© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you. Good morning, everybody, and thank you for showing up to our interim presentation. Hopefully, you've all got a copy of the presentation, and we'll turn the pages and thing out the numbers as we go along. Many of you will have seen some of these slides before. The Porvair strategy doesn't change very much, but we will turn the pages for the benefit of the tape relatively briskly. So I'm going to open up on Page 2, which starts with consistent strategy, which hasn't changed and is unlikely to change anytime soon because it's working pretty well. As you can see there, looking at the 6 months numbers, which hopefully now you've all had a chance to glance through. James will take you through the detailed numbers in just a minute. They are a record set of interim numbers and the business is going really nicely as you'll hear. We are optimism tempered by concern as to recessionary pressures, which seem to us to be building. But for the time being, we are running very nicely, and we'll get into that in just a minute. And then finally, on this opening page and importantly, really our 5-, 10- and 15-year compound growth record, which is relatively consistent and it's helpful, I think, particularly in sort of troublesome times because whilst -- who knows what's going to happen in 6 or 12 months, actually, when you start looking through that, you can see what the group is capable of and has done relatively consistently over in the longer time frame, 2 pretty crunching recessions. So that's very helpful for us to think about investment and other decisions. So that's the sort of opening slide. Very quickly then, as you all know, we are a specialist filtration laboratory environmental technology business. We regularly replace engineered products. We like that line of work because it has these attractive business characteristics. We make niche products with long life cycles, good barriers to entry in terms of either engineering design or quality accreditation or patents and fundamental demand drivers pushing us along, and we list those on the right-hand side of Slide 3. I tend not to go through them. Happy to discuss any of them. But I think that these are all well recognized demand drivers in the medium term. And they -- certainly, the group is positioned to take advantage of them. And I think in these last 6 months, one has seen that. So on Slide 4, then this is the slide that really doesn't change at all. Our strategy has been as it is now for many years. We principally measure success in terms of consistency of earnings growth and some ESG metrics. Just briefly on that. We do our ESG metrics annually not semiannually. And so there's nothing on that in this presentation. But we produced a full and separate ESG report in February, and we'll do so again next February. Just because we're not reporting on it, doesn't mean it's not very much top of mind. What is new in Porvair in ESG terms in '22 is that everybody's incentive from James and I, all the way down have ESG metrics associated with the annual cash bonus and that is definitely affecting performance, which is good. So in terms of where that strategy takes us, still on Page 4, well, it takes us into regulated markets, as you know. Customer-led product development process, which continues to deliver a sort of slightly above trend growth. And then the allocation of cash mainly to organic growth and margin enhancement, and I'll talk a bit more about that because margins are very -- key at the moment and then the other acquisition and a progressive dividend, which we have published this morning. So now on Page 5, you will all be aware, 3 divisions, 3/4 markets. And on this slide, we try and explain what we mean by regulated, why these markets are growing, how they relate back to fundamental growth drivers and where we see competitive advantage. And the share of revenues -- laboratory growing very quickly relative to the other 2. But as you'll hear, Aerospace is starting to come back now, which is encouraging.
So a pretty straightforward structure, highly autonomous management teams. Head office is really just James and I. We try and leave as much decision making as possible to the general managers who actually run the businesses. And in these inflationary times, both cost inflation and passing that through, that's tremendously helpful actually. It's closer to the customer or suppliers you can make those decisions. I think that's working well for us. James will talk a bit about that. So just pausing a little bit on Slide 6 and sort of key themes and what's happening. There are really 3 key themes: decent sales growth across all 3 divisions and very healthy orders. We don't publish an order book. It never seem to us to be sensible to do that. But it has been -- has grown pretty much every month since June 2020 and has been at record levels for a while. However, so have lead times that have been extended. And it's easy to be flattered by or complacent about very large orders. So you really need to divide your order book by your lead times and get to some sort of average number. And even at that level, we are ahead of where we might have been 1, 2 and 3 years ago. So that's encouraging. But while I mustn't get carried away and -- so we continue to trade nicely at the start of the second half with that sort of following tailwind. But it is mitigated to some extent with stuff that everybody would have been telling you for a while, and we started to talk about 12 months ago -- these set of results 12 months ago, which is supply chain disruption, which has now led to, as you know, inflation and we don't need to go into that in any great detail.
And then there are still COVID hangovers. It have been all year. The Shanghai ports closing for a while. The COVID cases creeping up again. The risk there is that either in your own plants or in a suppliers plant, a group of people go down and align stops for a week. That's happened to us. It's happened to many of our suppliers. It's just an additional complication in what is already a tight labor and supply market of further sort of turbulence. So those are the things -- those are the main things that we're dealing with. And then in a bit more detailed on the order position and inflation and supply chain, it is helpful for us that Aerospace is coming back. There's no question. We -- 6 months ago, we were saying, well, we were just a bit concerned that Laboratory may settle. Laboratory grew very quickly last year. It may settle as COVID retreats. There's no sign of that actually. So we've got Laboratory continuing at a fair old rate and Aerospace coming back, and that's been really helpful, although beware lead time distortion and as I've said. In terms of inflation and supply chain, primary inflation, which is to say raw materials and labor has been with us for a while, secondary inflation, which is everything else now coming through. Input lead times are very stretched. Every day, there is another supply issue. James will talk a little bit about inventories in just a moment and how we're dealing with some of that. It's not all bad news. 6 months ago, we were talking about really tight labor markets. That does seem to have eased, particularly in the U.S. over the last few months, not least because wage rates have gone up, particularly for the lower pay, which is where we were running vacancies. But nonetheless, that is less of a problem than it was 6 months ago. So I would characterize all of this as being ordinary course of business issues, but coming very much faster than is ordinarily the case. And frankly, one is either lucky or unlucky as to whether one trips up on some of these things. We have been lucky so far and managed to navigate them thus far. But it is hard work and it isn't at all straightforward. But so far, so good in 2022. So that's it in terms of the preamble. James and I got 2 or 3 slides on group results and then divisional results, and then I'll come back and talk a little bit about the outlook in just a moment. James, over to you.
Okay. Thanks, Ben, and good morning, everyone. Turning across then to Slide 7. The usual financial summary here. And as you've seen and heard this morning, this is a record half year performance for the group. Group revenue of $82.3 million, up 18% against the prior period with strong double-digit growth in all 3 divisions, as you can see across the top here. And I'll add a bit of color to the divisional performance in just a moment. Bottom left, adjusted profit before tax is up 14% to $9.8 million. Total basic earnings per share down 2% to 16.1p though noting the prior period total was flatted by the adjusting items and adjusted basic earnings per share up 12% and to 16.6p. Okay. Moving across to Slide 8. As usual, this slide shows the income statement on an adjusted and total basis and how we compare half-on-half. And as before, the numbers being presented today are the adjusted results and details of the adjusting items are disclosed in Note 1 to the interim announcement. Here you can see the 18% revenue growth from the $69.7 million in the prior period to $82.3 million, which has been driven in part by strong order book, strong order intake and in part by price increases that have been implemented certainly over the last year or so across the group to manage the cost inflation that we have been seeing and experiencing. Operating profit is up to $10.4 million with an operating profit margin of 12.7%. So the margin is down a little on the 13% reported this time last year, but up on the 10.9% reported for the full year 2021. We do have some currency retranslation benefit in these reported numbers and at constant currency, revenue is up 16% and adjusted operating profit up 13%. So just a word on tax. The effective rate of adjusted tax has increased from the 21% in the prior period to 22%, and that 22% is consistent with the rates that we had for the full year 2021. And at the bottom slide, you can see the adjusted EPS 16.6p, an increase of 12% on the 14.8p in the prior period. Okay. Moving across to Slide 9 and the cash flow. So cash generated from operations increased by $1.2 million half on half to the $7.2 million here. And as a reminder, the group typically sees an outflow of working capital in the first half of the year, and that is what we have here. So working capital management, however, continues to be strong in the group, and this has enabled us to invest in certain inventory items where required and where appropriate in order to shore up security supply given the widespread supply chain disruption and challenges that we and everybody else has been placing. So the working capital outflow of $4.9 million reflects the revenue growth, but also the investment in inventory in the period. Moving down the cash flow then. So we have this year, so far, spent $2.3 million on CapEx, which is an increase on the prior period as we've stepped up investments aimed at automation and productivity and we do expect strong levels of CapEx spend to continue as we continue to invest in these initiatives around the group. So the simplified net cash presentation at the bottom slide here shows that we had $12.2 million in cash at the end of the period, up from the $6.2 million this time last year and up from the $10.2 million that we had at the full year.
And just as a reminder, these net cash numbers exclude the IFRS 16 lease liabilities, which form part of our reported net debt. Following the period end, we paid a further -- sorry, $1 million in contingent consideration for the Kbio acquisition as the business met its next earn-out target and $1.6 million in final dividends, which were paid on the first of June. With respect to the interim dividend, the board has approved a further 6% increase, maintaining the group's progressive dividend policy. So moving across then to Slide 10 and working from left to right. Aerospace & Industrial revenue of $30.7 million is up 18% on the prior period. Aerospace volumes have started to return, as Ben has mentioned, which is encouraging, having increase in the first time since 2019. And our microelectronics part of the division has continued to grow and performed strongly as has the U.S. Industrial Filtration business. Divisional performance in Aerospace and Industrial is also starting to benefit from recent investments in the automation and productivity. And adjusted operating margins are at 10.1%, up from the 9.6% in the prior period and up from 7.9% we reported for the full year '21. So moving across the laboratory. Trading performance has continued to be strong. Revenue of $30.8 million, up 22% in the prior period and up 19% if we exclude the impact of Kbio acquired in February 2021. And all parts of the laboratory division continued to perform well. SEAL Analytical had another good period with sales up 18% and we've also had a busy time of it with new product introductions across the division, including the AQ700 water analyzer in SEAL, which incorporates robotic handling capability and a range of LAC consumables and extensions to the Kbio offering. So margins in the division are running at steady 19.8. And whilst we've not yet seen the softening in diagnostic-related demand to the extent expected following the height of the COVID pandemic, we do still expect this demand to soften over time. And lastly, moving across to metal mark quality. Reported revenue of $20.8 million is up 13% from the prior period. As we outlined this time last year, the prior period margin of 16.3% was flattered at that time by selling and marketing-related costs being temporarily lower than they were pre-pandemic. And these variable costs are now rightly starting to return. The margin of 13.5% is now moving to a more normal level for the division with performance in the period being supported by continuing strong underlying demand from the aluminum markets and also from increasing volumes for our aero-related filters.
So those are the divisional highlights. I will now pass back to Ben for the summary and outlook.
Yes. The final slide is on Page 11. So it's really the outlook, which is hard to read, I think, at the moment. So on the positive side, the reasons to be cheerful, very good underlying order position across all 3 divisions. And particularly so in aerospace, much of industrial and semiconductor schedules are particularly strong. And so that will carry us for quite a while. Tempered with inflation and supply chain and a concern that if there is to be a recession, it can't be that long in coming. And Porvair is susceptible to the effects of a destocking recession. And the stuff that we make goes into warehouses generally and is swapped out on a maintenance schedule. And if there is less economic activity, then that destocking process as it can have a disproportionate short term, but disproportionate effect on near-term volumes. So no sign of it but concern over that. But so what one does about that? Well, you can just continue to invest. If anything, we've increased the proportion of our CapEx that goes into productivity and automation, trying to address areas where we think the cost base is going to come under pressure and competitive dynamics are going to be harder as we get through the inflationary cycle. And so there's quite a lot of investment just being planned or just started now in those sorts of areas. Passing through cost increases, as I said to everybody, we've always thought we'd had pricing power. We're about to find out. Actually, I suspect we'll find that we've got quite a lot of pricing power and much of what we do, but not everywhere. And so we'll have to -- that's very useful in the longer term, thinking about the portfolio, but we'll have to roll with those punches as they come. Generally speaking, therefore, we're in pretty good heart. We're certainly running very well absolutely at the moment. But who knows what will be -- what shape the economy will be in the winter. So a little bit of optimism tempered there. And that's all we've got for you this morning, ladies and gentlemen. So if there are any questions, we'd be very happy to answer them now.
[Operator Instructions] Our first question comes from the line of John-Marc Bunce from Cenkos.
Absolutely cracking set of results. Congratulations on that. Can you sort of give us a flavor like in this time of real geopolitical uncertainty of what your geographic exposure is like. You sort of mentioned supply chain and the lockdowns in Asia, but also on the customer side. And then sort of -- looking sort of one step forward in terms of your acquisition strategy in terms of what opportunities you're looking at beyond the U.K. borders?
Thank you, John-Marc. James, do you want to do the geographical split?
Yes, sure. So in terms of the markets we sell into, we -- the U.S. is a huge market for us, probably sort of 45% to 50% of our revenue, closely followed by Europe, probably sort of 20% to 25%. Asia and U.K. probably 10% or 11% in the U.K. So we have a small amount of exposure within China. We certainly don't think that's enough to trouble us. Our Chinese operation is relatively small. We do sell into China from SEAL out of Germany. But say, relatively small in the grand scheme of things. We had some sales going into Russia, not enough to travel is probably sort of $400,000, $500,000 per annum. So our developed markets probably continue to stay as is, and we're not seeing too much disruption at this point in time.
And in terms of then of where we're looking to invest in, in terms of acquisitions, acquisitions for us is always a question of willing buyer, willing seller. So it's not always straightforward just to go and buy stuff. Got to find stuff that's for sale that we can afford and are prepared to pay for. But with that as a given, we are particularly interested in 2 areas. In Industrial Filtration in Northern Europe, we are underweight. We ought to be bigger than we are. We've got decent scale in industrial filtration in the U.S. and in the U.K., but we're underweight in Europe. And so we've been looking in that area quite actively. We bought Royal Dahlman a couple of years ago now in the Netherlands, and that has been a good acquisition. So we'd like to build on that. And then half of what we do is in the States with good sort of structure and management teams there. And so we're definitely looking in the states, both in industrial and particularly in laboratory actually, which last big acquisition we did in Laboratory was JG Finneran about 4 years ago. We did Kbio last year. Both of them have gone really well and knitting together nicely, and so we'd like to add to either or both of those.
Okay. And just one small follow-up. Are you seeing a much sort of onshoring of manufacturing from your Western customers? And is that likely to benefit you?
Yes, we definitely are. We mentioned this in the February results so not that long ago that whilst supply chain disruption was a problem. It was mitigated in the U.S., particularly by quite significant surprising onshoring. I think I mentioned at the time, we do a list periodically of recent new customers. And because this is quite a sticky business, it's a generally relatively short list. But in the U.S., and I think either March or April, there are about 15 or 20 names on it of many people we haven't even come across before and they were all U.S.-based customers who had decided that they didn't wish to have long supply chains anymore. And so that is -- that just definitely helping the U.S. businesses.
The next question comes from the line of Andrew Shepherd-Barron from Peel Hunt.
And I agree excellent set of results. Well, congratulations. A couple for me. One is just in terms of long-term growth opportunities. Is there -- I mean you -- I've always thought that you are pretty well invested capital-wise -- capital equipment-wise, but is there any area which you could become, should we say, put more money into, which would take you into new areas rather than necessarily making an M&A deal although always happy to him more about the M&A story, of course. That will be the main question for me.
Okay. So the answer to that is not straight forward. We have in the past made investments that have allowed us to have made new products take us into new areas. Actually, this time, 2 years ago, we were talking about that because the world was so short of COVID-related kit that, that was a good moment to invest, produce the product and quickly get through all the customer accreditation hoops that one needed to because force majeure and all the rest of it. In normal times, that's quite hard to do. I mean it's the reverse side of the stickiness of the business. It is very difficult just to buy a piece of kit, suddenly make a new sort of filter and tell the world, this is great. We've got it. You then have to go through all the customer accreditations. So that's difficult if you want to grow through market share. It's a bit more comforting if you were already owning the market share. So generally speaking, to break into new areas, we have acquired businesses that have those accreditations. But there's still a lot that we can do in terms of investing in the business, not least because machining technology and measuring technology, test and measurement technology, welding technology. It comes on all the time and what some of these -- some of this equipment is now capable of doing is quite remarkable. So we have invested, for example, in 2 very high-tech, latest machine to milling machines, milling machines, [ lathes ] and machining tools, which are going into the aerospace business, which will dramatically improve -- sorry about that, lead time and other things, quality, the amount of inspection that is required and so forth. So there's still quite a lot of improving in our existing businesses that we can do. And I hope we will have quite a lot of that done in the next 6 to 8 months.
The next question comes from the line of Maggie Schooley from Stifel.
Just 2 very quick questions from me. Laboratory 19.8% margin, and they keep going up. And I know you have said we should expect some pullback from COVID-type demand. But if you could give us a few on where you think perhaps we should be thinking the normalized margin would hover. That would be helpful. And secondly, there is -- we continue to be quite a fair bit of concern about energy-related demand in Continental Europe. Can you just tell us or remind us the use of energy on your footprint in both Germany and the Netherlands? And if we should be thinking anything on that basis? And really, that's all for me because I think you've been very clear on everything else.
Okay. Let's take the second one first. Energy-related demand in the U.S. in the -- sorry, European footprint, very little, Maggie. We have 1, 2, 3, 4 sites in Northern Europe, and they are all essentially design engineering and machine assembly sites. So very low sort of -- they don't use gas, for example, there's normal electricity uses offices, if you like, in the main. In terms of lab margins, we said for a long time, looking across the industry, if you're in the laboratory sector, but you're not in blood, in health care, you should be able to do 15% to 17% operating margins. We're running a little bit ahead of that. I suspect that will drift back as cost pressures increase and our ability to pass them on, gets more difficult, et cetera, et cetera, but certainly sustainable at those levels.
Okay. And one last question. I mean, you've alluded to this all throughout the presentation. Obviously, the whole world, every company is worried about recessionary pressures, you have invested a lot in terms of efficiencies and automation. You alluded to the fact that you're still doing it. And it's quite clear that you have a lot of recycle exposure in the business, that's some more cyclical exposure. But if we're thinking about the shape of a recession, possibly sharp in short. But what are the immediate things that you can do to kind of almost curate your own soft landing other than productivity and investment? Are there other shift patterns or things we should be thinking about?
Yes, you can -- I mean there's quite a lot you can do. We run a level of temps and overtime deliberately so that we have a bit of flex. We run through the processes, a proportion of subcontracted work. Again, so that one can pull back from that in the near term if one needs to some operations are more highly geared than others and they tend to be more vulnerable. If it is a standard destocking recession when we hit -- so I'll give you a great example. February 2009, I was with -- as an Artemis, presenting [indiscernible] who you all know. And he said -- we have the exact conversation. And I said, no, no, there's no sign of it yet. And I literally came out of the meeting and we had our weekly order report and is plummeted. So it can strike very quickly. So I'm saying, again, there's no sign of it yet, but I'm not having another [indiscernible] moment. So it's very quick. It's quite brutal, but it is over in a period of weeks. And you have a sort of Fibonacci bounce and you come back to a proportion of the levels that you were at before. Actually, what I think will happen this time is that lead times are so long that people have overordered, I suspect. And what we'll have is a period where orders just dry up and the order book is allowed to run down and then people will start trying to delay shipments and what have you. So I think we might be able to manage it to a degree, but a destocking recession is a destocking recession. And you just have to tighten your belt and suck it up.
Sorry, I'm going to ask one last sticky question. Are we still -- given where we are on aerospace cycle because I haven't particularly revamped back up, I appreciate your destocking comments on pretty much every other sector. But are you feeling the same way in aerospace?
No, it doesn't happen quite the same way in aerospace. It's a much longer cycle as long as the airplane is flying, it has to follow the same maintenance routine. The fact that it's flying half full because consumers are sitting on their hands is not so much of an issue. So it's less troublesome.
[Operator Instructions] Our next question comes from the line of Tom Fraine from Shore Capital.
I was just wondering if regarding the margin, I'm not sure if I missed it from the last question, but what would you say is a normalized margins for Laboratory. And also, if you could just give us a bit of a flavor of how cyclical demand for Laboratory is and how susceptible that is to destocking, yes, would that have a major impact from an economic downturn?
Yes. So 15% to 17% is the answer to the first part of the question. In terms of destocking in Laboratory, it's a really good question because actually, we built the Laboratory division more recently. So we've only been through 1 recession, and that was COVID, which perhaps wasn't a normal recession with it. But we own SEAL Analytical, which was a significant part of it in 2009, and that didn't miss a beat really because you have to test water. You can't -- you just have to crack on with that. So that -- I mean I think that might have been down 10% in '09. So that's more like aerospace than industrial. On the other side of things, environmental laboratories keep going, analytical laboratories generally keep going, but perhaps some of the industrial-related laboratories are less so. So you would expect to see a pullback, but perhaps not as dramatic as you would in a standard industrial model.
Okay. And how much you've got is industry-related for Laboratory?
Good question. Maybe 20%.
How much exposure do you have to Semicons?
Growing all the time. We've got a dedicated Semicon line, and it is about -- is it $7 million, something like that, James?
Yes, a bit more at the moment, yes.
Is it?
Okay. And in terms of the H1 performance, what was Aerospace's growth if you strip out industrial?
I don't think we published it. Did we this time, James?
No, we haven't...
We do sometimes, Tom. I don't think we have this time.
Okay. And in terms of H2, have you got cost increasing as usual in H2 and therefore, we expect margins for the full year to be a bit lower than H1?
Certainly, cost increases are continuing to come through every day. So it's more a question of to what -- it's more to what extent can you continue to cover those by price increases? Or can you get ahead of them in price increases. And that really is an unknown. I mean, that's the objective, but whether one is successful or not is hard to judge.
Okay. And finally, in terms of the CapEx, you said that it's likely to be a bit higher than usual going forward. Have you got any guidance there in terms of maybe a percentage of sales or just an absolute figure for the next for the short term and the medium term?
Yes. Well, our sort of annual run rate, is sort of $5 million, James, isn't it of CapEx?
Yes, probably sort of just $4 million to $5 million in terms of average what's coming through. We've done $3.3 million year-to-date.
So -- and so -- yes, so that's what you should expect, Tom.
And as there are no further questions, I will hand it back to the speakers.
Very good. Well, thank you all very much. Have a very good -- have a good day. Have a good week. If you have got any other follow-ups, James and I are here for the whole week. So do call. Thanks very much, everybody. Have a good day.
Thank you, everybody.
That concludes our conference call. Thank you all for attending. You may now disconnect your lines.