Earnings Call: H1 2020

May 11, 2020

Hello, and welcome to the diploma half year results. I'll shortly be handing you over to Johnny Thompson and Nigel Engwood will take you through today's presentation, and there'll be an opportunity for Q And A later in the call. For now, speakers, please begin. Good morning, everyone. This is Johnny Johnson, CEO of Diploma. Welcome to our half year results and COVID-nineteen 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, thank the tremendous work of those in the front lines. I feel really 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 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 product 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 Gibbs, She will become Group Finance Director on 23rd June before Nigel Retires officially on 30th September. 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 row. 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 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 nineteen. Nigel will take you through the numbers and I will come back for a business and strategy update before summarizing. Plenty of time for questions at the end. So let's get started. Before we come to talk about the impact and our response to COVID nineteen, It's 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 the impact of COVID-nineteen on the business in March. Margins were again solid at 17.6% in line with the equivalent period last year. A strong gross margins helped us to absorb our investment in the Louisville distribution facility and the impact of FX in our Life Sciences year. As a result, adjusted EPS for the 6 months grew by 6%. Dividend growth has been a critical part of diploma 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. And finally, we had available liquidity, comprising cash, and committed facilities of GBP 66,000,000 at the end of the half. With little leverage, we're well placed to successfully navigate the current crisis So more importantly now, let's look at how the crisis had affected us and what we're doing about us. In April, our reported revenue sale by 16% against last year, being 28% underlying with a positive contribution of 11 percent from acquisitions. At this level of revenues, we continue to generate good cash flows and therefore, with significant available funds should we require and confident in the resilience of the group. Our life sciences sector has been most significantly affected falling sharply at elective surgeries where postponed and healthcare systems focus on COVID-nineteen. We believe we will recover this back in. Sales and controls fell more modestly. 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 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 costs and into OpEx budget. And they are critical to our customers' needs. We are well diversified by geography and end segments. 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 accountsable, 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 plenty of liquidity and this provides us with a good platform upon which to manage the crisis effectively. So 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 effect as you would expect, we have eliminated all discretionary expenditure with positive results April as Nigel will present. And we have postponed CapEx and focused hard on our working capital. So the $66,000,000 of available funds we had at the end of March has now increased to 74,000,000 tonnes. As I said, at these revenue levels and which 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 work place 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 installators directly into the backlog against the virus. Finally, we have a number of local programs in place for deployment businesses to support their local communities. So 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 it at drama, but unfortunately, that's where it is. So 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 rent News up 9% to $283,600,000, 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 a COVID-nineteen and their mix significantly impacted in the last 2 weeks of March. And adjusted operating profit also increased by 9% to 49,900,000 and then the adjusted operating margin moved up 10 bps to 17.6%. Free cash flow improved by 56 percent to $21,800,000 and includes cash proceeds of $5,100,000 from the sale of a property and a small investment in one of our Chinese suppliers. So after spending $13,600,000 on 2 small acquisitions during the period and paying last year's final dividend, net bank debt increased to $29,900,000 from $15,100,000 at 30 September 2019. And this represents a net debt EBITDA leverage of 0.2 times against the bank covenant of 2.0 times. We've also have a committed revolver bank facility of $60,000,000, of which we've drawn down $20,000,000 at 31 March. And finally, our return on adjusted trading capital employed remains strong at 22%, well above our threshold of 20% and impacted slightly by the $85,000,000 we've now spent on acquisitions in the last 12 months. Now, turning to these results in a little bit more detail, beginning with the income statement, but before I go any further, I should remind you that these half year financial statements now reflect the impact through the implementation of the new IFRS 16 or leases, none of which are particularly material, but briefly they are as follows. The impact on the income statement has been to add 300,000 equivalent to 10 bps to group adjusted operating margin and profit Finance costs have increased by 700,000 and therefore adjusted PBT and EPS reduced by 400,000 and 3 point CP, respectively. And of course, we've had to add round about $30,000,000 to $3,000,000 of capitalized operating lease and the related liabilities to the balance sheet. And finally, we have not restated a prior year comparatives. So that impact is all set out and reconciled in note 16 of the announcement and I'll say no more on it. So returning to the slide, revenue and adjusted operating profit up 9% $283,600,000 $49,900,000, adjusted operating margin up 10 bps to 17.6 being the IFRS impact for 10 bps, Compared with 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 seals facility in Kentucky. The tight control of operating costs have continued across all sectors, and help to mitigate the impact of negative leverage. High interest, high interest expense of 1,500,000 reflecting additional borrowings to finance last year and of course, there's the additional $700,000 relating to IFRS 16. So we report adjusted profit before tax up 6 percent to $48,400,000 and with a broadly unchanged effective tax rate of 24% There is also a 6% increase in adjusted EPS to $32,300,000. On a statutory basis, which is after deduction of amortization of intangibles, acquisition costs and a small profit on the sale of the leaseback of a property, statutory profit and EPS was up 4% at $41,600,000 27.4p, respectively. Turning to Operating cash flow. Operating cash flow was 43 percent of last year at 43,000,000, but this represents flow benefits, this cash year, sorry, this year's cash flow benefits from a $3,600,000 IFRS 16 adjustment, which moves lease rental payments down the cash flow statement as you can see on this slide. But even after adjusting for this $3,600,000, operating cash flow was 31 percent of the comparable period last year, reflecting stronger profits and there's some $4,000,000 lower cash outflow into working capital than last year. The outflow of $13,100,000 included $5,000,000 from an increase in inventories. And within this amount, $3,500,000 was contingency stock being built up in the new distribution facility in Kentucky. The cash tax pay rate increased to 26 percent, largely reflecting the impact from HMRC's decision to advance quarterly tax payments in the UK. And our capital expenditure in the first half of six and a half was nearly $3,000,000 ahead of the last year's half year investment as we continued to ramp up the investment in the new distribution facility in Kentucky with a further $2,200,000 investment in new high-tech carousels. The DHG business also continue to invest a large amount round about $2,000,000 in new field equipment for placement in hospitals and laboratories. And finally, we also received $5,100,000,000 in cash proceeds from the sale and leaseback of controls is facility in Stuttgart Germany and from the sale of a small, non strategic investment in one of our Chinese suppliers. So we ended the period with free cash flow of $31,700,000 and an improved cash conversion rate so a free cash flow of $21,800,000 and an improved cash conversion rate of 60%. We spent $13,600,000 of this when acquiring 2 new businesses in the period, namely $9,100,000 on CR Systems, a faster manufacturer and distributor based in Germany, which complements Clarendon's business in the UK. And on pump and seals, which is seeding business in Australia, which adds critical mass to our total seals business. After paying final dividends to shareholders and minorities in January of some $23,000,000, which we largely funded through new borrowings, We ended the period at March 20 with netback debt of $29,900,000. That comprises available cash funds of 25.9 and bank debt of 55.8. So just looking a little closer at the group's available liquidity today, We had available liquidity of $66,000,000, as Johnny said, at 31 March 20, that's comprised in cash funds of $25,900,000 an undrawn, drawn revolving committed facilities of $40,000,000. These were all in place now until June 2022. Our longer term borrowings comprised a term loan of $35,800,000, which is repairable in June 21, and again, has an option for us to extend repayment by a further year. Since the period end, we've collected around $55,000,000 of cash from our receivables, which represents about 63% of outstandings at 31 March. And at the end of April, our available liquidity has increased to around GBP 74,000,000. Our net debt EBITDA covenant is just 0.2 against the banking covenant, the banking covenant of 2 times. And we had recently received confirmation that we were eligible for the Treasury's Covid DP program up to $225,000,000 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. So the group has a very strong liquidity position. Turning very briefly to the balance sheet. Creating capital employed was $399,500,000. The annualized actually at 22% remain well above our threshold. And the working capital metric of 17.6% a little weaker than September 2019 at 16.5, but that's that's consistent with our historical brands which see the larger outflow in the first half and lower or some inflow coming through in the second half. Acquisition liabilities of $16,100,000 include the deferred consideration of $11,900,000 payable in connection with recent acquisitions, and there's some $4,000,000 still payable to buy out the minority shareholders in Cantech And M And C Hills. So we're left with closing shareholders funds of $320,000,000 at the end of the period. Now 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. So 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, etcetera. However, 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 to fill the supply chain, but we are on an exclusive basis. Then controls is down 34% on last year underlying Again, these are larger European businesses that were locked down almost from the beginning of April and certainly back into March. That are impacted by large manufacturers closing facilities for sponing orders. And we think there will be some recovery in this as lockdown restrictions lift in Europe. But some sectors like aerospace, motorsport are going to be slower in recovering. And then sales 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, but we remain cautious about which directioners will go in May given the environment in the U. S. And the response by the authorities in the U S. So 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. So gross margins less OpEx that we've been able to reduce through savings. In April, we've seen this drop through at around 25%. So we've lost around 25% of our operating profit to from these revenue reductions and OpEx costing OpEx cost savings have been around about 3,000,000. These actions we've taken to conserve costs provide a 25% drop through in April, but clearly as businesses start coming back to work these savings will be lower. So we need to be cautious about looking forward at this level of drop through in future months. So I'll now hand you back to Johnny to talk through the operating results by Victor. Very good. Thank you, Nigel. So I'll take you through the sectors shortly, focusing mainly on COVID-nineteen and our strategic objectives. Firstly, a few words of context. The group remains well diversified by sector and by the underpinning resilience. The acquisition of VSP Technologies increased our seals and our North American representation. And a brief reminder of group strategy. As I said in November, we will focus our operating strategy around 5 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. And we will support that the development of capability in talent, technology and facility, which 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, UK, 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. So now let's start by looking at seals, the sales sector grew by 20% on a reported basis and remained unchanged on last year on an underlying basis. More challenging industrial markets, including the impact of trade disputes, affected our OEM performances in North America and in Europe. However, this was offset by a strong North America aftermarket as increased mobile machinery investment is flowing out of warranty. Sealed was down by 16% underlying in April compared with last year. In North American to market 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, but this is now unwinding and revenues have softened somewhat in recent weeks. In international fields, we continue to trade well in segment such as food, medical, renewable energy, particularly in MCOs based in Denmark and Cubo based in Switzerland. This is somewhat protected the decline, but log downs have nevertheless affected some of the businesses. Traditionally, the more cyclical of our sectors, the crisis has impacted sales 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, but I suspect that full recovery will still takes on time. We've made good progress with our strategic objectives in sales 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 expects to be fully operational by the end of the year. VSP has had a very successful start to the year with double digit gross margins up by over 400 basis points, together with improvements in working capital. Positively, we expect to pay the full and deferred consideration. We're well ahead of the business case and there are exciting developments to expand the business. The control 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 UK, as well as lapping Brexit stocking up in half 1 last This was also the sector impacted first by the crisis as it is predominantly a European based set of businesses. Seen good progress in the IS group in half 1, particularly in Germany where we have gained some new energy business and Cland And Specialty Fasteners also performed well until March. Control was down 34% underlying in April against last year. Clandon, 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 UK cable and wiring business, DCA, and UK, UK fluid controls business, Hocko, particularly. The IS group so far has performed reasonably well, buoyed by a strong energy contract performance in Germany and sector diversity in the UK. 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. Normal. We've made good progress with our strategic objectives and controls. Our core objective was to develop the Continental European business and we have now started to onboard a significant new contract and acquired CR systems, both in Germany. We look to take more advantage of in country scale to unlock growth that started successfully with the first steps of integrating cable craft and FS cables to create CCA. The Life Sciences sector grew by 2% on a reported basis and 2% underlying. Our Clinical Diagnostics business 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 1, 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. So 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, and some of the clinical testing programs have been late to. 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 but it will be phased according to PPE and ICU availability. Where possible, we've been working with our customers and suppliers provides face shields to the medical community. We make good progress with our strategic objectives We continue to develop our product pipeline and have had some exciting successes, including endotherapeutic and surgical scope sealants in our GI business, and automated tissue embedding in our clinical diagnostics business, all in Canada. Spheresurgical, our bariatric acquisition, has started well and broadened our products portfolio in Australia. I show now to summarize. The global made a good start to the year. Of course, that's all now in the past. And the crisis is affecting us, but the business model is resilient and we have a strong balance sheet and liquidity. We're doing the right things to manage through. It's for our colleagues, our customers, our communities, and for our finances, and the mood in the organization is positive I performance potential of the group. I'll now hand back to Hugh to coordinate the questions. Star and then 2 on your phone keypad now in order to enter the queue. And then after I announce you, just ask that question. So there'll be a brief pause while the questions are being registered. Once again, it is star and then 2. And our first question is over to the line of David Brockton at Numis. Please go ahead, David. Your line is now open. Good good morning. Can I ask two questions, please? The the first on life sciences and the second on M And A you've clearly set out, the the the sort of the challenge in April for the business, but but equally, it feels like that could be a part of the business that bounces back quickest. So I I became just any 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 get prolonged element, the slower spend for capital product? That's the first question. And then the second question in respect of M and A, clearly, your ability to progress M and A in the short term is limited. Is there anything you can do to progress the pipeline whilst in lockdown and sort of any thoughts on where valuation could also move? Thanks. Okay. On Life Science, is, yeah, David, you're you're right. And as Nigel and I both said over the last half an hour, we do expect that we'll get the biggest, recovery at Life Sciences. And we hope to get, you know, 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 as the elective surgery that'll start to come back quicker. We've seen it to reopen reasonably during probably mid month for next week or so in Canada. However, it's important to say that it'll be phased by its priority. So it's not all going to come back in one go. And also in will very much depend on available PPE and ICU in those countries. So yes, it's gonna start to come back reasonably soon, but somewhat measured over the coming months. I think the Diagnostics business will probably it will come back again because the demand is there. Perhaps a fraction slower than elective surgery. And that's really because This labs are focusing, continuing to focus on COVID testing, but it will come back again over the coming months. So we're reasonably positive about life sciences. Just on M And E, but we still have, we still, as I said to you before, we still have a good pipeline. More like coincidence than anything else, having done quite a few acquisitions in the last 12 months. The pipeline had annually a natural pause on this, so we haven't had any decisions to take that have been imminent in the last month or so. But there is a good pipeline still there. We've been using the time, of course, to gently move those projects along. But 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. And that I believe will set is up to be in a better position when we do eventually start to see M and A coming back onto the agenda later in the year. I hope Hopefully, that answers your question on M And A. Our next question is over to the line of Henry Carver at Peel Hunt. Please go ahead. Your line is now Thanks. Good morning guys. It's actually just a quick follow-up to the Life Sciences, division. I just want to be clear when you say this demand there, is that because obviously there's lists of surgery that sort of had been on the books that had then been owned, and there's now capacity and availability to do it? Or 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-nineteen when they go into some other kind of surgery. I just wanted to get some just a little bit of additional color on the demand side. For life sciences? Thanks. Yes. I mean, I understand the question. Obviously, Andrea, and, it's a sensible one. I mean, I guess, what I would say is that it's phased and it's phased by priority. So those that will be coming in, in the coming weeks, month say in Australia and Canada will be very much priority number 1, and I would say urgent. And 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 total. Of course, what we get to phase 2 and 3, which are perhaps lower down the priority, then we are talking about a month, 2 months from now. And so I think the natural phasing of it will, will deal with the issue that we raised. Got it. 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, the star, and then 2. So once again, it is star, and then 2. And we'll wait for any others, Sam, over to you. Sam, can you take your phone off mute? Sorry. It's Sam. Yes, sorry. First question was on this, Chinese supplier investment. I just want to give any more details on that. Is something you have other similar investments, in other suppliers or, you know, just what is it and why? And I guess Yeah. Yeah. Do you want me to just quickly answer that? Yeah, sure. All right. Yeah. I mean, Sam, that was when we when we bought, oh, Jay Ward, one of our, US industrial businesses back in 2012 or something. And 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. And as goodwill, we took a 10% interest in for a $1,000,000, that contract and the relationship doesn't need that that investment there. It was really getting in the way of just normal, sort of commercial terms. So we decided to exit both of us were happy just to exit that out. So very small. We don't have anything else like that at all. It was unusual. Okay. Understood. I just want to understand why the confusion in the April impact in controls has been you're so much higher than the in the field business. Is it really the aerospace exposure coming through that the main cause of that, or are there, is the weakness more broad than just that set Well, I think, I think the air airtable airspace is around about 20% of controls. They're there, they're above. So obviously, that 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 sales businesses, which are more, I guess, this is the North American base. So, that would be the 2nd factor. I think, 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 steel might have 16%. It might give it shallower at the moment, but might take a little bit longer come out, it's because some of the businesses that Nigel alluded to are in the U. S. Some of them are a little bit late cycle. And therefore, I see seals as a still perhaps a little more to go down, but certainly a little longer to come out. So it's just maybe a slightly different shape in the curve. Sam, I would just say that there is as we saw back in 2009, a lot of resilience in that controls business. I mean, Johnny mentioned Civil Aerospace motor sport is another bit that came down as the new Formula 1 builds have been pushed out a year. You know, we've faced quite a bit of UK 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. So you know, we've been hitting some areas, but other areas have held up quite well. I'm sorry, just final short one is, obviously, the business you said that the business remains cash generative. Is that being helped by any material working capital inflow on lower volumes currently? No, I mean, I think, you know, we're very focused on receivables. So certainly that's helped. We've done the business have been doing excellent work on that. We've also clearly tightened up on procurement. We're seeing less inventory coming into the business. So it's a combination of actions that we've taken, you know, 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 a 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 cap which is obviously better than a stronger position and hence, our available liquidity improving during the course of the month. Excellent. Very much. Okay. Our next question is over to the line of Jane Sparrow at Barclays. Please go ahead. Your line is now open. Good morning. I just wanted to, just ask about the COVID corporate financing facility that you you've obviously confirmed eligibility for, but not in your current expectations that you would need to use it. And and if I look at my, numbers and, and certainly a significantly worst case scenario in my numbers, you're still some way needing to to access that. So I just wanted to understand a bit better the sort of scenario stress testing that you've done internally, and, you know, that might require you needing 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, you know, your debt being in bad shape. But just wanted to understand a bit more about the internal testing that you've done on the business. Hi, James, thanks for that. Look, I mean, as you would expect, we come into this crisis and allow us from staff and say, of course, it's natural for everybody. So we had to do what the what you would expect and we're incredibly cautious, around how we manage the business and around how the avenues we look at to make sure that we have all available, liquidity. So of course, we pursued that, as protection now given where we are, as Nigel said earlier, absent, you know, a further flip 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 could imagine, down even towards the levels of lightest 50% on revenues. We're still generating cash. We still have plenty of available liquidity, 74,000,002. So it would really be a pretty steep and significant, cliff for us to come anywhere near acquiring that program. Okay. Thanks. And then just a second one on cost if I may. Obviously, you know, you talked on the, 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 will start to flow back in as as the business returns to sort of, you know, a a more normal level of activity you know, of the costs that, you know, 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, you know, in life sciences, obviously, if you see things coming back very quickly, you probably wouldn't look to take any costs out there because, why would you? Whereas there might be some others where you see a longer longer path to recovery. So obviously, short term drop through would go up from 25%. But, you know, on a sort of more medium term view, it would be less. So just understanding what's going on there. Well, I mean, just to give a bit more color around it. Ignacio mentioned that, we reduced costs by around about 3,000,000 in April. Now 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, etcetera. And the last third is basically some subsidy and furloughing that we've done in some of our businesses Now, look, it's been our number one objective to, look after the health of our colleagues, but also to look after their well-being too and to preserve jobs. And that's what we've started to do. Inevitably as time goes on, of that $3,000,000 as the businesses, I hope some of them improve over the coming months. Then of course, The furloughing of 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. And so I would expect discretionary spend to continue to be low. There will, as you say, potentially be some businesses that will lead a bit more longer term review and restructuring. And, you know, you wouldn't be surprised to hear me say that those in Civil Aerospace potentially found that might we might have to look at how we manage that business going forward. But I really do think that that's, very few of those businesses And so, I do continue to aim for us to maintain our jobs. I do think that short term. We'll continue to have very strong drop through. But as you say for the reasons I expressed, that will start to grow as the business is recovering. Yes. 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. Gentlemen, thanks for the, for the call. Just one from me on on VSP in in North American sales, just wondering how that's been fairing. Obviously, that's been a cracking performer in the first half. Just wondering how that's been fairing in in April and, and, and under these, these, these more stressed conditions? Sure. Well, I mean, as I said, we're absolutely delighted with VSP. I mentioned earlier, it's gross has been double digit margins. They're up over 400 basis points and the cash collection is is, has been excellent too. So thanks, Daniel, for giving me the opportunity to repeat that. The business has remained pretty resilient, but as, you know, maybe in tune with the fact that North America was a or U. S. Particularly was a little later into the virus. It started to slow some water towards the latter half of April. And particularly, you know, some of that business, 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 So I think they're slightly slower in April. They will be in May 2. However, I feel confident that we'll get that back later in the year. Okay. One final time. If anyone has any final questions at this stage, please press star and then 2 on your So I I started on your on your keypad now, and we'll go over the line of Will Kirkness at Jefferies. So, Will, please go ahead. Your line is now open. Thanks very much. It was just a quick one, a quick follow-up on the, US sales business. I was just surprised to hear you're a bit more cautious there. I guess they did sort of go into lockdown later that the lockdown seems a lot less onerous. They're already, from the opening up and the look elsewhere are the US industrial type exposure really seem to be seeing a trough in sort of mid April. So just if you've got anything else, you can sort of give color around why you're a little bit more cautious on the the pace or cadence of that recovery. That would be Thanks. Yeah, sure. I mean, look, it's incredibly difficult for us to say, isn't it? I mean, no crystal ball here. To some degree, we feel positive because the lockdowns, have had a more limited effect on the aftermarket business. And as if you look across the geography United States, the lockdowns are being eased more in Republican states, unsurprisingly than Democratic states. And that geographically relates more into the south of the country. And that is where most of our aftermarket business is based. So we have benefited somewhat from the lockdown starting ease in, in recent weeks. However, we're cautious about that because, you know, we know 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 customers. So that business is very much, latest cycle. I can see some of that unwinding. And of course, we some concerns about the, the, the, the mood music, let's say, around trade disputes with China, which will affect that business the most. So, so I would say that kind of moves music together with the unknown about, the unwinding of the lockdowns. Just give us cards to be cautious. Okay. That's good. 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, we feel confident that the business is resilient, and we feel positive about the future. And thank you very much for taking the time to dial in This now concludes today's call. So thank you all very much for attending, and you can now disconnect your lines.