Hello, welcome to the Diploma half- year results. I'll shortly be handing you over to Johnny Thomson and Nigel Lingwood, who will take you through today's presentation, and there'll be an opportunity for Q&A later in the call. For now, speakers, please begin.
Good morning, everyone. This is Johnny Thomson, CEO of Diploma. Welcome to our half- year results and COVID-19 update. I hope that you, family, friends, and colleagues are all healthy. My sympathy to those who may have been touched more closely by the virus, and of course, we thank the tremendous work of those in the front lines. I feel very proud of the way my colleagues have responded to this unprecedented challenge. Of course, our first priority has been to our people and their well-being. We provide essential products and services, so we have also been focused on remaining open for our customers. It's been important to us to make a difference in society too, and we have been providing products into the battle against the virus, as well as supporting our local communities. More on all of this to come.
I'm joined by Nigel Lingwood, our Group Finance Director. Also on the line is our Group Finance Director Designate, Barbara Gibbes. She will become Group Finance Director on 23rd of June before Nigel retires officially on 30th of September. I welcome Barbara, and I'm sure she will make a very big contribution to the group. This will be Nigel's last presentation after 20 years in the role. During that time, he has made an outstanding contribution to Diploma and its success. He's been a fantastic partner to me over the last 15 months or so as we have transitioned, and on behalf of everyone at Diploma, I would like to congratulate him, thank him, and wish him every success for the future. Today's agenda. I'll begin with an overview of our performance and an update on COVID-19.
Nigel will take you through the numbers. I will come back for a business and strategy update before summarizing. Plenty of time for questions at the end. Let's get started. Before we come to talk about the impact and our response to COVID-19, it is important to underline that we delivered another robust performance in the first half. Our constant currency growth was 10%, with underlying growth of 1% and an excellent contribution from acquisitions at 9%. This would have been a little stronger, but for the impact of COVID-19 on the business in March. Margins were again solid at 17.6%, in line with the equivalent period last year. A strong gross margin helps us to absorb our investment in the Louisville distribution facility and the impact of FX in our Life Sciences sector. As a result, adjusted EPS for the six months grew by 6%.
Dividend growth has been a critical part of Diploma's story over the years. However, we believe it prudent to suspend this year's interim dividend, and we will review it again with more certainty on outlook with our full year results. Finally, we had available liquidity comprising cash and committed facilities of GBP 66 million at the end of the half. With little leverage, we are well-placed to successfully navigate the current crisis. More importantly now, let's look at how the crisis has affected us and what we're doing about it. In April, our reported revenue fell by 16% against last year, being 28% underlying, with a positive contribution of 11% from acquisitions. At this level of revenues, we continue to generate good cash flows, and therefore, with significant available funds should we require, I'm confident in the resilience of the group.
Our Life Sciences sector has been most significantly affected, falling sharply as elective surgeries were postponed and healthcare systems focused on COVID-19. We believe we will recover this lost revenue over the coming months as elective surgeries are phased back in. Seals and controls fell more modestly. Around 7% of total group revenues come from the civil aerospace sector, and this part of the business has been challenging. The lockdown has slowed order levels across most of the businesses. However, the essential nature of our products and services and the diversity of end segments and geographies has somewhat protected us. Although the curve in these sectors may be shallower, we expect it may take longer for them to return to normal. Nigel will take you through the April numbers to help with your models a little bit later.
Before we talk about our specific actions, I want to remind you of why our business model is resilient. We provide essential products and services, generally niche, of low relative cost, and into OpEx budget. They are critical to our customers' needs. We are well diversified by geography and end segment. While these characteristics are well known, the most powerful aspect of our group for me in these weeks of crisis has been the quality of our local leadership. The decentralized model that we operate breeds accountable, commercial, agile business leaders who take ownership for their colleagues, their customers, and their performance. Their response has been outstanding.
Finally, we have a conservative and strong balance sheet with plenty of liquidity, and this provides us with a good platform upon which to manage the crisis effectively. With that platform, I'll go through what we've been doing to manage the group through the crisis. As you would expect, we have crisis management governance in place. Along with the proactive and agile response of our local leaders, we balance that with policy, shared learnings, and critical decisions from the center. Ongoing communication with all stakeholders is key in ensuring alignment, remaining focused and yet agile, and promoting a positive mood in the organization. Workforce management. Our priority is the well-being of our colleagues, so we have reviewed and adjusted all of our operating procedures to include working from home, split shifts, safe distancing, and ensuring a sanitized environment.
Our priority has been to preserve jobs, and we have worked therefore to flex the model to manage effectively our overhead. Financial management. As you would expect, we have eliminated all discretionary expenditure with positive results in April, as Nigel will present. We have postponed CapEx and focused hard on our working capital. The GBP 66 million of available funds we had at the end of March has now increased to GBP 74 million. As I said, at these revenue levels, and with few material capital outflows on the immediate horizon, we remain cash generative. We've an important role to play in society at this time, and we are making a difference. As I said, the physical and mental health of our colleagues, whether at the workplace or not, has been our priority.
All of our businesses have remained open, and we are supplying a number of products, including face shields and components for ventilators, directly into the battle against the virus. Finally, we have a number of local programs in place for Diploma businesses to support their local communities. I believe that the group is well-placed to navigate the crisis, as we have a resilient model, and we are doing all the right things. I hand over to Nigel to go through the numbers.
Thank you, Johnny, and thank you for those kind words. This is certainly not the way I expected to end my final results briefing at Diploma, but unfortunately, that's the way it is. Good morning, ladies and gentlemen. For the last time, I will briefly review the results for the half year ended 31 March 2020. Looking at the group's key headlines, reported revenues up 9% at GBP 283.6 million, comprising a strong contribution of 9% from acquisitions, as we indicated last September, and a small currency headwind of 1%. Underlying revenues grew by 1% with the COVID-19 pandemic significantly impacting the last two weeks of March. An adjusted operating profit also increased by 9% to GBP 49.9 million, and there the adjusted operating margin moved up 10 basis points to 17.6%.
Free cash flow improved by 56% to GBP 21.8 million and includes cash proceeds of GBP 5.1 million from the sale of a property and a small investment in one of our Chinese suppliers. After spending GBP 13.6 million on two small acquisitions during the period and paying last year's final dividend, net bank debt increased to GBP 29.9 million from GBP 15.1 million at 30 September 2019. This represents a net debt EBITDA leverage of 0.2 x against a bank covenant of 2.0 x. We also have a committed revolver bank facility of GBP 60 million, of which we've drawn down GBP 20 million at 31 March. Finally, our return on adjusted trading capital employed remains strong at 22%, well above our threshold of 20%, and impacted slightly by the GBP 85 million we've now spent on acquisitions in the last 12 months.
Turning to these results in a little bit more detail, beginning with the income statement. Before I go any further, I should remind you that these half- year financial statements now reflect the impact from the implementation of the new IFRS 16 on leases, none of which are particularly material, but briefly they are as follows. The impact on the income statement has been to add GBP 300,000, equivalent to 10 basis points to group adjusted operating margin and profit. Finance costs have increased by GBP 700,000 and therefore adjusted PBT and EPS reduced by GBP 400,000 and GBP 0.033 respectively. Of course, we've had to add around about GBP 33 million of capitalized operating lease and the related liability to the balance sheet. Finally, we have not restated any prior year comparisons.
That impact is all set out and reconciled in Note 16 of the announcement. I'll say no more on it. Returning to the slide, revenue and adjusted operating profit up 9% at GBP 283.6 million and GBP 49.9 million. Adjusted operating margin up 10 basis points to 17.6%, being the IFRS impact for 10 basis points. Compared to the last half year, we've seen a slight strengthening in gross margins, which offset the impact of negative operating leverage from weaker underlying revenues and from continuing investment in setting up the new aftermarket sales facility in Kentucky. The tight control of operating costs have continued across all sectors, helped to mitigate the impact of negative leverage. Higher interest expense of GBP 1.5 million reflect the additional borrowings to finance last year. Of course, there is the additional GBP 700,000 relating to IFRS 16.
We report adjusted profit before tax up 60% to GBP 48.4 million, and with a broadly unchanged effective tax rate of 24%, there is also a 6% increase in adjusted EPS to GBP 0.323. On a statutory basis, which is after deduction of amortization of intangibles, acquisition costs, and a small profit on the sale and leaseback of a property, statutory profit and EPS was up 4% at GBP 41.6 million, GBP 0.274 respectively. Turning to operating cash flow. Operating cash flow was 43% of last year at GBP 43 million. This year's cash flow benefits from a GBP 3.6 million IFRS 16 adjustment, which moves lease rental payments down the cash flow statement, as you can see on this slide.
Even after adjusting for this GBP 3.6 million, operating cash flow was 31% of the comparable period last year, reflecting stronger profits and some GBP 4 million lower cash outflow into working capital than last year. The outflow of GBP 13.1 million included GBP 5 million from an increase in inventories, and within this amount, GBP 3.5 million was contingency stock being built up in the new distribution facility in Kentucky. The cash tax paid rate increased to 26%, largely reflecting the impact from HMRC's decision to advance quarterly tax payments in the U.K. Our capital expenditure in the first half at GBP 6.5 million was nearly GBP 3 million ahead of last year's half-year investment, as we continued to ramp up the investment in the new distribution facility in Kentucky with a further GBP 2.2 million investment in new high-tech carousels.
The DHG business also continued to invest a large amount, around about GBP 2 million, in new field equipment for placement in hospitals and laboratories. Finally, we also received GBP 5.1 million of cash proceeds from the sale and leaseback of Controls' facility in Stuttgart, Germany, and from the sale of a small non-strategic investment in one of our Chinese suppliers. We end the period with free cash flow of GBP 21.8 million and an improved cash conversion rate of 60%. We spent GBP 13.6 million of this on acquiring two new businesses in the period, namely GBP 9.1 million on CR Systems, a fastener manufacturer and distributor based in Germany, which complements Clarendon's business in the U.K., and on PumpNSeal , which is a sealing business in Australia, which adds critical mass to our total seals business.
After paying final dividends to shareholders and minorities in January of some GBP 23 million, which we largely funded through new borrowings, we ended the period at March 2020 with net bank debt of GBP 29.9 million. That comprises available cash funds of GBP 25.9 million and bank debt of GBP 55.8 million. Just looking a little closer at the group's available liquidity today. We had available liquidity of GBP 66 million, as Johnny said, at 31 March 2020. That's comprising cash funds of GBP 25.9 million and undrawn revolving committed facilities of GBP 40 million.
These are all in place now until June 2022. Our longer-term borrowings comprise a term loan of GBP 35.8 million, which is repayable in June 2021, and again, it has an option for us to extend repayment by a further year. Since the period end, we've collected around GBP 55 million of cash from our receivables, which represents about 63% of outstandings at 31 March.
At the end of April, our available liquidity has increased to around GBP 74 million. Our net debt EBITDA covenant is just 0.2x against a banking covenant of 2 x. We have recently received confirmation that we were eligible for the Treasury's CCFF up to GBP 225 million, subject to documentation. However, we wouldn't expect that we will need to call on this, but it provides flexibility if things really do get much worse from here on. The group has a very strong liquidity position. Turning very briefly to the balance sheet. Trading capital employed was GBP 399.5. The annualized ROIC at 22% may remain well above our threshold. The working capital metric at 17.6% was a little weaker than September 2019 at 16.5%.
That's consistent with our historical trends, which sees a larger outflow in the first half and some inflow coming through in the second half. Acquisition liabilities of GBP 16.1 million include the deferred consideration of GBP 11.9 million payable in connection with recent acquisitions, and there's some GBP 4 million still payable to buy out the minority shareholders in Kentucky and M Seals . We're left with closing shareholders' funds of GBP 320 million at the end of the period. Before I hand you back to Johnny to talk through the operational results by sector, let me say a little on the group's trading in April. As Johnny mentioned earlier, our underlying group revenues reported for April 2020 were 28% below the comparable month of last year, but a good contribution from our acquisitions reduced this to a 16% reduction on an actual basis.
We've set out here that underlying reduction by sector. In Life Sciences, as Johnny indicated, there was a significant reduction of 39% below last year, which reflects the impact from hospitals being closed to access, elective surgery, clinical labs cleared for COVID, et cetera. We expect much of this is deferred, and we're confident that it should bounce back over the coming months as restrictions are lifted. Recognizing that we also need suppliers to fill the supply chain, we are on an exclusive basis. Controls is down 34% on last year underlying. These are largely European businesses that were locked down almost from the beginning of April and certainly back into March. They were impacted by large manufacturers closing facilities, postponing orders, and we think there will be some recovery in this as lockdown restrictions lift in Europe.
Some sectors, like aerospace, motorsport, are going to be slower in recovering. Then Seals had the least impact, largely as 65% of these revenues arise in North America, where lockdown has been patchy and certainly much later arising in April. We remain cautious about which direction this will go in May, given the environment in the U.S. and the response by the authorities in the U.S. We've looked at the impact of these reductions on our drop-through in April. Just to be clear, by drop-through, I mean the impact we've given forward in revenues on operating profit. Gross margins less OpEx that we've been able to reduce through savings. In April, we've seen this drop-through at around 25%. We've lost about 25% of our operating profit from these revenue reductions, and the OpEx cost savings have been around about GBP 3 million.
These actions we've taken to conserve costs provide a 25% drop-through in April. Clearly, as businesses start coming back to work, these savings will be lower. We need to be cautious about looking forward at this level of drop-through in future months. I'll now hand you back to Johnny to talk through the operating results by sector.
Very good. Thank you, Nigel. I'll take you through the sectors shortly, focusing mainly on COVID-19 and our strategic objectives. Firstly a few words of context. The group remains well diversified by sector and by geography, underpinning our resilience. The acquisition of VSP Technologies increased our Seals and our North American representation. A brief reminder on group strategy. As I said in November, we'll focus our operating strategy around five core competencies to allow us to successfully execute our value-add distribution model at scale. These are supply chain management, operational excellence, value-add services, our route to market approach, and our commercial discipline. We will support that with the development of capability in talent, technology, and facility. We started on that journey. We'll deliver growth by focusing on core big economies and core and adjacent product categories organically and through acquisition.
We have made some successful acquisitions in the last 12 months, focused in core geographies of U.S., U.K., Germany, and Australia, and bringing adjacent product ranges into our sector portfolios. Although we believe our model and strategy are strong and intact, we will reflect on recent events and update or adjust where we feel appropriate. Now let's start by looking at Seals. The Seals sector grew by 20% on a reported basis and remained unchanged on last year on an underlying basis. However, more challenging industrial markets, including the impact of trade disputes, affected our OEM performances in North America and in Europe. This was offset by a strong North America aftermarket, as increased mobile machinery investment is flowing out of warranty. Seals was down by 16% underlying in April compared with last year.
The North American aftermarket business has been relatively resilient but affected by the lockdown, with lower repair shop order sizes. The North America Industrial OEM business had been robust through most of April, perhaps supported by some stock building in our bigger customers. This is now unwinding, and revenues have softened somewhat in recent weeks. In International Seals, we continue to trade well in segments such as food, medical, renewable energy, particularly in M Seals, based in Denmark, and KUBO, based in Switzerland. This has somewhat protected the decline, lockdowns have nevertheless affected some of the businesses. Traditionally the more cyclical of our sectors, the crisis has impacted Seals the least due to the diversity of end customer and the relative strength of the aftermarket. At this stage, though, it's impossible to say, I suspect that full recovery will still take some time.
We've made good progress with our strategic objectives in Seals. The new distribution facility for aftermarket in Louisville, Kentucky, has been progressing well. We've delayed certain aspects of the project, of course, due to the crisis, but at this stage still expect it to be fully operational by the end of the year. VSP has had a very successful start to the year with double-digit growth, margins up by over 400 basis points, together with improvements in working capital. Positively, we expect to pay the full deferred consideration. We're well ahead of the business case, and there are exciting developments to expand the business. The Controls sector grew by 1% on a reported basis and was flat underlying. Underlying growth has been softer this half due to slower industrial and construction markets in the U.K., as well as lapping Brexit, stocking up in half one last year.
This was also the sector impacted first by the crisis, as it is predominantly a European-based set of businesses. We have seen good progress in the IS Group in half one, particularly in Germany, where we have gained some new energy business, and Clarendon Specialty Fasteners also performed well until March. Controls was down by 34% underlying in April against last year. Clarendon, which in part services the civil aerospace segment, has been severely affected. With the lockdown, we have seen some customers in continental Europe closing temporarily, and we have seen slower industrial and construction projects affecting our U.K. cable and wiring business, CCA, and U.K. fluid controls business, Hawco, particularly. The IS Group so far has performed reasonably well, buoyed by a strong energy contract performance in Germany and sector diversity in the U.K.
While we can see some signs of the shorter cycle businesses improving and we are confident in the resilience of the sector, again, it may be some time before a return to normal. We've made good progress with our strategic objectives and Controls. A core objective was to develop the continental European business, and we have now started to onboard a significant new contract and acquire CR Systems, both in Germany. We look to take more advantage of in-country scale to unlock growth and have started successfully with the first steps of integrating Cablecraft and FS Cables to create CCA. The Life Sciences sector grew by 2% on a reported basis and 2% underlying. Our clinical diagnostics businesses have performed well, particularly due to the continued rollout of our colorectal cancer screening products in Canada.
Our surgical and GI businesses were a fraction slower in half one, reflecting our diversification from the mature surgical smoke segment into new product lines in urology and gynecology, as well as further development of our GI endoscopy market share. Growth in these will accelerate in time. The effect of the virus in the second half of March was significant. Life Sciences was down by 39% underlying in April compared to last year. Clearly, the medical profession has been dedicated to the battle with the virus. Almost all elective surgeries were canceled from mid-March, some of the clinical testing programs have been delayed, too. However, we expect the sector to have the quickest and biggest recovery from the crisis as the demand remains and as capacity returns. Elective surgery is now starting to reopen, it will be phased according to PPE and ICU availability.
Where possible, we've been working with our customers and suppliers to provide face shields to the medical community. We made good progress with our strategic objectives. We continue to develop our product pipeline and have had some exciting successes, including endo-therapeutics and surgical scope sealants in our GI business, and automated tissue embedding in our clinical diagnostics business, all in Canada. Sphere Surgical, our bariatrics acquisition, has started well and broadens our product portfolio in Australia. Now to summarize. Diploma made a good start to the year. Of course, that's all now in the past and the crisis is affecting us. The business model is resilient and we have a strong balance sheet and liquidity. We're doing the right things to manage through it for our colleagues, our customers, our communities, and for our finances. The mood in the organization is positive.
I believe we're well positioned to come through the crisis successfully, and thereafter, to continue to deliver on the significant strategic and performance potential of the group. I'll now hand back to Hugh to coordinate the questions.
Once again, ladies and gentlemen, if you have a question, could you please press star and then two on your phone keypad now in order to enter the queue. Then after I announce you, just ask that question. There'll be a brief pause while the questions are being registered. Once again, it is star and then two. Our first question is over to the line of David Brockton at Numis. Please go ahead, David. Your line is now open.
Good morning. Can I ask two questions, please? The first on Life Sciences and the second on M&A. You've clearly set out the challenge in April for the business, but equally it feels like that could be a part of the business that bounces back quickest. I'd be keen, any thoughts in terms of what you're hearing on the ground at present, and also any thoughts in terms of what the balance could be between consumables and the potential, I guess, prolonged element of slower spend for capital product? That's the first question. Then the second question in respect of M&A. Clearly, your ability to progress M&A in the short term is limited. Is there anything you can do to progress the pipeline whilst in lockdown and any thoughts on where valuation could also move? Thanks.
Okay. On Life Sciences.
Yeah.
David, you're right. As Nigel and I both said over the last half an hour, we do expect that we'll get the biggest recovery in Life Sciences. We hope to get, if not all, then most of the lost business back because the demand is very much there. How quickly that will happen is the key question. Elective surgeries will come back first, and that's around about, I don't know, 36%, I think, of Life Sciences is the elective surgery. That'll start to come back quicker. We've seen elective surgeries reopen in Australia, we're expecting it to reopen reasonably soon, probably mid-month, next week or so in Canada. However, it's important to say that it'll be phased by priority, it's not all going to come back in one go. Also it will very much depend on available PPE and ICU in those countries.
Yes, it's going to start to come back reasonably soon, but somewhat measured over the coming months. I think the diagnostics business will come back again because the demand is there, perhaps a fraction slower than elective surgery. That's really because the labs are focusing, continuing to focus on COVID testing. It will come back again over the coming months. We're reasonably positive about Life Sciences. Just on M&A, as I said to you before, we still have a good pipeline. More by coincidence than anything else, having done quite a few acquisitions in the last 12 months. The pipeline had anyway a natural pause in it. We haven't had any decisions to take that have been imminent in the last month or so. There is a good pipeline still there.
We've been using the time, of course, to gently move those projects along. We've also been using that time productively to ensure that we continue to map in detail both the geographies and the product categories and adjacent product categories that we set out as part of the strategy. That, I believe, will set us up to be in a better position when we do eventually start to see M&A coming back onto the agenda later in the year, I hope. Hopefully, that answers your question on M&A.
Yeah, great. Thank you very much.
Okay, our next question is over to the line of Henry Carver at Peel Hunt. Please go ahead. Your line is now open.
Thanks. Yeah. Morning, guys. It's actually just a quick follow-up to the Life Sciences division. I just want to be clear, when you say there's demand there, is that because obviously there are lists of surgery that sort of have been on the books that have then been postponed, and there's now capacity and availability to do it? Are you seeing evidence of patients wanting to come back in for surgery? I'm just conscious of the fact that maybe patients might be more reluctant or still very reluctant to go into a hospital at this stage for fear of contracting COVID-19 when they go in for some other kind of surgery. I just wanted to get just a little bit of additional color on the demand side for Life Sciences. Thanks.
Yeah. I understand the question, obviously, Henry, and it's a sensible one. I guess what I would say is that it's phased, and it's phased by priority. Those that will be coming in in the coming weeks, months, say, in Australia and Canada, will be very much priority number one, and I would say urgent. Therefore, I'm assuming that for the most part, both the space will be available and the patients will be willing to participate in what will be relatively important surgeries for them. Of course, once we get to phase II and III, which are perhaps lower down the priority, then we are talking about a month, two months from now. I think the natural phasing of it will deal with the issue that you raised.
Perfect. That's clear. Thanks, Johnny.
Okay. Before going on to the next line, which is Sam Bland at JP Morgan, if anybody has any further questions at this stage, it is hash star and then two. Once again, it is star and then two. While we wait for any others, Sam, over to you. Sam, can you take your phone off mute?
Sorry. It's Sam here.
Sam Bland at JP Morgan. Yep.
Yeah. Sorry. First question was on this Chinese supplier investment. I just wonder if you have any more details on that. Is that something you have other similar investments in other suppliers or just what is it and why?
The-
I guess, yeah.
Yeah. Do you want me just quickly answer that?
Yeah, sure. All right.
I mean, Sam, that was when we bought J Royal , one of our U.S. industrial businesses back in 2012 or something. There was an important part of that business called JRPP, which is a Chinese supplier of hard parts who are still a supplier of ours. As goodwill, we took a 10% interest in them for $1 million. That contract and the relationship doesn't need that investment there. It was really getting in the way of just normal sort of commercial terms. We decided to exit. Both of us were happy just to exit that out. Very small. We don't have anything else like that at all. It was unusual.
Okay. Understood. I just want to understand why the material in the April impact in Controls has been so much higher than in the Seals business. Is it really the aerospace exposure coming through that's the main cause of that, or is the weakness more broad than just that sector?
Civil aerospace is around about 20% of Controls, thereabout. Obviously that's had a material impact. The second thing is, as Nigel mentioned, we both mentioned, these are mainly European businesses, so they came down probably harder and faster than the Seals businesses, which are more, I guess at this stage, North American based. That would be the second factor. I think the other thing I would say is that, given that, I think Controls has come down sharper at that 34%, but will start to ease, particularly as European lockdowns go forward.
I think Seals at -16%, it might be a bit shallower at the moment, but might take a little bit longer to come out because some of the businesses, as Nigel alluded to, are in the U.S., some of them were a little bit late cycle, and therefore I see Seals has still perhaps a little more to go down, but certainly a little longer to come out. It's just maybe a slightly different shape in the curve.
Yeah. Understood. Okay.
Sam, I would just say that there is, as we saw back in 2009, a lot of resilience in that Controls business. Johnny mentioned civil aerospace. Motorsport is another bit that came down as the new Formula 1 builds have been pushed out a year. We've faced quite a bit of U.K. construction, which has been really tough, but then there are areas in Germany like energy, infrastructure that have done quite well, and some medical elements. We've been hit in some areas, but other areas have held up quite well.
Understood. Just final short one is, obviously you said that the business remains cash generative. Is that being helped by any material working capital inflow on lower volumes currently?
No. I think that we're very focused on receivables, certainly that's helped. The business has been doing excellent work on that. We've also clearly tightened up on procurement. We're seeing less inventory coming into the business. It's a combination of actions that we've taken from the beginning of April to make sure that we try and reduce working capital as far as we can.
I'd say at these levels, even if we had not taken any cost action, and even if we'd assumed normal working capital levels, we would still be profitable and cash generative.
Okay. That's the important point.
However, we have taken action. We have reduced our costs, and we have improved our working capital, which has obviously put us in a stronger position and hence our available liquidity improving during the course of the month.
Excellent. All right. Thank you very much.
Okay. Our next question is over to the line of Jane Sparrow at Barclays. Please go ahead. Your line is now open.
Morning. I just wanted to ask about the Covid Corporate Financing Facility that you've obviously confirmed eligibility for, but not in your current expectations that you would need to use it. If I look at my numbers, and certainly a significantly worse case scenario than my numbers, you're still some way off needing to access that. I just wanted to understand a bit better the sort of scenario stress testing that you've done internally, and that might require you needing to use that. Is it a sort of secondary leg down from here? Is it prolonged at current levels plus some sort of issues on working capital collection because of your debtors being in bad shape? I just wanted to understand a bit more about the internal testing that you've done on the business.
Hi, Jane. Thanks for that. Look, as you would expect, we come into this crisis and the level of uncertainty, of course, was massive for everybody. We had to do what you would expect and be incredibly cautious around how we manage the business and around how the avenues we looked at to make sure that we had all available liquidity. Of course, we pursued that as protection. Now, given where we are, as Nigel said earlier, absent a further cliff edge, let's say, then we won't be needing that, although it's of course nice to have it in the background. We've done all the stress testing that you can imagine. Down even towards the levels of -50% on revenues, we're still generating cash. We still have plenty of available liquidity at GBP 74 million too.
It would really be a pretty steep and significant cliff for us to come anywhere near requiring that program.
Okay, thanks. Just a second one on cost, if I may. Obviously, I think Nigel talked on the drop-through slide about 25% drop-through, but being mindful that some of the costs that have taken out will start to flow back in as the business returns to sort of a more normal level of activity. Of the costs that if you look forward, should we assume that you'll be doing any sort of headcount reduction, cost reduction plans on a sort of very much a segment-by-segment basis, because there will be, in Life Sciences, obviously, if you see things coming back very quickly, you probably wouldn't look to take any cost out there because why would you? There might be some others where you see a longer path to recovery.
Obviously short-term drop-through would go up from 25%, but on a sort of more medium-term view, it would be less. Just understanding what's going on there.
Well, just to give a bit more color around it, I think Nigel mentioned that we reduced costs by around about GBP 3 million in April. Some of that, about a third of it, is from us flexing our operating model in the different businesses. About a third of it is from reduction in discretionary expenditure, less travel, et cetera. The last third is basically some subsidy and furloughing that we've done in some of our businesses. Look, it's been our number one objective to look after the health of our colleagues, but also to look after their financial well-being too, and to preserve jobs, and that's what we've sought to do.
Inevitably, as time goes on, of that GBP 3 million, as the businesses, I hope some of them improve over the coming months, then of course, the furloughing and subsidy will eventually drip away, and some of the savings we've made around flexing our operating model will start to come back as well. Although we'll obviously be managing things incredibly tightly for some time. I would expect discretionary spend to continue to be low. There will, as you say, potentially be some businesses that will need a bit more longer term review and restructuring. You wouldn't be surprised to hear me say that those in civil aerospace, potentially Clarendon, we might have to look at how we manage that business going forward. I really do think that that's very few of those businesses. I do continue to aim for us to maintain our jobs.
I do think that in the short term, we'll continue to have very strong drop-through. As you say, for the reasons I expressed, that will start to grow as the businesses recover.
Yep. Thank you very much.
Our next question is from the line of Daniel Cowan at HSBC. Please go ahead, Daniel. Your line is now open.
Thank you. Good morning, gentlemen. Thanks for the call. Just one from me on VSP in North American Seals. Just wondering how that's been faring. Obviously, that's been a cracking performer in the first half. Just wondering how that's been faring in April and under these more stressed conditions.
Sure. Well, as you saw, we're absolutely delighted with VSP. I think I mentioned earlier its growth has been double-digit, margins are up over 400 basis points, and cash collection has been excellent too. Thanks, Daniel, for giving me the opportunity to repeat that. The business has remained pretty resilient. Maybe in tune with the fact that North America, or U.S. particularly, was a little later into the virus, it started to slow somewhat towards the latter half of April. Particularly, some of that business, a large chunk of that business is in petroleum plants, energy plants, and some of the income that they would expect to get from outages during the spring has been deferred. I think they're slightly slower in April. They will be in May too. I feel confident that we'll get that back later in the year.
Got you. Thanks very much, Johnny.
Okay, one final time. If anyone has any final questions at this stage, please press star and then two on your phone keypad. Sorry, star two on your keypad now, we'll go over to the line of Will Kirkness at Jefferies. Will, please go ahead. Your line is now open.
Thanks very much. It was just a quick one, a quick follow-up on the U.S. Seals business. I was just surprised to hear you're a bit more cautious there. I guess they did sort of go into lockdown later, but the lockdown seemed a lot less onerous. They're already talking about opening up, and if I look elsewhere, other U.S. industrial-type exposure really seem to be seeing a trough in mid-April. If you've got anything else you can give color around why you're a little bit more cautious on the pace or cadence of that recovery, that would be useful. Thanks.
Yeah, sure. Look, it's incredibly difficult for us to say, isn't it? No crystal ball here. To some degree, we feel positive because the lockdowns have had a more limited effect on the aftermarket business. If you look across the geography of the U.S., the lockdowns are being eased more in Republican states, unsurprisingly, than Democratic states. That geographically relates more into the south of the country, and that is where most of our aftermarket business is based. We have benefited somewhat from the lockdowns starting to ease in recent weeks. We're cautious about that because who knows what the ramifications might be of that. That's the first thing. The second thing is that our industrial OEM business was relatively buoyant through most of April, as I said, probably supported by stocking up in some of our bigger customers.
That business is very much later cycle. I can see some of that unwinding. Of course, we have some concerns about the mood music, let's say, around trade disputes with China, which will affect that business the most. I would say that kind of mood music together with the unknown about the unwinding of the lockdowns just gives us cause to be cautious.
Okay, that's clear. Thank you.
Okay. As there are no other questions at this stage, can I please pass it back to you for any closing comments?
Well, thank you very much to everyone. Just like to confirm the fact that we feel confident that the business is resilient, and we feel positive about the future. Thank you very much for taking the time to dial in.
This now concludes today's call. Thank you all very much for attending, and you can now disconnect your lines.