Interim Results

Operating review

The Group has begun 2024 with 5% revenue growth (8% constant currency). Stripping out the benefit of acquisitions, underlying sales revenue was down 3% at constant currency as industrial and laboratory consumables markets adjusted to lower inventory levels and more normal lead times through 2023 and into 2024. The Board's view is that underlying market growth will be more evident in the second half.

Margins in those operations affected by de-stocking have reduced modestly and foreign exchange rates have had a £0.4 million adverse effect on adjusted profit. Adjusted operating profit was nonetheless 2% ahead of the prior period.  Cash generation was as expected, leaving net cash reserves of £4.1 million at 31 May 2024, having completed the acquisition of the European Filter Corporation ("EFC") in the first trading week of the new financial year.

Trading has been mixed across segments.  Stronger demand in aerospace and petrochemical markets has continued. Both have reassuring order books into 2025. Laboratory consumables businesses started to see more consistent order patterns in the second quarter. Demand for industrial consumables, notably in the US, remained patchy for most of the period.   

Inconsistency in trading patterns across the Group is not unusual. We serve a range of markets in different parts of the world and trading can be affected by both local and global events. Despite this natural variation Porvair benefits from underlying growth trends that have not changed: tightening environmental regulation; the growth of analytical science; the need for clean water; the development of carbon-efficient transportation; the replacement of plastic and steel by aluminium; and the drive for manufacturing process quality and efficiency.

Financial summary

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

Strategy and purpose

Porvair's strategy and purpose have remained consistent for over 20 years, a period that encompasses two recessions and a pandemic.  The Group's record for growth, cash generation and investment is:

This longer-term growth record gives the Board confidence in the Group's capabilities and is the basis for 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 financial results.

The Group is positioned to benefit from global trends as outlined above.

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:

·      focus on markets with long-term growth potential;

·      look for applications where product use is mandated and replacement demand is regular;

·      make new product development a core business activity;

·      establish geographic presence where end-markets require; and

·      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: 46% of revenue was in the Americas; 17% in Asia; 25% in Continental Europe; 11% in the UK; and 1% in Africa.  The Group has plants in the US, UK, Belgium, Germany, Hungary, the Netherlands, India and China.  In the last twelve months: 48% of revenue was manufactured in the US; 26% in the UK; 23% in Continental Europe; 3% in Asia; 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 2024 setting out:

·      Porvair's ESG management framework and goals;

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

·      ESG metrics and results; and

·      how the Group acted for the benefits of its stakeholders in 2023.

This ESG report will be updated in February 2025.

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 customer service.

Revenue in the period increased by 11%. Aerospace revenue was ahead 15%. Petrochemical sales, which can be lumpy, were up 43%.  US industrial consumable demand was lower, offset in the period by a strong start by EFC, which was acquired in December. HRW, acquired earlier in 2023, improved margins in the microelectronics segment, wherein demand seems to be improving. The general industrial factories were busier in the second quarter, with work due to ship in the second half.

Laboratory

*See notes 1 and 2 for definitions and reconciliations.

The Laboratory division has two operating businesses: Porvair Sciences (including Finneran, Kbiosystems and, from July 2023, Ratiolab) and Seal Analytical.

·      Porvair Sciences manufactures laboratory filters, small instruments and associated consumables, for which demand is driven by sample preparation in analytical laboratories.  Differentiation is achieved through proprietary manufacturing capabilities; control of filtration media; and customer service.

·      Seal Analytical supplies instruments and consumables to environmental laboratories, for which demand is driven by water quality regulations.  Differentiation is achieved through consistent new product development focused on improving detection limits, and improving laboratory automation.

A return to sales growth in the first half of 2024 was as expected, helped by a maiden contribution from Ratiolab, which was acquired in July 2023. The sales and margin delivered in the first half of 2024 are almost identical to those of the second half of 2023 with margins in both periods around 14%. As integration costs associated with Ratiolab fall away, we expect margins in the division to improve to more normal levels.

Investments in the new plant in Hungary and new product development in Seal continued unabated and both will start to deliver returns in the balance of the year.

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 extensive experience in melt quality assessment.

Revenue fell 11% with de-stocking in US markets reducing demand compared with a strong start to the prior year. This was partially offset by robust demand for turbine blade filters and revenue growth at the Chinese plant.

Margin management, operational discipline and a better product mix improved margins, with operating profits 4% lower.

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 performance.  Adjusting items comprise £0.9 million (2023: £0.4 million) for the amortisation of acquired intangible assets and £nil (2023: £0.2 million) for other acquisition-related costs (see note 1).

Finance costs

Net finance costs of £1.0 million (2023: £0.4 million) comprise interest on borrowings; lease liabilities; and the Group's retirement benefit obligations; together with the cost of unwinding discounts on provisions and other payables.  The Group also incurs undrawn commitment fees on available banking facilities. Net finance costs increased in the period, primarily due to interest on borrowings and the lease liability interest associated with a property lease renewal in the UK and the leased properties acquired within both Ratiolab and EFC.

Tax

The total Group tax charge was £2.3 million (2023: £2.4 million), including the tax effect of the adjusting items set out in note 1.  The adjusted tax charge was £2.5 million (2023: £2.4 million), with the effective rate of income tax on adjusted profit before tax at 22% (2023: 21%).

Earnings per share and dividends

The basic earnings per share for the period was 18.1 pence (2023: 19.3 pence).  Adjusted earnings per share was 19.5 pence (2023: 20.3 pence). 

The Board has declared an interim dividend of 2.1 pence (2023: 2.0 pence) per share.

Investment

In the last five years, £60.0 million has been invested in acquisitions and capital expenditure.  During the period, the Group invested £10.2 million (net of cash acquired) on the acquisition of EFC and £2.5 million on capital expenditure (2023: £2.9 million).

Cash flow, cash and net debt

Cash generated from operations in the six months to 31 May 2024 was £7.1 million (2023: £8.2 million).  The Group normally sees an outflow of working capital in the first half of the year.  Working capital increased by £7.0 million (2023: £5.0 million) in the period. 

Net cash (excluding lease liabilities) at 31 May 2024 was £4.1 million (31 May 2023: £19.7 million; 30 November 2023: £14.1 million), comprising cash of £14.2 million; bank overdrafts of £2.3 million and borrowings of £7.8 million.  The borrowings were drawn to fund the acquisition of EFC and are expected to be repaid in the second half.  Lease liabilities were £18.7 million (31 May 2023: £11.0 million; 30 November 2023: £13.4 million). 

Return on capital employed

The Group's return on capital employed was 14% (2023: 16%).  Excluding the impact of goodwill and retirement benefit obligations, the return on operating capital employed was 31% (2023: 37%).

CEO succession

As announced on 16 April 2024 Ben Stocks has notified the Board of his decision to retire in early 2025. The search for a successor is progressing well and further updates will be provided as appropriate.

Outlook

2024 is unfolding as expected. Over the first six months, strength in aerospace and petrochemical markets, helped by the benefit of 2024 acquisitions, has offset weakness in industrial and laboratory consumables and foreign exchange headwinds. This has been in line with management expectations. The trading outlook for the second half of the year is positive. Order books across the Group are strengthening with lead times now returned to more traditional levels. The benefits of the 2023 acquisitions continue to come through, and several larger petrochemical orders will start to ship towards the end of the year.

The Group's fundamental demand drivers have not changed. Porvair remains well positioned to take advantage of tightening environmental regulation; the growth of analytical science; the need for clean water; the development of carbon-efficient transportation; the replacement of plastic and steel by aluminium; and the drive for manufacturing process quality and efficiency. It is these trends that have driven the Group's consistent longer-term trading record. The Board expects a healthy second half which will allow the Group to move into 2025 in good shape.

Ben Stocks

Group Chief Executive

28 June 2024

Related parties

Other than remuneration of key management personnel, there were no related party transactions in the six months ended 31 May 2024 (2023: 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 2023.

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 2024. 

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 28 June 2024 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

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 2024 and 2023, the rates used were US$1.40:£1 and €1.20:£1, compared with actual rates of US$1.27:£1 (2023: US$1.22:£1) and €1.17:£1 (2023: €1.14:£1).

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

The acquisition lines relate to the revenue from Ratiolab and EFC, acquired in July 2023 and December 2023 respectively.

Alternative profit measures (unaudited)

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 £0.9 million (2023: £0.4 million); and

·      other acquisition-related costs of £nil (2023: £0.2 million) incurred in relation to the acquisition of certain business and assets from HRW acquired in March 2023; the 100% share capital of Ratiolab acquired in July 2023; and the 100% share capital of EFC acquired in December 2023 (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 2024, 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 superalloys 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 2024 are as follows:

The segment results for the period ended 31 May 2023 are as follows:

The segment assets and liabilities at 31 May 2024 are as follows:

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

The segment assets and liabilities at 30 November 2023 are as follows:

Geographical analysis