Porvair plc (PRV) Earnings Call Transcript & Summary

Hello. Good morning, everybody, and thank you for attending our preliminary results. I'm going to refer to the slides that you should find on our website, and hopefully, everybody can sort of follow along. So we'll tell you what slide we're on. I'm currently on the opening slide, which has our names and the date on. And I will hand over to Chris Tyler, who is also with me in an adjacent room in just a moment. Before we start, as you know, we have been doing this a while, and it's -- this has been the most interesting, in some sense, a challenging year Chris and I have seen. But one of the things we want to get across this morning is that whilst there have been tremendous challenges, and we will talk at some length about those. This has also been for us, a year of quite a lot of opportunities. And I want to just -- I actually want to open with some of those. The challenges we'll get to have been clearly around health and safety and keeping the staff safe. And there have been very unusual demand -- volatility in demand and indeed, supply side issues, particularly around the first lockdown and through the summer. We are, of course, exposed to aerospace market, which is -- the challenges of which are well known. The opportunities we found at both the plant level using periods of slower activity to fix and invest to a greater degree than is ordinarily possible when one is running flat out. And at the group level, we've spent certainly the last few months thinking through some longer-term challenges for the business. And we have presented those in a separate ESG report, which is also published on the website this morning, which sets out how we see the business operating in an economy that is moving to net 0. It sets out how we present our results in terms of TCFD, Task Force on Climate-Related Financial Disclosures. We set out some ESG metrics for the business for the next few years. And we talk a little bit about what we've done this year for all our stakeholders. We're going to talk about the dividend for shareholders in a moment. We are going to talk a lot about what we've done for staff, for pensioners and so on. And I think it's an interesting slight change of thinking around the group. It's a very -- certainly a very long-term view for the group, and it's a one of tremendous optimism. We think we are well positioned for a post pandemic world, and you'll hear me talk a little bit more about that in a moment. So I am now moving on to Slide 2. We've -- I'm pleased to say those of you who've sat through this presentation once or twice before, this is an updated presentation, but the strategy that we are following remains consistent. Chris will talk you through the year-end numbers in just a minute. Of course, revenues were down and EPS and profits follow, but investment has maintained at exactly the same level as of average over the last 5 years, and will continue to do so. And as I said, both challenges and opportunities. And we put there our 5-, 10- and 15-year sort of growth record because the sort of the main message we want to get across is that prospects, we think, for the medium-term are pretty good for us and that we should return to historic levels of growth once the pandemic allows. And that's sort of final line of our outlook statement. Now I'm turning the pages quite quickly. On Page 3, then the statement of what we do and why we do it. I think most of you have seen this before. Emissions control, we clean fluids and gases and filters that protect downstream systems, and that gives us a series of, we think, attractive business characteristics and these positions, fundamental demand drivers. And as we say at the end, we don't see much change in the fundamental demand drivers, more volatile perhaps, but still very much apparent and certainly apparent in as we move into 2021 and barriers to entry. What you don't see in that slide is that the business like any other engineering business has any defense to a destocking recession. You -- some of you will have heard me say that before, and we have been through the mother of all destocking recessions in 2020, and we've come out of it in reasonable shape. Over to page on Slide 4, a slightly amended strategic purpose in line with the ESG report, and some amendments to principal measures of success in which -- to which, along with consistent earnings growth, we've added certain ESG metrics, and I'll talk about those in a moment. But no change to the markets that we serve or how we allocate cash and so on. And then on Page 5 really a summary of the markets that we serve, the regulation -- the regulatory aspects of those markets, which we like very much. How our business is split across those markets and what drives them and we can talk about those at any point, but most of you would have seen them before. So moving on then on Slide 6 to -- how 2020 unfolded. We said at the half year and it was the case all the way through, really, #1 priority staff well-being, a lot of work. We run 13 sites, 13 factories, a lot of work on reconfiguring those, making people -- make sure people were safe, allowing those who felt vulnerable to shelter and so on and so on. And certainly through the middle part of the year where it was really not at all clear how things were going to unfold a lot of focus on cost base and cash. And Chris will talk about that in just a minute. And then towards the end, as I've said, really a lot of time and effort on positioning ourselves for recovery of fixing things that couldn't ordinarily be fixed when you're running flat out and making sure that we're ready to go as and when recovery comes. So it was an unusual year. We had a fantastic open for the year that shuddered to a halt really in March of last year with the Wuhan closure and the starting of tremendous sort of order book volatility. That continued through with, for us, a sort of destocking phase that seem to burn itself out around July. And orders -- the order book sort of fell through to July and has been building steadily ever since, continues to build and once we saw that turn, we were able to determine a sort of restructuring that was apparent. We took some furlough money to support us through that period while we waited to see and actually, we've paid much of that furlough money back. And then in the fourth quarter, growth over quarter 3 and some signs as we go into 2021 in some areas of recovery of much better demand and so on. And through that period, the box on the right on Slide 6, opportunity in adversity, what we were doing. So a lot of productivity investments. 5S, the process of clearing up your plants, looking at workflow. This -- if ever there was a moment to do the ghastly business that is upgrading ERP systems, this was it. And so we did 2 or 3 of those, lots of skills training. And we say in the statement, it was a really good year for new product development. And I think that was largely because the engineering cadre, none of whom -- all of whom stayed with us, were able to focus on new product development, particularly in the laboratory sector in a way that perhaps ordinarily they are distracted by the problems of the day. So lots of opportunity, and we'll come back to that. So that's a skip through to the end of Slide 6 on the sort of background, the strategy and what have you. I will now hand over to Chris Tyler, who will take you through the results, the numbers and the divisional split. Chris?

Good morning, everybody. I'm now on Page 7, which is just a summary of the results. Revenues, 7% down. You see that split across the divisions, more down in Metal Melt Quality than elsewhere. I will pick that up later on in the divisional slide. And with a revenue decline like that, there is fall in PBT, adjusted PBT of 15%, leading to basic earnings per share, fall of 15%, and a little bit more in basic earnings per share because of some one-off items, which I will also take you through in a moment. So I'm just going to turn the page to Page 8. I've stripped the income statement into 2 parts: the underlying adjusted income statement and then on the following page, I'll show you the various adjustments, which would bring us back to the overall income statement. So here, this is really the trading account and therefore, most of it gets picked up in the divisional section, but there's a couple of things to say here, just technical stuff really. This is our first year of IFRS 16 which has reduced our PBT by about GBP 200,000 compared to what a pre-IFRS 16 would be. And that also has an effect on interest, which is GBP 400,000 higher, and therefore, our operating profit is also a couple of hundred thousand higher than it would have been pre-IFRS. So the net effect is GBP 200,000, but the biggest effect in interest there leading to us getting to GBP 1 million of interest. The other thing to say here is that our tax rate has dropped to 19%, mainly that is the result of eliminating losses in China. In prior years, the losses in China, we've not taken a tax relief for eliminating those losses. Obviously, therefore, has quite a significant improvement in our overall tax rate. Moving over the page to Page 9. This is really a schedule of one-off items that we pull out as adjusted items each year. Many of these you saw at the half year, the settlement of project-related warranties and the impairment of tangible assets, those are mainly in China, were both features of the half year. In every year, we have -- the acquisition-related amortization and the release of contingent consideration is results from acquisitions as well. Those are normal adjusted items every year. The one thing that's happened in the second half, as Ben said, that we were able to see what restructuring to do, and we spent GBP 2.2 million on restructuring and plant reorganizations in the second half, substantially all of which has been paid in cash. There's one slightly unusual feature of that, which is that because the impairment doesn't attract any tax, there is a tax charge on that adjusted items charge, and you just need to be aware of that. Over the page, on to the cash flow. I've got 2 pages on the cash flow. The first one, showing you the movement in cash. And then the second one, reconciling it back to the movements in our closing cash position. I won't grind through every line in this. Safe to say that we continue to invest in CapEx. So we've spent GBP 3.6 million this year as against GBP 4 million, just over GBP 4 million in the prior year. Not much else to say on that first page, moving on to the next page. You see the various adjustments in relation to IFRS 16 and all that sort of stuff. But you do see, if you look at the net cash and bank debt, 3 lines from the bottom, that notwithstanding, continuing to invest in the year, our cash position has modestly improved in the year, even though we paid out dividends, and we've paid GBP 2.2 million out in restructuring costs. So a reasonable position to start 2021. I should have picked up the dividend earlier on, but having mentioned it here, just to say that we've moved the dividend up very slightly from 4.9p for a full year to 5p for the full year. Expressing some confidence in our ability to continue with a progressive dividend and that is still well covered, and we've got plenty of cash resources with which to pay our reserves. The final slide for me is on Page 12 is a quick look at each division. Aerospace and Industrial 4% lower revenues. But the biggest challenge here is in Aerospace, which was down in the second half by 29% for the half on -- second half on second half. And this is the area where most of the restructuring has been done, and staff costs are down by 21%. However, the Aerospace order book has begun to improve. But I think that, that is mainly for delivery in the second half of 2021. So the aero -- so expect to be -- to see this division continues to be somewhat depressed against the prior year in the first half of 2021. However, some good news in here, Dahlman has had a particularly good first year, first full year. If you remember, we bought it in September '19 and so the first full year is 2020. It's had a good year. And particularly pleasingly, there's been some good integration benefits, particularly with our U.K. business, making filters for Dahlman projects. So the integration there has gone better than expected. In the Laboratory division, we are 3% lower in revenue. That's a first half effect. If you recall, the first wave of the pandemic, a lot of, obviously, schools and universities closed. And so academic laboratories were closed and a lot of industrial laboratories closed for a while in the second quarter. And so it had quite a difficult first half. It has quite significant sales into China and that's when China had its challenges with the pandemic. However, it's rebounded strongly in the second half, particularly in the fourth quarter. And it has a record order book going into 2021, for which we are having to put some capacity in to meet demand. Much of that is related to diagnostics, definitely driven by the COVID pandemic, but we think a general underlying increase in the requirement for laboratory and testing related consumables. Throughout the year, other than the Chinese sales in the first half in Seal. Seal has had a particularly good year and exited the year, again, with a particularly strong order book. So it's both in diagnostics and in water testing the business is looking to. In Metal Melt Quality, this business suffers the most in destocking recessions. We saw the order book start to fall away in April and May of this year. And then its revenues were, therefore, lowest in June and July, and it's been building steadily since then, keeping very tight control on its costs. And had a late rebound in quarter 4, which means that it's finished 2020 with a pretty good order book in all areas, except for aerospace. In the case of China, once it had got through its 2 or 3 months of pandemic in the early part of the year, the China plant started to deliver pretty well, and its revenue is up 37% on the year, which has allowed us to breakeven in that plant in the period. And so if you look, notwithstanding the 16% revenue reduction, operating profit in this division has stayed steady in the year, which gives us some confidence for the future. So that's just a very quick canter through each of the 3 divisions. I'll now hand you back to Ben just to finish off.

Okay. So I'm on Slide 13, where just to bring out some of the ESG highlights to repeat. We have issued that stand-alone report this morning alongside the report and accounts and the finances. We've adopted a TCFD framework and spent some time looking at what a net 0 carbon economy might do for us and the answer to that, obviously, you're all going to read this report. But the answer is it's a mixed picture, there are some risks to net 0, and there are some tremendous opportunities. And we think the balance is on the positive side. And indeed, we can see that in some of the changes over the business over the last 2 or 3 years. We spent a lot of time this year, as you might expect on employee engagement, if ever there was a year to make sure that one is communicating properly with a staff who are existing in bubbles or at home and so on. I think all businesses probably will report that. And we've adopted 4 ESG metrics to start with, and we list them there. Carbon intensity, a continual reduction in lost time accidents, measures of employee engagement and the senior staff gender balance. And we report on all of those in the report, and we'll do so over the next few years, and we will see how we get on. It's been a year in terms of stakeholders where we do think we've done a lot, and we -- there's quite a lot of chat about this currently. It's worth perhaps noting that the only people in Porvair who got any pay increase this year were our lowest paid across the group. They all got cost of living or a little bit ahead but nobody else. We didn't hold the dividend at the half year nor are we holding it now. We think that's a discipline that is worth -- progressive dividend is a discipline that's worth retaining. We've actually increased the deficit recovery payments to the pensioners and so on. So we have tweaked our strategic statement to develop these businesses for the benefit of all stakeholders. And it does inform the decisions that we make. I mentioned earlier furlough money being paid back and so on in terms of what we've done for our communities, et cetera. So I think it has been an interesting year from that wider perspective. Moving then to the final slide, Slide 14. There is a tremendous feeling of renewed impetus. We are somewhere near the bottom of quite easily the worst recession any of us can remember. And that's quite an exciting place to be. It hasn't been great getting here, but it's quite an exciting place to be. In the end, 2020 wasn't nearly as bad as we feared it might be when we were sort of staring into the abyss. We can see that the underlying growth drivers of our various markets are definitely still there. It might be more volatile than they had been -- have been, but we can feel some of them coming back now, and we can see others starting to build momentum. That is helpful given that we have quite a significantly lower cost base as we go into 2021. And of course, we didn't stop investing at all as previously outlined. So those things give us some optimism across all 3 divisions as we get to the end of the pandemic. We were perhaps fortunate to have a very strong financial base going in, and we've retained that throughout. And as I have mentioned, there's lots of new products, particularly in the Laboratory division, starting to show through now. So whilst we are currently -- there are significant challenges around and this last lockdown around the world is problematic and so on, actually, we think the future is pretty bright. And 2021, I hope 2021 turns out will depend on when vaccines or immunity start to show through. We wouldn't presume to try and call out, but it will happen and when it does, we're in great shape. So that's the end of the presentation, we will be very pleased to answer any questions you might have.

[Operator Instructions] Our first question comes from the line of Tom Fraine from Shore Capital.

Just a quick question on the 21% reduction in staff, seem quite sharp and quite indicative of the long term, given that there was government support. Do you plan to start recruiting again as demand from the Aerospace market starts to take off in 2021 or 2022?

Yes. So 21% is specifically in the Aerospace business, which, as we say somewhere in the report, sort of seems to have bottomed out at around 29% down in sort of volume terms year-on-year. At the moment, we are not recruiting, as you might expect. But yes, certainly, as demand recovers, we will have to increase staff numbers.

Okay. Great. And in terms of acquisitions, I know you don't tend to be such an acquisitive company. And I understand your peers have probably held up better than most especially outside of Aerospace. But with cash on the balance sheet, do you see many acquisition opportunities? Are there any in the pipeline? And if not how do you plan to allocate capital?

The answer to that is, yes. This has been -- there has been much more around than is ordinarily the case. The U.K. possible CGT changes seems to have teased a few people out and also in the U.S. for different reasons. We tend to turn down quite a high proportion of the ones we look at, but there is activity going on. And we wouldn't -- we haven't changed our approach at all, actually. So I would over the last probably 7 years, we've -- on average, we've done one acquisition a year. And I would think that, that's probably going to be the case over the next 2 or 3 years or so.

Okay, brilliant. And in terms of the ESG credentials and the companies you are looking to target, I noticed some of the fund managers I have spoken to have been slightly pushed off by these and exposure to aerospace on an ESG basis. Do you have -- does this come into your thinking at all, the end markets? And if so, which end markets would you like to gain more exposure to?

Yes. Does it come into our thinking, definitely. Do -- are we concerned about aerospace in that regard, actually not. I mean I think the amount of work going on in the aerospace industry to deal with its ESG long-term issues is astonishing, fascinating, has every chance of success. And I'm happy to say we'll require filtration. So -- but I understand from the fund managers point of view, are the things that we do, sort of where we think that -- sort of a move to net 0 will be a threat, certainly everything around the internal combustion engine, and we have some work there, as you might imagine. Certainly, some things around oil and petrochemical. Those probably are sort of long-term decliners, but they're more than balanced by laboratory, analytical science, diagnostic science, aluminum replacing plastics and so on. And so we think what will happen over time is that the makeup of the business will simply move. And the growing areas will grow faster than the declining areas decline. And we are seeing that we -- the Laboratory division, which we only sort of assembled 2 years ago, I think. I think this year, will be the largest division that we have and that will continue.

Okay, brilliant. And just to briefly touch on one of the points you made earlier, about seeing more opportunities. What's been the driver of that? I mean, in the past some filtration companies have managed to be quite resilient. What's driven the greater number of opportunities that are on table from an acquisition point of view.

From an acquisition point of view?

Yes.