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

Good morning, and welcome to the Carclo plc investor presentation. Throughout this recorded presentation [Operator Instructions]. The company may not be in a position to answer every question at recent meeting itself. However, the company can 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. And I now like to hand you over to Chair, Joe Oatley.

Good morning, sir. Good morning, everybody, and welcome to our half year results for the 6 months ended 30 September. Just by way of introductions, I'm Joe Oatley, the company Chair. To my right, nearest me is Frank Doorenbosch, CEO; and to his right is Eric Hutchinson, the CFO. Just a brief introduction from me. I think my perspective, it's a remarkable set of results, remarkable in the sense that there's nothing truly remark in and they are in line with what we expected. You'll see as both Frank and Eric take you through the presentation. We are delivering on the plan that we set out. There's still plenty to do, but we are on track or in some respects, slightly ahead of track. You can see the margins improving as a result. You can see that we're maintaining our capital discipline, both working capital and CapEx. And that means you can see that driving up the return on capital employed. So I think the message for me is very much, we set out a very clear strategy and a very clear plan for the turnaround. There's still work to be done on it, but we're absolutely delivering against it and progress has been very, very good. I'd like to hand over to Frank, who will start taking through the detail of the results.

Thank you, Joe. So also, good morning, everyone. It is a pleasure to present Carclo's half year results for 2025, showcasing a transformative progress. We are delivering a great turnaround, with strengthened margins, reduced debt and a clear strategy to drive sustainable growth in precision-driven markets. Over the past 6 months, we have sharpened our focus on excellence. Operational excellence, leveraging asset revitalization and capitalize on above GDP growth in the markets, which are core to our business. Today, we will highlight our progress from improved health and safety, financial resilience and performance through strategic investments, positioning us for long-term success. This is more than just a recovery. This is a foundation for a long lasting value creation. So let's explore how Carclo is reshaping its future. Carclo is currently existing of 2 divisions, the CTP division and the newly-formed Specialty division, which is a combination of successful Aerospace, which we always had and the Optics business, which was hidden into the CTP division, but was more suitable within an own division focused on niche markets. We will get to the details later. Health and safety remains at the heart of our operational excellence. Over the past 6 months, we have achieved a 43% reduction in total incident rates, a testament to our commitment to creating a safer workplace and enhancing workforce resilience. This progress is not only improved safety protocols, but also a culture of continuous improvement, directly supporting sustainable operational success. By prioritizing health and safety, we are building a stronger, more productive foundation for Carclo's growth. So we're driving growth in our core businesses while we exited the non-short run non-scalable business. Our sales bridge reflects this. We have exited the non-scalable non short-run business, and this has allowed us to focus on growth in manufacturing solutions in the core markets being life science, precision tech and aerospace, which has achieved in the CTP business a like-for-like growth for 4.5%, in line with the market. And the Specialty division grew remarkable with a 9% growth year-on-year if you look at a trailing 12 months. The repositioning is intentional. It's enabling us to prioritize higher-margin opportunities while preparing for the next phase of asset revitalization to sustain efficiency and drive future growth. Our financial performance clearly marks a step change with return on sales rising to 6.2% and the return on capital employed reaching 17.5%. This signals a decisive move beyond the traditional threshold of below 5% return on sales and 10% return on capital employed. These results reflect the disciplined execution of our strategy, focusing on operational excellence, enhancing margin, optimizing asset utilization, positioning us firmly on a path of sustainable growth. Our focus on financial resilience is also clearly reflected in the net debt-to-EBITDA ratio, which has moved from 2x by the end of our full year to 1.6x by the end of the first half. This progress is driven both by the improved EBITDA and disciplined continued cash management, strengthening our financial position to support future investment and sustainable growth. I will now hand over to Eric, who will provide us with a helicopter overview of the financials and walk us through the key highlights in more detail.

Thank you, Frank. Yes, I'll take a high-level view of the numbers. But just note that actually, we cut our supplies the tables for this aircraft. So it is our own product in the picture. I look at the key performance indicators that we think are most relevant to these sets of results here today. And you can see, as we forecast a year-end but we expected the revenue to be down as we departed from site closures and focus the business on more profitable product lines. So that is in line with our expectations. But we've concentrated, as Frank said, on where we grow the profitability, expand the contribution margin. Contribution margin is revenue less the direct costs of production. And here, you see that's up of 3.2%. I'll take you through the bridge on that shortly. That's resulted in underlying EBIT before interest and taxes, GBP 1.2 million. Working capital has been maintained within the range of GBP 9 million to GBP 10 million. So we've got a stable position there. And the end result of this period of activity is that we've reduced our net debt position from GBP 29.5 million to GBP 25.2 million. We track quite a number of KPIs in the business. We always look at the trailing 12 months. So these numbers are better indicators of the trends in the business. What you can see here is on the revenue that we saw the decrease in Design & Engineering as we've seen the engineering team now concentrating on improving the production activities, new projects coming in, we expect it to be at a lower level this period. But what you can see is the underlying Manufacturing Solutions product sales is pretty stable. So despite the fact that we've moved away from a number of sites, the underlying manufacturing GBP 110 million compared to GBP 112 million. Operating profits, as I referred to on a 12-month rolling basis is now up to GBP 7.9 million. That certainly is indicative of the trend in the business, but also gives us confidence in the expectations for the full year. So we're running in line with our plan. Return on sales, as Frank noted, expanding to 6.2%, so trending in the right direction and higher than it was in full year -- half year 2022. And that's also resulted in a positive earnings per share in this period. The other key KPIs that we look at, cash conversion. So it was extremely high as we had some exceptional receipts in the previous year, but an 87% cash conversion is a healthy ratio for the company. If I look at the net debt position, as you can see, it's down. We split this out into components of the net debt. So we've got bank debt less cash net GBP 17 million. The GBP 8 million of finance lease creditors are split GBP 4 million on property, which is essentially capitalization of factory rentals and then the plant machinery leases, which have got a shorter life. So that's coming down, and you'll see that in cash flow that we are paying off those plant machinery leases. The property leases will vary as we renew factory leases around the world. So that could well increase, but it doesn't change the underlying cash flows of the business. The resulting return on capital employed, climbing steadily now over the last 6 periods. So we're now up to 17.5%. And the ratio of fixed assets to revenue is now at a healthy 3.5x. So again, a positive trend in the business, reflecting the increased utilization rates that we're achieving through the focus on factory specialization. If I look at the income statement at the top level, you can see here the revenue changes, which we've touched on, the increase in the contribution margin has maintained pretty much the contribution on reduced revenues, but we've also taken GBP 1 million out of the overheads year-on-year, and that's helped drive up that underlying EBITDA. At the operating profit level, there's a decrease in depreciation charges due to site closures, but also strict control over capital spending in the period. The underlying profit up, as I referred to, and exceptional items down year-on-year and below the number that we were expecting it to be, and I'll touch on that in more detail. If I look at the contribution margin bridge, you can see here prior year 34.6%. Our project Zelda program, which really focuses on driving out waste in the business in the broadest sense, has resulted in material cost savings. and other activities in our sustainability is improving our profitability. So a good alignment between sustainability and economics in the business. Factory specialization is enhancing the workforce productivity. So that's benefited the results by another 1.2 percentage points. And the improved mix as we move into a longer run, medium but longer run business, we produced better profitability and that's a plus 0.8%. The headwind in this period has been the impact of increased energy prices. So that will be a feature for full year '25 in terms of the margin percentage. So we resulted at 37.8%, up 3.2%. If I look at the exceptional costs, this is mainly about the restructuring in the business that's going on, primarily in the United States, where we've exited 2 major locations in Tucson and Dairy Hampshire. What we can see here is that our cash costs of that restructuring at GBP 663,000 was actually slightly lower than we thought it would be in cash terms. We've also seen through some very good negotiations on exiting the property leases and then how we've unwound the assets there. We're able to reverse a number of provisions, nearly GBP 1 million. And you can see that, that is primarily on the property lease, but also some adjustments on our tangible fixed assets. The biggest cost in the P&L is running the refinancing project where we have advisers in place, and that's running in the first half of GBP 1.2 million, GBP 1,284,000. So the cash cost exceptionals in the period of GBP 1.9 million. However, that is lower in cash terms than we're expecting it to be on the restructuring activity. Pension deficit, not a lot to report in this period. The valuation under accounting standards basis is fairly steady. We are seeing that we the drive on that is really to do with gilt yields. The triennial valuation is still in progress. Unfortunately, I'm not able to update you on the results of that today. We expect to get to a final position by the 31st of March next year. However, there is an improved financial position. So we're expecting that to be a positive report when we get to that. Focusing on the balance sheet. Here, you can see we're looking just as we strengthen the balance sheet on the net debt position, but you can also see that the reduction in the tangible fixed assets, reflecting our factory specialization, primarily in the U.S. and also the fact that we're depreciating assets and not replacing them with new capital spending in the period. And so that's down to GBP 35.7 million. Inventory is pretty steady, around about GBP 12 million level, so GBP 11.7 million against GBP 11.3 million prior year, down from the year-end position of GBP 12.5 million. Other working capital, again, small variations. But as I said, net working capital in that GBP 9 million to GBP 10 million range. That means that the assets employed in the business down to GBP 44.9 million. Then on the right-hand side, you can see that the drive in the increases in capital employed and fixed asset utilization referred to working capital as a percentage of revenue in that 7% to 8% range with the net debt down and an improvement in the net debt to underlying EBITDA, as Frank referred to earlier. So a very positive position from the company's perspective. And this is demonstrating both the performance and increased efficiency in the business. I turn to the cash flow. Sustainable cash flow is what we're aiming to achieve. It's really being driven by the underlying operating profit growth. There is a help from change in working capital in the period, but now we got back to a sustainable position. Capital spending, as we noted in curtails only GBP 300,000 in the period compared to GBP 1.9 million in the prior year and the lease repayments, that I mentioned, reducing the finance lease creditor as we go through. So free cash flow in the period, positive GBP 900,000. First half of last year was an exceptional boost to the unwind of contract closures where we were compensated for that, but certainly a better result from a free cash flow perspective compared to second half prior year. Bridging on the net debt reduction, you can see that, that's mainly being driven by the profit improvement in EBITDA, also from the benefits on strict working capital control and the outgoing limited CapEx and pension obligations have gone through slightly lower than planned. There was a cutoff period, which meant one contribution of about [ GBP 225,000 ] fell into the next period. Interest charges in line with what we expect. So without the exceptional activities, net debt would have been GBP 23.3 million. The GBP 1.9 million cash outflows on exceptionals ended up resulting in GBP 25.2 million. still a very good position with a much improved leverage ratio of 1.6x. With that, I'll hand back to Frank.

Thank you, Eric. So as the picture shows, we're going to make -- take a deep breath to explore the strategy going forward. As we showed last time, the strategy pyramid is clear and simple. The focus was and will stay on the financial resilience, where we build financial strength through reducing debt and enhancing long-term stability. And of course, continuation in the operational excellence, where we have made major strides in all the regions where we still got a long way to go to call ourselves really excellent. We're now currently focusing ourselves on the expansion program, accelerating growth to capturing high-value opportunities in expanding markets. The markets in which we operate to have growth above GDP, and we are currently capturing that growth. The additional use of the assets allows us to capture the growth without excessive capital expenditures. And the top layer, which is the long-term position is the innovation incubator, which will drive long-term sustainable growth in proprietary technology products and materials. So this slide highlights the tangible results of the first layer of our strategy, the financial resilience and the operational excellence. We've achieved stronger financial resilience while we're improving our debt ratios, and we have a stable working capital efficiency staying around the targeted 7%. Operational excellence is evidenced in our enhanced contribution margin, as Eric just alluded to, and a better utilization of our fixed assets. So as we like to say, the net debt declines, working capital efficiency improves, the profit efficiency climbs and our assets are working harder. All of them together underlie our commitment to a robust foundation of sustainable growth and long-term profitability. On the expansion part, we have achieved in the Manufacturing Solutions, excluding the GBP 6 million of short-term business, which we deliberately exited a 4.5% like-for-like growth, which is staying aligned with our core markets. Specialty division has advanced significantly, and we have more later in that in the presentation. You see in the different regions, we have different growth rates. We had a -- which we'll go through in 2 pages. In the innovation, we are beginning to an exciting journey on longer-term growth. We're laying the foundation of further advancements and focusing ourselves on developing new processes, technologies to enhance efficiency, advancing sustainability through eco-friendly materials and recyclability. And we're exploring in depth the opportunities in what we call connected care by processing digital life science technologies with applications in the markets. These initiatives mark the first steps in the strategy to shape the future of precision-driven industry, but will only deliver a longer-term growth. We talked a few times about the new division, the Specialty division, which is a combination of Aerospace and Optics. You see the little graph, we're showing that the total of the business is EUR 13 million and of which 2/3 is Aerospace and 1/3 is Optics. Aerospace had expertise and leadership in the industry, and they were very known for their operational efficiency. Optics have complementary solutions. Both businesses do short series, value-added and approaching themselves in niche parts of the market. The 2 businesses are now strategically aligned, and you see on the graph on the right-hand side, the internal components of that group. The cables and wires, which we have seen the growth after the air travel picked up after COVID. You see the optics, which is we call light and motion, which in the new division has regained growth, which is a testimony to the success of the new division. The machining part becomes a more and more important part of that division. We're investing in new equipment in the 2 sites, and they have achieved 33% cumulative average growth rate over the last 3.5 years, also, of course, helped by some supply chain improvement in the Aerospace steel industry. The other business, we do trading products to complete the offering to be a complete solution supplier to our customers in those niche markets. We will go through the sales in the regions. Design & Engineering revenue declined as projects are transitioning into Manufacturing Solutions and the focus currently is on asset revitalization to enhance efficiency for the next years. Manufacturing Solutions in the EMEA region grew by 0.7% and supported the stable sales and continued process optimization to improve profitability. Manufacturing Solutions in the APAC region has increased by nearly 9%, which is driven by a rebound in regional demand and operational improvements, allowing us to serve the broader part of the market. In this region, we do understand that geopolitical shifts are impacting the regional developments in the future. In the U.S., the sales, which was hurt the most by the decline of sales has now rebounded, rose by 6.9%, reflecting a strengthening core of our operations in Pennsylvania and the total market recovery we see in the region. This slide highlights our progress on maximizing Carclo's global footprint through operational optimization and factory specialization. The APAC and EMEA, factory specialization has boosted capacity, efficiency and customer satisfaction, laying the groundwork for future growth. In the U.S., we have completed the Tucson facility closure ahead of schedule and below cost, while ongoing optimization in Pennsylvania is aligning operations with global standards. These efforts reflect our commitment to enhancing efficiency, leveraging automation and delivering value to strategic focus and specialization across regions. In the Design & Engineering, we are tailoring our focus to deliver maximized value in each region. The regional focus, which we do in EMEA on new technologies, materials and products. In APAC, focusing on back-end automation development and in the U.S., delivering major project validations will help us to create a solid foundation for long-term growth and innovation to -- because as an organization, you have to be able to not only get the growth, but also be able to deliver it sustainably to your customers. So Carclo's transformation is delivering the results today. We're positioning ourselves for sustainable long-term growth through targeted investment and operational excellence. And if you look in the 3 time horizons in the short term, we continue to reinforce resilience by focusing on financial stability and operational efficiency, creating a robust foundation. In the medium term, we're expanding with our core markets. And on the right-hand side, you see one of our core markets being the IVD market is expected to grow by between 4% and 5% over the next years. We will leverage our operational capabilities and strategic automation investments so we can follow that growth without excessive capital expenditures. For the long term, with emphasis on driving growth through finding new customers, new opportunities and innovation and leadership in life science, precision components and specialty to ensure sustainable success. This balanced approach enables us to deliver immediate results while positioning Carclo for future opportunities and value creation. So let me summarize. We've delivered financial strength. Our return on sales rose to 6.2%. ROCE climbed to 17.5%. EBITDA ratio came down to 1.6x and working capital efficiency stabilizes at 7%. We've done this through operational excellence. Our health and safety improved by 43%. The factory specialization benefits are coming through and bringing a stronger margin in FY '25 and will have an annualized effect in FY '26. The U.S. revitalization process is on plan and to show our ability to execute, the factory closures in the U.S. have been completed, all of them ahead of plan and below the projected cost. We can't save ourselves to [ glory ]. We're going to build market leadership. We're optimizing our strategic sales portfolio, and we've exited the non-scalable business. The newly formed Specialty division grew by 9% and we're currently working on projects with new and existing customers to find a broader base for our business. And on the long term, the innovation pipeline will be expanding, delivering the long-term growth. What's the outlook? The outlook I have is that we're positioned for growth and long-term success. In life science, we have medium-term growth, which outpaces GDP. In Specialty, we have a much better division, which is set for growth for the future and additional market gains. The operational process, we have the ability to execute, we showed by accelerated the Tucson closures and the U.S. restructuring, which will boost performance. So we will have confidence that FY '25 targets and the long-term goals remain firmly on track. Thank you very much for your attention.

Frank, Eric, thank you very much for your presentation. [Operator Instructions] I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed by our Investor dashboard. As you can see, we have received a number of questions throughout today's presentation. Can I please ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end.

Thank you. I'll read out the questions and then hand them across my colleagues where appropriate. And first of all, one from Andrew. What does the competitive landscape look like? Frank, can you give a sort of high-level overview of that.

High-level. I think we're positioning ourselves as a kind of a boutique organization, which focuses very on service and tool service to our customers. In the market and the competitive landscape, there are players who would get who extreme, very big and getting bigger. We do see that I feel further away from the customers. I think people were in the plastics industry have seen the acquisition of Berry by Amcor, making a very big player. But we're focusing on the elements of being a global player being a player, which is focused these customers dedicated and by regionally delivering and regionally having all our factories, we are able to supply our customers regionally and react quicker. So we don't see currently a big increase in competitiveness from competition. We do see that our position is currently improving.

Thank you. I'm going to roll the next two questions into one because they're somewhat linked. One from Alex asking, what steps we're taking to mitigate the customer concentration risks that we have and then one from Ben asking or basically saying that the restructuring going well, both in the U.S. and Europe, could we share our growth targets for these regions in the coming years. And as I said, the 2 are somewhat interlinked because obviously, dealing with the customer concentration risk, there are two elements. One is making sure you're looking after your big customers, which, of course, we are doing and doing an excellent job of. But the other is growing other customers, so that one is less dependent on the large customers who already has, which talks to where is your growth coming from? I think we don't publish our growth targets, and we don't intend to. And I think we also don't think of it as a growth target for individual regions, we choose where we manufacture our product. We think of growth globally rather than individual regions. And maybe, Frank, if you could talk to a little bit about -- we said in the medium term, we expect to grow at a higher than GDP rate?

Correct.

What things we're doing to achieve that in general?

Yes. So there are two things. Of course, you have to be able to follow your customers and be with the successful customers in the market. The overall growth as we show, and we put in the appendix some of the -- some more market data on growth in the area with growth on the global growth, which both for life sciences and both for Aerospace will be above GDP. And our current focus is, of course, to get additional customers onto our platform, which we're working on and those are the projects there. But as I said in earlier presentations, we will talk to you about when we deliver, not when we're talking to those customers at this moment. So I'd rather say when we've done it than currently talk about what we do.

Thank you. Can question make our screen scroller by removing those 2. Thank you. This is going to be one for you, Eric. I'm not entirely sure I understand, but I'll read it out nonetheless. Pension benefits paid are down around 10% to GBP 4.8 million. Why is that the case? Can we argue that very high inflation, the peak is clearly behind us and do we expect it to continue to decline? That's quite a detailed pension question, which I'm not sure whether we have the detail around us at the moment to answer.

That's very much a question of pension trustees. I mean the actual payments to pensions are not if that's what we're getting out of this question.

We focus on our obligations to the pension fund, and it's the pension fund's job to worry about what gets paid out to its members.

Exactly. And that will vary with the demographics of that pension population. The impact on the company is how much do we put into the fund. In gross terms, we've been putting in GBP 3.5 million, which includes paying for the administration cost of the fund. I would expect that, that would actually trend up over time because that was repairing the pension fund deficit over a 15-year period. And ideally, they want to repair it over 10. So from a company perspective, the cash that we'll be putting into the fund will actually slightly increase in the future is my expectation.

Thank you. A question on CapEx from Alex, to paraphrase is asking how sustainable the low CapEx that we've got at the moment is and whether we're guiding on medium-term CapEx to sales ratio. I think the answer on guidance is we're not providing guidance on that. But in terms of sustainability of CapEx, obviously, it's very -- we have kept it very low in the current period. Frank, do you want to make a short comment on that?

Short comment on that is that we have in the specialization what we've done, we have taken a lot of the older machines out, the hybrid machines out. We've taken enormous amount of energy per kilogram to run. So we've taken those out. All the machines we have are running more hours. That means we needed less machines, also new projects and growth we had on it, we're now putting on standard machines. One of the capital demand for Carclo in the past was always that every new project needed a new machine. And we now have a different approach that the machine platform we have, we will exploit to use for the current equipment. So the asset utilization is going up. So we didn't need a lot of new machines for the additional work we're getting. And that was the biggest reason for that. The additional machines always also needed a new rooftop. So a lot of the investments in the years before were not only about machines, but also about auxiliary equipment and buildings and rebuilding of buildings to put the new machines in. So we now have lesser machines, machines run faster. So we don't have any infrastructure cost investment this year. We don't have any additional capacity need this year because we're just exploring the capacity we're having. So a different -- totally different strategy. allowing us to run it at the long term, of course, when we get more sales in, we get higher growth in, we will get to new investments in machines, but all will stay within our manufacturing strategy.

I think the other thing to add to that is that where we are looking is are there investments we can make that will drive much higher efficiency on which the payback will be very, very rapid. And then we do see they are starting to see opportunities for that. So there may be some increased investment for that. It's not -- we don't expect it to be huge numbers and the returns will be very significant.

But that will be more on the back of the automation, yes. It also has to do with availability of labor in different regions.

One from Mark on the refinancing. Is there an expectation that the finance refinancing will result in a lower cost of debt. I think just before I hand it to Eric, I make a comment on that. We're not going to publish any numbers in terms of what we think expectations or anything might be, but it will be what it will be. But any other comments to add on top of that Eric? We're in process.

We're in process. It will be what it will be. I think holding an expectation will be a lower cost probably unrealistic.

Yes. Thank you. And last one, another one from Alex asking about the central costs, which are high relative to the division's profits. I wrong, but I can remember it, it doesn't matter. Central costs are relatively high for the business. Part of that is because we are a main market listed business, which has associated costs. We are always looking for can we become more efficient, can we control our costs better. So if we see opportunities within central costs, we will take them. You can see they have come down a little bit. period-on-period. And if we can see further opportunities to do that, we will do. Any more, Eric, on that?

No, just to note that our cost into the cost administrating the pension fund and we are looking on to reduce that operating cost.

I think that is all the questions that we have had. So thank you for your questions. They were a fair number, and they were good. So thank you for those. Thank you for listening. And we will see you again in 6 months' time for the full year results.

Frank, Eric, Joe, thank you for answering all those questions you have from investors. And of course, the company can review all questions submitted today, and we'll publish those responses on the Investor Meet Company platform. Just before redirecting investors to provide you with their feedback, which I know is particularly important to the company. Frank, can I please just ask you for a few closing comments.

So I think we're very proud of what we've done. I'm very happy that in the 2 years, we're now working on the transformation of Carclo, this is the result. I want to thank all the employees for all their great efforts because it's not the 3 people around this table have done it. It's the currently 950-ish people in the organization who are working every day motivated to get things done. Changes done by the team, not by a person. I'm very happy we're going in the right direction. We're happy to see the results. We're happy to see the attitude in the organization going and winner mentality is back. We're ready, we restructured, and we're ready to grow.

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