Spirax-Sarco Engineering plc

Hello, and thank you for joining us for our presentation of Spirax Group's half-year results. I'm Nimesh Patel, Group CEO, and I'm joined by Louisa Baudet, Group CFO. As this is an online presentation, please type your questions into the Q&A box on the webcast at any time, and we'll address as many as we can at the end. I'll start by summarizing our performance in the first half. Against a challenging macroeconomic backdrop, we continued to deliver against our operational priorities by focusing on the controllables, driving group organic sales growth of 3% ahead of industrial production growth, with adjusted operating profit growing 7% organically. Our group margin was 19.3%, 70 basis points ahead organically, as we maintained pricing and cost discipline, while also investing in future growth. The demand trends that I highlighted at the time of our full year results have continued. In particular, we're seeing strong demand growth in BioPharm and Semicon, alongside modest IP growth and weakness in large project demands from China and Korea. In STS, organic growth was 3% excluding these large projects, which is well ahead of IP ex-China of 1.7%. which demonstrates how focusing on our direct sales in target sectors to self-generate MRO and solution sales is driving growth. Including the large project headwind, STS sales were in line organically with the first half of last year. In ETS, demand for our process heating solutions remains strong, with double digit growth in the first half, while Semicon demand also improved double digits. This strong growth in demand alongside our continued delivery of operational improvements, which are increasing throughput from our manufacturing facilities, resulted in ETS organic growth of 10%. In Watson Marlowe, earlier this year, we reorganized our direct sales teams around target sectors to bring greater focus to developing and better leveraging process expertise and building deeper customer relationships. We are seeing the benefits with demand growth in process industries well above IP, and additionally benefiting from large contract wins with medical device OEMs, specifying delivery in the second half. BioPharm orders also grew at more than 10%, with shipments heavily weighted to the second half of the year, as we expected, and reflecting the shape of the demand recovery. Therefore, Watson Marlowe organic sales growth in the first half of 2%, supported mainly by process industries, is expected to accelerate in the second half, with confidence supported by our strong order book. The restructuring, which we began in January, is on track to deliver annual savings of £35 million, funding our investment in future growth, that I'll speak more about later, and cash conversion. in the first half improved from last year to 61%, reflecting discipline in the use of capital and returns on investment. Our continued focus on the controllables through the implementation of our Together for Growth strategy is how we drive organic sales growth and improving margin in this more volatile and uncertain economy. Our progress in the first half is why we remain confident in our outlook and why we are reiterating our guidance today. Let's now review the environment in which we're operating. Industrial production growth remains an important lead indicator across our businesses. And as you know, we outperform IP through the execution of our business model and strategy. As you can see from this slide, the macroeconomic backdrop remained challenging with IP excluding China consistently revised downward for both the first and second half. The temporary increase in the H1 forecast in March was due to stronger than expected performance in the U.S., which was then revised back downwards in April following the announcement of U.S. trade tariffs. The table shows IP across our key markets with half of our sales coming from markets where IP contracted in the first half, such as Germany, France, Italy, and the U.K. and the U.S., where IP remained weak. Second half forecasts anticipate an improvement in some of our key markets, but as you'd expect, our internal planning has more cautious assumptions, just as it did at the start of the year. For China, IP forecasts remain uncertain, and we continue to see a wide range of expectations across different providers. That's why we continue to highlight IPX China. And second half IPX China is now forecast to be lower at 1.7% rather than the 2.1% that was forecast in February. I'll now talk you through two important drivers of our growth in 2024, the impact of this weak backdrop and political instability on large project demand, as well as the demand trends we're seeing in BioPharm. SCS sales were in line organically with the first half of 2024 after, and as expected, we faced meaningful headwinds in China and Korea. These markets account for around 20% of STS sales and 10% of group sales. As you know, both have a higher proportion of sales coming from large projects funded from customers' capital budgets. Unsurprisingly, in light of uncertainty around tariff barriers and costs to global trade, business confidence has been impacted and longer-term capital investment decisions delayed. In China, we highlighted this headwind early in 2024 and we explained how we pivoted to driving MRO and solution sales from the large installed base. A year ago, there were no dedicated MRO sales engineers in China. Now we have 20 and are expanding. We've increased site visits by nearly 10%. Customers are responding. We delivered double-digit growth in these sales in full year 2024 and again in the first half of this year. As a result, while overall demand continues to decline in China, the rate of decline is moderating. We expect demand for capital projects will stabilize and then return to growth. Together with continued progress in MRO, we see a path to China once again being a contributor to STS growth at some point in 2026 or 2027. In Korea, macroeconomic challenges were compounded by political instability. This led to a significant decline in demand in the first half, again, particularly in large project orders. Following elections and a proposed economic stimulus package, we anticipate improved demand in the second half. We saw a sequential recovery with the second quarter up on the first quarter, and this continued in July and August. Our sales pipeline also continued to grow in the first half and particularly in Q2, indicating customers are deferring rather than cancelling investments. Together, first half sales in China and Korea were down 9% on last year. In the second half, we anticipate absolute demand from China and Korea to be in line with the first half. If we now look at the underlying performance of STS, you can see in the chart on the left that excluding these large project sales, STS sales grew organically by 3% compared to IPX China of 1.7%. This is a clear demonstration of our business model at work, strengthened through execution of our Together for Growth strategy, which I'll speak to later. Looking now at another important demand driver, BioPharm, which accounts for close to 50% of Watson Marlowe sales and 12% of group sales, we are continuing to see a strong recovery in BioPharm demand post the COVID vaccination decline when, from 2021 to 2023, new order intake halved. As we explained in March, Sales between 2022 and 2024 were supported by pulling down on the very large backlog that had been built over COVID, with customers re-phasing rather than cancelling shipments. Our order book had normalised by the end of last year. During the first half and continuing last year's trend, end-user demand grew strongly, and now we are also seeing a recovery in OEM demand, which was previously highly volatile. Biofarm orders in the first half grew over 10%, having also grown double digits in 2024. Orders are now, again, exceeding sales, which underpins our confidence in second half sales growth. Having explained these market-related drivers of demand, I'll now hand you over to Louisa to take you through our first half financial performance in more detail, before I then provide an update on our strategic progress.

Thank you, Nimesh. Good morning, everyone. Before we start, a couple of presentational points which will be familiar to you. The numbers we will be discussing today are the adjusted results and a reconciliation between statutory and adjusted operating profit is included in the appendix. And with the absence of material M&A in the period, our definition of organic growth only excludes the effect of currency movements on sales and profit which in the first half was minus 3% on sales and minus 7% on operating profit. So, trading for the first half was in line with the expectations we set out in May. From a group perspective and on an organic basis, revenue was 3% higher versus the prior period, ahead of IP and driven by growth in ETS and Watson Marlowe with STS flat compared to the last year. Operating profit grew 7% with operating margin 70 bps higher at 19.3%. Net financing costs of 18.6 million pounds were lower than the prior period due to lower average net debt and lower rates on floating debt. As expected, the effective tax rate was 27.4% and adjusted EPS of 137.6 pence per share was flat versus the prior period, consistent with the small decrease in operating profit and the increase in the effective tax rate, which were offset by lower financing costs. We are increasing our interim dividend by 3%. Turning to the sales bridge on the next slide, as noted, currency movements had a negative impact of 28 million pounds or 3% on first half sales. Organic sales in steam thermal solutions were level with the first half of 2024. Strong growth in MRO and solution sales offset the anticipated weakness in large CapEx-aligned projects in China and Korea. And as you've heard, adjusting for these large projects in China and Korea, the rest of steam grew 3% despite the weak IP backdrop. ETS first half organic sales growth was 10%, reflecting ongoing operational improvements in process heating, a contract win from an OEM supplier of temperature management solutions to data centres, and improving Semicon demand in equipment heating. Watson Marlowe sales grew 2% organically, supported by growth above IP in process industries, with BioPharm broadly level on 2024. Double digit order growth in BioPharm in the first half, with shipments weighted to the second half, will underpin higher sales in the second half. And that reflects the shape of the BioPharm demand recovery that we had expected. The bridge on the next page details the movements in adjusted operating profit for the first half, currency movements had a negative impact of 11 million pounds or minus 7%. Operating profit in steam thermal solutions grew 3% organically, higher than the growth in sales, which was driven by manufacturing efficiencies alongside savings from our restructuring program ahead of reinvestments, which are weighted to the second half. the operating margin in steam at 23.4% was 60 bits better organically compared to the first half of 2024. In ETS, operating profit grew by 12% organically, driven by higher volume and continued efficiencies in process heating. Operating margin in ETS was up 60 bits organically to 15.3% before adjusting for a one-off 30 bits negative currency movement related to the US tariff announcements in April. As we highlighted in the 2024 full year results, we are still processing some legacy orders through the Ogden pipeline, which have not been repriced for inflation. And this moderated the first half margin relative to the strong sales growth. The ETF margin, however, did increase progressively through the first half, underpinning a stronger margin trajectory into the second half. Watson Marlowe delivered organic profit growth of 12% and a 240 bits increase in margin. In addition to volume, trading margin improvement was driven by manufacturing efficiencies and similar to STS, delivery of some net restructuring savings in advance of reinvestment. Corporate expenses remained at approximately 2% of group sales, including investments in support of key strategic initiatives in digital and sustainability. Turning to cash flow, our operating profit to cash conversion rate was 61%, up from 53% in the prior period, driven by a lower working capital outflow and lower capital expenditure. We were able to deliver a small increase in cash flow compared to the prior period and a reduction in net debt despite £13 million of cash spend relating to restructuring. And we ended the first half with net debt of £658 million and leverage of 1.8 times EBITDA. Our capex of £34 million was 4% of sales and I will draw out three quick items of interest. £7 million was spent in the first half on the completion of our new low and medium voltage production facility in Ogden, which will be commissioned for use shortly. In ERP, we are currently focused on common design and build before deploying CAPEX through each business unit. And as we noted at the full year results, we have paused the planned expansion of our Gestra facility in Germany. we have started a formal process with the local works council to explore ways of achieving greater efficiency and better performance. Now let me talk you through on the next slide how we see the second half shaping up. Overall, we are expecting an acceleration across the second half based on the strong order books at the end of the first half, continued recovery in key end markets, and further delivery of our operational priorities. In STEAM specifically, you will hear from Nimesh in a moment about the success of our growth initiatives in MRO and distribution partnerships, which will continue into the second half. Importantly, in China, we are expecting the decline in large projects to start moderating in the second half. And we also expect to see an improvement in trading in Korea now the political situation is stabilising, indicated by higher order growth in Q2 versus Q1. We expect STS margin in the second half to be similar to the first half. In ETS, we expect further improvements in throughput in process heating. There is second half weighting to revenue on volcanic projects, and we will also see further impact of this Semicon improvement in equipment heating. All of these will support sales momentum into the second half, although I would remind everyone that we are up against a much tougher comp than in H1. The second half organic growth in 2024 was 15%. As I mentioned earlier, ETS margin increased progressively through the first half. and we expect a higher margin in the second half because of drop through, positive mix and a small net restructuring benefit. In Watson Marlowe, higher sales conversion in BioPharm is expected in the second half, given orders above sales and OEM trends stabilising. In process industries, we have a relatively large customer order in medical equipment with specified H2 delivery dates. But more generally, the process industry's team is delivering growth above IP. Following the reorganization, our sales teams are now better supported to develop deep expertise in their customers' processes and maximize opportunities from accounts with the highest potential. The establishment of an inside sales team focused on serving smaller customers and less complex orders has also allowed sales engineers to increase the frequency of customer visits. and this is driving double-digit growth in demand through sectors like wastewater, mining and medical. We expect second-half margin in Watson Marlowe to be broadly in line with the first half, with further benefits from manufacturing efficiencies and the drop-through from higher sales, enabling us to step up investments in future growth. For the group, the tariff environment remains uncertain, but we expect to continue to mitigate the financial impact of this through surcharges, prices and limited reorganisation of manufacturing activities. So on my last slide, turning to guidance, our group guidance for the full year remains unchanged. We continue to expect organic growth in group revenue in line with 2024. And we also continue to expect mid single digit organic growth in adjusted operating profit. We have outlined in the RNS and the presentation today the business unit by business unit expectations for sales and margin, which are consistent on a four-year basis with the guidance that we gave in March and that we are reiterating today. The P&L charge for our restructuring programme remains unchanged at a total of approximately £40 million. However, the cash outlay will be spread over 2025 and 2026. Other group guidance factors are included in the appendix of your pack. And just briefly, CapEx guidance is similar to the first half of 4% to 5% of sales. We're guiding for lower net financing costs than previously guided. And our current FX outlook is unchanged from the trading update in May at minus 3% and minus 6% on sales and profit respectively for the year. I'll now hand you back to Nimesh for the rest of the presentation.

Thank you, Louisa. I'll now turn to how we're executing on our strategy. You'll be familiar with this slide from our full year presentation. The progress we've made in driving sales and profit growth in the first half, despite the macroeconomic challenges, is because of what is set out on this slide. We have three strong engines of growth sharing a common and powerful business model, focused around our experienced direct sales engineers who leverage local relationships with over 100,000 customers in nearly 70 countries and generate revenue from mostly OPEX-funded budgets in largely defensive sectors. We have clear medium-term targets and a plan to deliver them through our operational priorities, which are commercial excellence, how we build on our sales capacity and capability, operational excellence, how we become more productive and efficient in our manufacturing and organisational fitness, how we improve the way we work across the organisation to better serve customers. These allow us to better leverage our resources and help fund targeted investments in our future growth through digital and services and decarbonisation, which in turn will support the delivery of long-term targets. Using this framework at the full year results, we set out our specific areas of focus. I wanted to remind you of these and to update you on progress in the first half, including sharing just a few examples of delivery. Starting with commercial excellence. Our focus in the first half has been on generating MRO and solution sales in all three businesses, supported by sales engineers walking customers' plants. to identify optimization opportunities and enhanced by developing our digital connections and systems audit capability, both of which generate service revenues as well as product pull-through. In STS, we are also redefining our partnership approach to distributors, aimed at leveraging our direct sales engineers' expertise to generate solution sales from new target customers. In Watson Marlowe, we are delivering double-digit demand growth through the successful sectorisation of our sales engineers, who were historically geographically focused, as Louise has explained. In ETS process heating, our bespoke heating solutions, including our medium voltage offer, continue to be a differentiator, supporting double-digit growth in demand, including from decarbonisation-related orders, which I'll speak about later. Turning to operational excellence, You've heard from Louisa that we're delivering operational efficiencies within and across our three businesses, driving benefits in material usage, procurement, and labor productivity. And we're implementing the consolidation of manufacturing facilities, including completing the closure of our STS facility in Mexico and transferring production to the USA. In ETS, we continue to drive operational improvements, particularly in Chromalox, where in the first half, we have successfully increased throughput, which is now up over 25% since 2023, demonstrating the progress we made last year and this year. And you've heard about the progress we're making in organisational fitness with our restructuring well advanced and on target, the savings from which will fund our investment in future growth. I'll now give you three examples of commercial excellence on the next slide. Starting with an example from the USA, where SDS has reframed its approach to working with distributors that represent around 70% of local sales. By thinking differently about how we partner, we are now co-generating opportunities to accelerate growth through defining combined go-to-market strategies in jointly targeted sectors and customers. We have well-developed growth plans in place with eight key distributors, and in the first half, we generated 20% orders growth from these partnerships. We have more in the pipeline for the second half. Direct sales and co-generated opportunities now account for approximately 50% of total US demand. The second example on this slide from ETS in Mexico demonstrates how a combination of commercial and operational excellence served an OEM customer by creating a bespoke solution for an essential component to be used in data center's temperature control. Our sales and supply teams work together, combining solution selling with responsive and flexible manufacturing to deliver a successful pilot that is since translated into a material contract wing. To meet the order volumes that will support growth in the second half and beyond, we have set up a bespoke and dedicated production line. The third example explains how Watson Marlowe's sectorised approach is delivering growth. In the UK wastewater sector, we provide peristaltic pumping solutions to OEMs and direct to customers, requiring a multi-layered approach to engagement. The sector is highly regulated, with utility companies required to employ precise chemical dosing to maintain water quality. Historically, only diaphragm pumps were specified in regulation. Our wastewater team worked with key industry stakeholders, supporting them to develop new mechanical and electrical specifications that now incorporate peristaltic dosing pumps, opening up additional revenue streams. As an example of the impact, we saw 60% growth in sales from just one chemical customer that switched to our QDOS pumps, with more to come. These are some of the drivers of our near-term growth. Now I'll speak about how we're building on our foundations to accelerate long-term growth. Through our digital and services growth driver, augmenting our customer relationships by being more connected with them, we walk the data as well as walk the plant. We connected an additional 400 customer sites in the first half, providing real-time data on their critical processes and taking the total number to 1,400 sites. The data from our connected products, such as steam track monitoring and machine learning-enabled pumps, is driving service and product pull-through revenues. We're also increasing customer facing time direct sales engineers. Following completion of a pilot last year, we have now expanded the sectors and scope for our AI knowledge assistant, MIM, broadening its applicability. It's now being actively used to support sales engineers saving them on average over four hours a week, mostly in researching specific production processes or product applications and in developing solutions. Moving to decarbonisation. You will remember that we talked about our nearly £7 billion opportunity at our last capital markets presentation. This is a 60% increase in our current annual addressable market. How is this estimated? First, The electrification of steam generation, which we size based on today's installed base of fuel-fired boilers in our target sectors and regions, we've assumed adoption will take decades, constrained by factors such as customer appetite to invest, availability of green electricity and grid transmission capacity. But even then, this is still a £2.4 billion annual addressable market. And secondly, There is the decarbonization of thermal energy beyond steam, by which I mean the subset of industrial process heat that is suitable for electrification. To size this, we leveraged our sector and process knowledge to identify the industrial applications of heat, which are met through the direct burning of fossil fuels. For the applications that can be met through our electrification technology, based on temperature and power load requirements, we convert total heat demand into the estimated heating power required to meet that need. As you can imagine, the resulting demand is huge. Recognising that this transition is a long-term endeavour, we've factored in a long multi-decade conversion. We estimate the potential market at £4.2 billion annually. I'll now explain how we're positioning ourselves to address this market and what we're seeing from customers today. Because while we recognize the headwinds to adoption, especially in a cost-focused environment, we do continue to see demand. On this slide, you can see how we're working with customers to optimize, manage, and ultimately decarbonize their thermal energy processes through four go-to-market strategies. Starting on the left and working right, Energy optimization has always been at the heart of our customer value propositions in STS and ETS, with our teams supporting customers to be more efficient through reducing their energy consumption, which in turn makes them more sustainable. Now, over 50% of STS quotes include quantified sustainability benefits from our proposed solutions. Next. Our new to world target zero solutions are developed through our unique combination of steam and electric thermal energy expertise and are designed to electrify the generation of steam. We've reached agreement with several global industrial boiler OEMs to incorporate steam bolt technology into their electric boilers with our first pilot solution installed at a regional food and beverage customer facility and planned delivery of a second solution for installation in a chemical plant in the second half. Electrofit, which enables the conversion of existing fuel-fired boilers to electric, is being tested and refined with a global food and beverage customer at two production sites. Moving to Powering Zero, which utilises our low voltage and proprietary medium voltage, or MV, technologies to replace the direct burning of fossil fuels. Following a successful pilot to build a decarbonized model of an OEM machine serving the paper industry, we are working on our first orders from this leading manufacturer. And we also recently secured an order for a bespoke NV solution for a renewable energy storage project. We are testing prototypes for the next generation of electric heating solutions operating at higher voltages and higher temperatures. which have the scope to further differentiate our competitive position while also expanding our addressable market beyond our current assessment. Finally, I'm pleased with the progress we've made in the first half to build our integrated steam and electric thermal energy assessment capability with an experienced team of audit experts drawn from STS, ETS and Cotopaxi. We are delivering pilots for customers in our target sectors, food and beverage, downstream petrochemicals and chemicals, validating customer appetite for a combined and holistic review of their thermal energy needs across steam and electric, recognising our deep and unique combination of expertise. Having set out what I hope you'll agree are exciting future prospects, I'll now come back to our focus on the first half. Bringing everything together, I would summarize our performance as follows. Our first half results are in line with our expectations as we continue to meet the macroeconomic headwinds through executing on our strategy and focusing on the controllables. We are driving demand growth in our three businesses through execution of our powerful business model, and we are driving operational improvements across the group. As a group, we continue to deliver organic growth, outperforming IP at industry-leading margins. And our organizational changes are delivering the funds to invest in accelerating future growth. In the balance of the year, we are not expecting a meaningfully improved trading environment. However, we remain confident in delivering on our operational priorities, which is why we're reiterating our unchanged guidance for the full year. Through our Together for Growth strategy, we're building a platform from which we will deliver our medium-term financial objectives and long-term compounding growth and attractive margins. Thank you. We are now happy to take your questions. So if you haven't yet posted these into the platform, please do so now. Our head of investor relations, Mal, is monitoring the questions and will ask them on your behalf. So Mal, over to you.