Porvair Regulatory News (PRV)

For immediate release 24 June 2019

Porvair plc

Half yearly results for the six months ended 31 May 2019

Strong results and continued momentum

Porvair plc ("Porvair" or "the Group"), the specialist filtration and environmental technology group, today announces its half yearly results for the six months ended 31 May 2019.

Highlights:

· Revenue up 21% to £72.0 million (2018: £59.7 million), 17% on a constant currency basis*.

· Operating profit up 39% to £7.8 million (2018: £5.6 million). Adjusted operating profit* up 38% to £8.0 million (2018: £5.8 million)

· Profit before tax up 41% to £7.4 million (2018: £5.2 million).

· Adjusted basic earnings per share* up 36% to 12.9 pence (2018: 9.5 pence).

· Basic earnings per share were 12.4 pence (2018: 10.7 pence).

· Net cash was £3.2 million (31 May 2018: £2.2 million). £2.8 million (2018: 7.0 million) was invested in acquisitions and capital expenditure during the period.

· Interim dividend increased 6% to 1.7 pence per share (2018: 1.6 pence).

Commenting on the outlook, Ben Stocks, Chief Executive, said:

"Porvair has started 2019 strongly, with demand in aerospace and industrial markets more than offsetting the effects of global trade disturbances seen in some of our smaller product lines. The Group's new product pipeline is promising and investment in more capacity has continued. Order books for the second half are robust and prospects are encouraging."

*See note 1 for definition of alternative performance measures

For further information please contact:

An analyst briefing will take place at 9:30 a.m. on 24 June 2019 at Buchanan. An audio webcast and a copy of the presentation will be available at www.porvair.com on the day.

Operating review

Overview

Revenue growth was 21% (17% at constant currency). Strength in aerospace offset a slower start to the year in markets affected by global tariff or related US/China trade disturbances. Several larger orders in the Aerospace & Industrial division, which commenced shipment in the final quarter of 2018, were delivered in the period.

Profit before tax rose 41%, benefitting from higher volumes through the plants and better operating efficiencies. Adjusted earnings per share increased 36% to 12.9 pence.

Over the last five years the Group has achieved revenue growth of 46% (8% CAGR), earnings per share growth of 92% (14% CAGR) and cash from operations of £67 million.

Strategic statement

Porvair's strategy is to generate shareholder value through the development of specialist filtration and associated environmental technology businesses, both organically and by acquisition. Such businesses have certain key characteristics in common:

· Specialist design or engineering skills are required;

· Product use and replacement is mandated by regulation, quality accreditation or a maintenance cycle; and

· Products are typically designed into a system that will have a long life-cycle.

This strategy continues to work well for the Group, which is in a position of financial strength, able to invest in both organic and acquired growth as appropriate.

Business model outline

Our customers require filtration or emission control products that perform to a given specification. Orders are won by offering the best technical solutions for these requirements at an acceptable commercial cost. Filtration expertise is applicable across all markets with new products often being adaptations of existing designs. Experience in specific markets or applications is valuable in building customer confidence. Domain knowledge is important, as is deciding where to direct resources.

This leads the Group to:

1. Focus on markets where we see long term growth potential.

2. Look for applications where product use is mandated and replacement demand is therefore regular.

3. Make new product development a core business activity.

4. Establish geographic presence where end-markets require.

5. Invest in both organic and acquired growth.

Therefore:

· We focus on three operating segments: Aviation & Industrial; Laboratory; and Metal Melt Quality. All have clear structural growth drivers.

· Our products typically protect complex downstream systems and as a result are replaced regularly. A high proportion of our annual revenue is from repeat orders.

· Through a focus on new product development we aim to generate growth rates in excess of the underlying market. Where possible we build intellectual property around our product developments.

· Our geographic presence follows the markets we serve. In the last twelve months: 51% of revenue was in the Americas; 23% in Asia; 13% in continental Europe; 12% in the UK; and 1% in Africa. The Group has plants in the US, UK, Germany, the Netherlands and China. In the last twelve months, 55% of revenue was manufactured in the US, 33% in the UK, 8% in Europe and 4% in China.

· We aim to meet dividend and investment needs from free cash flow and modest borrowing facilities. In recent years we have expanded manufacturing capacity in the UK, Germany, US and China and made several acquisitions. All investments are subject to a hurdle rate analysis based on strategic and financial priorities.

Aerospace & Industrial

This division designs and manufactures a wide range of specialist filtration products, demand for which grows as aerospace and industrial customers seek cleaner, safer or more efficient operations. Differentiation is achieved through design engineering; intellectual property; and quality accreditations.

Revenue increased by 48% and margins improved with greater volume. Demand in aerospace and US industrial was strong. Several larger orders which commenced shipment in the final quarter of 2018 were delivered in the period. These included further gasification spares, for which similar orders should repeat periodically but will not be regular. In the US, work for nuclear clean-up and tighter marine emissions standards contributed, as did a full period of the Keystone acquisition. Sales into the microelectronics segment were affected by US/China trade issues, although the profit impact of this was modest.

Laboratory

This division has two operating businesses: Porvair Sciences and Seal Analytical.

· Porvair Sciences manufactures laboratory filters and associated consumables. Differentiation is achieved through proprietary manufacturing capabilities and filtration media.

· Seal Analytical is a leading supplier of instruments and consumables for environmental laboratories for which demand is driven by water quality regulations. Differentiation is achieved through active new product development.

After a strong 2018, revenue remained stable for the first half of 2019 with growth in Porvair Sciences offset by a slow start to the year for Seal Analytical. Porvair Sciences grew sales by 10% with demand increasing in most segments supported by new production capacity and patented molecular separations technology acquired in 2018. Seal Analytical sales were down 1% with demand from China affected by tariff changes, and lower production during the switch over to manufacturing the newest platform, the AA500. Tooling is now complete and the new model is in full production. Orders for the second half are healthy.

Metal Melt Quality

This division manufactures filters for molten metal, specialising in aluminium, ductile iron and nickel-cobalt alloys. It has a well differentiated product range based on patented products.

Revenue at constant currency was down 2%. Revenue in the US in automotive and agricultural end markets was affected by global trade issues, however revenue in China grew 33%. Operating profit grew through strong operational efficiencies in the US and losses in China reduced by a third.

Impact of the adoption of IFRS 15

The Group has adopted IFRS 15 for the first time in these results. The Group profit before tax was £0.2 million higher in the period and net assets and total equity were £0.1 million lower at 1 December 2018 under IFRS 15 than would have been the case under the previous revenue reporting standards. Under the adjustment made at 1 December 2018 to reflect the adoption of IFRS 15, deferred revenue of £7.7 million and accrued revenue of £0.3 million was eliminated.

As a consequence of the adoption of IFRS 15 provisions for warranties of £8.2 million were created and accrued losses of £0.7 million were eliminated. Matters that could affect the timing and quantum of the utilisation of the provisions include the impact of any remedial work, claims against the outstanding performance bonds, and the demonstrated life of the filtration equipment installed. Any future residual release to the income statement would be a non-cash item.

Alternative performance measures

Adjusted operating profit and adjusted profit before tax exclude the impact of acquiring businesses:

· the amortisation of acquired intangible assets was £0.3 million (2018: £0.2 million); and

· other adjustments to profit and loss related to acquiring businesses was £nil million (2018: £0.1 million).

Adjusted profit for the year excludes an exceptional one off tax credit of £nil (2018: £778,000), reflecting a reduction in the Group's deferred tax liability from the change in US tax rates from December 2017 enacted in the US Tax Cuts and Jobs Act.

More detailed disclosure of the alternative performance measures is given in note 1.

Interest

The Group incurred an interest charge of £0.4 million (2018: £0.3 million). £0.2 million (2018: £0.2 million) relates to the finance cost of the defined benefit pension scheme. The remainder comprises undrawn commitment fees and interest on the Group's banking facilities.

Tax

The Group tax charge was £1.7 million (2018: £0.4 million). The adjusted income tax expense was £1.7 million (2018: £1.1 million). The underlying rate of income tax for the period has increased to 24% (2018: 22%).

Earnings per share and dividends

The basic earnings per share for the period increased to 12.4 pence (2018: 10.7 pence). Adjusted earnings per share grew by 36% to 12.9 pence (2018: 9.5 pence).

The Board has declared an interim dividend of 1.7 pence (2018: 1.6 pence) per share, an increase of 6%.

Investment

In the last five years, £42.4 million has been invested in acquisitions and capacity expansion. The Group invested £2.8 million (2018: £7.0 million) in acquisitions and capital expenditure in first half of 2019.

Cash flow and net debt

Cash generated from operations in the six months to 31 May 2019 was £1.4 million (2018: £0.9 million). Working capital increased in the period by £7.5 million (2018: £5.9 million). Working capital usually increases in the first half. A particularly strong May trading performance this year led to unusually high receivables at the period end. In addition, inventories are higher than the year end reflecting the strength of the order book over the next quarter and increases as a result of Brexit preparations, which have not yet been utilised.

Net cash at 31 May 2019 was £3.2 million (31 May 2018: £2.2 million; 30 November 2018: £6.6 million).

Return on capital employed

The Group's return on capital employed increased to 16% (2018: 14%). Excluding the impact of goodwill, acquired intangible assets and the pension liability the return on operating capital employed was 46% (2018: 44%).

Current trading and outlook

Porvair has started 2019 strongly, with demand in aerospace and industrial markets more than offsetting the effects of global trade disturbances seen in some of our smaller product lines. The Group's new product pipeline is promising and investment in capacity has continued. Order books for the second half are robust and prospects are encouraging.

Ben Stocks

Group Chief Executive

21 June 2019

Related parties

There were no related party transactions in the six months ended 31 May 2019 (2018: none).

Principal risks

Each division considers strategic, operational and financial risks and identifies actions to mitigate those risks. These risk profiles are reviewed by the Board and updated at least annually. The principal risks and uncertainties for the remaining six months of the financial year are discussed below. Further details of the Group's risk profile analysis can be found in the Strategic Report section of the Annual Report for the year ended 30 November 2018.

Although healthy at 31 May 2019, certain elements of the Group's order position can change quickly in the face of changing economic circumstances. The Metal Melt Quality division, Laboratory division and general industrial filtration within the Aerospace & Industrial division all have relatively short lead times and order cycles and, therefore, revenues are subject to fluctuations, which could have a material effect on the Group's results for the balance of 2019.

Forward looking statements

Certain statements in this half yearly financial information are forward-looking. Although the Group believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements.

We undertake no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

Condensed consolidated income statement

For the six months ended 31 May

Condensed consolidated statement of comprehensive income

For the six months ended 31 May

The accompanying notes are an integral part of this interim financial information.

Condensed consolidated balance sheet

As at 31 May

The interim financial information on pages 7 to 22 was approved by the Board of Directors on 21 June 2019 and was signed on its behalf by:

Ben Stocks Chris Tyler

Group Chief Executive Group Finance Director

The accompanying notes are an integral part of this interim financial information.

Condensed consolidated cash flow statement

For the six months ended 31 May

The accompanying notes are an integral part of this interim financial information.

Condensed consolidated statement of changes in equity

For the six months ended 31 May (Unaudited)

The accompanying notes are an integral part of this interim financial information.

Notes to the condensed half-yearly consolidated financial information

Notes

1. Alternative performance measures

The Group uses adjusted figures as alternative performance measures in addition to those reported under IFRS, as management believe that these measures provide a useful analysis of trends in underlying performance compared with prior periods.

Alternative revenue measures

Revenue at constant currency is derived from translating overseas subsidiaries at budgeted fixed exchange rates. In 2019 and 2018 the rates used were $1.4:£ and €1.2:£.

Underlying revenue is revenue at constant currency adjusted for the impact of acquisitions made in the current and prior year.

1. Alternative performance measures continued

Alternative profit measures

A reconciliation of the Group's adjusted performance measures to the reported IFRS measures is presented below:

An analysis of adjusting items is given below:

Adjusted operating profit and adjusted profit before tax exclude:

· the impact of acquiring businesses:

o the amortisation of acquired intangible assets was £0.3 million (2018: 0.2 million); and

o acquisition expenses and other adjustments to the income statement related to acquiring businesses was £nil (2018: £0.1 million).

Adjusted profit for the year excludes the adjustments to profit before tax and an exceptional one off tax credit of £nil (2018: £0.8 million) reflecting a reduction in the Group's deferred tax liability from the change in US tax rates from December 2017 enacted in the US Tax Cuts and Jobs Act.

2. Segmental analyses

The chief operating decision maker has been identified as the Board of Directors. The Board of Directors review the Group's internal reporting in order to assess performance and allocate resources. Management has determined the operating segments based on this reporting.

As at 31 May 2019, the Group is organised on a worldwide basis into three operating segments:

1) Aerospace & Industrial

2) Laboratory

3) Metal Melt Quality

The segment results for the period ended 31 May 2019 are as follows:

The segment results for the period ended 31 May 2018 are as follows:

Other Group operations are included in "Central". These mainly comprise Group corporate expenditure such as head office and Board costs, new business development and general financial costs.

2. Segmental analyses continued

Segment assets and liabilities

2. Segmental analyses continued

Geographical analysis

Revenue

3. Earnings per share