medium term as we look to acquire new businesses.

3 

What are your plans for Crown International?  There has been talk in the market that this has become non-core to the group in the medium term.

SMQ – Currently, our people at Crown International have done an excellent job in keeping its cost base down to the absolute minimum, whilst at the same time delivering excellent products to Balfour Beatty and The Welsh Assembly – winning recent awards for innovation is testament to that.  Despite strong interest domestically and internationally, the public sector market in the UK is very challenging as the austerity measures begin to bite;  this is the only business within the group that has core exposure to the UK market and we are continuing to look at ways where we could bring value back to our shareholders.  Nevertheless, this is not an ideal economic environment in order to find new partners to take the business forward.  As such, we are working hard to find new customers in this market and expand our international reach.

Is the dividend likely to start at a very low level and is it likely to be progressive?

SMQ – Roger McDowell (Chairman) stated that: “We [Avingtrans] can commit to a recommencement of the payment of a dividend with the final results this year”.  Naturally, we have to balance the Capex that we require to invest in our global businesses with that of returning funds to shareholders to thank them for their loyalty over some of the most challenging economic conditions we have faced for a very long time. The analyst’s consensus view is for 0.4p per share and I think that is a very sensible place to start.  In answer to the second part of your question, yes, the dividend is likely to be progressive.

5

The Chairman states “Proactive steps to insulate the group from raw material price increases.  What are these ‘proactive’ steps?

SMQ – There are a number of steps that can be taken in order to insulate the group from raw material price increases. They are as follows:

a) Where possible our contracts with our customers have clauses built in which basically allow us to pass on additional costs which we incur from rising commodity prices.  Similarly, this can also work in reverse, should commodities fall in price

b) The majority of our suppliers are approved of by our ultimate customers (e.g. Siemens, Rolls Royce etc).  They can assist us during negotiations, should this be required. This has been a help in certain situations.

What we do not do is actively hedge in the markets for particular commodities.  In fact, unlike other industries, we are only really exposed to three commodities – steel, titanium and aluminium – and whilst these prices have admittedly increased, they have not seen anything like the increases that have occurred in a number of other commodities, such as copper or silver.

Possible acquisitions have been alluded to in both your Interim results statement and also Roger’s comments.  Where are you hoping to strengthen and in what markets? 

SMQ – As the global economy has begun to defrost and we are seeing more ‘normalised’ markets at all levels of our business, it makes strategic sense to target a number of smaller sized acquisitions to complement our existing businesses. Before I continue, it is important to stress that we are embarking on such a journey not for ego but to genuinely scale up our businesses and support our global partners in their plans. 

We have identified a number of geographic areas where we would like more presence, especially in the United States and China, respectively the World’s largest and second largest economies. We have had manufacturing operations in China for Aerospace for several years and have added a separate operation for Energy and Medical in Chengdu and a Sales Office in Shanghai for Jena Tec during the year.

We see nuclear as a very big market for us in the future and with our specialism in pressure vessels, this is extremely good news for us.  It comes as no surprise that nuclear energy will see enormous growth in China over the next 20 years.  Conservative estimates are that at least 70 nuclear installations will need to be constructed in China alone.  Each of these installations will require a substantial number of pressure vessels. Therefore this could require an acquisition or business partnership.

We would also like to increase our presence in the US, where we already have Jena Tec but it would make sense strategically to also have an Aerospace presence and possibly a local facility for Metalcraft.

What is the ideal gearing level for the business?  I note that in the interim results, you state that gearing is now down to 34% (£7.5 million) as at 30 November 2010.  If you were looking to acquire new businesses, would you expect this level to increase and at what level would you no longer be comfortable?

SK – That is always a very difficult question to answer as it really depends on how we see our businesses growing in future years and where we would like to strengthen via acquisitions.  So, to take your questions in order, there is no real ‘ideal gearing level’, it just depends at what point in our business cycle we are at. Naturally, during downturns, you would want less debt than say when economic conditions are more favourable, such as the conditions we are hopefully navigating into now.  With an acquisition, we would be looking to take a business / businesses that were highly cash generative so we could conceivably have a much higher gearing ratio for a short time”

SMQ – Although I would not be happy with a level of around our previous peak of 75% over any period of time.

SK – To take the next part of your question, yes, I would expect the gearing level to increase over the medium term if we made an acquisition but I must stress that any debt that we currently have (or may take in the future) will be comfortably charged against a number of our assets.  We are an asset rich business.

Will any potential acquisition be via debt or will there be an issue of equity?

SMQ – We will never rule out a large acquisition which would clearly need funding via the issuance of equity.  However, as Steve has already stated, the likelihood is that we will use a combination of our own cashflow as well as debt to fund this but look to repay debt down  as soon as is practicably possible. These acquisitions will be more ‘bite sized’ than anything else.

What gross profit margins would you be looking for in a prospective acquisition?

SMQ – The key attribute of any acquisition would be strategic fit and what Avingtrans could add to the business. Yes, ideally they would be cash generative and have a profit of at least the Group’s current run rate, but these businesses always tend to come with a slightly higher price tag.

Will a new broker note to be issued? 

SMQ - A new broker note was issued by Finncap on the 9 February 2011.

The world press are stating that pay rises are becoming a key feature in China?  Is this affecting your Chinese businesses?

SMQ – Avingtrans’ manufacturing Chinese business is in Chengdu, which is in a very central part of China.  This is important to state, as most of the significant pay increases have been taking place on the Eastern Seaboard of China, where it has not been uncommon to see 10%-15% annual pay increases right across the board.  In our case, we have obviously been facing increasing pay demands but they are at a more sedate pace of around 5% to 8%.

Is it possible with your connections as a Non-Executive Director of the UK Atomic Energy Authority Board that you see a bright future in the nuclear sector for Avingtrans?

SMQ – As already stated in a previous question relating to acquisitions, I do see a very bright future for the worldwide nuclear sector, especially in China and we are able to leverage some of our considerable expertise developed out of Metalcraft in the UK to service this need.

How long is the Siemens contract with Metalcraft for upgraded MRI scanners which begins in 2012, to last?

SMQ – The Siemens contract with Metalcraft is open ended in that there is no final end date, as such, provided that we continue to supply excellent product and service to them. As a side note in November 2010 Metalcraft was awarded supplier of the year by Siemens Magnet Technology.

At what point do you expect your MetalCraft Chinese subsidiary to be profitable?

SK – We are on course to see our first profits at our Metalcraft Chinese subsidiary during the next financial year.  We anticipate that this year it will be a modest cost.

For a £15m company, the executive board have to spend a lot of time throughout the world, especially China.  Do you feel that this is becoming more problematic?

SMQ – That’s a very important question and I’m glad you asked it.  It is key to state that as an organisation, we would struggle to manage a large globally diverse group of businesses outside what we currently have.  Currently, we have operations in Germany, the UK and China.  We are able to support expansion in one final geographic region – The United States – but we will not be looking to source any new businesses in India, Brazil, Russia or other developing countries at this time as the senior management team are simply unable to adequately support this.

Steve and Stephen thank you both for spending the time updating Aimzine on your Interim results.  I know that you are both extremely busy and are due to head off to see another institutional investor straight after our conversation.  Good luck with the rest of the financial year and I look forward to reading through your Final results in due course.

SMQ / SK – It’s our pleasure.

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