Porvair Regulatory News (PRV)

For immediate release 3 July 2023

Porvair plc

Interim results for the six months ended 31 May 2023

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 2023 ("H1 2023" or the "period").

Highlights:

· Revenue 10% higher at £90.6 million (2022: £82.3 million), 5% higher on a constant currency basis*.

· Operating profit 16% higher at £11.7 million (2022: £10.1 million). 

· Adjusted operating profit* 17% higher at £12.2 million (2022: £10.4 million).

· Profit before tax 18% higher at £11.2 million (2022: £9.5 million).

· Adjusted profit before tax* 20% higher at £11.8 million (2022: £9.8 million).

· Basic earnings per share 20% higher at 19.3 pence (2022: 16.1 pence). 

· Adjusted basic earnings per share* 22% higher at 20.3 pence (2022: 16.6 pence).

· Cash at £19.7 million (31 May 2022: £12.2 million; 30 November 2022: £18.3 million) after investing £2.9 million (2022: £2.3 million) in capital expenditure and acquisitions.

· Interim dividend increased 0.1 pence per share to 2.0 pence (2022: 1.9 pence).

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

"This is a record set of results for the half-year and shows the Group performing well overall, despite inconsistency of demand across markets served. Aerospace, petrochemical and water quality markets are having a strong year. As expected at the time of the results announcement in January, orders in industrial and laboratory consumable segments have been lower as they go through a de-stocking cycle and lead-times return to more normal levels.

"Looking ahead, while noting that inconsistent order patterns pose risks to forecasting, the Board expects the Group's full year result to be ahead of that for 2022. The aggregate Group order book, which has been at record levels for much of 2023, remains high. Porvair's long-term earnings record is supported by established global 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 Board expects the momentum of this strong start to 2023 will carry through to a satisfactory conclusion to the year and views the longer-term with confidence."

*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 3 July 2023, please contact Buchanan for details.

An audiocast of the meeting and the presentation will subsequently be made available at www.porvair.com.

Operating review

The Group has begun 2023 with a record set of results, delivering 10% revenue growth (5% constant currency) which with improved margins has generated 17% adjusted operating profit growth (around 11% constant currency). Cash generation was as expected, leaving cash reserves of £19.7 million at 31 May 2023.

Beneath the headlines, trading has been mixed across segments. Stronger demand in aerospace and petrochemical markets is supporting both the Metal Melt and Aerospace & Industrial divisions; and new products, along with steady demand for water quality assurance, are responsible for the growth in Seal Analytical. This is balanced by the anticipated de-stocking in laboratory and industrial consumable markets with supply chain issues now mainly resolved. Inflation in wages and services remains a concern but raw material cost pressure is less acute than was the case twelve months ago.

The Group order book was at record levels for most of the period, and remains high at the start of the second half, but again the detail on a market-by-market basis is more nuanced. Lead times which were stretched in 2022 have started to return to more normal levels in 2023 and while this is advantageous in terms of customer service, and will benefit inventory turns in the second half, it makes near-term forecasting in these markets difficult.

The Group continues its consistent investment programme. In addition to the Ratiolab acquisition which we hope to close in the second half, investments have been made in productivity and margin enhancements.

Financial summary

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

Strategy and purpose

Porvair's strategy and purpose has remained consistent for over 19 years, a period that now encompasses two recessions and a pandemic. This longer-term growth record gives the Board confidence in the Group's capabilities and is the basis for capital allocation and planning decisions.

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

* Compound annual growth rate

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, engineering or commercial 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 or commercial service at an acceptable 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; and

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: 51% of revenue was in the Americas; 18% in Asia; 20% in Continental Europe; 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: 56% of revenue was manufactured in the US; 27% in the UK; 14% in Continental Europe; and 3% in China; and

· 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.

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 2023 setting out:

· Porvair's ESG management framework, goals and TCFD reporting;

· How climate change and a net zero carbon future might affect markets served by the Group;

· ESG metrics and results; and

· How the Group has acted for the benefits of its stakeholders in 2022.

This ESG report will be updated in February 2024.

Divisional review

Aerospace & Industrial

*See notes 1 and 2 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; quality accreditations; and technical customer service.

Revenue in the period increased by 19%. Better aerospace orders supported an increase in output and margins benefitted from productivity investments made in recent years. Royal Dahlman, based in Holland and mainly serving the petrochemical market with emissions control filters, is having a much better year supported by orders through our Indian engineering team. In the US, industrial consumable demand is lower, notably in microelectronics where de-stocking is affecting near-term demand. Acquired in March, HRW expands the machining and product design skills of our facility in Idaho, and this will help to support microelectronic margins over the balance of the year.

Laboratory

*See notes 1 and 2 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; filtration media; and technical customer service.

· 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 and technical customer service.

After several years of robust growth, revenues in the Laboratory division fell 6% in the period.

Seal Analytical had another strong half, supported by demand for both their new AQ700 instrument and associated automation devices. De-stocking of laboratory consumables from the second quarter affected Porvair Sciences, where lead-times have now fallen to more normal levels. This helps levels of customer service and inventory turns, but challenges manufacturing efficiency. In the plants affected, cost-reduction programmes have been undertaken to balance changing order patterns.

As outlined in the results announcement in January, the Board anticipated this de-stocking cycle and does not see any fundamental changes in the underlying growth drivers of the Laboratory division, in which investment continues. The acquisition of Ratiolab was announced in May, subject to regulatory approval. Ratiolab GmbH, located outside Frankfurt, distributes a wide range of laboratory consumables in Europe and the Middle East, offering technical customer service to a wide range of customers, only some of which are already served by the Group. Ratiolab Kft., located close to Budapest, manufactures laboratory consumables in a modern and well-invested facility, the freehold of which is included in the acquisition. Ratiolab has annual external revenues of around €12 million. The transaction is expected to be earnings neutral (after acquisition costs) in 2023, and earnings accretive thereafter.

The Board believes Ratiolab will fit well into the Group's Laboratory division, offering a complementary product range and adding European manufacturing capabilities, injection moulding expertise, new routes to market and additional engineering and customer service capabilities. 

Metal Melt Quality

*See notes 1 and 2 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 20%, helped by further recovery of aerospace-related filters; the switch from plastic to recyclable aluminium in beverage packaging; and the higher proportion of aluminium used in electric and hybrid vehicles. Margins at 15% remain ahead of their 10% - 12% target level.

The satellite manufacturing plant in China has had a strong start to the year. Covid restrictions were lifted at the start of the period enabling staff to return to work consistently. An increasing proportion of the filters made in China for the Chinese market are for higher-grade metal alloys where filtration efficiency is more important.

Alternative performance measures - profit

The Group presents alternative performance measures to enable a better understanding of its trading performance (see note 1). 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. Adjusting items comprise a £0.4 million charge (2022: £0.3 million) for the amortisation of acquired intangible assets, together with a £0.2 million charge (2022: £nil) for costs incurred in relation to the acquisition of both HRW and Ratiolab (see note 9).

Finance costs

The Group incurred a net interest charge of £0.4 million (2022: £0.6 million) which consisted of the finance cost on the pension deficit, lease liability interest, and the unwind of discounted provisions and other payables. The Group also incurred undrawn commitment fees on the Group's banking facilities, though there were largely offset by interest receivable on deposits.

Tax

The Group tax charge was £2.4 million (2022: £2.1 million), including the tax effect of adjusting items (see note 1). The adjusted income tax expense was £2.4 million (2022: £2.2 million), with the effective rate of income tax on adjusted profit before tax at 21% (2022: 22%).

Earnings per share and dividends

The basic earnings per share for the period was 19.3 pence (2022: 16.1 pence). Adjusted earnings per share was 20.3 pence (2022: 16.6 pence). 

The Board has declared an interim dividend of 2.0 pence (2022: 1.9 pence) per share.

Investment

In the last five years, £40.8 million has been invested in acquisitions and capital expenditure. In the first half of 2023, the Group invested £0.7 million on the HRW acquisition and £2.2 million on capital expenditure (2022: £2.3 million).

Cash flow, cash and net debt

Cash generated from operations in the six months to 31 May 2023 was £8.2 million (2022: £7.2 million). The Group normally sees an outflow of working capital in the first half of the year. Working capital increased by £5.0 million (2022: £4.9 million) in the period. 

Net cash at 31 May 2023 was £19.7 million (31 May 2022: £12.2 million; 30 November 2022: £18.3 million). Lease liabilities were £11.0 million (31 May 2022: £11.5 million; 30 November 2022: £11.5 million). 

Provisions and contingent liabilities

The Group has £4.4 million (31 May 2022: £4.5 million; 30 November 2022: £4.0 million) of provisions for dilapidations and performance warranties.

The Group has outstanding performance bonds with customers at 31 May 2023 of $nil (31 May 2022: $2.5 million; 30 November 2022: $1.0 million) and €0.2 million (31 May 2022: €0.4 million; 30 November 2022: €0.3 million).

Return on capital employed

The Group's return on capital employed was 16% (2022: 13%). Excluding the impact of goodwill and retirement benefit obligations, the return on operating capital employed was 37% (2022: 33%).

Outlook

This is a record set of results for the half-year and shows the Group performing well overall, despite inconsistency of demand across markets served. Aerospace, petrochemical and water quality markets are having a strong year. As expected at the time of the results announcement in January, orders in industrial and laboratory consumable segments have been lower as they go through a de-stocking cycle and lead-times return to more normal levels.

Looking ahead, while noting that inconsistent order patterns pose risks to forecasting, the Board expects the Group's full year result to be ahead of that for 2022. The aggregate Group order book, which has been at record levels for much of 2023, remains high. Porvair's long-term earnings record is supported by established global 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 Board expects the momentum of this strong start to 2023 will carry through to a satisfactory conclusion to the year and views the longer-term with confidence.

Ben Stocks

Group Chief Executive

30 June 2023

Related parties

Other than remuneration of key management personnel, there were no related party transactions in the six months ended 31 May 2023 (2022: 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 2022.

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 2023. 

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 be 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 30 June 2023 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 (unaudited)

Revenue at constant currency is derived from translating overseas subsidiaries results at budgeted fixed exchange rates. In 2023 and 2022, the rates used were $1.40:£1 and €1.20:£1, compared with actual rates of $1.22:£1 (2022: $1.31:£1) and €1.14:£1 (2022: €1.19:£1).

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 £0.4 million (2022: £0.3 million); and

· Other acquisition-related costs of £0.2 million (2022: £nil) in relation to the HRW acquisition and the planned acquisition of Ratiolab (see note 9).

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. The key profit measure used to assess the performance of each reportable segment is adjusted operating profit/(loss). Management has determined the operating segments based on this reporting.

As at 31 May 2023, 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 2023 are as follows:

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

The segment assets and liabilities at 31 May 2023 are as follows:

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

The segment assets and liabilities at 30 November 2022 are as follows:

Geographical analysis

3. Earnings per share (EPS)

In addition to the above, the Group also calculates an earnings per share based on adjusted profit as the Board believes this to be a better measure to judge the progress of the Group, as discussed in note 1.