Porvair plc (PRV) Earnings Call Transcript & Summary

Okay. Well, good morning. For those of you who don't know me, I'm John Nicholas, the Chairman. Welcome to the Annual General Meeting of your company. As well as those present here in the room, we have attendees joining us by conference call or maybe we do, I don't know and others listening through webcast. So for their benefit, I'm joined here by my fellow directors, Ben Stocks, James Mills, Sally Martin and Jasi Halai; and by Chris Tyler, the Group Company Secretary. I should remind you that attendance by conference call or webcast does not constitute legal attendance at the meeting, and therefore, there is no opportunity for those attendees to vote today. It's now 11:00, the time appointed for the meeting, and there is a quorum present. Thank you. The notice of meeting has been in your hands for the statutory period. I would ask your permission to take the notice of meeting as read. Is that okay? Thank you. So before we begin the formal part of the meeting, I'll ask Ben and James to give a short presentation on the performance of the group based on the results to the year ended 30th of November 2021.

Thank you, Chairman. Good morning, everybody. Particularly, good morning to those of you [indiscernible]. So we'll run through this presentation fairly quickly, and Chris can you put up the first slide. So as you all know, certainly, those of you who've attended these presentations before, we've had a consistent strategy since 2004. It's one of niche positions in filtration and specialty filtration and environmental technology, with a focus on engineering, new product development and IP. James will take you through the results for the year ending 2021, and at the end, we've got an updated trading statement, which the Chairman will give formally at the end of this presentation. Most important part of this slide is the bottom 3 boxes, our 5, 10 and 15 year record. You will see that's remarkably consistent and really, for us, it's the 15-year record that I think is the important one, and as much as that incorporates 2 fairly significant recessions, and therefore, is a pretty good proxy as to what the business is capable of and in the results that you'll see -- in a moment, you'll see that the results for 2021 are relatively consistent with that record. We often get asked, where is the company going? What's it capable of? Well, I think that's a pretty good answer. And certainly for us, acts a good basis for planning. On the next slide, we summarize really what we make and why we do it? So the top left-hand corner, what we make. Well, I think most shareholders are aware of that, because we clean processes, we clear our permissions, we analyze impurities. And we think that makes sense for the box along the bottom, because these businesses have a number of attractive characteristics, and we think they are attractive, certainly, niche positions. Fundamental demand drivers, I'll come to that in a minute, and pretty good barriers to entry. Patents to some extent, patent is about 1/3 of what we do, but quality accreditation and engineering design, also very useful in terms of building a competitive moat. And we have driven along and the 15-year record is driven along by the global growth trends. I'm not going to go through them all, but these are the sorts of things that drive the demand for our products, and we think that is a pretty good list. And certainly, over time, it has proven to be so. So that's what we do, what drives it and why we think it's worthwhile. So -- and from that read, still a pretty straightforward strategy on the next slide, which it hasn't changed for a very long time. So I won't go through it, other than to say that this time last year, we amended our principal measures of success. It has always been consistent earnings growth, but we added selected ESG metrics, and I've got a slide on that coming up. We published at the time of our results in January or 1st of February I think it was, a separate and equally important ESG report, and there are copies of that available in the room, if you'd like to read it. And this is, in fact, our 12th ESG report. And certainly, if you're a filtration company, your environmental concerns and credentials are pretty good. So that strategy then leads us to regulated markets to customer-led product development, and to allocate cash, important for this meeting, really in this order, mainly organic growth over the period, most of our cash has gone back into organic growth and margin enhancement. That's where we get the best return, generally speaking. We certainly made acquisitions, and we made -- we bought Kbio about this time last year. We can talk about that. We make acquisitions, where they are sensible for us to do, which means they have to be available, and at a reasonable price and clearly strategically sound. And then we have a progressive dividend, and again, we'd be happy to talk about that if that's of interest. The next slide then takes that -- and talks more then about what happened in 2021. So across 2021, it feels like quite a long time ago, the world is moving quickly, isn't it, at the moment. The year started in lockdown, January 2021. So staff well-being was the primary concern, certainly at the beginning of the year. And then as Omicron and other things came towards the end of the year, it's not easy running manufacturing businesses in a COVID environment. So that was the underlying drumbeat of the year. In the early part of the year, as the world recovered from COVID, there was a restocking order improvement from the lows of 2020. But by the end of the year, and we talked about this at the half year, supply dislocation and inflation, here we are in April 2022, and the world knows about this, but we have been feeding those things for 12 months already. To divide this into our restocking and order improvement and to talk a little bit about the division, actually, the Laboratory demand has been strong all the way through mid-2020. Some COVID-related, some general science-related demand. We supply diagnostic and analytics and environmental laboratories, and all of them have been busy now, for getting on for 2 years. On the industrial side, particularly in aluminum industrial, that side has recovered, from the middle of the year and remains strong, has been ever since. But there's been tremendous lead time elongation across all industrial processes and all industrial supply chains, and that is still with us. As supply dislocation started, their lead times started to go out and they still out. And then the one area that has recovered more slowly or is recovering more slowly is aerospace. Nearly a third down on where it was pre-pandemic in 2021, but orders were better in the second half, and they remain better, as we are now into 2022. On the supply and inflation side, I've mentioned input lead times getting stretched, there -- transport disruption, which I think everyone understood in the middle of the year, extraordinary cost input increases. We think that goods inflation is probably running at 10%, perhaps even a bit more. Wage inflation probably a bit less than that, but still substantial, of course. The news this week that inflation is 7% and 8%, either side of the Atlantic, extraordinary numbers. And we have seen -- we put our prices up quite a bit, and a lot of companies say they have pricing power through this, we'll find out. We think we probably do, but we'll find out. Certainly, we're not shy of passing things on. It's not all bad news. Part of the supply-side dislocation has been a lot of reshoring, particularly in the U.S. of supply chains getting shorter and people finding more local suppliers. And that's good for a business like us, that is largely in Europe and the U.S. So it hasn't all been bad news, but it has been a difficult period. It has been a challenging period, lots of little problems through the year. But on the whole, we have sort of navigated the choppy waters and James will run you through some numbers on the next slide.

Thank you, Ben. Good morning, everybody. Next slide, please, Chris. Thank you. So moving on to the income statement slide here. This slide shows income statement on an adjusted and total basis, how we compare year-on-year. Within the trading numbers here on the left-hand side of this slide, revenue of GBP 146.3 million, 8% up in total against the prior year. And adjusted operating profit of GBP 15.9 million was 17% up on the prior year. The Group performance for the year ending November '21 was benefited from increased trading activity, which you can see coming through the top line. Also benefited from the cost reduction actions that were taken in the prior year, and also within the results, some costs were temporarily lower than they were pre-pandemic. So the operating profit margins increased to 10.9% from the 10% in the prior year, and it's also just worth noting, some of the currency headwinds that we had in last year's numbers. And if we remove the effect of FX, then revenue would have been up 12% and profit would have been up 23%. The effective rate of tax increased slightly in the year to 22%, up from 21% in the prior year and the 22% included the impact on deferred tax of the -- an active rate change in the U.K., it has taken the rate corporation tax from 19% to 25% in April '23, April next year. And at the bottom here, our adjusted basic EPS was also up 17% to GBP 0.252, in line with profit. Just moving across then to the cash flow statement for this year. Simplified cash flow statement here. Just a few things to draw your attention to and just to talk through, the second line down, working capital movement, the prior year, GBP 6.3 million, that was distorted by provision releases in that year. So the 2021 number, an outflow of about GBP 800,000 there was broadly where it should have been last year, given the trading that we had. We spent GBP 4 million, close to GBP 4 million on the acquisition of Kbio, that's net of cash acquired last year, and we still have a further GBP 2 million of potential payments on Kbio, depending on profit performance over this year and next year as well. CapEx was GBP 3.2 million, slightly down on the prior year, but that's just simply due to the -- that was just simply due to the timing of CapEx projects within the Group. The level of CapEx through the Group have been fairly steady year-on-year. If we move to the bottom of the slide, the net increase in cash over the year, GBP 28,000, so broadly cash neutral and that was after having invested GBP 7.2 million in acquisitions and CapEx, and we also reduced our borrowings in the year to the tune of around GBP 3.7 million. And this cash at the bottom, we finished the year at GBP 10.2 million of net cash that is in the bank, and that GBP 10.2 million is purely our cash number and it excludes the impact of the IFRS 16 lease liabilities, which we have to include now within our reported debt. So just to finish, then a word on dividends. Last year, the Group has -- a progressive dividend policy, and the Board previously approved a 6% increase in the final dividend, taking that final dividend from the GBP 0.033 in the prior year to GBP 0.05 for the year just gone. Back to you, Ben.

Okay. So one slide as promised then on ESG. So we adopted some ESG metrics 2 years ago, it was our second time of presenting them. The first thing to say on the top left there is that, of course, our whole being is helping our customers with their environmental footprint, clean water analysis, emissions control and so on. But within our [Technical Difficulty] business, we also try and address some of these issues, and we've adopted 4 metrics: carbon intensity, lost time accident. We run factories, so safety is important, employee engagement, self-evident and senior staff, gender balance. And here on the right, how we're doing on those things. Three of those are for the time -- the 3 for the time being are quantifiable. The one where we haven't had such a good year of senior staff gender balance, where you see we've gone backwards. The -- we've only got 32 senior staff members in total, so it can be very sensitive to changes, but this is a backward move from 30% to 25%. Carbon intensity; our goal is to reduce carbon intensity by 10% from 2020 to 2025, and we are on track to do that. We actually emitted Scope 1 and 2 18.6 kilotons of carbon last year, which is 0.127 kilos per pound of revenue. And so that's moving in the right direction. And then lost time accidents, that's the ratio of lost time per 100 employees, and that at 0.43% is 4 minor accidents in the course of the year. So again, it's quite sensitive to changes, and you can see that in the movement from 2020 to 2021. Actually, where we spend most time managerially, is employee engagement, which is difficult to quantify, although we're working on ways of doing that. And particularly through COVID, it's become more and more important to talk to our staff, see how they're doing and deal with issues of mask or not mask, vaccinate or not vaccinate, to what extent do the vulnerable stay away and those sorts of things, and how are they feeling about their working life. And Sally Martin on my left is sort of -- is particularly responsible for this on the board, and we do monthly surveys. And it's become -- it's been, I would say, in the last year, one of the bigger changes in the way we run the business and an entirely welcome one, and we are learning a lot, actually, how to deal with people and how to listen and communicate with them. So it's been a very positive change, but doesn't actually have -- for the time being any -- have a quantitative metric. So finally then, a summary slide. So there are 2 lines. The top line is the summary statement that we gave in 2021 -- at the end of 2021 for 2021. With underlying growth drivers, certainly more volatile but intact, [ area ] schedules were improving. In January, we talked about supply chain dislocation and inflation and continued investments. We have not stopped investing throughout COVID. In terms of that, and that's fine, but that's a little historical now, isn't it? So in terms of where we are today -- the Chairman will give a formal statement in just a moment. Summary is, revenue is ahead in all 3 divisions, supply chain dislocation and inflation continue, but no major issues so far, lots of minor issues, but we continue to navigate for the time being. And the underlying order books are healthy. Now we -- what we mean by that is that, everybody has good order books at the moment. But if your order book has doubled and your lead times have doubled, then your net position is the same, right? So our underlying position is better than it was 12 months ago, and that's -- we are very pleased about that. So we feel that the year has started well, and the outlook is promising. That's the end of the formal presentation. Thank you.

Thanks Ben. [ We had issued ] issue a trading update this morning. So in case you haven't already seen that, I will read it out to cut short. So in the 4 months ended 31st of March 2022, revenue growth was 14%, and that was supported by the timing of the Kbio acquisition in February 2021. So without acquisitions and at constant currency, revenue for those 4 months was up around 10%, with all 3 divisions contributing to that growth. So near-term supply dislocations and the inflationary pressures continue, as Group -- as Ben said, but the Group has avoided major problems thus far. Order books are, in some cases, flattened by extended lead times, but looked at on an underlying basis, remain healthy. So that was the formal statement that we issued this morning. So now I'd like to invite questions.

Good information about revenue and margin [indiscernible]

We do not have any questions on the conference call?

Okay. Thank you. We have a question in the room, so just to try to answer that. At this point in the year, after only 4 months, we would really only talk about revenue rather than profit, the profit numbers will come at the interim results, when we report in 3 months' time.

Your question was on the good part wasn't it? Stuart, did you want? Or this current year?

[indiscernible]

We don't reveal…

[indiscernible]

Yes. Correct. Any other questions?

I've got one -- okay one on the -- 2 on the webcast. And I think you can speak directly to Michael, because I think he's on the conference call as well. So it's for [ Michael Polly ]. Slightly embarrassing, the first bit he's a [indiscernible]. So he starts with a general comment, if I may. At last year's AGM, I mentioned we need to improve the website. It looks really good, thanks Chris for his efforts. A question, is the promise of a government investment in nuclear power generation likely to help? Second, any news on activities in China?

I think probably Ben.

Yes. So in general terms, an increase in nuclear power is helpful for filtration companies. We do a certain amount of products for power generation, and we do much more on nuclear fuel regeneration and remediation. And so yes, in the long term, we should see benefit in those 2 areas. The third area that we do, do work is in the building of nuclear power stations, where buildings where the egress of fissile material needs to be contained, and we do filters for that. That tend to be larger, lumpier contracts. We have some work on Hinkley C, for example, and we have done work in the U.S. on that. So yes, that should be positive. What was the second...

China...

Just general update?

On activities in China. And then I've got a final one for Michael as well.

Yes. So in China, we have a sales analyst -- sales office in Shanghai, which has been shut for several -- well, that's been nearly weeks now. Although the team can more or less work from home there. They're locked out of their laboratories, not a major issue. Wuhan, which did shut at the beginning of the pandemic, remains open for the time being. We think that Chinese activity will be lower in the balance of the year, as they go through their latest COVID chain. But you may remember in 2020, we adjusted our exposure to China, such that we are -- whilst it's important to us, we are -- it has less of an effect on the Group results. So we don't anticipate any sort of Chinese effect in the 2022 Group results.

And finally, again, for Michael, is there scope to bring some of the feedback from employees into the ESG thinking?

Yes, I think there probably is, Sally do you -- would you -- yes, I think there is. We're sort of feeling our way around that a bit, to be quite truthful. But as I said, we can do better. And yes, I think we probably can -- in the next ESG report, we can expand on that area. Yes. -- that was a nod of the head from Sally.

That's all the questions that we've got on this side. And just to check with Beth, that there aren't any on the conference call, Beth?

No, there are no questions on the conference call.

Any other questions in the room? Oh, you are still with it now?

[indiscernible]

Yes. So in terms of the range of the challenges out there and the cost potentially to be incurred, that's the top end of the range. We don't think it's anywhere near that just with the discussions that we're having with clients, we provided on what we think is a sensible and reasonable basis, at a relatively conservative basis. But that's at the top end of the range in terms of exposures out there. But we don't [indiscernible] clearly to that level.

[indiscernible]

Yes, the -- well, we are not currently bidding on any new gasification installation. Historically, you're absolutely right. High oil price does lead to greater interest in gasification technology. In terms of the installed base, we have had a quiet 2021, and you are right that there is a double-edged sword there. But our filters are still running, and we would anticipate that there will be replacement filters -- at some stage, yes, we did in 2020. We had, I think, GBP 7 million in 2020. I think we might have had GBP 11 million in 2019, zero in 2021. So it will be a bit like that. And we've always been very open about it. And when they do come in, we badge them, so that you can see.

Any further questions? Okay. Thank you. Then we can start the formal part of the meeting. So the Annual General Meeting of the company has been called for the purpose of considering and, if thought fit, passing the resolutions. Details of which are set out in the notice of meeting. Today, all the resolutions set out in the notice of meeting will be taken on a poll. This is in line with current corporate governance guidelines. So all shareholders, proxies and corporate representatives here today should have been provided with the poll card on arrival. If you do not have a poll card, please raise your hand now and we'll provide you with one. So after the resolutions have been put to the meeting, you will be asked to complete your poll card. If you have already completed a poll -- a formal proxy and do not wish to change your vote, there is no need to complete your poll card. If, however, you wish to change your vote, you must complete the poll card for all of the resolutions. So before formally proposing the resolutions now, check whether there are any questions on the process. No? Okay. So I propose the resolutions set out on the screen. With the exception of Resolution 7, which is in respect to my own reelection as a Director, Resolution 7 is proposed by Sally Martin. Thank you, Sally. So we will now proceed to a poll on the resolutions. If you have previously lodged/completed proxy form, nominating the Chairman to vote on your behalf, and you do not wish to change your vote, then you do not need to complete a poll card. For those of you who either do wish to change your proxy vote or have not previously cast a proxy vote and wish to take part in the poll, please complete poll card. The details of how to complete the poll card are shown on the screen. Should you require any assistance completing your poll card, please raise your hand and someone -- Chris will assist you. So the poll count for the resolutions put to the meeting today, will be conducted by the Company Secretary, and will be combined with the proxy votes already submitted. So for your information, the proxy votes received in advance of the meeting are now shown on the screen. If you can read that. The final results will be announced at the London Stock Exchange, as soon as practicable, following the conclusion of this meeting and will also appear on the Investors section of our website. So when you've completed your poll card, you'll find a ballot box, which is where, okay, good. Where you can deposit your completed poll card. Ballot box will remain in place for 15 minutes only, after the close of the meeting and will then be closed in order for the poll count to commence. Okay. So that concludes the business of the Annual General Meeting, and I declare the meeting closed. Thank you for your attendance. It's actually nice to see people in person again. And my fellow directors and I, are happy to join you for a cup of tea or coffee. Is that in the reception area? And we can do our best to answer any other questions you might have.