Porvair plc (PRV) Earnings Call Transcript & Summary

Good morning, everybody. This is the Porvair Plc Preliminary Results presentation for the year ending the 30th of November 2022. I am Ben Stocks, Chief Executive; James Mills, Finance Director is also on the call. We're going to just turn the pages of the presentation that you were all able to see and is on our website. We will go through the financial presentation. Also on the website is the 2022 ESG report, which we published simultaneously with the results, and we'll touch on some of the main aspects of that in the presentation. So I'm just going to turn the pages now, starting on Page 2 with a summary. So no change to our strategy, I will talk a bit about that in a moment. We are a specialist in filtration, laboratory and environmental technology business. And in the year ending 30th of November 2022, you see in that middle box, a set of results, a decent set of results with revenues up 18% and net cash at the year-end of just over GBP 18 million. And we also always put on this slide our 5-, 10- and 15-year record. So this is a set of results that's a little ahead of trend and we will talk a little bit about that and where we think the future will be towards the end, but a relatively consistent 5-, 10- and 15-year record for the group. A couple of slides on what we make and to whom we sell. So on Slide 3, really, once you understand this, you understand the whole group. We may regularly replace engineered products. We clean processes, we contain emissions. We prepare samples, we analyze impurities. And these sorts of lines of work have very attractive business characteristics which you see at the bottom there. We tend to be a niche manufacturer of products with long life cycles. I'll come to the demand drivers in just a minute. The sorts of products we make have relatively straightforward and clear barriers to entry, either engineering design or quality accreditation. About 1/3 of what we make is patented. But actually, it's quality accreditation that is probably the best barrier to entry. And we try and position the group to take advantage of really well understood global growth trends. And we list most of those out in the top right-hand box of this slide, and they are important. They're particularly important in volatile trading conditions, and we've seen a few of those in 2022 and into 2023. And we talk about in some detail in the ESG report because looking further ahead, getting the group positioned right to take advantage of some of those credit strengths is really the key sort of management task. And so that slide is really fundamental to how we think about the business and how we try and position it going forward. On Slide 4 then in a little bit more detail, the market position. So we have 3 divisions, and you see them color-coded here. And you also see the share of the revenues for sort of regulation, which is very helpful in terms of barriers to entry and the growth drivers that we alluded to on the previous slide. Market growth rates ebb and flow a bit, but you see some relatively update numbers there. These are on the whole GDP plus growth markets, which is helpful and perhaps go some way to explain our long-term growth. Perhaps half of our long-term growth comes from the markets that we're in, which means that we have to produce the other through either organic or acquired growth. And we'll come to that in just a moment. And while all the businesses have in common is at the bottom of that slide. So this is the sort of lining work where if you are -- if you have an installed base or you are the incumbent, it tends to be more difficult to get knocked off. This is not the sort of line of work where market share gains ebb and flow very much. This is sort of line where you have to engineer your way to a better product. And win work that way. Loosely, in aerospace, we have about 15,000 aerospace products. We're capable of filtering from 5,000 microns to 0.1 micron. There are typically 200 [indiscernible] parts on most Airbuses, certainly the 320 family, the 737 family, which, of course, is where commercial aerospace, the volume is. We might be supplying this 200 parts through 10 or 12 Tier 1 customers in laboratory, split 2 ways into laboratory consumables and seal analytical, which is water analysis. We have about 35% or 40% share of the market that measures inorganic contaminations in water. In Metal Melts, we have at least 50% of the world's can stop filtration, which is beverage can and higher than that on the filtration of the world's turbine blade has as much as 80%. So we've got some good niche positions in the markets in which we operate, and that's how they split across the group on Slide 4. Moving on to Slide 5 then. Slide 5 and 6, really a pair of the slides. Strategy and execution. Strategy slide hasn't changed since 2004. At the same strategic purpose, same principal measures of success. And then what that means is on the right-hand side, it's trying to find regulated markets with long-term growth prospects. We've just gone through those. Customer-led product development, we'll talk a little bit about that in a moment. And then we allocate the cash primarily to organic growth, acquisitions when sensible, properly priced and available and the progressive dividend, and we've announced a dividend increase this morning. So the strategy doesn't change, but the execution on Slide 6 definitely does. So that is perhaps where we spend a bit more time because execution changes with conditions. So the conditions or the key themes of 2022 in green there, really 3 main things to deal with. First of all, inflation and supply chain disruption. We've been talking about that 6, 12 and 18 months ago. I come on to that in just a minute. And then as a result of supply chain disruptions, generally speaking, strong order books through most of 2022. Although towards the end and currently, we do see diminishing lead times. 6 months ago, we were saying that it'd be fooled by very high order books because if you've got double your order book and double your lead time, you are in effect in the same position. And we can see lead times starting to diminish in a number of areas now. And that requires a flexible and more responsive approach. And then those 2 things have been volatile in the last 12 months, then the thing that we -- that you have to continue with in a sort of more steadfast manner is consistent investment in productivity, NPD and people, and I'll come on to that. So if we take the first 2, inflation, supply chain and the order book on the bottom left-hand side. Inflation, first of all, 12 months ago, clearly, primary inflation, let's say, goods inflation running at about 10% at that time. As the year has progressed, that is sent through to the secondary wage inflation. And that has required price increases, costs to pass through and to some extent because wage inflation tends to come in our case anyway on January 1 of the new year. Anticipatory price and margin management to make sure that a much larger than normal wage bill is covered ahead of time. And that when James comes to talk to you about the margins in the various divisions and upgrading the year-end numbers towards the end of the year, that is largely because we have been more successful than perhaps we anticipated in getting anticipatory price increases through ahead of wage bill that will go up by around GBP 2.25 million from January 1, 2023. So inflation is the first thing to deal with. Supply dislocation, very, very difficult at the start of 2022. It is getting better in most cases. It has required pretty agile inventory management and a fair amount of luck if we're on it. Lots of suppliers and customers have been unlucky. A particular component that they haven't been able to sort is shutdown products or lines or in some case factories, we've been fortunate to avoid that. But as supply dislocation diminishes, so to safety starts or the safety inventory. And looking ahead to 2023, which will come to how that plays out will be an interesting and challenging thing to manage in the next few months. And that feeds into the third point here of order books. High overall still, very high orders, I must say, but with lead times reverting. And that means that we need to be more flexible on plant scheduling. In all of that, Porvair's devolved management structure is very helpful. So just to remind you, head office has changed and I -- we have 3 divisional managers and then 16 general managers. And it is those 16 general managers who make most of the day-to-day [ decisions ]. And certainly, most of the margin management decisions and inventory decisions. And because they are so much closer to their markets than we are that has, I think, been one of the reasons that we've sort of navigated these difficult times relatively successfully. So slight change in execution there in the year. And then in terms of consistent investment, well, that hasn't changed. GBP 5.9 million of CapEx, just over GBP 17 million over 3 years. It really is in 3 areas, particularly productivity in Aerospace and Industrial. We've put in a lot of equipment for capacity and productivity reasons. And laboratory, been more about investing in new product development and to some extent, process efficiency and Metal Melts, about training and people, and we continue to invest in all of those areas. So I'm going to talk a little bit about NPD and People in the ESG slide. So moving on from that, from Slide 6 to Slide 7. This is a slight change in our deck. I thought we might be interested to see just some of the things that we've been doing this year. These are simply some of the more eye-catching. They don't necessarily have a big effect on the numbers but I thought you'd be interested to know that we do a fair amount of rocketry. We're on the Dragon capsule fuel filters on the [ Merlin ID ] fuel filters on SpaceX and the fuel injection system on the Vulcan Centaur launch rocket for Blue Origin, relatively small in terms of volume but fascinating in terms of engineering. Also in Industrial, we are doing the vacuum vessel heat transfer filters to [indiscernible], which is the fusion muscle multi-country fusion project in the south of France, very, very interesting stuff, very high temperature, [indiscernible] fusion system requiring very clever heat transfer and we're involved in that. So that's been -- that's a reasonably large projects and engineering very interesting. Above that, cell imagery plates, some of our genetic work, new plates that enable cells to be photographed as they grow, looks to be a promising line of work. I've just mentioned about 90 billion beverage cans go through Porvair filters every year. It's actually, we think, perhaps a little higher than that, but we wanted to be conservative to something around half of all of beverage cans in the world that we filter. And then finally, a new product for [ Seal ], which has gone particularly well, which is a high throughput, low detection limit, automated water analysis instruments and the consumables that go with it. So it's been an interesting year. 12 months ago, we said the recession has been a big time to bring new products forward, and these are some of the things that we've been working on. So I'm going to pause at that point and let James take over with some numbers.

Thank you, Ben, and good morning to you all. So turning the slide then to the financial summary on Slide 8, which summarizes the performance for this year. As you can see here at the top left, our revenue was up 18% on the prior year. And if you look at the top of the slide there, we got relatively sort of expressed strong revenue growth across all of our other regions as I'll come back to regional performance in a minute, just to add a bit more color. So bottomneck, adjusted PBT is up 31% to GBP 19.4 million. And the adjusted earnings per share, up 32% margin impaired for the PDC growth to 33.2 pence. And then [indiscernible], we've got to finish the year to say GBP 18 million of cash and a pretty strong balance sheet going into 2023. So a [ cost center ], Slide 9. Once again, the numbers we are presenting this morning are the adjusted results currently and details of the adjusting items could be found in those bonds to the announcement this morning. So revenue growth of 18% of the GBP 172.6 million versus GBP 146.3 million in the prior year, with the growth coming from accrete volumes, increased prices and also the share foreign exchange [indiscernible] and the revenue on a constant balance basis is up 13%. On the [indiscernible] revenue growth, operating profit has grown 29% to GBP 20.5 million, with a margin of 11.9%, up only 10.9% we reported this time last year. And with all of our businesses working hard this year to manage the effects of inflation. Margin performance has [indiscernible] to an extent by the price increases going in often out of the anticipated cost increases and Ben has talked a bit about that. That was particularly the close in Q4 of this year. And the U.S. businesses were over half of the group's revenue as well. We've experienced [indiscernible] tailwinds on the retranslation of our U.S. dollar performance, which got the pace to certainly the second half of the year. And we estimate that the foreign upside in operating profit is around GBP 1.4 million. So our constant currency conversion, operating profit would have been around EUR 19 million rather than the reported GBP 20.5 million. Effective rate of tax, the [indiscernible] down from the 22% that we had in [ the prior year to 21% ]. And at the bottom of slide, we see adjusted EPS of 33.2 pence, being an increase of 32% up on 25.2 pence for the prior year. The [indiscernible] to Slide 10 and simplify cash flow. And just picking up on some of the headlines for the year. Cash generated from operations was at GBP 22.8 million, increased broadly in line with operating profit, and we had a working capital outflow within that at GBP 2.7 million, you can see here. So despite the strong revenue growth. Our receivables increased by just GBP 2 million and working capital disciplines in the support of the investment in inventory where necessary and where appropriate to show up the security supply and sometimes as well to get a little ahead of the cost increase that we were seeing. We paid a further GBP 1 million in contingent consideration on the Kbio acquisition, which actually we'll recall completed on February '21. And as a reminder, we have a further and final GBP 1 million contingent consideration on pay [indiscernible] from the profit target for the year ending 31st of March '23, and that amount remains occurred in our balance sheet at the end of the year. We've got a busy year on CapEx projects. We invested GBP 4.9 million across the group in automation, productivity and expanding capacity. And GBP 4 million to GBP 5 million a year on CapEx project is typically what the group is capable of delivering. Borrowings were reduced by GBP 5 million. And as a result, we finished the year with no borrowings on the balance sheet. And we paid GBP 2.5 million in dividends and in line with the group's progressive different policy. The Board is recommending a final dividend of 3.8p, which would take the full year dividend of 5.7p standing to 7.5% on the prior year. Right to the bottom here, you can see closing cash flows up [indiscernible] 8.1% on this time last year. And as a reminder, this net cash number excludes the IFRS 16 lease liabilities, which form part of our reported net debt. Just before I leave the slide, by way of an update, we completed the triennial actuarial valuation of the year for our U.K. defined benefit pension plan. And as a result of that process, we have agreed to increase debt [indiscernible] recovery payments on the scheme for the 1.6 million [indiscernible] that we were paying to 3.1, which started in December '22. All right. So we [indiscernible] Slide 11, which summarizes the divisional performance and moving from [ left into right ]. Aerospace and industrial revenue of GBP 64.7 million, up 16% and 13% from prior year in a constant currency basis, but with profit up 64% year-on-year GBP 7.2 million. In fact growth across aero, nuclear and microelectronics were -- they were 19% up from last year, it's going to go back to where we were until prepandemic. The petrochemical business [indiscernible], not as expected as you would in this business is going to be fairly lumpy. But these [ top of then and final quarter and edge point in net is right ] that it was coming into this. Ben has talked a bit about the divisions at a pretty busy year on CapEx projects, particularly in the U.K. and all of this coming together is supported by moving -- margin moving back into double digits of 11.1%, which is towards prepandemic levels and the target [indiscernible] 15%. So moving across to Laboratory revenue was GBP 62.7 million, up 18% from prior year and 14% on a constant currency basis. Seal, another record year of sales, which included the new product sale and the [ AG700 ], which is the picture that Ben just referred to on the earlier slide, has exceeded expectations and continues to be well received in the market. And [indiscernible] performed well, again, demand setting back at this consumable sales across the division was strong. NSK Bio and the lack consumables, which typically benefit from the U.S. routes and market offered by our [indiscernible] business in [indiscernible]. [indiscernible] also benefited from CapEx investments in capacity tooling productivity. The operating profit margin of 16.4% and settled back at lately 18% last year and more towards the target range of 15% plus with currently related demand softening as expected and more normal product mix. [indiscernible] Metal Melt quality revenue of $45.2 million, up 21% on the prior year or 11% on a constant currency basis. Our performance is supported by the aluminum markets, which remain consistently strong last year, increasing demand for the aero-related filters from metal mounts. And despite what was a tricky year in a local circumstances, the China business remain comfortable, which was helpful. We've mentioned before that the adjusted operating profit margin in Metal Melts has been flat recent time by lower selling and other costs that was the case prepandemic and these are now [indiscernible] starting to return to the business. And with all of that, there was also margin, 12.6% is down, but it's up from the 13.6% last year. So a little above the target range for the division, which we think of about 10% to 12%. And now back to Ben.

All right. A couple of final slides. Slide 12. ESG, very important, lots to say on it, although we're going to skip over it for this call. I think we published full report separately and contemporaneously with the financial results to illustrate how seriously we take it. You can see the results of the metrics that we published there. There's 2 or 3 things we've done differently this year. First of all, all the management team have ESG metrics in that bonus. Secondly, we've introduced a quit rate, which we think is an interesting proxy -- only a proxy, but a proxy for employee engagement, employee satisfaction, quit rate is 12.3% median across the plants at 7.1%. So I think we can -- there's improvements to be made there. That's not bad, but we can do better. I think the main thing about this report is that we have updated the central paper in it, which is as the world moves through energy transition and other mega trends, how are our businesses affected? And what do we do about that? And I will go through that now. It's -- in our view, it's worth a read. But it is absolutely the heart of our strategic thinking what businesses we want to be in, what we want to do if the businesses are going to be more challenged, et cetera, et cetera. So I think a useful strategic exercise. So then the final slide, which is Slide 13 is the outlook or summary and the outlook. Summary is a better set of results than we expected, above-growth trend rates, flattered to some extent by currency and benefiting from anticipatory price increases and very close margin management and helped by underlying growth drivers, which really haven't changed and continue to support the underlying growth of the business. And a strong balance sheet. We almost got -- we say in the notes, we always got an acquisition. We -- eventually, we pulled that off in the various reasons [ sitting ] with culture and values. So a stronger balance sheet than we expected and a plenty of firepower if we can find the right sort of acquisition or indeed, internal investments. Some of the outlook, which, of course, I understand that's mostly what you're interested in. There are a number of things to say, and we're trying to strike a sort of balanced tone. The current order books are healthy. They came into the year high and they remain high, and they will be supported by a number of things. Aerospace's order book is good for the full year. Petrochemical is looking very good for the full year. We've mentioned some of the new products that again have certainly helped in 2023 and so on. But there are some headwinds. And at the 30th of January, it seems sensible to strike the note of caution. They are -- lead times are diminishing and the risk of destocking events, segment by segment. They are inflation carrying away some of the margins that we've painstakingly built up for that very reason. And then there's just wider economic uncertainty related to higher interest rates across the industrial world. There are also some currency headwinds of course or likely. So the outlook statement is trying to say we don't know, we're not that bothered. But we don't know what 2023 going to be like. Almost certainly nothing to be as good in terms of compared to 2022. But at this stage, it's a bit too early to call it. So what do we know? Well, we know we're going to continue with consistent investments across the business. We're actually very optimistic for the future, our 5-, 10- and 15-year record speaks for itself. And so we're not really too bothered about the near term, but we do see this period of volatility, which has been really going on probably since the end of 2021 and continuing certainly through the first half of 2023. We will be fine, but we think a balanced [indiscernible] is probably the right one at this stage with further announcements in April, June and September to come. That's us for the time being. If there are any questions, we would be very happy to answer them.

[Operator Instructions] Just the first question. What -- are there any particular challenges that you could see over the next 5 years?

On a 5-year view, yes, we talked about this actually in the ESG report. Where do we think we are challenged? And we think work associated with internal combustion engines around 5% of group revenues, we wouldn't see them necessarily growing. Work associated with certain plastics and chemicals, fossil-based over things, aromatics and polymers, again, about 5% of group revenues. And then the outlook for aviation, we think, is mixed on a longer-term view. We think air travel is expected to grow due to tourism or the industry thinks tourism and family ties and so on and so on. But the industry's carbon footprint will remain a problem. That probably will in the near term, require a move to synthetic air fuel, which we think -- we know it's still a liquid fuel, so we think we'll be all right but there will be some challenges in changing technology to that. So there are some challenges. They are more than offset, I can say, by the opportunities that energy transition brings us. But those are the particular areas that we are thinking about.

We have a question from Andrew [indiscernible] of Peel Hunt. On M&A, your cash pile is building. KBR that seems to be maxing out as first consideration. How much do you feel you can come to the spend? And have multiples changed? And as what we're looking for changed in any way and in what area was the deal which did not complete?

Okay. In regards to the deal, the deal didn't complete was in industrial filtration, petrochemical filtration. The right thing for us. This is a business with [indiscernible] we felt we probably would [indiscernible] with the vendor or so. In terms of how much we've got to spend, well that's about GBP 80 million on the balance sheet, give or take. And we've said before, we're very comfortable to at least 1x EBITDA in terms of borrowings. So that's another GBP 18 million or GBP 20 million, something of that nature. So somewhere around GBP 30 million, GBP 35 million, we could spend without too much difficulty. And that should be more than enough for the sort of deals that we are likely to contemplate. In terms of valuations, have they come down? We haven't got any deals really cooking, so it's quite difficult to judge that. What clearly is happening is that higher interest rates are making private equity buyers more [indiscernible] than they ordinarily are, and that is to the benefit of trade buyers like us. So there is more activity than what ordinarily would be the case. But that doesn't mean that these are necessarily good businesses at a reasonable price but there's more going on for sure. So I would be disappointed if we didn't acquire something in 2023. But I will tell you I said exactly that in 2022. So we're trying.

We've got 2 questions here from Margaret Schooley, Stifel. First one, would you be able to give us some understanding of the [indiscernible] aerospace and industrial by revenue and operating profit in full year 2022?

Yes. But we might -- James might need a couple of minutes just to get his slide rule out. So what was the second question?

And then the follow on was, what do you believe a normalized split may be? Industrial.

In Aero and Industrial? James? Good question, Maggie.

I mean, we just got the around in terms aero, [indiscernible] total proportion of the group. In [indiscernible], we're probably low double digits in the current year. Just dropped back a bit [indiscernible] where we were prepandemic to sort of the lower proportion of the group than perhaps it was in 2019. The other one is on the industrial. A bit more difficult to say, I think across the...

It was a follow up. So you'll come back to it later?

I'll come back to it.

The question was -- which may have already been covered. The balance sheet is solid and the environment should be more [indiscernible] to M&A. Can you highlight any segment or geography you may be targeting?