Carclo plc (CAR.L) Earnings Call Transcript & Summary

Good morning, and welcome to the Carclo plc Interim Results Investor Presentation. [Operator Instructions] The company many be in a position to answer every questions received during the meeting itself. However, the company will review all questions submitted today, and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Joe Oatley, Non-Executive Chairman. Good morning, sir.

Good morning, everybody. Thank you all for joining us. I'll just start by making some introductions. For those of you who don't know my colleagues sitting to my left, Eric Hutchinson, the CFO; and remotely in a different room for logistical reasons, Frank Doorenbosch, the CEO. I'll hand over to the team in a second. Just by way of introduction, you'll hear from them that business has faced some pretty strong external challenges over the last 6 months. We've made some really good progress in parts of the business. We still have some challenges ahead of us, but the progress has been good, still work to do and you all have seen that in the results, and you'll see it when we talk about the outlook at the end. Frank, can I hand over to you to take the investors through the presentation?

Yes. Thank you, Joe. So welcome to Carclo's half year results presentation for the fiscal year 2023-'24. And we're here to share our progress and our strategies. On the agenda today, we will cover our business highlights. Eric will discuss the financial overview and our business performance, and I will then expand on the strategic directions and the summary and the outlook of the year. So as Carclo, we -- Carclo continues to excel in manufacturing critical component precision products across diverse sectors like Life Science, Precision Tech, and Aerospace, with over 1,050 team members across 13 factories worldwide. So our strategy is to leverage our recognized expertise in producing and delivering precision components into the global life science and specialty markets through innovation in products and performance. So being the full service partner for our clients, we're delivering design, engineering, manufacturing, assembly and decoration of multipart components and complete supply chain solutions for our customers. So that's the little intro of our business. So in the face of the post COVID market -- Eric, the next slide. In the face of the post COVID market challenges and macroeconomic uncertainties, Carclo has successfully increased the operating margins, generated strong cash flow and reduced debt and continue to invest in the future. On the results, the revenue fell to GBP 66.9 million in the first half year of 2023-'24, which is a 8% to 4.8% drop compared to last year using constant exchange rates. Most of the decrease was due to the reduced sales in the in vitro diagnostics sector in the U.S. as demand for COVID-19 PCR testing has gone down significantly. However, we've improved our cash conversion rate, thanks to better operational processes and working capital management. And the reduction in our net debt and the focus on our capital employed showed that we are managing our finances strongly. So adapting to the market challenges. In response to reduced customer demand, high inflation, rising energy costs, interest rates reaching to the highest level in 2 decades and ongoing supply chain issues Carclo has implemented the broad range of actions, as you can see on the right hand of the slide. The most significant impact has come from refocused factory setups, which we rolled out in the EMEA structure, and we are currently addressing the manufacturing platform in the U.S. At the same time, we are implementing necessary changes while we're keeping our focus on cash generation and preparing for future growth. Maintaining this delicate balance is the challenge, but I have to say that the team is doing a phenomenal job. In this section, we want to provide you -- give you some insights in the development of our underlying operating profit over the past 6 months versus last year. Despite declines in demand, we have increased our margins through a focus on operational excellence and more efficient manufacturing processes, especially in the EMEA region. The impact of exchange rates is primarily due to a non-recurring advantage we experienced last year and the rise in central costs relate to strengthening our management teams. We have seen little change in our material input costs out of the past 6 months. The prices of polymers that we use have remained relatively stable. Meanwhile, energy prices remain high over GBP 100 per megawatt hour. This is double the average price over the many years. For now, input costs are consistent through energy costs, in particular, we continue to put pressure on our overall expenses. So I would like to hand over to Eric for the financial reviews and the business performance.

Thank you very much, Frank. Let me turn to a discussion of the financial results. We track a number of KPIs. Clearly, all of these are showing a decline over the prior year. Revenue decreased by GBP 5.3 million, as Frank noted, primarily due to the drop in demand in Life Sciences as a result of the restructuring by our major customers due to the end of large-scale PCR testing for COVID. Underlying operating profit also declined. But as we have shown, this was largely due to the prior year being flattered by foreign exchange gains. Of course, underlying earnings per share tracks the fall in profit. Return on assets employed also reflects the fall in profit, but this has been moderated by the reduction in working capital. Return on sales also reflects the drop in profit. Net debt, on the other hand, has reduced significantly as strong cash generation has enabled the company to pay down GBP 7.3 million in borrowings. If I turn to the performance by segment. As discussed earlier, the CTP segment is the business that suffered the drop in revenue. However, the underlying profit return on sales was maintained at a 5.8% return as Frank explained, the increase in margin contribution offset the decline in revenues. Aerospace saw an increase in revenue as the demand for travel -- air travel has enabled airframe manufacturers to restart build programs. Pricing is set in aerospace with customers for each contract. So prices are adjusted to the current level of input costs. This business has strong market position in the manufacturer of precision components with a high set of -- set of high barriers to market entry. And the underlying profit increased markedly with the increase in revenue. Let's turn to the overall income statement for the group. Here we show the first half results compared to the first half of 2023. The main points to emphasize here are the exceptional items charge in the period of GBP 2.1 million, GBP 1 million of this relates to rationalization costs. The cash cost of the rationalization expense was GBP 400,000. There's also a GBP 1 million expense as a result of the past service pension cost, which is a non-cash item, reflecting the past service benefits as a result of pension equalization, which relates back to 1990. Taxation has become a credit of GBP 330,000 compared to a charge of GBP 983,000 as profits earned in Europe are tax sheltered by prior year losses, and the U.S. has ceased to be in a taxable position. I turn to the pension fund. The deficit recognized on the company balance sheet has increased by GBP 2.3 million since the year-end position. Most of this relates to the combination of the movement in corporate bond rates, which has driven an increase in discount rate of 0.65% and the gilt yield, which increased by 0.8%. The combination of these 2 has increased the net deficit by GBP 1.8 million. The past service cost provision of GBP 1 million, which I mentioned earlier, is also recognized in the increase in deficit. The next actuarial valuation for the fund is the 31st of March 2024. And currently, indications are that we're expecting an actuarial deficit to decrease. The group's financial position has strengthened. The net working capital has reduced by GBP 12.3 million since last year. This has resulted in the decrease in assets employed by GBP 18.1 million since the end of September last year. Gross bank debt decreased by GBP 8 million since the year-end. The net cash position has reduced by GBP 3.2 million. However, the revolving credit facility was fully drawn at March '23, whereas at the end of September '23, the facility of GBP 3.5 million was completely undrawn. If I look at the progression in net debt. Pictorially, we're showing the movement. And as you can see, operating cash delivered GBP 4.4 million in the reduction in net debt and working capital reduction in the period delivered a further GBP 7 million reduction. We have maintained our business -- investment in the business for capital assets with the cash net capital expenditure being GBP 2.2 million and a further GBP 1.8 million was invested through the leasing of assets. We have serviced the pension contributions, interest payments and tax payments out of cash flow and the resulting net debt position is down to GBP 29.5 million. Next is a table for the cash generation where we set up the detailed numbers, showing how this has moved over the period year-on-year. The turnaround effect is primarily due to strong working capital management, as I mentioned. If we turn to our business update and overview. Looking at the different parts of the business and the dynamics behind it, the design and engineering division of CTP is focused on innovation, driving automation, validation of products and education of our workforce and partners in the business. We have been through a large program for customers to revitalize their tooling and molds in order to drive more efficient manufacturing. We are now developing new automation for the delivery of product and packing on the machines running precision injection molding in CTP. We are improving factory layout and material handling, both to drive safer operating conditions and to achieve better efficiency. The business, as we have said, has been significantly impacted by the reduction in PCR testing. However, we are focused on diagnostics in vitro, which is not related to PCR testing. We are also looking to expand the existing products into adjacent markets. Regarding aerospace, as I've said, this is a niche product market. And you can see we are back on trend to achieve pre-COVID levels of business as we see continued growth in the aviation market and to expand with new projects in close adjacencies. So with that, I'll hand back to Frank to comment on our strategy and to wrap up with a summary and outlook on the business. Over to you, Frank.

All right. Thank you very much, Eric. So on the slide -- can you turn to next one. Yes. So this is the overview of our market movement. So in the first box on the top left looks at our market movement. And we do see, as Eric alluded to, continuous growth in the in vitro products, which are not specifically used for PCR testing. We also see that as digital currency and the use of digital currency is growing that we feel pressure in the ATM market, which we're supplying from our Indian facility. We are in our business focus on the box in the top right, we are successfully charting out the cap of 2025 strategic plan which we started out in the EMEA region by implementing factory specialization to further improve operational excellence and the turnaround in that region has been remarkable. At the same time, we are strengthening the balance sheet and through tight cash management. And as Eric alluded to, our focus is on to keep the debt down as low as possible. Evidence of success in delivering improved divisional margin and high cash generation is showed in the middle graph. We are allowing for capital expenditures to make further operational improvements as we can't reduce the debt by not investing in our business. Our successful implementation in EMEA is now going to be applied into a U.S. manufacturing platform restructuring. We are building positive -- we're building on positive long-term market rates. We're expanding our diagnostic markets and our services and a strong global customer base, building it from a better performance from global precision manufacturing is the base of the improvement of Carclo. In the next slide, we show how we deliver on our strategy. We've created a safer working environment at Carclo, make it a much better and safer place to work. Our operational excellence program delivers in the EMEA performance and increased utilization of the machines. We're strengthening our balance sheet, as Eric referred to, by reducing our debt, managing our working capital tightly and focusing our investment on performance projects with higher returns. In the United States, we are now starting to execute the same program as in the EMEA region. One consequence of focusing our strategy on medium- and long-term business, was that we had to close our short term -- our short run facility in dairy in the U.S. We cannot manage all these changes without the support from all of our team members. We are now focused on building process and technical training centers in all the regions to drive continuous improvement through a very inclusive business approach. Further progress has been made on our Zelda project to reduce our overall use of polymers and electricity, and we have been awarded the Bronze Medal from EcoVadis, putting us now in the top 50% of the companies on their platform. So what's the longer-term market opportunity for Carclo? We are currently operating in global markets for in vitro diagnostics and drug delivery systems. Both markets show a solid base growth potential, and Carclo is well positioned through its international standards and processes and global manufacturing capabilities to service these markets effectively. In the niche markets, but also Eric said, of aerospace and the integrated technologies, we see opportunities for growth at improved margins due to the uniqueness and the complexity of the product lines we run. And as increased performance has created additional capacity on our platform, we are broadening our market focus and renewing our attention on the global growth markets like pharmaceuticals and Animal Health. We will build upon our core expertise and our current manufacturing platform. In conclusion, Carclo is well positioned to capitalize on growing global markets focusing on new sectors where we can offer innovative technology solutions and draw upon our strong global manufacturing strengths. So Carclo is proud to have a highly diverse and index talent pool. This diversity across all of its dimensions strengthens our decision-making and allows us to understand change quickly, help us embed it throughout the organization. And as always, we're staying true to our core values, is continually seeking better solutions, working as 1 Carclo, maintaining an open and honest communication, focusing on sustainable growth and act responsibly. Together, in Carclo, we create more than just products. So in our summary and outlook. As we finish the first half year, we can take pride of the resilience through the challenges, but we also have to recognize that we need to maintain the momentum of positive change. In the near future, maintaining robust operational control, restructuring our operations in the United States, rolling out global procurement processes and confirming that all overhead expenses generally benefit the business will be our priority. During this time, our design engineering team will focus on all attendance on carrying out system replacement for projects for strategic customers. Looking further ahead, we are in line to achieve our midterm objective of 10% return on sales and 15% return on capital employed through value engineering, progressing our market offering and backing employee and development and training. So with our great team guiding by a clear vision and a robust strategy, Carclo is preparing to seize new opportunities and continue on the journey towards growth and excellence. Thank you very much.

[Operator Instructions] As you can see, we've received several questions today throughout today's presentation. Thank you to all the investors submitting those. Joe, if I could just hand back to you just to read out the question where appropriate to do so and direct it to the team, I'll give your response.

Yes, of course. The first question submitted from David. How do you see the recovery in demand? And what steps are you taking to position for sustained future growth? And I think probably that's best directed to you, Frank, if I may.

Yes. We -- when we had the growth, we were riding -- picking back riding on the PCR testing people data for COVID. The testing materials where our customers use the products we make, they'd like the ProtEx and [ COVAX ] They are used in a lot of diagnostics, but also in the PCR testing. We are seeing where customers who do not do any PCR testing that the underlying growth of the diagnostic market is very strong due to new technologies and new innovations in that market. So that's how we see the recovery in demand. So it won't be from PCR testing. We're not waiting for a new COVID, but we see the underlying trend of the non-COVID-related in vitro diagnostics as a growth market.

I think the part B of it Frank was also how we are positioning ourselves to benefit from that growth in demand when it comes.

Yes. So -- and that's why you need the optimize operational platform. So we are changing our -- we changed our focus. We had very mixed factories, and one of the things we've done is we have high rent factories where people focus on processing and optimize processing, get the last second out of the cycle. And we have to meet the medium size runs where we progress ourselves on changeover and flexibility. And by being present in all the major regions like in the U.S., in EMEA and EMEA APAC with both design and engineering and manufacturing platform, which will be optimized. That's how we can use from that global growth because all our customers, which we're currently serving are global blue chip customers.

I think this next one is probably going to be for you as well, Frank. You said that the EMEA turnaround has been implemented and has been very successful. Can you just go into a little bit more detail and explain what you did and why that worked?

Yes. We have 2 main operational platforms. One was in the U.K. and 1 is in Europe, in the Czech Republic. And we have allocated to the fully long run, fully automated product lines to be in the U.K. and the smaller and medium run lengths we're going to run into Bruno, that allowed us to invest into process optimization in the U.K., having great focus on operational performance and cycle time reductions and back-end automation and we are investing in our medium to short run, medium run business in Bruno. We are focusing on, what we call, single minute change of dice, a very quick changeovers of 1 product to another. And also, it's a very cost-effective region to do a little bit more labor-intensive work. So the non-labor intensive work goes to U.K., and the more labor-intensive work ends up in the Bruno facility and the focus of the factories has shown that their operating equipment efficiency has gone up in both of the sites because if you can do something very well, you will excel in it, and the same that we are going to do now in the U.S.

I think we're going to continue with you, I suppose, Frank. Are you seeing any trends in stocking I guess also destocking from clients?

Yes, we see more destocking from clients. I think if you follow numbers from the bigger players in in-vitro diagnostics, where all our customers, you see their sales going down. And due to the PCR testing, which is ending, and they are currently -- they will have a running high stocks. So they are now destocking themselves, especially for this year-end, by December. And so we anticipate some normalization coming back in the first quarter of 2024.

Okay. And then a somewhat lengthy question from [ Zahir ]. Regarding the OEM and the termination of a supply contract, can you provide details about the mutually satisfactory settlement agreement like the amount, for example? And how is it effective to reduce the group's financial risk, particularly in relation to the interest cover covenant and the balance sheet? I think, I'll take the first half and then you have the second half. The first half is, no, we can't provide details because it was a commercially sensitive confidential agreement. But in terms of the impact on the group financial health, Eric, at a high level?

At a high level, the -- effectively, those are multimillion pound settlement, and that cash was utilized as early debt repayment. The way it was came through in the balance sheet numbers, the majority of that was, in fact, a purchase back all covering the cost of inventory that have been purchased and built to service that customer. And then the better it was contributing to the cost of carrying up and clearing out some of the builders that we've done to build capacity for that customer. So yes, it has helped the financing position of the company by a few million pounds.

Andy, you mentioned the return on sales target of 10%. Any time line as to when this will be achieved? Probably back to you, Frank, because that was your slide where you mentioned that.

Yes. Everything depends on the quickness of change. So we say medium term, so it won't be -- it won't take us 5 to 10 years. It won't be there next year either. So -- but we are working towards that 10% return on sales. We see, especially in the EMEA region that we can achieve that. We can also achieve the 15% with return on capital employed. So once we are ready with our project in the U.S., we're getting very close to that number. So I can't give you an actual date when it's going to be, but it's a journey we're on, and we understand that the volume drop has hindered us, but you've also seen volume drop gave us a big margin decrease, but you also see the massive increase in contribution margin, which we gone through from our restructuring programs and our optimization programs, as we promised.

Sticking with you, Frank. One from Simon, how is pricing and input inflation impacting sales?

Yes. So we have been able to pass on part of the inflation to our customers. You have seen that the raw material prices has gone down. So there is a lowering of volumes. So lowering of prices to the customer because we follow that and follow that trend will be an increase in pricing due to the inflation. So all in all, it was not a key driver for the sales loss.

Thank you. And then we have 2 come in from Brian. I think these are probably the last 2, take them in turn. First of all, how much more can be drawn down in working capital or will cash flow be more profit related going forward? And that's probably one for you, Eric.

Yes. So I think, that's a very fair question. You've seen a dramatic decrease in working capital. We're now in a position where roughly receivables are matching payables. So it's unlikely that we would be able to get more out of that element. We think there's opportunity to get the inventories down by better utilization, better procurement and better efficiency in the factory. So there's a little bit to come from that. Otherwise, you're quite right, the future is about turning profit into cash and not having to put it back into the balance sheet. So essentially, we're matching depreciation charge with capital expenditure. So what you see in the profit line is really the free cash generation going forward.

And lastly, second 1 from Brian, given the restrictive capital investment available, is there any consideration to any divisional sales (Aerospace) to raise funds, which actually, I can probably take that one. I think, we look at our -- we have 2 divisions of CTP, the Plastics division and the Aerospace division. So these are the only 2 parts you can ask that question. The Aerospace business is really important part of the group. It's a small part of the group, but it's a strong cash generator, and we see that as a strong element to the group going forward. So at the moment, no, there is not. Anything you wanted to add on that, Eric?

Maybe I would add. To understand do we see the restrictive capital investment, but as we are improving our performance, we are seeing so much capacity, which has been invested in the company which has not been used. So we still see a lot of growth we can achieve without a high capital investment in fixed assets. Of course, we're always working capital related, but that percentage has to stay as low as it is to date. But so it's not so much respect that it's going to be much more focused investments, what we're doing now. And we always said we wanted to run between 5% to 7%.

Maybe you have actually covered all of those questions from investors, and thank you to the investors for pushing those through to the team. Of course, any further questions, the team will have the ability to review those and will publish responses where appropriate to do so on the Investor Meet company platform. Frank, just perhaps before redirecting investors to provide you with their feedback, which is particularly important to you and the company. Could I just ask you for a few closing comments, please?

Yes. I was very happy to make the presentation. We're very proud of the team on what we have achieved. As Joe said in his opening statements, there are still a long way to go, where we've got a clear plan and a clear vision and a clear strategy. The people are behind us. They were starting to act more and more as 1 Carclo and we see that as the basis of success in the future going onwards, the new horizons.

That's fantastic. Joe, frank, Eric, thank you very much indeed for updating investors today. I please ask investors not to close the session as you'll be automatically redirected to provide your feedback in order the team can better understand your views and expectations. This will only take a few moments to complete and that's greatly valued by the company. On behalf of the management team of Carclo plc, we would like to thank you for attending today's presentation, and good morning to you all.