Porvair Regulatory News (PRV)

For immediate release 27 June 2016

Porvair plc

Half yearly results for the six months ended 31 May 2016

Strong positive 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 2016.

· Encouraging financial progress:

o Revenue up 13% to £52.1 million (2015: £46.3 million). Constant currency revenue growth was 10%.

o Profit before tax up 7% to £4.5 million (2015: £4.2 million).

o Basic earnings per share up 9% to 7.5 pence (2015: 6.9 pence).

o Net cash was £7.2 million (31 May 2015: £6.2 million; 30 November 2015: £10.7 million).

o Acquisition of TEM for £3.4m, £2.9 million paid in the period.

o Capital investment of £2.7 million in the period.

· Microfiltration:

o Revenue up 15%.

o Aerospace revenue up 14%.

o Large contracts progressing smoothly - POSCO contract is largely commissioned.

o TEM has performed well since acquisition.

o New facility in USA opened on schedule and to budget.

o Indian joint venture with Mascot Dynamics signed.

o Order book healthy.

· Metals Filtration:

o Revenues up 7% (4% lower in constant currency).

o New facility in China performing well and has delivered its first filters for molten aluminium.

o Exclusive multi-year contract with Alcoa renewed.

· Interim dividend increased 8% to 1.4 pence per share (2015: 1.3 pence).

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

"Provided recent economic and political uncertainty does not affect general industrial activity, the outlook for Porvair is positive. 2016 has started well. Demand in most of our markets is good and order books for the second half are healthy. We are benefiting from the introduction of new products and the integration of acquisitions made in 2015. The Group has a strong balance sheet, a promising project pipeline and many opportunities ahead."

For further information please contact:

A copy of the presentation that accompanies these results is available at www.porvair.com 

Operating Review

Overview

Demand in most of our markets was good and revenue for the six months ended 31 May 2016 was up 13%. In constant currency revenue growth was 10%.

The Group has invested £5.6 million in capital expenditure and acquisitions in the period and has made good progress towards its key operating objectives including:

· Growth in aviation, nuclear and Seal Analytical driven by strong demand and new product introductions;

· Large projects progressing well, with developments in ancillary services;

· New facilities opened in the USA and China on budget and schedule; and

· A good start by TEM, acquired in December 2015.

The second half of 2016 has started well and order books are healthy.

Strategic statement

Porvair's strategy has remained consistent for a number of years. It is to generate shareholder value through the development of specialist filtration and 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 often designed into a specification and will typically have long life cycles.

Over the last five years this strategy has worked well for the Group. It has invested £27 million in capacity expansion and acquisitions and generated sufficient cash to turn £9 million of net debt into £7 million of net cash. The Group is now in a position of financial strength, and will continue to invest in both organic and acquired growth as appropriate. In the last twelve months the Group's after tax return on operating capital was 48% (2015: 47%).

Business model outline

Our customers require filtration or emission control products that perform to a given specification; for a minimum amount of time; often with prescribed physical attributes such as size or weight. We win business by offering the best technical solutions for these requirements at an acceptable commercial cost. Filtration expertise is applicable across all markets with new products generally being adaptations of existing designs. Experience in particular markets or applications is valuable in building customer confidence. Domain knowledge is important, as is deciding where to direct resources.

This leads us to:

1. Focus on end-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 four end-markets: aviation; energy and industrial; environmental laboratories; and molten metals. All have clear structural growth drivers.

· Our products are specialist in nature and typically protect costly or complex downstream systems. As a result they are replaced regularly. A high proportion of our annual revenue is from repeat orders.

· We encourage new product development in order to generate growth rates in excess of the underlying market. Where possible we build robust intellectual property around our product developments. About 30% of our revenue is derived from patent protected products.

· Our geographic presence follows the markets we serve. Some 44% of revenue is in the Americas, where aviation and metals filtration are strong. Some 24% of revenue is in Asia, where sales into water analysis markets are growing and the demand for gasification plants is strongest.

· 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 small acquisitions. All investments are subject to a careful investment hurdle rate analysis based on strategic and financial priorities.

Operating structure

· The Group has two divisions. The Microfiltration division serves the aviation, environmental laboratory and energy/industrial markets. The Metals Filtration division focuses on filtration of molten metals, principally aluminium.

· The Group has plants in the US, UK, Germany and China.

Investment and future development

Since the start of 2014 over £11.5 million has been invested in capacity expansion. New plants have been opened in the UK, US and China. Highlights in 2016 and future developments include:

· A new US industrial filtration plant was opened in March 2016, expanding manufacturing and design capabilities. Further investment in production equipment is planned for the second half of 2016.

· New equipment to increase capacity has been installed in Caribou, Maine.

· The new plant in China has started production successfully and is making good quality products for aluminium filtration customers in the region.

· Manufacturing capacity has been expanded in two of the UK plants.

· Gasification projects remain on track. Commissioning work in Korea has gone well with no major issues reported. Shipping on the project for Reliance is now substantially complete. Commissioning is likely to start in 2017.

· Several new aviation product programmes were won including work for Airbus NEO and Boeing 777x.

· Integration of TEM, acquired in December 2015, is underway. Trading since acquisition has been good.

· A joint venture agreement with Mascot Dynamics was signed to provide filter cleaning and services in India.

Metals Filtration

Revenue was up 7% to £16.8 million (2015: £15.7million). However, in constant currency, revenues are 4% lower, with fewer capital projects at aluminium smelters, following a period of low metal prices, holding back the sales of capital equipment.

Nevertheless, this division has made positive progress in 2016. Sales of filters in the US and Europe have been steady, with consistent market share gains from patented products. We have been awarded a further multi-year contract for the exclusive supply of aluminium filters to Alcoa.

The new plant in China has started production with modest start-up losses as expected. The aluminium filtration line is fully commissioned and is making good quality products. These products will be sold into the Asian market, using a new patented formula specifically developed for these applications. We plan to grow our volumes steadily, competing on value not price. We are confident that we have a differentiated offering in Asia and that over time, as in the rest of the world, this approach will be successful.

Microfiltration

Revenue was up 15% at £35.3 million (2015: £30.6 million) as a result of good growth in most markets and further revenue from the large projects.

Aviation revenues are up 14% and the order book is healthy. It has been a good period for project wins, including packages for the Airbus NEO programme, which will be made in the new US facility; and the next generation inerting systems for the Boeing 777x. Bioscience filtration projects are going well with sales of the product licenced to Thermo Fisher Scientific growing well. Nuclear projects are having an encouraging year with stronger order books for the second half including some interesting new HEPA filter designs in the USA.

Large projects continue to be a focus. The installation in Korea is now largely commissioned. Shipments to the installations in India and China have finished and both are expected to begin operations in early 2017. Shipments for the UK Government nuclear remediation contract will continue through 2016.

We have signed a joint venture agreement with our long term Indian partner, Mascot Dynamics. The joint venture has reached an agreement with Reliance to design, build and operate filter cleaning equipment for its Indian installations. We do not expect this to generate significant revenues but it will give better access to the Indian industrial filtration market, and we expect sales to grow in time.

We completed the acquisition of TEM, a filter business serving the microelectronics industry, in December 2015 and it has traded well since then. Integration is underway and we have started the process of expanding the product range using filtration capabilities from other parts of the Group. Prospects for the second half are encouraging.

Seal Analytical sales grew 13%, again posting a record for the period. Strong demand from Chinese and US markets has driven this growth. Seal is a market leading supplier of equipment and consumables for the detection of inorganic contamination of water. It distinguishes itself from its competitors with an active new product development programme that has seen the introduction of four new platforms in the last four years, with more to come.

Interest

The Group incurred an interest charge of £0.3 million (2015: £0.3 million). £0.2 million (2015: £0.2 million) relates to the finance cost of the defined benefit pension scheme. The remainder principally comprises non-utilisation fees on the Group's banking facilities.

Tax

The Group tax charge was £1.1 million (2015: £1.1 million). This is an effective rate of 24% (2015: 26%), in line with the rate recorded for the full year ended 30 November 2015 and higher than the UK standard corporate tax rate because tax rates are higher on profits made in Germany and the US.

Earnings per share and dividends

The basic earnings per share for the period increased 9% to 7.5 pence (2015: 6.9 pence).

The Board is declaring an increased interim dividend of 1.4 pence (2015: 1.3 pence) per share, an increase of 8%.

Cash flow and net debt

Cash generated from operations in the six months to 31 May 2016 was £2.5 million (2015: £3.1 million). Working capital increased in the period by £3.9 million (2015: £2.8 million). Following several years of receiving cash in excess of revenue recognised on the large projects, in this period, as expected, more revenue has been recognised than cash received. In addition, there was a planned increase in inventory as part of the startup of the new plant in Xiaogan.

Interest paid was £0.1 million (2015: £0.1 million). Tax payments were £0.6 million (2015: £0.6 million) in line with the prior year.

Capital expenditure was £2.7 million (2015: £1.4 million), mainly spent on the planned fit out of facilities in US and China and additional machining capacity in the UK.

£2.9 million (2015: £0.5 million of deferred consideration on previous acquisitions) was spent on TEM acquired on 4 December 2015. As described in note 9, further consideration is due in 2017 contingent upon the performance of the business in its first year of trading under our ownership.

Net cash at 31 May 2016 was £7.2 million (31 May 2015: £6.2 million; 30 November 2015: £10.7 million).

Return on capital employed

The Group's return on capital employed was 15% (2015: 15%). Excluding the impact of goodwill and the pension liability the return on operating capital employed was 48% (2015: 47%).

Current trading and outlook

Provided recent economic and political uncertainty does not affect general industrial activity, the outlook for Porvair is positive. 2016 has started well. Demand in most of our markets is good and order books for the second half are healthy. We are benefiting from the introduction of new products and the integration of acquisitions made in 2015. The Group has a strong balance sheet, a promising project pipeline and many opportunities ahead.

Ben Stocks

Group Chief Executive

Related parties

There were no related party transactions in the six months ended 31 May 2016 (2015: 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 2015.

Although healthy at 31 May 2016, certain elements of the Group's order position can change quickly in the face of changing economic circumstances. The Metals Filtration division and environmental laboratory supplies and general industrial filtration within the Microfiltration 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 2016.

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 21 was approved by the Board of Directors on 24 June 2016 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

1. 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 2016, the Group is organised on a worldwide basis into two operating segments:

1) Metals Filtration

2) Microfiltration

The segment results for the period ended 31 May 2016 are as follows:

The segment results for the period ended 31 May 2015 are as follows:

Other Group operations are included in "Other unallocated". These mainly comprise Group corporate costs, including new business development costs, some research and development costs, general financial costs, and income tax expense.

Segment assets and liabilities

Geographical analysis

Revenue

2. Earnings per share

3. Dividends per share

The final dividend approved for the year ended 30 November 2015 was paid to shareholders on 3 June 2016.

The Directors have declared an interim dividend of 1.4 pence (2015: 1.3 pence) per share to be paid on 2 September 2016 to shareholders on the register at the close of business on 29 July 2016. The ex-dividend date for the shares is 28 July 2016.

4. Property, plant and equipment and goodwill and other intangible assets

5. Share capital and premium

The authorised number of ordinary shares is 75 million (2015: 75 million) shares with a par value of 2.0 pence (2015: 2.0 pence) per share. All issued shares are fully paid. 308,200 (2015: 450,221) ordinary shares of 2p each were issued in the period on the exercise of employee share options for a cash consideration of £6,000 (2015: £19,000). The weighted average share price at the date of exercise of the options was 288 pence (2015: 298 pence).

6. Other reserves

7. Cash generated from operations

8. Reconciliation of net cash flow to movement in net cash

9. Acquisition

On 4 December 2015 the Group, through its subsidiary Porvair Filtration Group Inc., purchased the trade and assets of TEM Filter Company. The total estimated consideration payable is $5,100,000 (£3,377,000); $4,350,000 (£2,880,000) was paid on 4 December 2015, with the balance being contingent and due for payment before 31 May 2017. The contingent consideration is estimated based on the forecast for the operating profit performance of the acquired business in its first year of ownership by the Group.  A change in its operating profit forecast by $100,000 (£69,000), which is considered a reasonable possibility, would change the liability by the same amount. The maximum contingent consideration is $1,200,000 (£825,000). Direct acquisition-related costs of $58,000 (£38,000) have been charged to administrative expenses in the consolidated income statement. In the period since acquisition, the business has contributed $1,279,000 (£883,000) in revenue and $296,000 (£205,000) in operating profit to the Group results.

The goodwill attributable to the acquisition relates to the acquired customer base and non-contractual relationships, the synergies between the business acquired and the existing operations of the Group and the potential to develop the acquired technologies, which do not meet the criteria for capitalisation as intangible assets. The goodwill recognised is attributable to the Microfiltration division and is expected to be deductible for income tax purposes. The purchase is accounted for as an acquisition.

10. Contingent liabilities

At 31 May 2016, the Group has advanced payment bonds totalling US$5,024,000 (30 November 2015: US$5,273,000) relating to monies received in advance on contracts. The bonds require the amount to be repaid in the event delivery is not made within certain parameters. The Group has performance bonds totalling US$7,179,000 (30 November 2015: $9,728,000). The bonds are released after a warranty period and in any event no later than January 2019. The Group has no bid guarantees in place at the period end.

11. Fair value estimation

The Group's activities expose it to a variety of financial risks: market risk (including currency risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The condensed half-yearly consolidated financial information does not include all financial risk management information and disclosures required in the annual financial statements; it should be read in conjunction with the Group's annual financial statements as at 30 November 2015. There have been no changes in the risk management department or in any risk management policies since the year end.

Compared to year end, there was no material change in the contractual undiscounted cash out flows for financial liabilities with the exception of bank overdraft and loans of £1.2 million, which are due in 2018.

The Group's finance department includes a team that performs the valuations of financial assets and liabilities required for financial reporting purposes, including Level 3 fair values. This team reports directly to the Group Finance Director and the Audit Committee. Discussions of valuation processes and results are held between the Group Finance Director, the Audit Committee and the valuation team at least twice a year, in line with the Group's external reporting dates.

The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined below:

· Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1).

· Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2).

· Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).

There were no transfers between levels during the period, and there were no changes in valuation techniques in the period.

Level 2 trading and hedging derivatives comprise forward foreign exchange contracts. These forward foreign exchange contracts have been fair valued using forward exchange rates that are quoted in an active market. The effects of discounting are generally insignificant for Level 2 derivatives.

A summary of the movements in deferred and contingent consideration on acquisitions contained in Level 3 is given below: