Spirax Group Plc

Good morning and welcome to all those who are joining us on this call and on the webcast. I'm Nicholas Anderson, Group Chief Executive, and I'm joined here by our CFO, Kevin Boyd, who, as previously announced, will retire at the end of September after four and a half years on our team. Kevin has been a fantastic teammate for me and an outstanding contributor on our positive transformational journey. While saddened to see him go, I fully understand and respect the personal nature of his decision and I am very happy for him. Also with us here today is Nimesh Patel, Kevin's successor who joined us two weeks ago. We're all excited to have Nimesh on our team and I look forward to continue building a successful future for our group with Nimesh's help and support. Regarding today's presentation, I will start by sharing the first half highlights and then Kevin will take you through our financial performance. Later, I will return to cover the operations, including our half year update on the impact of COVID-19, as well as our latest outlook for 2020. To close, we'll be happy to take questions from the analysts on the call. Turning now to slide two. The outstanding efforts and dedication of all our employees worldwide were of pivotal importance to continue serving our customers, many of whom operate on the front line of the pandemic. I'm extremely proud of all our colleagues and very grateful for their engagement and commitment. Employees' health, safety, and well-being remained our top priority during the first half of this year. with rigorous new measures implemented that help keep infection rates very low across the group. Additionally, in April, we launched a global employee assistance program in the local language of all countries in which we operate to support employees with multiple issues, including mental wellbeing. Despite the significant challenges posed by the COVID-19 pandemic, The group's operational health and safety performance continued to improve across almost all leading and lagging indicators. All manufacturing and warehousing facilities remained operational, with only a few experiencing temporary shutdowns of less than two weeks, mostly in line with shutdowns mandated by local authorities. Strategic capital and revenue investments were maintained in order to ensure we do not compromise our readiness to capitalize on future growth opportunities, despite, at the moment, implementing strong cost controls and deferring non-essential capex. I am very excited by the actions we have taken to accelerate the group's sustainability agenda and performance. These include the appointment of a group head of sustainability and making a number of environmental commitments such as achieving net zero greenhouse gas emissions by 2040 or earlier. Turning now to slide three, the strengths of our robust direct sales business model, diverse end markets, geographic spread, and high proportion of sales driven by the customer's operational maintenance spend enabled our group to achieve a resilient trading performance despite the unprecedented circumstances caused by COVID-19. Once again, we outperformed global industrial production as revenues declined 5% organically, while IP declined 8% in the first half of the year. Strong cost containment actions combined with the benefits from ongoing performance improvement initiatives mitigated the adverse effects of lower sales on our operating profit and maintained the operating profit margin above 20%. Watson Marlowe achieved good sales and profit growth. A strong demand from the biopharm sector outstripped the sales decline of other industrial sectors, which are more closely aligned with movements of global industrial production. Both electric thermal solutions and the steam specialty businesses experienced sales declines consistent with industrial production declines in the main sectors they serve. Thermocoax, that joined the group in May last year, achieved double-digit sales and profit growth on a like-for-like basis, supported by market share gains in the semiconductor sector. I'll now hand over to Kevin to take you through our financial performance.

Thanks, Nick. Good morning, everyone, and welcome to my last results presentation. Nick tells me that I will miss it, but I must admit I'm looking forward to dialing in with the rest of you in March to hear Nick and Nimesh present the prelims. Down to business, on slide five. As always, the numbers we will be discussing today are the adjusted results. Details of the adjusting items are given in the appendix. Reported sales fell by 4% with an organic decline of 5%. We saw a fall in reported profit of 8%, an organic decline of 7%. The reported operating profit margin fell by 100 basis points to 20.9%. Organically, the margin fell by just 50 basis points. On a reported basis, the margin in the steam business contracted 240 bps, whereas we saw a margin expansion of 90 bps in ETFs and 100 bits in Watson Marlowe. Net finance expense reduced by 0.2 million pounds, despite the increase in facilities in the period, and we anticipate a charge in the region of nine million in the full year. The tax rate, which is based on our assumption for the full year, decreased by 100 bits to 28% due to a change of mix in both corporation tax and withholding tax. Adjusted EPS of 111.6 pence was down 7% on the prior year, less than the decrease in operating profit due to the reduced tax rate. And we are proposing an interim dividend of 33.5 pence, an increase of 5%. Finally, net debt at the end of the period was £326 million, down from £392 million at the same time last year. This equates to 1.1 times the last 12 months EBITDA. Moving to the sales bridge on slide six, currency impacts represented a headwind of under 2% in the first half. In recent weeks, sterling has strengthened, particularly against the U.S. dollar, and if July month end rates were maintained for the rest of the year, we would expect to see the headwind increase to over 2% for the full year. In mid-May 2019, we acquired Thermocoax, The additional four and a half months of ownership this year added £15.2 million of revenue. The organic decline in the steam specialties business totalled 7%, with EMEA and Asia-Pacific down 8%, with the Americas, which experienced effects of COVID later, down 3%. Watson Marlowe performed very well in the circumstances, with the growth in biopharma exceeding the decline in industrial to give organic growth of 5%. The organic decline in ETS of 12% was driven mostly by market declines in the US, a fall in the oil price, and their higher proportion of capex-related project work. This next bridge on slide 7 highlights the movement in adjusted operating profit for the half year. Exchange movements decreased profits by £4.5 million, a decline of £3.7 million due to translation, combined with £0.8 million from transaction. We anticipate this headwind will continue, and if July's month-end rates were maintained for the rest of the year, we would see a 4% negative impact on profit. The additional four and a half months of ownership of Thermocoax added £3.1 million profit. Dental costs were well controlled, falling 10%. Team Specialty's business organic profit fell 11.6 million as careful cost containment limited the drop through to less than 50%. Watson Marlowe continued to perform strongly, delivering 3.9 million organic profit growth. ETF saw a fall in profits at an organic level of 1.9 million pounds, a drop through from sales of only 18%, as we saw underlying operational performance improvements. The total organic decline in operating profit was 8.8 million, or 7%. The chart in slide 8 shows the adjusted operating profit by half year over a 10-year period, with the margin in the first half represented by the blue column. The solid bars show the reported margin for the period, while the full bar show what the margin would have been excluding the two large, lower margin acquisitions made in 2017, which, by the way, are still on course to get to group margins by 2027. This year, we expect group reported margins to again reflect the historical phasing of being higher in the second half. The reported margin in the first half of 2020 decreased by 100 basis points to 20.9%, due in part to the effects of FX. We strip out M&A and SX. The margin fell by just 50 basis points due to operational gearing effects. In the steam specialty business, the reported margin reduced by 240 basis points to 20.5% due in part to currency. Organically, the margin was 190 bits lower as cost containment could not quite compensate for the fall in the top line. In ETS, the reported margin increased by 90 basis points aided by a larger contribution from higher margin thermal coax. Organically, the margin fell 130 lips as efficiency gains and cost containment lessened the impact of operational gearing. In Watson Marlowe, both the reported margin and organic margin increased by 100 basis points due to positive operational gearing and targeted cost containment. Turning now to cash on slide nine. Free cash flow increased by £21 million, with operating profit to operating cash conversion of 86%, up from last year's 67%. This was primarily a result of lower working capital outflow, as a traditional build of inventory was compensated for, to a degree, by lower sales and the deferral of £6.3 million of tax payments, £5 million of which will be paid in the second half of the year. On a constant currency basis, including acquisition and disposals, underlying working capital percentage of sales improved by 100 basis points to 22.9%. Investment in fixed assets was ahead of the prior period. While we postponed some non-essential capital expenditure in the second quarter, we continued with a number of strategically important programs, not least the continuation of work on the new facility for AFLEX in Yorkshire. We expect spend in the full year to be at a similar level to that of last year. Acquisitions in the half year represent the payment of an earn-out on Concave, the small technology acquisition that Watson Marlowe made in early 2018. In May, we paid last year's final dividend of £58 million, an increase of 10% over the prior year. And we ended the period with net debt of £326 million. Total committed debt facilities at the 30th of June amounted to £809 million, giving headroom of around £500 million. Net debt equated to 1.1 times trailing 12 months EBITDA, and that compares to our debt covenants of 3.5 times. I'll now hand you over to Nick to take you through the operations outlook.

Thank you, Kevin. As mentioned earlier, I will... first provide an update on our markets and operations in the first half of this year, including the impact of COVID-19, followed by a summary of the key points of today's presentation, including our latest outlook for 2020. To finalize, I will open for your questions. Turning now to slide 11. This graph tracks the quarterly evolution of global industrial production annual growth rates, which we refer to as IP. As you all know, IP is the best predictor of our markets. Today, I'd like to highlight two observations. First, prior to the advent of the COVID-19 pandemic, global IP was slowing for eight consecutive quarters and ended 2019 at virtually zero growth. In the first quarter of 2020, global IP contracted 3.9% before collapsing to an 11.8% contraction in the second quarter, which resulted in an 8% contraction for the first half of 2020. Second, this latest forecast indicates a recovery starting in the third quarter, but still resulting in a 5% contraction for the second half of the year, and therefore a 6.4% contraction for the full year 2020. As hopes of a V-shaped recovery recede, we now anticipate a slower rate of IP recovery in the latter part of 2020 than we assumed back in May, or than appears to be captured in these forecasts. On slide 12, we start the review of operations with the steam specialties business, which accounted for 58% of revenues in the first half, and where organic sales and profit declined 7% and 15% respectively. All geographic segments suffered organic sales declines, with an exchange headwind expanding the reported sales and profit declines to 9% and 19% respectively. The operating profit margin fell by 190 basis points organically to 20.5%. The strong cost containment actions were taken to mitigate the adverse effect of the sales decline without compromising the strategic capital revenue investments that will support growth in future years. Despite the challenging operating conditions caused by COVID-19, customer service indicators, such as on-time delivery, continue to improve across all geographies. We remain confident in our ability to continue outperforming our markets in all geographic segments, absent a significant resurgence of the virus. Moving on to slide 13. In the steam specialties, Europe, Middle East, and Africa segment, organic sales were down 8%, with operating profit down 23% organically. Sales decline in Northern Europe were less intense than Southern Europe, where countries have been more adversely impacted by the pandemic. Sales in the Middle East and Africa region declined significantly, while gastrop. was able to maintain sales at similar levels to the first half of the year. The operating profit margin decreased 360 basis points to 17.0%, as lower sales and an exchange headwind were only partly offset by strong cost containment actions and the favorable product mix. We believe the twin issues of COVID-19 and uncertainties surrounding Brexit will continue to suppress business sentiment and act as a drag on economic recovery in the second half of the year. Moving to the Asia Pacific segment, sales were down 8% organically, while the organic operating profit was down 13%. Sales in China were down 15% in the first half, as the severe 35% contraction in the first quarter was only partly offset by a strong recovery in the second quarter when sales grew 7% over last year. Korea achieved a strong 9% sales growth, driven by the shipment of several large capital projects for the electronic and the oil and gas sectors that carried over from 2019. Elsewhere in the region, Sales contracted strongly in Japan, Southeast Asia, and India. The new gastro sales company in China celebrated its first anniversary in April and achieved significant growth in the first half, despite challenging market conditions. The operating profit margin declined 190 basis points to 26.9%. as a significant drop in sales volumes and an exchange headwind were partly offset by strong cost containment actions and a positive product mix. Absent a significant resurgence of the virus, we anticipate a lower sales decline in the second half of the year, as the region leads the return to a more normal business environment. Turning now to the Americas, Overall, organic sales were down 3%, while operating profit was up 3% organically. All countries were impacted by COVID-19, albeit to different degrees. Nevertheless, our businesses demonstrated good resilience in this large and diverse region. Organic sales were down 8% in North America compared to a good first half of last year. Most of this decline was driven by a rapid contraction of our distribution partners in response to plant closures and falling industrial production. Latin America achieved 8% sales growth organically as our local manufacturing plants remained open and serving our customers despite the increasing challenges caused by the escalating infection rates in all countries across that region. Gesture with a smaller presence in this region served primarily through distributors, also experienced an organic sales decline against a very strong performance in the first half of last year. Reported operating profit margin was down 90 basis points to 18.5%, due mostly to the strong currency headwind. Organically, the margin was up, a strong 110 basis points. The continued severity of the pandemic across this region could potentially extend its duration. So we anticipate increased business weakness in the second half of the year. Moving now to slide 16 and the electric thermal solutions business. Revenues expanded 7% in ETS as a 12% organic sales decline was offset by the additional 4.5 months of revenues from Thermocoax. Additionally, we experienced a strong order book build in the first half of the year. Thermocoax, acquired in mid-May of last year, delivered strong double-digit sales and profit growth on a like-for-like basis compared to the first half of last year. This growth was partly driven by market share gains in the semiconductor markets they serve. As with steam specialties business, Chromalox's organic sales decline was primarily due to market-driven weaknesses. Nevertheless, continued performance improvements and strong cost containment initiatives strongly mitigated the adverse impact on profit. reported operating profit for ETS was up 16%, increasing the operating margin by 90 basis points to 10.6%. In early 2020, we initiated a process to reorganize Cromlox France in order to eliminate the losses of the European operation by the end of 2021. That process is expected to complete next week and start generating savings in the balance of this year. We also completed the sale of Protrace, a small non-core heat trace engineering business in Canada that was lost making in 2019. We remain confident that all the actions taken to improve the ongoing performance in Chromalox, plus the continued good performance of Thermocoax, and The unwinding of the order book build-up in the first half of the year will result in an improved second half for the ETS business. Turning now to Watson Mall on slide 17, where organic sales grew 5% with strong contributions from all geographic regions, while operating profit grew 9% organically. A small exchange headwind increased reduced operating profit growth to 8% on a reported basis. Sales to the biopharm sector, which accounted for 53% of revenue in the first half, expanded by a strong 18%, aided in part by an unseasonal order book reduction in the second quarter of the year. Sales to the other industrial sectors declined 6%, which is consistent with the organic sales decline of the steam specialties business. The operating profit margin remains strong and increased a further 100 basis points to 32.6%, reflecting the combined effect of sales growth and prudent cost controls. In the second quarter, production commenced, at our new £23 million state-of-the-art facility for AFLEX in Yorkshire, UK, which will be fully operational in late 2021 following multiple validation processes. Also in the second quarter, the Board approved a £24 million investment to construct a new manufacturing facility in Portsmouth, UK, significantly expanding the capacity of our BioPure connectors business that was acquired in early 2014. The strong first half performance in the biopharm sector was buoyed by some customers pulling forward orders from the third quarter in order to protect their supply chain during the COVID-19 pandemic. We therefore anticipate sales growth to be lower in the second half of the year for the Watson-Marla business. Moving now to a COVID-19 update on slide 18. As I mentioned earlier, employees' health, safety and well-being remained our top priority during the first half of this year, with rigorous new measures implemented that helped keep infection rates very low across our group. All our operating companies stepped up their community engagement activities during the pandemic. supporting the vulnerable in the communities in which we operate. On our website, you can find multiple examples of these initiatives from all over the world, which make me extremely proud of our teams. With over 50% of revenues coming from sectors on the front line of the pandemic, we worked hard to ensure our sales and service engineers could continue supporting customers, most of which was done virtually. All manufacturing and warehousing facilities remained operational, with only a few sites experiencing short shutdowns, mostly in line with local government mandates. All businesses proved resilient to the worst effects of the pandemic, with strong cost containment and performance improvement measures mitigating the adverse impact of lower sales on our operating profit. The group's risk register was reviewed to reflect effects of public health crises, particularly COVID-19. This resulted in eight of the 14 risks on our risk register being updated with special attention to the mitigation plans. Turning now to slide 19, we have again added three new customer case studies. that help illustrate how our three businesses improve the performance of our customers and help them achieve their sustainability targets. For example, by reducing energy expenditure and waste. These case studies are further examples of how our robust direct sales model, diverse end markets, and continuous investments in innovation underpin the resiliency and performance of our group. However, in the interest of time, on this occasion, we have moved these case studies to Appendix 1, and I would encourage you to read more about them at a later moment. Moving now into our summary and outlook on slide 20, we are pleased to report a resilient first half performance. with an organic revenue decline limited to 5% and reported revenue decline of 4% despite an 8% contraction of global industrial production. The group operating profit declined 8% and was down 7% on an organic basis, resulting in a group operating profit margin of 20.9%, 50 basis points below the first half of last year. If July's month-end exchange rates were to prevail for the remainder of the year, there would be a 2% headwind on the translation of sales and a 4% impact on operating profit. As hopes of a V-shaped recovery recede, we now anticipate a lower rate of economic activity in the fourth quarter. As a result, we believe that organic revenue growth in the second half of the year will be lower than we anticipated in our May trading update. However, due to the operating profit being stronger than forecasted in the first half, our expectations for full year operating profit remain unchanged. And that concludes today's presentation. So we will now be pleased to take questions from the analysts on the call. I would request that before asking your questions, please state your name and that of your organization for the benefit of others on this call.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press star one on your telephone keypad. Once again, please press star 1 if you have a question. There will be a brief pause while questions are being registered. The first question comes from the line of Michael Tindall calling from HSBC Turkey. Please go ahead. Your line is open.

Hi there, gentlemen. It's Mike Tindall from HSBC. A couple, if I may. Just the first one, seems like you had a very strong first half in a relative sense. And I'm just wondering about your sales engineers operating virtually. Is there a degree of pent up demand because they had access issues that we might see coming back as the world approaches something slightly like normal again? And then the second question is just around savings. Cost containment in the first half very strong. Can you give us a sense of how much of that was temporary that we may well see come back in the second half and affect that drop through in the second half? Thanks.

Okay, thank you, Mike. I'll answer the first one, and I'll let Kevin answer the second one. So, yes, we're pleased we had a strong first half relative to the circumstances, and we were pleased that we were able to continue serving our customers, our sales engineers, our service engineers. We're still able to remain in touch. mostly, as I said, through virtual means, digitally, but that did not stop us supporting the customers, and we believe that the big risk of not being able to support the customers was therefore overcome, and we're very pleased with that. It was a great test for our sales and service engineers in the field all over the world. Does that translate into pent-up demand? I don't think so. I think we've stayed in line with with the requirements of the customers as they've been reopening or, in some cases, on the front line, maintaining their operations. So I wouldn't anticipate any additional pent-up demand because we weren't able to service them in the first half. What we will see, of course, is as the economic activity recovers, we'll see more interest as we're able to more and more access The plants physically will see more of that self-generated growth coming through, but we don't think there's any material damage to the demand that could have come through in the first half. Kevin, you can take the second one.

Yes. Hi, Mike. Yeah, in cost containment, obviously some of the costs will start coming back in again. In Q2, we were in total lockdown, and therefore sort of everything stopped, and hence the the cost savings probably a little bit higher than we were anticipating back in May. As we move into the second half, there's more mobility with our sales engineers. To your first question, they are getting out, particularly in Asia-Pacific, and seeing customers more, and that brings costs with it as well. However, having said that, you'll see that we've ceased the – future accrual of the UK pension schemes, so that will bring a saving in the second half. And obviously, we've got the restructuring in Chromalox in France, which will also bring savings in the second half. So yes, I think some costs will come back. And of course, we're very careful that we don't avoid cutting costs too much so that we damage the ability for the business to expand in the future, particularly going into 2021 when we hope we'll see growth return, and we won't be ready for that. So I don't think you'll see the same level of cost containment as you did in the first half, but it still will be better than last year. So you see an example of that will be the central costs where we're down 10% in the first half. I would expect a similar level of central costs in the second half, and that's a good barometer. Perfect. Thank you.

The next question comes from the line of Mark Davis Jones calling from Stifel. Please go ahead.

Morning, Nick. Hi, Kevin. A couple from me, please. Firstly, just a clarification. When the increased caution in terms of the revenue trajectory, Just to be clear, is that just a reaction to what you're seeing in terms of the macro forecasts out there, or is there anything that you're hearing from your business itself in terms of customer leads or whatever that is also giving you that impression?

Yes, Mark. Hi. Nice to hear your voice. The caution is essentially, yes, what we are seeing. I think nobody would be surprised that whilst we all thought that the recovery would be more V-shaped like in previous economic recessions. What we are seeing today is somewhat of a hesitance of people getting back to normal because of the nature of this crisis. We're seeing a bit more hesitance in the recovery of the economic activity of people coming back to work, that kind of stuff. We anticipate that you'll have the small flare-ups in different parts of the world that have to be addressed. We see all of these actions and these circumstances acting really as a drag on that recovery. Therefore, whilst we thought that the second half and into the first half of next year that the bounce back of economic activity would be stronger. We think that the economic recovery is coming, but not at the same pace. And we just feel that. And probably the economic forecasters haven't fully reflected that yet, but that's what we are feeling as we see the levels of activity improving, but not at the rate that we were anticipating before.

Great. And then the other question was around M&A. I mean, it's difficult given the uncertainty and obviously the movements in valuations around at the moment, but it's notable that some of the resilience in your performance has come from newer areas like Thermacowex. Are you actively out looking again at further M&A opportunities or is that something that needs to wait until the market calms down somewhat?

Good question, Mark. Look, we have for all three of our businesses a pipeline of companies that we think could fit our strategy and could be good members of our group to reinforce the group's organic growth and margin progressions and strategically contribute to the progress on our group. So we have those three pipeline for each tier of the businesses. We actually reviewed and updated that pipeline in the first half of this year and we continue to track. As we've always said, we would not buy anything just because it was available or suddenly the price was more accessible than before or whatever. We want to continue being and we will continue to be very disciplined with M&A, and only by what fits our strategy and reinforces the group on a strategic long-term basis. Having said that, we continue monitoring. If any of those companies in our pipeline became available, we'd be prepared. We have the balance sheet strength. We'd be prepared to address them, especially if that was, for example, in the Watson Marlowe business. or in the steam business, we'd be prepared to address them quickly. We have capability to do that. Management is now the worst of the – it wouldn't be a distraction on management because now the business is flowing and under control. We have the strength to balance it. So I think the circumstances are there for us to capitalize if the right opportunities arise. The only area where I would be hesitant to distract management at this point is ETS because, you know, we're working, the management team is working very hard and improving the performance of Chromalogs and that's coming through strongly, embedding, integrating thermal coax. So I wouldn't be excited about adding some distraction with a new acquisition at this moment in time for ETS. But the other two businesses, definitely yes, if they were the right one and became available.

Thanks very much. That's very clear.

Okay. The next question comes from the line of Jonathan Hoon calling from Barclays. Please go ahead.

Hey, guys. Good morning. Just a few questions from me, please. Firstly, can you just talk a little bit about that distributor destocking you saw in the first half? I mean, obviously, you're chatting to these guys. Is there any signs of a restock coming through in H2? That was the first question.

Yes, it's typical. In every slowdown of an economic activity, distributors, and I'm assuming you're asking the question because of those areas where we have a higher... share of our sales going through distribution channels, right?

Yes, just in terms of, yeah, absolutely in terms of ETS and also in terms of obviously the U.S. business.

Yeah, yeah. So inevitably, I mean, it's no surprise, distributors, as soon as they see the level of demand dropping, they have to resize their stocks so they stop replenishing those stocks and preserving cash, of course, for themselves. So that's absolutely expected and nothing really different to the slowdowns at the moment. When will it replenish? As soon as confidence returns that the economic activity is picking up, which in the States at the moment I would say is actually a difficult call. because you can all see how the state of the pandemic is affecting the different states. And so, personally, we don't feel yet that big surge coming back, and that's why we referred it in the second half of this year. We probably would expect slightly lower levels of demand because America is lagging in other parts of the world in terms of the pandemic. So I would expect the restocking to occur. in the U.S., both in SIEM and the gastro distributors. But probably, if anything, at the end of this, only once the business really starts recovering in a serious way.

Thank you. And the second question may be slightly related. It's just in terms of the outlet for your project side of your business. what it's really just in terms of in terms of how that's playing out have you seen a lot of delays in terms of the projects you've received in sort of h1 and in terms of them sort of being delivered is that going to come back in the second half or do you feel that some of the project delayed business or the project business has been delayed into 2021. so so thanks jonathan that's that's uh another good question uh again just as a reminder to everybody the the larger project activity is is the capex driven business is only about 15 of our activity over the rest of the group so it's not

the major part. But typically, and again, this time is no different, those projects that are well-advised, and one thing I have to remind everybody is, almost without exception, we're always a supplier to the later stages of any project. So our products will come in on these projects when they are coming to the end, nearing completion, or the latter stages of any project. So when any economic crisis hits or recession, then those projects that are ready at the point where we're going to have to deliver, usually they've gone beyond the point of no return and they continue. And so the projects that we have in our order book tend to be delivered Some might get a bit delayed on deliveries, but usually those go through. And other projects that were, say, partway through, halfway through, and we've been working with the engineers, the contractors, and we're expecting orders, sometimes those get a bit delayed, but they tend to come. And we've seen that continuing. Now, that trend is repeating in this first half and we would expect in the second half. Now, obviously, the pipeline of new projects, that's the one that gets impacted, but we wouldn't see the effect of that until probably next year. So we expect the element of project activity within our business to continue similar to what we've seen. We have seen some projects being delayed a bit, And that's not surprising. But I think the pipeline effect or a smaller pipeline will probably only be sensed next year. Great, thanks.

And maybe just a final one. I wonder if you could just talk a little bit about sort of biopharma. I saw that you're expanding your capacity in BioPure. Can you just give us a little feel? I know it's a little bit tricky, but can you just give us a little feel for how you think biopharma sort of trends in 2021? I know it's a little bit further out, but... How are you seeing that relative to 2020? Do you think that the strength in that business can continue for Watson Marlowe?

So even before the pandemic, we were saying that just the characteristics of the biopharm sector, the biotechnology and biopharmaceutical businesses, this industry has been growing globally, double digits, nine, 10, percent per annum for at least 20 years and in the last two or three at least the data we've seen suggests that that industry as a whole has has actually gone into double digits growth uh a pandemic of this nature actually is is an opportunity for them to to step up and we've seen many of our biofarm uh customers you know all of those names that you hear reported in the press that are working on vaccines they're all customers of ours and and and so we have seen um And in fact, as we mentioned here, the demand on Watson Marlowe in the first half of this year was actually, yeah, in double digits and quite strong. The sales were a bit benefited also by them pulling forward some orders because they were obviously worried with their own supply chain issues, so they did ask us to deliver early a few products that were probably scheduled for the third quarter. But we don't see that trend changing. We see still strong demand for the biopharmaceutical sector in the second half and going into 2021 and beyond that because we think the nature of that industry isn't going to change in the short term.

That's very helpful. Thank you very much.

Thank you, Jonathan. Nice to see you.

The next question comes from the line of Robert Davis, calling from Morgan Stanley. Please go ahead.

Yes, thanks. I've got a couple. First of all, the changes that you've made to France and profitability there, I guess the biggest risk for sort of staying on track with that program and sort of optionally what you're sort of doing. The second one was just really important. Sorry, Robert.

Unfortunately, you're breaking up and we couldn't understand your question. We couldn't get it.

I'm sorry.

Sorry, Robert. We've lost you. No, we've lost you, I'm afraid.

We will move on to the next question, which comes from the line of Andrew Douglas, calling from Jefferies. Thank you.

Good morning, gents. Hopefully you can hear me loud and clear. I've got four quick questions, please, if I may. With regards to your previous comments on Watson Marlowe, can you give us an indication of how much sales was brought forward? And I think previously you've alluded to Watson Marlowe being flat for the full year. You seem to imply that even though we'll have a bit of a slowing in growth in the second half, that should still be positive. Is that a correct read of what you said? One by one, please.

Yeah, let's answer them one by one. So, hi, Andy. Good to hear you. So, yes, we have seen some demand pull forward into the first half, from the third quarter mostly, into the second quarter. And we actually saw order book declines. contract or reduce in the second quarter for Watson Marlowe because of that reason. But we're still anticipating, as I said in response to Jonathan's question earlier, we're still anticipating strong demand coming through in the second half of this year. It will probably remain in the low double digits, I think, for the biopharm sector on its own. Don't forget, of course, all the other part of Watson Model that's not biofarm sector related, it actually has contracted, like all other industrial sectors have. So what you see in the total Watson Model is the balance between one part doing very strongly, and will continue to do strongly, but that's partly held back by the other half of the business that is contracting.

Yeah, and if I can maybe add something there. So, yeah, we do expect growth in what tomorrow for the year. So they're a bit more optimistic than we were in May time. But as Nick has said, as that pull forward means that we wouldn't expect growth in the second half to be at the same level as the first half. But, yes, we do expect growth for the full year.

Okay, understood. And can we just talk briefly about ThermoCoax? You say that there was growth driven by market share in Semicon. If you take global IP of high single-digit declines, it looks like you've outperformed that market by about 20%. That's a hell of a market share gain. Can you give us a bit more indication as to what's going on there? Is that something that we can continue to see growing at very healthy rates over and above the market?

So our sales... Good question. Thanks for that. Our sales in Thermocoax to the biopharm sector is to the manufacturers, as you know, of... equipments that, for example, that make the silicone chips. So it's the equipment manufacturer or for the equipment that makes the chips. And what we've, well, this has been even before the pandemic, for some years, Thermocoex had been using their superior technology to develop a better solution for some very critical temperature controlled applications. High temperature, very, very precise, very stringent tolerances about variability across the surface and et cetera. So we'd already started replacing, displacing the incumbent suppliers on those applications, not only in the existing generation of equipment, that was already in the field, and therefore when that equipment needed a part change instead of the new part coming with another supplier, with an element coming from another supplier, that aftermarket was beginning to be serviced with parts coming from thermocoax. And we also gained some new equipment, some new generation, some new fit, new build, where it was going out with our equipment. So we are seeing a displacement of competing incumbents, both on the new builds and on the aftermarket. And that's why probably those numbers... well, that is because while those numbers are larger than you would have originally anticipated, when you're looking at the Semicon industry, you're probably looking mostly at the new build and forgetting about the aftermarket of the large install base that's also contributing.

Sorry, Andy, the other thing I'd add is that one of the areas that they specialize in is atomic layer deposition, ALD, which is It's, as you know, growing faster than conventional silicon techniques, so we're getting a boost from that as well. And are you agnostic from a geographical perspective, whether it's coming from the States or China? It's not coming from China. It's coming from Europe and the U.S. Our two biggest customers are European and U.S.

Okay, cool. And then I guess my final question is on operational gearing. I guess it's a slightly different way of asking Mike Kindle's question. Given that some costs will be going back in next year as you, hopefully, as we all come back to normal, what kind of drop through should we be thinking about with regard to volume growth? Is that kind of still in the kind of 35% to 40% or will it be a bit less?

Well, what we said, Andy, at the AGM statement was we were expecting a total drop through from total sales to total profit of about 45%. It actually ended up at 47%, so pretty close. We're not giving guidance for the second half. other than we're very happy with where our consensus is and where our expectations are. But we're not giving specific guidance in the drop-through in the second half.

Sorry, the question was more on 21, as we get some volume growth.

Oh, sorry, 21. We're definitely not giving guidance on 21. Come on, Andy, most people aren't giving guidance for 20. You'll have to wait... a little later in the year, I think, for any guidance in 21 so we can see what's happening. A good try.

Thanks, Andy.

Before we take the next question, please be reminded, if you would like to ask a question, please press star 1 on your telephone keypad. The next question comes from the line of Andrew Wilson, Chloe Brom, JP Morgan. Please go ahead.

Hi, good morning, everyone. I just have three, I think, probably quite quick ones. But I'm interested in the resilience in the steam business. I think it's surprised some people just because getting on site has historically been such an important part in terms of driving sales and at least the kind of customer audit side of that business. Just interested, obviously, what's been a success in terms of shifting that model. Does that change anything going forward in terms of how you think about running that business and, I guess, whether you can do more of that remotely, and maybe if there's a cost advantage of that, or is this something that you expect to go back to normal, basically, as we go back to normal, whatever that means?

Okay, yes. Hi, Andy, good to hear your voice also. So look, yes, we're very pleased with the resilience of the steam business. I will remind you, of course, that We've been working for years on digital progress in all our businesses, but your question is particularly in STEAM. And so this pandemic was, yes, at first moment we were also concerned, as most of you were, with is our direct sales initiative going to be in some way jeopardized or damaged by by limited access to customer sites. And actually, the work that we've already been doing and that we accelerated in terms of digital connection with customers, it just helped us verify that we are able to continue accessing the customers, even if virtually. And the customers, again, in a crisis, they will come to the people that they know can help them fix their problems And that we were very nice to confirm during this pandemic. So does it change anything in the way we run the business? Not really. I mean, these are, in essence, productivity tools. These bring additional benefits also for the relationship with the customers. I think it's just part of the continuous strengthening of the business that was tested, a strong test, and has come out consistently. very well at the other end. So if anything, it just encourages us to continue working on this line and strengthening the business with more digital access with customers and more digitalization and connection of the products and all of the things that we were doing already.

And Andy, I think as Nick says, we've probably seen acceleration of that journey. But one thing we have seen in China now is that site visits are now back to pre-COVID levels. I'm not sure if that's a precursor of what will happen for the rest of the world, but it's certainly the way things have gone in China. Okay.

Perfect. And then just kind of one, I guess it's fallen up a little bit from Jonathan's question earlier just on the distribution side, but does any, I guess, what we've been through over the last few months, does it have any effect in terms of accelerating potentially moving some customers from distributors to direct sales. I mean, obviously in a number of the areas of the business that's kind of unobjective. Does it accelerate any of that progress or do you expect no real change from that?

Andy, I would phrase it in a slightly different way. Again, the pandemic has been a great test to many of the strategies, the principles, the activities that we've been doing. and has helped confirm that we have better business and more resilience in our business when we have direct contact with the customers. And that's just, again, being confirmed. You will have higher volatility when you don't have complete visibility of the end user of your products. I wouldn't go as far as to say it's going to accelerate it because this has been a trend that you have already witnessed for years and that is part of our strategic direction. And I will remind you, it's not about shifting a customer from happy or satisfied with the services getting from a distributor to now forcing him to go buy direct from us. That's not what we're doing. It's not jeopardizing. It's not a zero-sum game. It's about accelerating our initiatives to provide an alternative contact to the end users, mainly, and OEMs, so that they can have the benefits of the self-generated solutions that we bring to customers that you can't expect any distributor to do. But that doesn't mean that we're going to cancel work with distributors. We haven't been doing that. We're not planning to do that. But we have been accelerating or continue to accelerate the drive of direct sales into end users of our products.

That makes sense. And then maybe a final one, just on Concave from Concave. pronouncing that correctly. You got it right. It feels like this is the first time we've had any real information about obviously the sort of mystery pre-revenue acquisition we talked about maybe 18 months or so ago. Just interested on, you talk about the sort of the new product and I guess development of the QDOS family, which obviously has been very, very successful in terms of what's the model. Just interested in, you know, I guess some help or scaling on the size of the opportunity here would be helpful.

So, Andy, you're correct. This is the first time we've disclosed the name, I think, Concave, because as we said, when we acquired this business about two years ago now, it was a pre-revenue company. They were developing what we saw as the next generation, if you want, of an evolution. I think the explanation might be a bit too too strong to say, but an evolution of peristaltic pumping technology. So different ways, instead of the traditional squeezing of a tube, to put it in plain terms, they're using different materials with different ways of compressing those materials to generate the same peristaltic effect. And this is a small group of PhD researchers in Germany that were making good progress, had a series of patents. And they came to us because they recognized that Watson Marlowe is the world leader in peristaltic pumps around the world and has this global direct sales organization around the world that would be the perfect fit for the technology that they were developing. We didn't want to... disclose too much about it until, and in fact, the acquisition, as you can see, the consideration was a significant element linked to an earn out, which was contingent on high standards of performance of a series of tests or products being tested extensively. and therefore only would we pay out the earn out if the products that they developed could deliver those high levels of performance in very adverse circumstances. So let me give you an example. Hypo, so some very, I'm not going to be too technical here, but hypo, very aggressive, chemically aggressive products you just can't put through your normal silicone tubes or plastic tubes because they chemically react with the materials in the tubes. So they've developed these other flexible materials, some of them metallic-based, that therefore can withstand the chemical aggressiveness. And that allows us to take our peristaltic pumps. It's the same QDOS pump. For example, the first product that we've launched now in the second quarter is is the same QDOS pump but with a different pump head that now has this conveying wave technology, CWT technology, in the pump head and can therefore pump those very aggressive chemicals in ways that the normal QDOS pump couldn't before. And that for us opens up a real big, we see this as a long journey, lots of opportunity in the long term coming from accessing other applications that today the technology for peristaltic pumping doesn't exist yet. And we think this is a very exciting breakthrough, but you've got to take one step at a time. This is the first product that's been launched. It's passed all the tests with flying colors since we paid the earn out and started talking about it publicly.

Thanks, Nick. Appreciate all the detail. And congratulations, Kevin, on the retirement. Good luck in the future. Thanks, Andy. Thanks, Andy.

As a final reminder, if you would like to ask a question, please press star 1 on your telephone keypads. There appear to be no further questions at this time, so I'll hand back to Nicholas Anderson for any closing remarks.

Well, I thank everybody for signing in and for this call and for the questions that have come from the analysts. Always good to hear your voices. All of them very good questions. So thank you all very much, and I hope you all stay safe. Thank you.