Carclo plc (CAR) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to the full year results for Carclo for the year ending 31st March 2026. [Operator Instructions] First of all, some introductions. My name is Joe Oatley. I'm the Chair of Carclo. To my immediate left, I've got Frank Doorenbosch, the CEO; and to his left, Ian Tichias, the CFO. And what you'll hear this morning is another year of delivery for Carclo. Frank is going to give a little bit of a reprise on the journey we've had to get here before Ian takes you through the detail of the results. And then importantly, Frank is going to come back and talk through Precision 2030, which is our growth plan going forward, where we take the company from here and where the growth is coming from and why that's going to create shareholder value. With that, I'll hand over to Frank.

Thank you, Joe. So good morning, and thank you all for joining. Yes, we are proud to present the results for the year ending the 31st of March 2026 and give you a first conversation about Precision 2030. This is a live webcast [Operator Instructions] Here is how we will use the next half hour. I will start the journey, the 4 years from FY '22 to FY '26 and why we deliberately made the group better rather than bigger. Ian will then go through the financials, including the targets we have met ahead of schedule. I will come back to Precision 2030, our plan for the next phase and how we grow from there. You will see 4 targets on the screen. These are the Precision 2030 targets, the framework for everything that follows. Revenue compounding above 8%, net debt below 0.5x EBITDA by FY 2031, keeping our return on sales at and above the 10% through the cycle and our return on capital at or above 25%. So let's start with how we got here. FY '22 to FY '26 spans 4 years, and those were 4 years of deliberate choices. None of what you will see in these numbers has happened by accident. Every step was chosen. Let me be clear about the top line. Revenue fell and most of it was by design. One piece wasn't, the major design engineering contract that was canceled in FY '23, which we informed you about as our customers' demand fell away at the end of the COVID period. The rest we chose. We completed the asset revitalization back [Audio Gap] noncore manufacturing because the discipline we've set ourselves was a simple one. We concentrate on the work, we are adding real engineering value and can generally excel I mean we have stopped competing for work that we can't. Look at the core we kept. Our strategic manufacturing portfolio delivered a compounded average growth rate of 4% right through the reset and look what the discipline did to the quality of the business. Return on sales up from under 5% to 11% return on capital employed from 9.5% to over 29%, net debt to EBITDA, down from 2.5x to 1.3x and cash from operations up from under GBP 7 million to GBP 12 million. The business is smaller, but it is considerably better, and that was a choice that we made. This wasn't one big move. No one big red button we could press to solve it. This took hard work and clear strategic choices. We relocated head office to London and strengthened the leadership team. In CTP, our Precision Plastic Solutions division, we globally stopped our short-run business and as a consequence of that choice was the closure of our Derry site in the U.S. And when we've improved our asset utilization and effectiveness we were able to concentrate our work and our talent in the U.S. in Pennsylvania. We standardized our global manufacturing network, enhancing flexibility and is currently a big asset in these times of geopolitical uncertainty. In Specialty, our Precision Metal Solutions division we invested in machining technologies at both Brunton in the U.K. and Jakarta in France. We opened new routes to market and entered into adjacent segments that also demand extreme reliability. Specialty has delivered a compounded average growth rate of its revenues of 14% over the past 4 years with margins held. This is the blueprint of the group. And the proof is not only financial. We've also built a safer company over that period. Our incident frequency ratio per 100,000 hours has dropped nearly 75% from 2.7 to 0.7. We also became more sustainable. Our carbon intensity per GBP 1 million of revenue, more than halved due to the efficiency improvements and moving towards CO2-neutral energy supplies. And we use our assets harder and more effectively. And yes, I'm extremely proud to say that the Carclo team has built a better, not a bigger company in nearly all aspects. With that in mind, let me hand you over to Ian for what the numbers confirm.

Thank you, Frank, and good morning, everybody. Today, I'll take you through the financial performance for FY '26 and explain what the numbers tell us about the continued transformation of the group. Overall, this has been another year of strong operational and financial progress. We have continued to improve the quality of our earnings, increased profitability, strengthened our balance sheet and delivered another year of solid cash generation. Importantly, both return on sales and return on capital employed are now ahead of the medium-term targets we originally set in FY '22. That reflects several years of sustained disciplined execution towards reaching and exceeding those targets. Reported revenue reduced year-on-year, although this needs to be viewed in context, which I will come back to on the next slide. Our underlying business remains resilient and continues to generate higher quality earnings. Cash generation remained strong throughout the year. EBITDA growth largely offset the normalization of working capital, while net debt leverage remained well controlled despite completing our financing and making a one-off GBP 5.1 million contribution to the pension scheme. Overall, this represents another year of improving financial quality across the group demonstrated by the growth in earnings per share. Turning now to revenue. Our strategic focus remains firmly on moving from volume to value. Rather than pursuing revenue growth at any cost, we continue to prioritize higher-value programs, stronger margins and better long-term returns. Around GBP 2.6 million of the reduction relates to foreign exchange translation. While H1 FY '25 also included revenue of GBP 2.2 million from products that have since been exited as part of our portfolio reset. Within Design & Engineering, revenue was lower in the U.S. following the completion of several significant automation and asset revitalization programs delivered during FY '25. Meanwhile, Manufacturing Solutions continues to perform well. driven by exceptional demand in aerospace across both civil and defense markets for our specialty business, while CTP Manufacturing Solutions revenue was in line with prior year. Taken together, these factors demonstrate exactly the type of portfolio evolution we have been targeting. Discipline is clearly visible in our margin performance. which we have grown to 11% operating profit margin through self-help activities that delivered sustainable margin improvement across the business. Operational improvements such as reducing waste, improved materials management and better asset utilization have helped reduce operating costs. Our commercial discipline has continued to enhance product mix. We have also successfully absorbed inflationary pressures during the year, holding cost increases below inflation, wherever possible and through disciplined procurement and continuous efficiency initiatives. The combination of operational excellence and strategic portfolio management continues to expand margins despite the challenging external environment. Looking specifically at CTP, we continue to see consistent improvement in operating margins despite the revenue headwinds I previously mentioned. Having completed our planned exit from short-run lower-margin work in the U.S., capacity is now directed towards higher-value programs and underlying Manufacturing Solutions revenue remained broadly stable year-on-year. Overall, the CTP business is now more focused, more profitable and higher quality business. The Specialty division has had an outstanding year, Revenue increased for the third consecutive year, driven primarily by sustained aerospace demand across both civil and defense sectors. Importantly, this growth has also been accompanied by further improvements in profitability. The combination of strong market demand, improved operational performance and disciplined customer selection continues to position Specialty as an increasingly valuable contributor to group earnings. Turning now to cash generation. Cash management remains a strength and a priority of the business. Underlying EBITDA growth translated into strong operating cash generation during the year. Working capital has moved towards more normal levels following our refinancing. Annual pension contributions were in line with expectations, and while the separate GBP 5.1 million one-off contribution was completed as part of that refinancing, rather than from operating cash flows. Overall, the business continues to demonstrate excellent cash generation and conversion and strong financial discipline. Moving on to tax. Our reported effective tax rate improved significantly during the year, reducing from 67% to 44%. And it is important to take a moment to understand the effective tax rate as it should not be interpreted as an indication of higher taxation within our operating businesses. Our overseas operations remain profitable and are taxed broadly at normal local taxation rates. Additionally, there is a tax cost to move in cash internally across the group. The final element that drives the group effective tax rate remains structural. These include the U.K. financing costs and corporate overheads that currently exceed U.K. taxable trading profits. As our financing costs continue to reduce, and U.K. profitability increases under Precision 2030, these structural items are expected to unwind further. Turning now to the balance sheet. During the year, we successfully completed our refinancing and established a new banking relationship that provides stability and flexibility for the business. Net debt increased year-on-year, primarily reflecting 2 principal actions. Firstly, the normalization of working capital following the refinancing. Previously, we have the benefit of short-term supply finance agreements with some of our U.S. customers which has now ceased following our new financing arrangements. And secondly, the one-off GBP 5.1 million pension contribution made during the year. Our long-term objective remains unchanged. We continue to target net debt below 0.5x EBITDA by FY '31, and we remain firmly on track to achieve that ambition. And finally, turning to pension, as we continue to make significant progress in reducing the pension risk and improving the long-term sustainability of the scheme. Most importantly, the cash burden of the scheme continues to fall. Pension cash costs now represent approximately 19% of underlying EBITDA compared with almost 30% a few years ago. The pension scheme, therefore, becomes progressively less of a financial constraint as profitability continues to improve. So to conclude, FY '26 represents another year of meaningful progress. We have improved margins, increased profitability, successfully refinanced the business and reduce the pension risk. Perhaps most importantly, the quality of our earnings continues to improve as our strategy shifts the business towards higher value markets and stronger returns. The financial foundations of the group are considerably stronger than they were a few years ago, and we believe the business is well positioned to continue delivering against our Precision 2030 ambitions. Thank you very much. And now I'll hand back to Frank.

Thank you, Ian. So that is the foundation. The real question is what are we going to do with it? And that's Precision 2030, our plan for growth. A reminder of what Carclo is because it shapes where we can grow. We engineer precision solutions for highly regulated markets. What sets us up apart isn't a single machine. Plenty of firms can mold or machine a part. It's how we work alongside the customer, solving the hard engineering problem with them. fluent in the qualification and regulations these markets demand and precise and consistent at volume every time. The molding, machining, welding, printing and assembling are how we deliver. The skill is putting them to work reliably and being agile enough to move when a customer needs us. We're operating in 2 divisions. CTP in the plastics -- Precision Plastic Solutions and Specialty in the Precision Metal Solutions, 11 sites, 6 countries, 3 continents. And 3 end markets where there is no tolerance of getting it wrong. In Life Sciences, we focus on the intra-vitro diagnostic consumables and reagent systems. In drug delivery systems on auto-injector pens and inhalers. And we added a new focus being pharmaceutical packaging and closures. In Aerospace, we create mechanical flight control cables, machine components around safety mechanisms and streamline wires. And in Safety and Security, we focus on precision gears, head and face protection and sensing and optical solutions Here is why this platform is worth growing from. We don't sell finished medical devices. We make the precision consumables that run on our customers' diagnostic analyzers and the precision auto-injectors and pens that deliver life-critical medicines dose after dose. 6 of the world's top 10 in vitro diagnostics companies rely on us and our average tenure with them runs into decades. That depth of relationship is earned and it place a real obligation on us when our consumable is specified within the diagnostics platform or a drug delivery device is approved our customer is building their product and their own regulatory approvals around us. They are trusting us to perform every time because changing supplies would mean revalidating and reapproving the whole project. So our job every day is to be worth the trust on quality, on supply and on consistency. It's exactly the same in aerospace, where the qualification is earned from scratch and a part that stays on a platform for its entire life. That trust is what protects the business and this year, we have signed a 5-year life science renewal and a 3-year Aerospace renewal. And a commitment like that runs both ways. Long-tenure customers. deep technological integration and a business that earns its position by performing. Precision 2030 is built on 2 pillars: expand to carry the growth and innovate to make it durable. Together, they target organic revenues growth compounding above 8%, while we bring down the net debt below the 0.5x EBITDA by the end of FY '31. Both pillars built on the platform, the turnaround delivered. We grow from a position of strength and the bolt-on acquisitions in the later years are upside to these targets, and they are not in the base plan. Expand is the main driver of revenue growth, and it comes in 3 moves. First, deeper with the customers who already trust us, more programs and more value per component. Second, into adjacent segments where the demand and regulations are moving our way. GLP-1 drug delivery, the pens and auto-injectors between the weight loss and diabetes therapies, pharmaceutical packaging, wearables and veterinarian care. And for our metal precision, we're exploring maritime opportunities. Third, geographies we have underserved, like for CTP, the many life science players across Asian Pacific. An example for specialty is the growing Southeast Asian aerospace hub in Bangalore in India. On Aerospace, specifically, the engine here is civil aviation. Build rates of the major commercial European programs are rising. And next to our traditional metal cable and wire business, we've expanded our machining capability to deliver more of that opportunity. Defense sits on top of that. And with NATO budgets rising, it's a genuine tailwind. But civil is a structural growth story and defense is the upside on it. None of these new -- none of this are new grounds for us. It is growth where we're already strong. Innovate is a smaller number today and deliberately so. Its job is to keep the growth defensible for years. Three kinds of proprietary advantages. First, technology competitors can't match easily is for in and on the body liquid silicone, rubber solutions, micro molding and importantly, our proprietary C-Mould technology. The C-Mould matters more than it sounds. It lets us produce production tooling in weeks rather than months, which means that we can take the customers new program to market faster than almost anyone. And in this market, speed is a real commercial value. Second, materials, the market is moving towards, battery vials and stoppers that replace traditional materials as regulation tightens. And thirdly, products that are platforms in their own right, drug delivery engines where the IP stays with Carclo, connected inhalers and our sandbox for developing along outside partners. Innovate doesn't just add revenue. It earns us the right to be seen as an innovator. And that standing as [ most of the ] technology itself is what opens the door to the next tier of customers. Which brings me to the most important part of the change. What it asks from us as an organization. Growth needs a different mindset than a turnaround did. In the turnaround, leadership set the plan and the business executed it. In growth, it runs the other way. The team out in the market finds opportunity and the leadership role is to back them to give them the resources and to clear the obstacles out of their path. We're moving from a responsive supplier to a value engineer, leading each conversation with the engineering problem worth solving. From protecting the base to actively seeking new demand and from engineering to a brief to owning the IP. It's -- and it is already underway. New people in our customer partnership teams and early progress in LSR, the inhaler platform and the Sandbox already has the first partners playing in it. Let me close with the outlook. Three years ago, Carclo was a business facing significant financial and operational challenges. Through the sustained focus, on operational excellence, we have addressed those issues. And today, Carclo has a strong foundation and a disciplined plan for sustainable growth. Market conditions across the group are currently mixed. In Aerospace, demands remains strong. And with the additional capacity now in place, we're well positioned to benefit from sustained sector growth in both civil and defense applications. In Life Sciences, conditions are more varied. Parts of the portfolio continued to perform well, while the demand on certain diagnostic customers has been softer in the earlier part of this year. And particularly, a notably weaker respiratory virus season has reduced testing volumes across the diagnostics industry, leading some customers to adjust inventory levels, an effect we expect to be temporary. We anticipate demand strengthening as we move through the year as a number of our new growth initiatives will come on stream. And accordingly, expect trading to be weighted towards the second half and expect to deliver positive organic revenue for the full year. So thank you. And as this is a conversation with Carclo, we're now happy to take your questions. Please put them into the chat and I'll...

We're back on screen? Yes. Okay. We have had a few questions in. I'll just run -- I'll read the question out and then hand it over to one of my colleague to deal with. First one from Mark. About the pension contributions, which I think it's going to be one for you Ian. Please clarify the nature of the GBP 3.5 million and GBP 5 million pension contributions that were made in the year. Are these fully for the repair of the deficit with normal course of business contributions in addition? Or do these payments cover both elements?

So we have an agreed payment deficit recovery plan with the pension scheme. And that for the next 4 years is an annual contribution of GBP 3.5 million. So that's where you can see flowing through the cash flow statement. There was a one-off additional GBP 5.1 million that was agreed at the time of our refinancing arrangement. As I say, that was one-off, that's not to be repeated. And then there is a further recovery plan out after the initial 4 years of GBP 3.5 million beyond that to try and fully fund the pension scheme over time.

And just for complete clarity, these relate to our closed defined benefit pension scheme, so it's repairing the deficit of that closed scheme. Next one is from Chris. Again, it's going to be one for you, Ian. Report says, we have insufficient distributable reserves and therefore, no dividend is proposed, which implies there are some distributable reserves, but I can't see a figure anywhere. What is it?

So the arrangement with our lenders is baked into the covenants we have around paying a dividend. So any dividend that will be paid would need to be agreed with those. We basically feel that we have better uses of our capital to be able to invest internally in the business to help grow the business. At some point, clearly, we will always consider paying dividend. But right now, we have a better draw on our capital.

In terms of the specific question on what the distributable reserves are, can one -- this is an accounting question. Can one derive that from the account somewhere?

Yes, I guess I'm struggling to point them to the detail, but yes.

Okay. One for you, is for Frank, and it's quite a detailed question on the growth prospects. In the results, you referred to an expectation of benefiting from the growth in wearables, for example continuous glucose monitoring. What level of manufacturing is anticipated across the various devices? And will it include Carclo manufacturing the sensors themselves? Does the growth opportunity also include dual biomarker sensing?

Yes. So we're talking to more and more customers about the issues they're having on the wearables. We needed to have the micro molding technology to put the small parts into the insights. That's what we have now. We've invested in liquid silicone rubber capacity to produce other parts of the wearable. And in the whole wearable market, there is enormous amounts of development. You have to see that our sales cycles are long and our customers are sticky to us, they're also sticky to our competition. What is important that we focus ourselves on the growth markets, where there are new products. Currently, Abbott already comes with their version 5. And that means that we have when we go on there, there's a complete new system and then we can take advantage of that market and especially in the wearables, there are so many developments over there. And that is a great opportunity for us to gain business as we're not wanting to have win business over price because we don't want to go back into return on sales under 10%.

And that would appear to be all the questions we have. I'll just give everyone another minute just in case anyone has a last-minute question. There's no others showing up on my screen. We'll give you 1 more minute and then if there's no more questions, we'll finish the call. Okay. I think that's it. Thank you all for joining. Appreciate your time and look forward to talking to you next time. Thank you.

Thank you.

Thank you.