Spirax-Sarco Engineering plc

Hello, and thank you for joining this presentation of Spirax Group's half-year results. I'm Nimesh Patel, Group CEO, and I'm joined by Louisa Burdett, Group CFO. Let me begin with summarizing our performance in the first half. We have again delivered a resilient set of results for the first half, and we remain on track to deliver our full-year guidance. Across the group are together for growth strategy is strengthening our differentiated business model. We are benefiting from our diversified end market exposure and importantly, driving growth ahead of our markets in spite of external conditions is becoming increasingly embedded in how we operate. As a result, we delivered 5% organic sales growth well ahead of IP of one and a half percent. Our organic profit growth was 6%, and the operating margin progressing to 19.8%, with EPS up 9%. We achieved this while continuing to invest in future growth. The group-adjusted operating margin increased 10 basis points organically, with planned investments weighted to the first half. We invested in sales headcount, customer digital connectivity, and digital tools for sales effectiveness. Now looking briefly at the businesses. In STS, sales grew 1%, although demand growth was more than double IP. Sales were below orders as customers specified a small number of deliveries for the second half. So we are carrying both a strong order book and demand momentum into the second half. As expected, the decline in large project demand in China has continued to moderate, partly offset by further growth in MRO and solution sales. This resulted in China being down 1% compared to the 6% decline we saw in the first half of last year. ETS performed very well, with sales growing 11%, supported by strong demand growth across all three divisions and continued operational improvements, that are increasing throughput and supporting strong margin progression. And in Watson Marlowe, sales grew 7% with BioPharm new order intake ahead of sales. And in Q2, orders reached the highest quarterly level since the COVID-related peak. In process industries, we continue to outperform IP. The lower STS margin of 22% reflects the phasing of shipments. but also investments in future growth that were more weighted to the first half. We expect higher margin in the second half and for the full year to be broadly in line with last year. Margins improved in ETS by 220 basis points to 17.2% through operating leverage, the mix of higher margin sales from Semicon and HeatTrace and delivery of operational efficiencies. Watson Marlowe margin also improved on operating leverage by 80 basis points to 27.5%. Our cash conversion, which is typically lower in the first half compared to the full year, reflects planned inventory builds to offset potential supply chain disruptions caused by the Middle East conflict. And our return on capital employed has improved by 180 basis points to over 35%. are together for growth strategy is delivering. We continue to grow well ahead of IP. We are carrying strong order books and order momentum into the second half, and we remain confident in delivering on our reiterated guidance for the full year. Let me turn to the broader demand environment. Once again, the macroeconomic backdrop remained weak during the first half. You can see from the chart on the left that IP forecasts continue to be revised downwards for both the first and second half. But this is broadly consistent with the more cautious assumptions we have adopted in our planning. The table on the top right shows that the expected recovery in IP has been pushed out to the second half, and the bottom right illustrates that industrial production has remained weak across key markets, making up around half of group sales. Germany continues to contract, while growth in the USA, France, Italy, and the UK remains modest at around 1%. To deliver on the IP forecast for the second half, growth rates would have to improve significantly in key markets. Our approach remains unchanged. We plan prudently and focus on delivering what we can control. IP can be a headwind or it can be supportive, particularly when over a 2% tipping point, above which we start to see a real step up in customer activity. But what our performance is reinforcing is our ability to self-generate demand to drive organic growth. And what I'm most pleased with is that driving growth against challenging external conditions is becoming embedded in how we operate because of our strategy, because of our execution and because of our investments. And this highlights an important point. Our growth is linked to IP, but it is not reliant on IP. The resilience of our growth is underpinned by the breadth of markets and customers we serve, which is a key strength of our Group. Our growth potential is underpinned by our position in attractive sectors exposed to supportive long-term growth trends and by our ability to take market share through our focus on solution selling. The long-term growth trends I'm referring to are evident in all three businesses. Process optimization, What we do every day across multiple sectors to help our customers with their process reliability, energy costs, higher throughput, lower scrap, safety, essentially their efficiency and effectiveness as they meet increasing consumer demand. Health where we serve the biotech and pharmaceutical markets as well as medical devices and hospitals all benefiting from an aging population and innovative advances in healthcare. Technology where we're finding new applications in Semicon, data centers, nuclear and aerospace and defense through new product development benefiting from how technology is changing the way we live and work. And in ETS and STS, we benefit from the trend towards electrification which is how our customers in all sectors will deliver on their sustainability targets. Around 40% of group sales are in sectors where these trends are driving high growth, and around 60% are in sectors with good growth where we are also increasingly taking market share. Importantly, across our three businesses and across all our end markets, we leverage the same differentiated business model to deliver on the opportunities we see. Direct sales engineers build deep customer insight through sector focus and local presence. They're experts in customers' mission-critical processes and applied engineering expertise enables us to solve customers problems and deliver measurable value with 85% of our sales funded by customers operating budgets. This combination allows us to consistently generate demand growth ahead of IP and it's why we remain confident in our ability to deliver our medium term targets and above these in the long term. And speaking of the medium term, Let me explain why we remain confident in achieving the organic sales growth targets we set out in 2024. As you know, we have three strong engines of growth, starting with STS. Progress in execution of our commercial excellence initiatives is enhancing demand growth relative to IP. I will speak later about how we're investing in direct sales, reshaping partnerships with distributors and driving growth through digital connections. China has been a headwind for growth over the past two years but we are repositioning our business in China and as expected we continue to see a moderation in the decline of large projects as well as strong growth in MRO as a result we are on track to improve growth within our low to mid single digit range in ETS sustained strong demand across all our divisions and our focus on operational improvements to deliver into that demand underpins our target of above-mid single-digit growth. We are delivering above that level. And in Watson Marlowe, the underlying market growth in BioPharm coupled with our success at taking market share in target sectors within process industries supports high single-digit growth. Taken together, These drivers support sustaining and enhancing our mid single-digit organic sales growth at a group level, while continuing to build on our long track record of growth ahead of industrial production. Now I'll hand over to Louisa for a deeper dive into our first half financial performance.

Thanks, Nimesh, and hello everyone. As usual, the numbers I'm presenting are on an adjusted basis, excluding amortization of acquired intangibles. and the prior numbers also exclude the costs that related to the restructuring program we undertook last year. There were no P&L charges for restructuring in the first half, although you will note £5 million of cash outlay in the cash flow statement, which reflects timing of settlements. And as a reminder, our definition of organic growth excludes both the effect of currency movements on sales and profit and the impact of any M&A, of which there was none in this or the prior year. Group performance in the first half was in line with our expectations and sets us up well to deliver our full year guidance. We delivered mid single digit revenue growth, increasing 5% organically, well ahead of IP and with growth in all three businesses. Adjusted operating profit increased by 6% organically, with adjusted operating margin improving 10 basis points to 19.8%. Margin progression was driven by strong performances in ETS and Watson Marlowe, partly offset by a reduction in STS margin, which I'll come on to shortly. Adjusted earnings per share increased by 9% to 150 pence per share, reflecting the growth in adjusting operating profit together with stable financing costs and a stable tax rate. The board has declared an interim dividend of 50.4 pence per share, representing an increase of 3%. With dividend cover returning to the board's target range, future dividend growth will more closely reflect underlying earnings growth while maintaining our commitment to sustainable shareholder returns and our capital allocation framework. I'll now take you through the drivers of sales and profit performance, starting with the sales bridge. First half organic sales growth was 5% well ahead of IP, and there was a negligible impact of £1 million from FX. All three businesses delivered organic growth. In STS, mid single digit demand growth translated into organic sales growth of 1%. with some shipments specified by customers for delivery in the second half. And as Damesh has already explained, China is performing as expected. ETS delivered another strong performance against a strong comparative with organic sales growth of 11%. We are driving the demand, which is reflected in strong order books across all three divisions, including double digit growth in Semicon. and our continued operational progress in process heating also had a positive impact on throughput. In Watson Marlowe, sales grew 7% organically. As expected, new orders in BioPharm have remained above sales, benefiting from strong consumables demand, while new capacity demand is still recovering. And Process Industries has continued to significantly outperform IP as we grow our market share in our target sectors. Moving to the operating profit bridge where group profit increased 6% organically with FX driving a 2% tailwind or £3 million. Looking first at STS, adjusted operating profit declined 6% organically and the margin was 170 bps lower at 22%. This is largely a function of timing, reflecting the phasing of shipments, and in addition, we also made considered investments in sales headcount and digital capabilities which were weighted to the first half. In ETS, adjusted operating profit increased by 27% organically, significantly ahead of its strong sales growth. Margin improved by 220 bits to 17.2%. What we are doing here is working with the margin progression in the first half anchored in each of our ongoing operational actions. As a reminder, these are strong volume growth, improved operational efficiencies, the absence of lower margin legacy orders, and a favorable mix from higher margin Semicon and Heat Trace sales. These drivers were partially offset by ramp up costs associated with our new medium voltage facility and consistent with the other two divisions continued investment in sales headcount and capabilities. Encouragingly, ETS delivered a 20% margin in the month with the highest shipments, demonstrating the strong profit characteristics of this business. And finally, looking at Watson Marlowe, adjusted operating profit increased 11% organically, with margin improving 80 bits to 27.5%. The margin improvement was driven by operating leverage on higher volumes, as well as ongoing implementation of manufacturing and supply chain efficiencies, offset by some focused investment in sales capabilities, digital solutions and new product development. I'll now turn to cash flow where adjusted cash from operations was £92 million, resulting in a cash conversion of 54%. A lower level of cash flow in the first half does reflect the normal seasonality of our business, and we continue to expect full year cash conversion of around 90%. However, our absolute cash from operations and conversion were lower than the first half of 2025, and this reflects actions we took to build inventory to mitigate supply chain disruption that we anticipated in response to the conflict in the Middle East. Our capital expenditure was around 3% of sales reflecting continued discipline in allocation as we prioritise investments in projects that support future growth whilst maximising the use of our existing manufacturing capacity. We now expect full-year capex to be at the lower end of our guidance range of 4-5% of sales. We ended the half with net debt of £618 million and a net debt to EBITDA ratio of 1.6 times. Whilst this is temporarily outside our target range of 1-1.5 times, it is not unusual for the normal cycle through the year, particularly with the recent payment of the interim dividend and we fully expect to be back within this range by the end of the year as we continue our focus on deleveraging. So let me now turn to the outlook for the second half and the full year. As we have outlined, we ended the first half with strong demand momentum and healthy order books across all three businesses, providing good visibility and confidence in our second half delivery. Our initiatives being sponsored through our operational excellence growth driver continue to underpin sales conversion. In STS we expect higher sales growth in the second half driven by shipments from the strong order book at the end of the first half which is unwinding as anticipated as well as further progress in driving self-generated demand. We anticipate second half margin to be higher than the first half, consistent with our typical 45-55% weighting of adjusted operating profit. And this margin reflects operating leverage from higher second half sales shipments, driving a full year margin broadly in line with that of 2025. In ETS, we expect high single digit sales growth in the second half even against the strong double digit comparator from last year. This is supported by the strong demand environment and large order books in all three divisions. Margin will be slightly ahead of the first half. And finally, in Watson Marlowe, as we have said, biopharm orders remain ahead of sales and process industries entered the second half with a strong and growing order book. So overall for Watson Marlowe, We expect high single digit sales growth in the second half, with margin broadly similar to the first half. A word on FX. If FX rates were to remain at today's levels, we would expect a negligible impact on both revenue and profit for the full year. To give a little bit more color, In the first half, there was a negligible impact on revenue and a tailwind of 2% on profit. Therefore, we're expecting the second half revenue impact to be again negligible, but profits to be impacted by a 2% headwind, which gets you to the full year guidance. To summarize then, we anticipate higher sales volumes in the second half, driving improved operating leverage across the group, combined with the continued benefits from operational efficiency initiatives This gives us confidence in margin progression through the remainder of the year. We are on track to deliver our full year guidance. And I want to finish by reminding you why we remain confident in the medium term margin targets that we set out at our Capital Markets Day in 2024. Nimesh has already taken you through this slide and the sales drivers that underpin our medium term targets. So let me now take you through the margin drivers. The actions we have taken over the last two years are increasingly gaining traction as we continue to hold and meet the expectations that we set, supporting our confidence in delivering a group margin of 22 to 23% over the medium term. The remainder of the journey to that 22 to 23% will be largely driven by ETS and Watson Marlowe. So if I start with ETS, we remain on track to deliver our 20% margin target. The backlog of lower margin legacy orders has cleared, demand remains strong, operational improvements continue to increase our efficiency, and our mix is benefiting from the growth in higher margin Semicon and Heat Trace sales. And as our lead times continue to improve, we also see opportunity for further value-based pricing although we expect this to be more of a factor through 2027 and beyond. In Watson Marlowe, it is simple. As we have said before, this business is well invested and the path to over 30% margin is clear. It will come from operating leverage from a sustained level of higher sales. And finally in STS, we remain confident in delivering margins of 23.5% over the medium term as we have proven consistently we are capable of. Higher sales volumes, continued operational improvements and the benefits of organisational initiatives will support that progress. So taken together, the strong progress we have evidenced in ETS, the operating leverage in Watson Marlowe and the proven history of STS underpin our confidence in delivering our group medium-term margin target of 22% to 23% while continuing to drive attractive returns on capital. Nimesh, I'm handing back to you.

Thanks, Louisa. Let's turn now to some of the key drivers of our performance in the first half. First, a brief reminder of our Together for Growth strategy. At the foundation is our differentiated business model. Building on that foundation, we are executing against three operational priorities, commercial excellence, operational excellence, and organizational fitness. These priorities are strengthening our sales effectiveness, improving manufacturing efficiency, and helping us leverage the scale of our group. We're also creating the capacity to invest in attractive future growth opportunities, particularly through digital and services and decarbonization. where we see significant long-term potential. Together, these support delivery of our financial ambition. Moving to how we're delivering on our operational priorities, last year, our restructuring program simplified our organization's focus on customers to accelerate growth, supported by reinvestment into key initiatives. We are seeing the benefits of the changes we made last year. Establishing heat trace as a standalone division within ETS benefiting from dedicated sales engineers is contributing to strong growth in this high margin part of ETS. Similarly, in Watson Marlowe, our sectorized sales teams continue to build on the double digit demand growth we saw at the end of last year in focus sectors such as mining and wastewater. In STS, the reorganization enabled us to reinvest in sales and technical capabilities increasing headcount by around 3%, helping drive demand growth of more than two times IP in the first half. We are also seeing the benefits of our focus on other commercial excellence initiatives. Our cogeneration approach with STS US distributors continues to gain momentum with demand from the 22 partners onboarded in 2025 increasing by around 6%. Finally, data centers are a good example of how we're continuing to expand our addressable market across all three businesses. In ETS, we see considerable opportunity in liquid cooled load bank solutions with a growing development pipeline. We're also seeing demand in heat trays for freeze protection, in STS for air eliminators, and in Watson Marlowe for specialist hoses. Together, our initiatives are helping us generate demand, wind share, and drive growth. Turning next to operational excellence. First, we're optimizing our manufacturing and supply capabilities. In STS, we continue to localize production by transferring casting and forging activity from EMEA to China and India, while also rationalizing and repricing some of our lower demand products, all of which improves manufacturing efficiency. In Watson Marlowe, we've continued to ramp up production at our Devons facility in the US to support strong demand, improve operating leverage, and reduce tariff exposure, while also localizing selected production and assembly activities in APAC to shorten lead times and better serve our customers. And in ETS, operational improvements continue to translate directly into growth and margin progression through higher throughput and shorter lead times, shipments of large medium voltage heaters more than doubled in the first half. We also successfully responded to Semicon demand with a further double digit increase in shipments. Our operational priorities create the capacity to invest in the opportunities that will support our future growth. In digital and services, We continue to strengthen our customer relationships by becoming even more connected with customers' processes, and I'll delve deeper into this on the next slide. But first, turning to decarbonizing thermal energy, we continue to make progress across our four go-to-market strategies. In STS, our sustainability center of excellence, established as part of our restructuring, successfully won orders to deliver steam system audits across 80 sites for a number of multinational food and beverage customers to identify energy optimisation opportunities. And in ETS, we secured 10 Powering Zero orders during the first half at a total value of around £12 million. We are also further leveraging the combined expertise of STS and ETS through our thermal energy assessment capability. During the first half, We delivered 16 assessments across the USA, Europe and China, helping customers identify meaningful energy savings while creating significant potential pull-through revenue opportunities at an average of over five times the initial assessment revenues. These investments are strengthening our customer partnerships, expanding our addressable market and supporting sustained long-term organic growth. I want to spend a moment to explain the opportunity we see in digital. Over the last few years, we have invested in developing our connected products and service capabilities to create a differentiated digital offering, supported by small bolt-on acquisitions such as Cotopaxi Energy Management Solutions and Pulse Sensing Technology. Now, our capability is helping us become even more integrated in our customers' critical processes, moving us from periodic walk the plant reviews to providing constant insights data and actionable recommendations today we physically survey around 1 million traps every year and that isn't even our entire installed base our experience and expertise tell us that we need to connect around 1 in 10 steam traps in a steam loop to allow us to build a system-wide view of course Our sales engineers' knowledge of our customers' individual systems and their mission-critical processes, as well as how they operate in practice every day, is key to knowing which steam traps need to be connected. In STS we now have 19,000 connected steam traps across 2,350 customer sites, all since 2023. Our ambition is to grow beyond the 19,000 traps firstly to 100,000, but then also recognizing that this number is only part of our growing installed base and a fraction of the industry's installed base. Through our investments, we are on track to do just that. Beyond the connected product and digital subscription revenue, our connections create significant additional value. By identifying optimization, maintenance, and replacement opportunities, We are generating pull-through revenue while helping our customers improve their reliability, efficiency and sustainability. One example is a dairy customer operating with highly variable throughput and limited maintenance windows. They moved from physical annual steam trap surveys, which identify failed traps at a point in time, to continuous wireless monitoring across their steam and condensate loop. Our solution now identifies failures as they occur, reducing energy losses and saving approximately £100,000 a year for that customer, while also improving maintenance planning and delivering a short payback for them. We're excited about our digital potential and continue to evolve and adapt to ensure we maximise the opportunity. So to summarise before moving to Q&A, We have again delivered on the expectations that we set out. Despite the challenging macroeconomic backdrop, we delivered resilient mid single digit organic growth in both sales and profit well ahead of industrial production. We are confident in our ability to deliver on the second half. Strong order books and continued momentum across our end markets provide good visibility into growth and margin progress. Lastly, A reminder that our relentless focus on execution and controlling the controllables is working, and we are embedding the mindset of driving growth ahead of our markets in how we work. As a result, we remain on track to deliver our medium-term targets and above these in the long term. Thank you. We're now happy to take your questions.