Porvair Regulatory News (PRV)

For immediate release 4 July 2022

Porvair plc

Interim results for the six months ended 31 May 2022

Porvair plc ("Porvair" or "the Group"), the specialist filtration, laboratory and environmental technology group, announces its interim results for the six months ended 31 May 2022 ("H1 2022" or the "period").

Highlights:

· Revenue 18% higher at £82.3 million (2021: £69.7 million), 16% higher on a constant currency basis*.

· Operating profit 9% higher at £10.1 million (2021: £9.3 million). 

· Adjusted operating profit* 14% higher at £10.4 million (2021: £9.1 million).

· Profit before tax 7% higher at £9.5 million (2021: £8.9 million).

· Adjusted profit before tax* 14% higher at £9.8 million (2021: £8.6 million).

· Adjusted basic earnings per share* were 16.6 pence (2021: 14.8 pence).

· Basic earnings per share were 16.1 pence (2021: 16.4 pence, flattered by adjusting items. See note 1). 

· Net cash was £12.2 million (31 May 2021: £6.2 million; 30 November 2021: £10.2 million) after investing £2.3 million (2021: £2.0 million) in capital expenditure.

· Interim dividend increased 0.1 pence per share to 1.9 pence (2021: 1.8 pence).

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

"This is a record set of Interim results with growth in all three divisions, showing that the Group is performing well and has managed wide-spread supply dislocation and inflationary pressures satisfactorily thus far. Porvair remains well positioned to address long-term global growth trends: tightening environmental regulations; growth in analytical science; the need for clean water; carbon-efficient transportation; the replacement of plastic and steel with aluminium; and the drive for manufacturing process quality and efficiency.

The strong current order book is flattered in places by extended lead times, but the underlying order position remains healthy, with aerospace and laboratory demand notably stronger than one year ago. The focus for the coming months is on margins. The Group will continue to pass on cost increases where necessary and has accelerated investments in productivity. 2022 has started strongly and provided economic conditions allow the outlook for the balance of the year is promising."

*See notes 1, 2 and 3 for definitions and reconciliations.

For further information please contact:

An analyst briefing will take place at 9:30 a.m. on Monday 4 July 2022, please contact Buchanan if you wish to join. An audiocast of the meeting and the presentation will subsequently be made available at www.porvair.com

Operating review

The last twelve months have seen revenue and earnings growth despite headwinds from supply-side challenges and inflationary pressures. At the start of 2022, supply chain dislocation had started to ease somewhat, but inflationary pressure continued to build and war in Europe, along with renewed covid outbreaks in China, increased volatility. While the Group has navigated these issues satisfactorily thus far, we remain vigilant and expect inflationary and supply problems to persist well into 2023.

Despite these conditions the Group delivered revenue growth of 18% in the first half of 2022, with all three divisions contributing. Excluding currency and acquisitions, revenue growth was 15%. This was in part driven by strong order books through the period, and in part due to price increases implemented over the last year. Laboratory demand was expected to settle as the direct effects of the pandemic eased, but this has not noticeably been the case yet. The aerospace forward orderbook is better than it has been since 2019. Aluminium production is also robust.

In inflationary times the management of margin is critical. We pass on direct cost increases and have stepped up investments aimed at productivity and automation. Porvair's devolved management structure is helpful in these conditions with key cost, price and inventory decisions made close to the market.

Financial summary

*See notes 1, 2 and 3 for definitions and reconciliations.

Revenue was 18% higher (16% at constant currency). Operating profit was 9% higher at £10.1 million. Profit before tax increased by 7%. Adjusted earnings per share increased 12% to 16.6 pence. Net cash at 31 May 2022 was £12.2 million.

The Group's record for growth, cash generation and investment is as follows:

* Compound annual growth rate

Porvair's strategy and purpose has remained consistent for over 17 years, a period that now encompasses two recessions, a pandemic, and many years of growth. This longer-term growth record gives the Board confidence in the Group's capabilities and is the basis for longer-term capital allocation and planning decisions.

Strategic statement and business model

Porvair's strategic purpose is the development of specialist filtration, laboratory and environmental technology businesses for the benefit of all stakeholders. Principal measures of success include consistent earnings growth and selected ESG measures. The Group publishes a full ESG report at the time of the annual Final Results.

The Group is positioned to benefit from global trends: tightening environmental regulations; growth in analytical science; the need for clean water; carbon-efficient transportation; the replacement of plastic and steel by aluminium; and the drive for manufacturing process quality and efficiency.

Porvair 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 and must perform to a given specification.

Orders are won by offering the best technical solutions at an acceptable commercial cost. Technical expertise is necessary in all markets served. New products are often adaptations of existing designs with attributes validated in our own test and measurement laboratories. Experience in specific markets and 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 with long-term growth potential.

2. Look for applications where product use is mandated and replacement demand is 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: Aerospace & Industrial; Laboratory; and Metal Melt Quality. All have clear long-term growth drivers.

· Our products typically reduce emissions or 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, 49% of revenue was in the Americas; 18% in Asia; 22% in Continental Europe; and 10% 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, 51% of revenue was manufactured in the US; 30% in the UK; 15% in Continental 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 have made several acquisitions. All investments are subject to a hurdle rate analysis based on strategic and financial priorities.

Environmental, Social and Governance ('ESG')

The Board understands that responsible business development is essential for creating long-term value for stakeholders. Most of the products made by Porvair are used to the benefit of the environment. Our water analysis equipment measures contamination levels in water. Industrial filters are typically needed to reduce emissions or improve efficiency. Aerospace filters improve safety and reliability. Nuclear filters confine fissile materials. Metal Melt Quality filters reduce waste and help improve the strength to weight ratio of metal components. 

A full ESG report was published in February 2022 setting out the Group's ESG management framework and goals. This will be updated in February 2023.

Divisional review

Aerospace & Industrial

*See notes 1, 2 and 3 for definitions and reconciliations.

The Aerospace & Industrial division designs and manufactures a wide range of specialist filtration products, demand for which is driven by customers seeking better engineered, cleaner, safer or more efficient operations. Differentiation is achieved through design engineering; the development of intellectual property; and quality accreditations.

Revenue in the period increased by 18%. Aerospace revenues increased for the first time since 2019 and the forward order book is returning to more normal levels. We have used the pandemic-induced quieter period since 2020 to invest in automation and productivity and the benefits of this are starting to materialise as aerospace volume returns. Industrial filtration has started 2022 well. Timing of certain petrochemical contracts has drifted but this has been balanced by strong demand in general industrial filtration in both the US and Europe. Microelectronics continues to grow. With better aerospace volumes, adjusted margins are higher in 2022 at 10.1%.

Laboratory

*See notes 1, 2 and 3 for definitions and reconciliations.

The Laboratory division has two operating businesses: Porvair Sciences (including JGF Finneran and Kbio) and Seal Analytical.

· Porvair Sciences manufactures laboratory filters, small instruments 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 consistent new product development.

Revenue grew by 22% in the period, or 19% excluding acquisitions. Demand for laboratory consumables remained robust, while demand for covid-related components fell, but by less than expected. Seal Analytical sales were up 18%.

The division continues to perform strongly, driven by the global expansion in diagnostic, analytic and environmental laboratory capacity. The Group's expertise is in sample preparation products, chromatography consumables and clean water analysis. Investment has been made in expanding capacity, improving sales channels and accelerating new product development. Seal Analytical has a good record of product introductions. Its latest analyser, which incorporates robotic handling capability, has secured its first sales in 2022. Adjusted operating margins in the division were steady at 19.8%.

Metal Melt Quality

*See notes 1, 2 and 3 for definitions and reconciliations.

The Metal Melt Quality division manufactures filters for molten aluminium, ductile iron and nickel-cobalt alloys. It has a well-differentiated product range based on patented products and a promising new product pipeline.

Revenue grew by 13%, helped by a partial recovery of aerospace-related filters. Aluminium demand in 2022 has been robust, driven by the switch from plastic to recyclable aluminium in beverage packaging and the higher proportion of aluminium used in electric and hybrid vehicles.

As outlined this time last year, adjusted margins in H1 2021 (16.3%) were flattered by lower sales and marketing costs. The Board notes that the 13.5% adjusted operating margin recorded in H1 2022 is good relative to historic averages and is driven by operational efficiency, productivity investments, and active management of cost and price issues.

Alternative performance measures

The Group presents alternative performance measures to enable a better understanding of its trading performance. Adjusted operating profit and adjusted profit before tax exclude items that are considered significant and where treatment as an adjusting item provides a more consistent assessment of the Group's trading. Adjusted operating profit excludes a £0.3 million charge for the amortisation of acquired intangible assets (2021: £0.3 million of net income) from operating profit. The details of these adjustments are set out in note 1. 

Finance costs

The Group incurred an interest charge of £0.6 million (2021: £0.5 million): £0.1 million (2021: £0.2 million) relates to the finance cost of the defined benefit pension scheme; £0.2 million (2021: £0.2 million) relates to the interest charge on lease liabilities; and £0.1 million (2021: £0.1 million) relates to the cost of unwinding discounts on provisions and other payables. The remainder comprises undrawn commitment fees and interest on the Group's banking facilities.

Tax

The Group tax charge was £2.1 million (2021: £1.3 million), including the tax effect of adjusting items (see note 1). The adjusted income tax expense was £2.2 million (2021: £1.8 million), with the underlying rate of income tax for the period on adjusted measures being 22% (2021: 21%).

Earnings per share and dividends

The basic earnings per share for the period was 16.1 pence (2021: 16.4 pence). Adjusted earnings per share was 16.6 pence (2021: 14.8 pence). 

The Board has declared an interim dividend of 1.9 pence (2021: 1.8 pence) per share.

Investment

In the last five years, £43.1 million has been invested in acquisitions and capacity expansion. The Group invested £2.3 million in capital expenditure in the first half of 2022 (2021: £2.0 million).

Cash flow, cash and net debt

Cash generated from operations in the six months to 31 May 2022 was £7.2 million (2021: £6.1 million). The Group normally sees an outflow of working capital in the first half of the year. Working capital increased by £4.9 million (2021: £3.8 million) in the period. 

Net cash at 31 May 2022 was £12.2 million (31 May 2021: £6.2 million; 30 November 2021: £10.2 million). Lease liabilities were £11.5 million (31 May 2021: £12.8 million; 30 November 2021: £12.2 million). 

Provisions and contingent liabilities

The Group has £4.5 million (30 November 2021: £4.7 million) of provisions for dilapidations and warranty risks.

The Group has outstanding performance bonds with customers at 31 May 2022 of $2.5 million (30 November 2021: $2.5 million) and €0.4 million (30 November 2021: €0.8 million).

Return on capital employed

The Group's return on capital employed was 13% (2021: 11%). Excluding the impact of goodwill and the pension deficit, the return on operating capital employed was 33% (2021: 29%).

Outlook

While the Group has managed supply dislocation and inflationary pressure satisfactorily thus far, both are expected to persist for the rest of 2022. Longer-term, Porvair remains well positioned to address global growth trends: tightening environmental regulations; growth in analytical science; the need for clean water; carbon-efficient transportation; the replacement of plastic and steel by aluminium; and the drive for manufacturing process quality and efficiency.

The strong current order book is flattered in places by extended lead times, but the underlying order position remains healthy, with aerospace and laboratory demand notably stronger than one year ago. The focus for the coming months is on margins. The Group will continue to pass on cost increases where necessary and has accelerated investments in productivity. 2022 has started strongly and provided economic conditions allow the outlook for the balance of the year is promising.

Ben Stocks

Group Chief Executive

1 July 2022

Related parties

Other than remuneration of key management personnel, there were no related party transactions in the six months ended 31 May 2022 (2021: 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. Further details of the Group's risk profile analysis can be found in the Strategic Report section of the Annual Report & Accounts for the year ended 30 November 2021.

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, revenue is subject to fluctuations which could have a material effect on the Group's results for the balance of 2022. 

Forward-looking statements

Certain statements in this interim 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 was approved by the Board of Directors on 1 July 2022 and was signed on its behalf by:

Ben Stocks James Mills

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 interim consolidated financial information

1. Alternative performance measures

Alternative performance measures are used by the Directors and management to monitor business performance internally and exclude certain cash and non-cash items which they believe are not reflective of the normal course of business of the Group. The Directors believe that disclosing such non-IFRS measures enables a reader to isolate and evaluate the impact of such items on results and allows for a fuller understanding of performance from year to year. Alternative performance measures may not be directly comparable with other similarly titled measures used by other companies.

Alternative revenue measures

Revenue at constant currency is derived from translating overseas subsidiaries results at budgeted fixed exchange rates. In 2022 and 2021, the rates used were $1.40:£1 and €1.20:£1, compared with reported rates of $1.31:£1 (2021: $1.38:£1) and €1.19:£1 (2021: €1.14:£1).

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

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 excludes:

· The amortisation of intangible assets arising on acquisition of businesses of £0.3 million (2021: £0.4 million);

· Other acquisition-related costs of £nil (2021: £0.1 million in relation to the acquisition of Kbio);

· Covid-19 related impairment of assets and restructuring costs of £nil (2021: £0.6 million, principally within the Aerospace & Industrial division); and

· Monies received under the US Paycheck Protection Program of £nil (2021: £1.3 million, for proceeds received in relation to eligible costs incurred within the US operations during the covid pandemic, as disclosed in the Annual Report & Accounts for the year ended 30 November 2021).

The 2021 tax effect of adjustments to operating profit includes a credit in relation to eligible costs incurred in the prior year, associated with the US Paycheck Protection Program and previously treated as disallowed for tax. The £1.3 million Paycheck Protection Program income in 2021 does not attract US tax. These items combined contribute to the tax credit on net adjusting items.

2. Segmental information

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

As at 31 May 2022, the Group is organised on a worldwide basis into three operating segments:

1) Aerospace & Industrial - principally serving the aviation, and energy and industrial markets;

2) Laboratory - principally serving the bioscience and environmental laboratory instrument and consumables market; and

3) Metal Melt Quality - principally serving the global aluminium, North American Free Trade Agreement (NAFTA) iron foundry and super-alloys markets.

Other Group operations' costs, assets and liabilities are included in the "Central" division.  Central costs mainly comprise Group corporate costs, including new business development costs, some research and development costs and general financial costs. Central assets and liabilities mainly comprise Group retirement benefit obligations, tax assets and liabilities, cash and borrowings.

The segment results for the period ended 31 May 2022 are as follows:

The segment results for the period ended 31 May 2021 are as follows:

The segment assets and liabilities at 31 May 2022 are as follows:

The segment assets and liabilities at 31 May 2021 are as follows:

The segment assets and liabilities at 30 November 2021 are as follows:

Geographical analysis

3. Earnings per share (EPS)