Spirax Group Plc

Good morning, everyone, and welcome to our 2023 half-year results announcement call. I'm Nicholas Anderson, Group Chief Executive, and I'm joined here today by our CFO, Nimesh Patel. Regarding today's presentation, I will again start by sharing the highlights of the first half, and then Nimesh will take you through our financial performance. Later, I will return to cover the operations and outlook for the full year 2023. And to finalize, we'll be happy to take questions from the analysts on the call. As you all know, two days ago, we announced my desire to retire after 10 years in this role and 41 years of full-time employment. I'm really pleased and proud of what we have achieved together over these years and wish to publicly thank all my colleagues, past and present, for their support and contributions along this journey. I'm really looking forward with excitement to the years ahead when I plan to realize many personal projects that have been delayed due to my busy schedule of my executive career. I'd also like to say that I'm delighted that the Board chose Dimesh to lead our group on the next leg of this journey, which I'm sure will be even more successful. Back to the order of the day. I would like to start by acknowledging and thanking all my colleagues across the group for their outstanding efforts in what has been a good but challenging first half. We have delivered results broadly in line with our expectations, despite weaker than expected biofarm demand and the softening IP environment. As overall demand across the group was higher than expected, Sales were in line, but operating profit was slightly below our first half expectations. We have achieved strong organic sales growth in steam specialties and most of ETFs, offset by sales decline in direct industries in Watson Marlowe, where BioPharm customers continue to satisfy part of their current needs with excess stocks built up during the COVID-19 pandemic. To note, including the weaker including the impact of weaker biofarm demand, group sales grew close to 11% organically. As a result of lower sales in our highest margin businesses of Watson, Marlin, and Dirks industries, our group operating profit margin was down 360 basis points to 20.2% in the first half of the year. Steam specialty sales grew 15% organically. with its operating profit margin expanding 190 basis points. ETS sales grew on a pro forma basis, while operating profit declined due to lower sales in the Semicon fabrication equipment sector, or as we call it, Semicon for short, as well as integration costs incurred to align recently acquired Vulcanique and Druix Industries with our group's operating standards. Vulcanique. acquired in late September of last year is performing well and ahead of our initial expectations. Sales of Durex Industries acquired in late November 2022 declined on a pro forma basis due to lower Semicon demand. Watson Valo sales declined 21% organically, which adversely impacted their operating profit. Although Watson Marlowe's sales were below the exceptionally high levels experienced during the COVID-19 pandemic, demand from BioPharm in markets remains very strong, and the businesses' underlying strength and competitive position in the market remain unchanged. I will come back to these points later on. We continue making good progress with our strategic and operational priorities during the first half of this year. In ETS, the integration of Vulcan-Echondrix industries is progressing very well, and we have initiated a 58 million US dollar investment to expand the Cromlox manufacturing facility in Ogden, USA, which will significantly increase our capacity for medium voltage heating solutions. Decarbonization of industrial processes is driving substantial opportunities and increased demand for both steam specialties and ets with many solutions based on our patented medium voltage technology in steam specialties we completed the installation and commissioning at the diageo facility in turkey of the first two worlds electrophit which is one of the target zero solutions we launched last year protopaxi's proprietary digital platform strata continues being deployed across steam specialty sales companies, together with the build out of regional hubs to leverage the data this connectivity is delivering to our sales engineers. In June, we announced the acquisition of a 15% stake in Kyoto Group as part of a strategic investment agreement, alongside major Spanish energy group in Vidrona, to accelerate the decarbonization of industrial process heat with Kyoto's proprietary heat, a molten salt thermal energy storage solution. Lastly, we continue making further progress on our ESG agenda, and I'll provide more details of this on the next slide. As I just mentioned, we've continued progressing our group's ESG agenda, and in particular, our journey towards net zero. Scope one and two greenhouse gas emissions have fallen by 16% so far in 2023, compared to the 2022 mid-year performance. And we've achieved a 47% reduction against our 2019 baseline, which means that we are well on track to achieve our milestone target of 50% reduction by 2025. We have improved our energy efficiency, reducing global energy use on an intensity basis, as well as achieving year-on-year reduction in water consumption compared to the 2022 mid-year performance. We are also deploying Cotopaxi's Strata platform across the group's 40 manufacturing facilities to enable real-time monitoring and improvement of our own consumption of water, energy, and steam. We are building on the momentum of 78 biodiversity projects completed in 2022, with a further 41 projects undertaken so far this year. In the first six months of 2023, we have also made good progress developing roadmaps to implement sustainable packaging across all group manufacturing sites, as well as eliminating the use of solvent-based paints. These are just some of the many internal initiatives the first half, in addition to continued support of customers to help improve their own sustainability performance. And with that, I'll now hand over to Dimash to take you through the first half financials in more detail. Thank you, Nick.

Before I begin, I'd like to acknowledge your significant contributions to the group and the strong positions you have built in our three businesses. It's a huge privilege to be trusted with the leadership of this very special group, and I'm looking forward to building on your legacy. Now, let's begin with a summary of the financials. Remember that, as always, the numbers I am presenting are the adjusted results. Details of the adjusting items are given in the appendix. Sales were 13% higher, reflecting an organic increase of 2%. Excluding sales to Watson Marlowe's BioPharm customers, organic growth was 11%, which reflects the strong performance across our businesses where demand is more closely linked to IP growth. Operating profit was 4% lower or down 13% on an organic basis. Our operating profit margin contracted by 360 basis points to 20.2%. And on an organic basis, the margin contracted by 370 basis points. This margin performance reflects the impact of operational gearing and an adverse sales mix, with the lower demand from customers in the biopharm and semi-con sectors impacting our highest margin businesses. Net finance expense increased due to higher average net debt following last year's acquisition activity, with only a modest impact from the rise in interest rates on the floating rate component of our debt. For the full year, we expect net interest costs of 35 million pounds. Our effective tax rate was lower year on year at 25.4%. We expect the tax rate for the full year 2023 to be similar to the first half. Adjusted EPS of 155.2 pence was 11% lower, higher than the rate of decline in operating profit due to the impact of higher financing expense offsetting the lower tax rate. And finally, net debt, which is higher following last year's acquisitions, stands at £748 million. Reflecting our confidence in the group underlying drivers of growth, we have declared an 8% increase in the interim dividend to 46 pence per share compared to 2022, which follows growth of 12% in the total dividend in 2022. Moving to the sales bridge, translational exchange movements had a positive impact of £12 million or 1.5%. Given the continued appreciation of sterling and based on rates at the end of July, we now anticipate an adverse impact on the group's full year sales of between 2% and 2.5% compared with the full year 2022. Of course, movements in exchange rates are often volatile and unpredictable, and therefore the actual impact could be significantly different. Across all three businesses, sales were supported by price increases to protect our margins and pass through the effects of inflationary pressure. Organic growth of 2% reflects the strong performance from both steam specialties and ETS, offsetting the decline in biofarm sales at Watson Marlowe. The organic increase in steam specialties was 15% with strong growth across all regions. ETS sales grew by 7% organically. Both steam specialties and ETS grew significantly ahead of the low 1% IP in the first half. Watson Marlowe sales were down 21% organically compared to a very strong first half of 2022. as a result of the ongoing de-stocking by BioPharm customers. Our acquisitions, net at the disposal of our Russian operations, had a positive net impact on sales of around 10%. On a pro forma basis, Volcanique and Eurex Industries' sales were higher than in the first half of last year, with strong growth of Volcanique partially offset by lower sales at Eurex Industries. Both Durex Industries and to a lesser extent Thermocoax have been impacted by lower demand from customers in the Semicon sector. Sales to this sector accounted for 18% of total ETS sales in 2022 on a pro forma basis. Moving on to the outlook for sales, we are confident in our group's resilience and ability to navigate the current uncertainty in the macroeconomic climate and sectors. Demand from Watson Marlowe's BioPharm customers is now likely to normalize in 2024 as they continue to work through COVID-19 driven excess inventories. Reflecting the continued challenges of forecasting the precise timing and pace of a recovery in BioPharm and Semicon demand, we have updated our guidance within a range. For the group and excluding the impact of the currency headwind I mentioned earlier, compared to 2022 pro forma sales of over £1.7 billion, we anticipate sales growth of between 0% and 4% for the full year. The next bridge highlights the movements in adjusted operating profit for the half year. Exchange movements had a small positive impact on operating profit of approximately 1.7%, as a result of translational and transactional impacts. Steam Specialties' profit grew 25% organically in the first half, well ahead of the growth in sales, reflecting strong operating leverage. ETS adjusted operating profit was broadly flat organically compared to the first half of 2022, despite the strong organic sales growth as a result of the weaker Semicon demand in Thermocoax. Watson Marlowe's adjusted operating profit was down 47% organically due to lower sales to customers in the biopharm sector. As you will recall, actions were taken in the first half of the year to appropriately right-size capacity and overhead support costs in Watson Marlowe, with the full beneficial effect to be realised in the second half of the year. Destocking by our BioPharm customers is expected to be a short-term headwind, with a return to growth expected during 2024, and as such, no further restructuring actions are currently planned to avoid compromising the longer-term growth potential of the Watson Marlowe business. The increase in central expenses includes the impact of investments in implementing our digital and sustainability strategies through our group functions. For the full year, we would expect central expenses in the order of £30 million. The combined adjusted operating profit of our acquisitions net of disposals represents a first-time contribution of £14 million to this half's results. On a pro forma basis, combined operating profit in Vulcanique and Durex industries was lower than in the first half of 2022, reflecting weaker Semicon demand in Durex industries and our planned investments in integration costs. As in Watson Marlowe, we also undertook right-sizing actions in Durex Industries with the full beneficial impact expected in the second half. Overall, total group operating profit was down 4% or 13% organically. While I have spoken about our adjusted operating profit, I do also want to highlight two items impacting our statutory results in the first half. Restructuring cash costs of £5 million incurred in the right-sizing of Watson Marlowe's capacity and a software-related non-cash impairment charge of £14 million. This charge relates to our project to upgrade the ERP system in Steam Specialties, which began in 2018. Since then, we have made the decision to implement a consistent ERP solution across all three of our businesses, making use of newer technologies, enhancing future capability and leveraging the scale of the broader group. Moving to the next slide and the group adjusted operating profit margin, which contracted by 370 basis points to 20.2%. While strong sales growth in steam specialties and ETS offset the decline in Watson Marlowe, lower demand from customers in the biopharm and semi-con sectors impacted our highest margin businesses. The resulting impact of operational gearing and difference in the group's mix of sales compared to the first half of 2022 had an adverse impact on the adjusted operating profit margin. Steam's specialties margin of 24.4% saw strong organic progression up 190 basis points, reflecting volume growth, cost containment initiatives, and strong pricing discipline to offset inflation and protect margins. This progression was offset by organic declines in the adjusted operating profit margin at ETS and Watson Marlowe. reflecting the temporary weakness in demand that I've already spoken about. The ETS margin, including the contribution from acquisitions, was 14%. The pro forma combined adjusted margin of Volcanic and Eurex Industries was lower than in the prior year. And Watson Marlowe's margin was significantly lower at 24.6%. In terms of the outlook for the group margin, we anticipate a year-on-year decline of between 100 basis points and 200 basis points compared to our 2022 adjusted operating profit margin of 23.6%. Nick will comment further on the drivers of our margin when he speaks about each of our businesses. Turning now to cash flow. Cash conversion in the first half was 48%, slightly above the first half of 2022. CapEx of 51 million pounds represented 6% of sales and we expect to spend around 7% of sales in the full year, which includes our initial investment in the expansion of our Ogden facility to meet the growing demand for decarbonisation solutions. We ended the half with net debt of £748 million, as a result of the debt taken on to finance the acquisitions of Volcanique and Durex Industries, with leverage of 1.8 times EBITDA. for the full year, we continue to expect cash conversion of above 70% in line with the guidance from earlier in the year. And so with that, I'll hand back to Nick to talk you through the operating performance of our three businesses.

Thank you, Damesh. On slide 14, we once again share a graph with the annual growth rates by quarter of global industrial production, which, as you know, we refer to as IP. The table in the middle of the slide shows the annual IP growth rates for the last four years. And as you all know, IP is the best predictor of our markets. Now on this graph, the blue line represents Oxford Economics latest forecast on the 27th of July of this year. The red line represents their forecast in November of last year at the time of developing our budgets for 2023. while the green line is their forecast in February of this year, which we shared with you at our preliminary results announcements in March. There are two observations I'd like to highlight here today. First, there is really no material difference between the full year IP forecast at each of those three dates, which hover around the 1% growth assumed in our original planning assumptions for this year, and is also the actual IP growth the first half of this year second global ip in the first quarter of this year turned out to be a little bit better than forecasted in february with the latest forecast still indicating global ip recovery starting in the second quarter and accelerating as of the fourth quarter of 2023 which suggests ip rising to 1.8 percent in the second half of this year and improved demand levels in 2024. But it's really still very challenging to make firm IP predictions for 2023, as these forecasts could still change considerably given the uncertainty surrounding China's economic recovery and the monetary policies deployed by central banks globally to contain persistent inflationary pressures. Nevertheless, our resilient business model ability to self-generate sales in significant proportion of our sales from maintenance and repair budgets of our customers, underpin our confidence in continued self-generated sales growth ahead of IP. Now, we start the half-year review of our operations with the steam specialties business. Demand for steam specialty products and solutions grew significantly above IP in the first half of 2023, ahead of our expectations and ahead of sales, with the business further expanding its order book. Sales were up 15% organically, while operating profit grew 25% on an organic basis. Demand was strong across all regions and most market sectors, with Asia Pacific also benefiting from some large CapEx-driven project orders that were expected in the second half of the year. The 24.4% operating profit margin expanded by 190 basis points on an organic basis, as we benefited from operating leverage, price discipline, and strict cost management. As I mentioned earlier, we successfully completed our first world electrofit solution in Turkey. Retrofitting the existing boiler's gas burner for electric heaters and helping that site become Diageo's first fully decarbonized facility worldwide. New orders have already been placed and we are building a pipeline of interest from other customers around the world. Cotopaxi's Strata platform is being deployed across saline specialties operating companies to digitally enable efficiency improvements for our customers as well as for our own manufacturing facilities. We anticipate steam specialties full year organic sales growth significantly above IP with half yearly split of sales closer to our typical 48% to 52%. We also anticipate the improved first house operating profit margin to be sustained for the full year. Given the fundamental changes we've made to the shape of ETS over the past 12 months, I will focus my narrative along the slide on the total performance of the broader ETS business. Demand for ETS products and solutions has continued growing significantly above IP in the first half of 2023, with the business's order book further expanding over its already record levels of 2022. We experienced strong demand for Chromalox and Vulcanique products, supported by growing interest for decarbonization solutions, while Durex Industries and Thermocoax experienced weaker demand from the Semicon sector. ETF sales grew 84%, with operating profit up 110%, reflecting the first-time contributions from the Vulcanique and Durex Industry acquisitions. Excluding these contributions, sales were up 7% organically. The resulting operating profit margin was 14% and was up by 180 basis points. As already mentioned, we initiated a 58 million US dollar investment to extend Cromlox's facility in Ogden, USA and establish a state-of-the-art manufacturing unit exclusively dedicated to medium voltage heating solutions, which we expect will be fully operational in early 2025. We have made good progress with the integration of Vulcanique and Durex Industries to align both acquisitions to our group culture, our values including safety, our business model, and core operational and financial processes. In addition, we have begun to leverage cross-selling opportunities between Durex Industries and Thermocoax, as well as consolidating their US manufacturing sites. Now, compared to the 2022 pro forma results, we now anticipate full year 2023 sales growth well above IP, with half yearly sales split also closer to the typical 48%, 52%. As well as larger decline of the operating profit margin than we guided through at the beginning of the year because of the weaker semi-con demand. In Watson Mallow, sales for the first half of 2023 were 21% lower on organic basis due to continued destocking by BioPharm customers. which we now anticipate will continue into 2024. Although sales are lower than an exceptional level experienced during the COVID-19 pandemic, compared to the first half of 2019, sales have grown by 9% on an annual compound basis, which is consistent with the pre-pandemic growth rates of Guatemala. In the first quarter of 2023, Watson Mallow took steps to appropriately right size manufacturing capacity and reduce overhead support costs in order to offset the adverse impact of lower sales volumes on the operating profit margins without compromising on our ability to respond to increased sales. The full benefit of these actions are expected to materialize in the second half of this year. The higher than expected first half sales decline adversely impacted Watson Marlowe's profitability, with first half operating profit declining 47% organically of a record first half of 2022. Now, we anticipate sequential growth in sales and operating profit in the second half of this year. With the half yearly split also closer to the typical 48% to 52%. Biopharm and markets remain robust and we anticipate the underlying demand growth has continued at its pre-pandemic growth rate of over 10% per annum. Therefore, the businesses underlying strengths and competitive position in the marketplace remain unchanged positioning the company well to meet the expected return of sales growth in 2024. We've prepared this new slide to help improve your understanding of the ongoing dynamics within Watson Mall's biopharm business. Please note that this graph is for illustrative purposes only and is therefore not drawn to scale. The blue line represents the annual demand on Watson Marlowe from the biopharm sector from 2016 to our latest estimate for 2023. The green line represents the underlying demand through the COVID-19 cycle, assuming continued demand growing at its pre-pandemic rate of greater than 10% per annum. We estimate the incremental demand generated by COVID-19 to have been close to 100 million pounds. Two thirds of the demand forecasted at the beginning of the pandemic when expectations for global inoculation rates were higher than ultimately required to defeat the pandemic. This COVID related demand is represented by the red line on the graph. The vertical arrow in 2021 between the blue and the red lines therefore represents demand placed on Watson Marlowe in excess of what was actually required to defeat COVID. While the vertical arrow in 2023 between the green and the blue lines represents demand currently being satisfied by excess stocks built up during that pandemic. So based on all of these assumptions, Our takeaways are, first, most of the biofarm customers destocking should occur in 2023. And second, once these excess stocks are fully consumed in 2024, we should expect Watson Marlowe's biofarm demand to return to those underlying levels before resuming its pre-pandemic growth rates of greater than 10% per annum going forward. now let's be clear visibility in the market regarding actual levels of excess stock is very poor with most customers unable to provide a reliable information nevertheless once we get through this fog which we believe will dissipate during 2024 we are confident that watson malo's total organic growth will return to its 30-year high single-digit track record. 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 by reducing energy expenditure and waste while contributing to a more efficient, safer, and sustainable world. These case studies are in the appendix one of this presentation, and I would encourage you to read more about them at a later moment. So with that, we now move into the final slide of today's presentation, which summarizes our first half performance and our full year outlook. First half performance was broadly in line with our expectations, as overall demand across the group was higher than expected, sales were in line, where operating profit was slightly lower. Strong sales by steam specialties was offset by weaker Watson Marlin direct industry sales, which resulted in an adverse mixed effect on the operating profit as a result of lower sales by the higher margin businesses. It is worth noting that excluding BioPharm, the groups achieved 11% organic sales growth in the first half of 2023. Now, our revised full year outlook for 2023 now assumes recovery of biopharm and semicon sectors moving out into 2024, with most of the stocking occurring in 2023. This would result in the half yearly sales split being closer to that typical 48%, 52% of prior years. If the exchange rates at the end of July prevail for the balance of this year, we anticipate a small half-year currency tailwind becoming a full-year currency headwind on sales and operating profits of between 2% and 2.5%. Now, compared to the full-year 2022 pro forma results, we anticipate sales growth within a range of 0 to 4%. while the operating margin would decline between 100 basis points and 200 basis points. We remain confident that the underlying biofarm demand of the end markets remains as strong as in pre-pandemic periods. And therefore, the current demand softness is temporary rather than structural. More importantly, the group's underlying strength and competitive position in the marketplace remain unchanged. And we are therefore very well positioned for stronger growth in 2024. And that concludes today's presentation.