Spirax Group Plc

Good morning and welcome to our 2024 first half results presentation. I'm Nimesh Patel, chief executive of Spirax Group, and I'm joined today by Phil Scott, our interim chief financial officer. And also in the audience is Louisa Burdett, who joined the group in July to be our new chief financial officer. The first half of this year has been more challenging than we had anticipated. Our financial results are slightly below our plans. And we have taken a more cautious view for the remainder of 2024. Overall, group organic sales growth was 1.3%, reflecting a weaker macroeconomic environment in key markets in the first half, particularly in China. Estimates for industrial production growth in China vary significantly across different forecast providers. and they've changed materially and often. Therefore, we focused on global IP excluding China, which in the first half was up 0.8%. This compares to our group organic sales growth excluding China of 2.7%, so well ahead of IP. In STS, where China represents nearly 20% of sales and is amongst our most profitable operations, sales and margin were lower on an organic basis. ETS was up organically, driven by continued demand for the electrification of thermal energy and delivery of operational improvements, increasing manufacturing throughput, all of which supported the industrial process heating division. Semicon demand in the industrial equipment heating division has yet to improve, although our customers are signalling a return to orders growth by the end of the year, which would only impact sales next year. Watson Marlowe was also up organically, and we have seen early signs of an improvement in biopharm demand, which is encouraging, but we do not expect a material recovery in sales in the second half. Our adjusted operating profit margin was down organically, with progress in ETS offset by STS. We maintained our cost discipline, but while preserving investment in our sales and manufacturing capabilities to sustain and enhance our future growth. We faced material FX headwinds in the first half, leading to reported sales down 3% and adjusted operating profit down 6%. Reflecting our confidence in the group's return to high levels of growth, we are declaring an interim dividend of 47.5 pence, which is an increase of 3%. Now, I've referenced the challenging macroeconomic environment in the first half, so I'll explain the trends in industrial production growth for IP and set out our expectations for the rest of the year. Global IP was weak throughout the first half, and in the second quarter of the year, it was weaker than forecast at the time of our May trading update. In key markets such as Germany, France, and the US, which account for close to 40% of group sales, IP contracted in the first half, the largest reduction being minus 4% in Germany. As the table shows, there have been material downward revisions to second half IP, particularly in Europe and the Americas, while the second half in China is forecast to be materially lower than in the first half. Although estimates continue to be revised downwards, there is still a large recovery forecast in global IP growth, excluding China, from 0.8% in the first half to 1.6% in the second half. we remain cautious about that outlook, particularly the scale of this forecast improvement. Therefore, we've taken a more conservative view in our planning for the second half, factoring in a smaller improvement in IP over the first half, and this is reflected in our guidance. So I'll now hand over to Phil to talk you through our financials before coming back to talk through our operational performance.

Thanks, Dinesh, and good morning, everyone. So, as always, the numbers we'll be discussing today are the adjusted results. A full reconciliation between the statutory and adjusted operating profit is included as an appendix to today's presentation. And just to remind you, the difference between our reported and organic growth rates reflects the effect of currency movements on sales and profit. These impacts are reflected in our reported numbers, but are excluded from our organic growth rates. So as we messaged in March, and again our trading update in May, currency movements represent a material headwind of 4% to our first half sales and 6% to profit. This reflects sterling strengthening materially versus the comparative period in 2023. Whilst reported group sales were 3% lower in the first half than in the same period last year, this decrease was impacted by the exchange rate headwind of 4%. On an organic basis, sales increased by 1%, reflecting increases in ETS and Watson Marlowe being partially offset by a decline in STS. Group operating profit declined 7%, or 1%, on an organic basis to 160 million pounds. A decline of 2% in STS, driven by the lower sales, more than offset organic growth in both ETS and Watson Marlowe. This decline in operating profit Alongside the resulting mix of group sales and profit resulted in a lower margin of 19.4% compared to the same period in 2023. Our net financing costs increased to approaching £22 million, reflecting the impact of higher market interest rates on maturing fixed rate debt, which we refinanced in the second half of last year. As we guided in March, the group's effective tax rate increased by 110 basis points, This increase reflects the profit mix of the countries in which the group operates, including the impact of exchange rate movements, together with the first year of the BEPS Pillar 2 minimum tax rate adjustment. Our adjusted EPS of 137.2 pence per share was 12% lower, above the rate of decline in operating profit due to the higher net finance expense and affected tax rate. As Nimesh said, we're increasing our interim dividend by 3%, reflecting our guidance for a stronger second half trading and our confidence in the resilience of our group. Turning now to the sales bridge. As referenced earlier, you can see the material exchange rate headwind of 34.5 million, or 4% on sales. Against a very strong growth comparator of 15% in 2023, organic sales in our steam thermal solutions business fell by 1%. This fall was driven by contracting IP in a number of our key markets, as Nimesh highlighted, together with the weaker macroeconomic outlook in China, which impacted large projects that are funded from our customers' capital budgets. In China, in the first half of last year, we benefited from catch-up expenditure following the easing of COVID-19-related lockdowns. This included the tail end of capacity expansion in the pharmaceutical sector, together with growing demand from the EV battery sector, in which we have built a strong position. This half year, lower large project sales in China were impacted by the tariffs on EV exports, which resulted in lower demand from the battery sector in particular. ETS half year organic sales growth was 5%. This was supported by strong growth in industrial process heating, which comprises our Chromalox and VulcanEat businesses. We continue to benefit from strong demand for decarbonisation solutions, as well as an improvement in throughput from Chromalox's manufacturing facilities. Organic sales growth and industrial equipment heating at our Thermocoax and Durex Industries businesses continue to be impacted by weak Semicon demand. In Watson Marlay, sales grew by 3% organically. Whilst we've seen some early signs of an improvement in year-on-year demand from biopharm customers, this is not yet translating into material sales growth. Sales to customers in process industries are much more directly correlated to IP, meaning organic growth was dampened by the relatively weak macroeconomic environment. The next bridge today details the movements in adjusted operating profit and adjusted operating profit margin for the six-month period. Currency movements again had a negative impact, this time on profits of over £10 million, or 6%. This is as a result of both translational and transactional impacts. Profits in steam thermal solutions reduced by 2.4% organically, reflecting the organic fall in sales together with the adverse mixed effects of lower sales from our higher margin business in China. This led to the adjusted operating profit margin in STS falling by 90 basis points or by 30 basis points organically to 23.5%. In ETS, profit increased by 3 million pounds or by 12% organically, reflecting the strong progress across our industrial process heating divisions being partially offset by the adverse mix effect of lower, higher margin semi-con sales in industrial equipment heating. The ETS margin grew organically by 80 basis points to 14.7%. The increase in manufacturing volumes in our Chromalock sites are supported by continuing investment in people, processes and operating efficiency initiatives. which are also helping us prepare for the completion of the expansion project in Ogden in the first half of next year. Watson Marlowe's profit grew organically by 2.4%, with the benefit of organic sales growth being partially offset by a full six months of cost relating to our new US manufacturing facility in Massachusetts. As a result, Watson Marlowe's adjusted operating profit margin was flat to the first half of 2023 at 24.6%. Our corporate expenses as a percentage of group sales increased slightly year on year as a result of ongoing investment to support key strategic initiatives such as developing our digital solutions for customers. The group adjusted operating profit margin fell by 80 basis points or by 30 basis points on an organic basis, reflecting the mixed impact of both lower sales in higher margin countries, together with the overall sales and profit contribution of each of our three businesses. Turning now to cash flow. Our operating profit to cash conversion rate was 53%. This was broadly in line with our expectations, albeit capital expenditure was slightly lower than forecast. In the first half, capex amounted to 5% of sales. This shortfall was driven by changes to the phasing of payments on ongoing large capital projects, together with the sale of an existing building in Australia where the proceeds reduced our net capex spend. Working capital increased in the first half of the year, reflecting typical seasonality. We continue to anticipate an inflow in the second half of the year, which would move our working capital to sales ratio back towards our historical year end position. For the full year, we continue to anticipate cash conversion will be approximately 75% in line with our guidance from earlier in the year. And following the payment of the final 2023 dividend, we ended the period with net debt of £718 million, which equates to 1.9 times EBITDA. Thank you. I'll now pass you back to Nimesh.

Thank you, Phil. In the six months since I became CEO, I've completed a comprehensive series of visits to our local operating companies around the world and across our three businesses. I've also engaged in conversations with customers and my colleagues across the group. My intent has been to take a fresh and objective look at the Spirax Group, working with my executive team, and I'll shortly share with you some early thoughts on our commercial, operational, and financial priorities. But where needed, we've not waited to take action to deliver on the opportunities which we have identified. So over the past six months, we've made progress in a number of areas, and I'll cover these across the next two slides. Starting with building on our commitment to preserving the safety of our colleagues. through, for the first time, implementing mandatory safe operating practices for machine guarding across the group. I have made changes to our executive leadership team. Armando Pazos, MD of ETS, will leave the group at the end of August and will be succeeded by Andrew Mines, currently the MD of Watson Marlowe. I'd like to thank Armando for his contribution to ETS, including his leadership of the Vulcanique and Durex Industries acquisitions. I also want to thank Andrew for taking this new role as he brings extensive experience leading US and European based manufacturing and sales operations, as well as strong leadership skills, which will support greater collaboration between and integration of the four acquisitions that comprise ETS. And a search for Andrew's successor has already begun. We invested in our future growth drivers. Just this week, we agreed to invest 4 million euros for an initial 12% stake in a technology startup in Germany that is pioneering the development of high temperature heat pumps. We have an option to increase our holding, adding this technology to our portfolio of target zero solutions to electrify the generation of steam focused on critical high temperature applications where steam is used directly in our customers' industrial processes. I'll speak more about that later in the context of our ambition and our unique ability to support our customers with delivery of their decarbonisation goals. We have also continued to reduce our scope one and two emissions by 9% in the first half of the year, and we're well on track to meet our target of a 50% reduction in emissions against our 2019 baseline by 2025. And over the past six months, our teams have adapted to internal changes while also navigating and responding to a more challenging macroeconomic environment. And I would therefore like to thank my colleagues for their ongoing passion and their hard work. Now turning to operational progress within our businesses, starting with STS. Sales and margin were down organically in STS, particularly due to China, where our high margin operations account for close to 20% of sales, and where demand declined 12% in the first half, entirely due to a reduction in large projects, as explained by Phil. Large projects account for approximately 15% of group sales, but a much higher share of STS sales in China aligned with the past trend of customers expanding their production capacity driven by growing exports. Looking forward, our local team is working to pivot from a heavier reliance on large expansion projects towards process optimization and MRO, but that will take time. And looking towards our end markets, sales to our larger target sectors of food and beverage, oil and gas, and chemicals, which account for over 30% of STS sales, grew organically in the first half, demonstrating the continued benefit of our sectorized go-to-market strategy. And turning to our strategic drivers, as I've mentioned, we made an investment in emerging high temperature heat pumps, which will add to our target zero suite of solutions. And we are piloting our electrofit technology, which is the retrofit of steam generating boilers. And we are about to commence a pilot of our steam vault, which is the first fit of steam generating boilers working alongside boiler OEMs. Moving to ETS. Our order book in industrial process heating remains at historically high levels with continued demand for our thermal energy electrification solutions helping customers achieve their greenhouse gas emission goals. Industrial process heating was the principal driver of good organic sales growth in ETS. And we have started to deliver operational improvements, increasing throughput from our manufacturing facilities and shortening lead times on customer deliveries. This remains a key priority for us, particularly in the Ogden facility, given its role in manufacturing large bespoke low voltage and medium voltage heaters to meet global demand. We've now built a detailed understanding of the issues that impeded progress historically, and we've taken concrete steps to build an improvement path, including the appointment of a new head of manufacturing in ETS and general manager in Ogden. The early progress we have made in improving throughput is encouraging and will continue to support ongoing ETS margin expansion. And just to remind you, This is one of the most important self-help opportunities that we have and a key component of improving ETS margins towards our 20% target. We are seeking to deliver value from our recent acquisition in industrial process heating by aligning our regional sales teams and leadership of our global manufacturing sites under a new organizational structure across Vulcanique and Chromalox. In industrial equipment heating, sales have yet to benefit from a recovery in demand from the higher margin Semicon sector. While customers are signaling high expectations of placing increased orders in late 2024, that will mostly benefit our sales in 2025, so we don't anticipate a meaningful recovery in Semicon sales in the current year. Examples of increasing collaboration across industrial equipment heating include migrating Thermocoex's US-based production to Durex Industries, and we are leveraging the combined team's expertise in our new product development projects. So through changes to the leadership, as well as organizational changes, you can see how we're focused on delivering value from our recent acquisitions in ETS. And finally, turning to Watson Marlowe. We saw organic sales growth in sales across both biopharm and process industry sectors. We've seen some early signs of improving demand from biopharm customers, which is encouraging. As these customers take shipments of orders placed in prior years, we're also continuing to see our order book normalize to a lower historic level as sales continue above order intake. We do not expect a material increase in BioPharm sales in the second half, with a recovery more likely later in this year than previously anticipated, but it remains challenging to forecast the precise trajectory. In April, we launched Watson Marlowe Architect Solutions to BioPharm customers and have seen strong traction. This is an example of self-generated solution selling. being a bespoke solution that enables customers to connect disparate systems and equipment along the fluid path while preserving the safety and integrity of their processes. Process industries grew organically, although demand was dampened by the weak IP environment, with strong growth in the wastewater, food and beverage, and mining sectors partially offset by weaker demand in our industrial sectors. In light of the challenging demand environment and to manage our cost base, we reviewed Watson Marlowe's manufacturing footprint in the USA, consolidating two small facilities into our Devon's facility, which is new. During the first half, we also made progress on our digital ambitions, commencing a pilot of a machine learning pump in the mining sector. This technology is designed to limit process downtime through preventative maintenance alerts based on monitoring of fluid path parameters through the pump. I'll now briefly set out our outlook by business and for the group. Starting with STS, where for the full year, we anticipate low single-digit organic sales growth driven by our usual seasonality and a higher IP than in the first half. Margins, as we said in March, will be lower than last year's record 24.6%, reflecting strong currency headwinds, the lower contribution from our high margin operations in China, and partial reversal of temporary cost containment measures taken in 2023 as we preserve investment in our future growth. In ETS, we expect ongoing operational improvements in industrial process heating and the continuing strong demand for electrification products to support further growth in sales, profit and margin in the second half. In industrial equipment heating, we don't anticipate a meaningful recovery in higher margin Semicon sales for the rest of the year. So for ETS as a whole, we anticipate mid single digit organic revenue growth and continuing margin progress. And in Watson Marlowe, we anticipate continued organic growth in the second half against the week prior year comparator. In BioPharm, As I said, demand has shown some early signs of improvement, although we anticipate lower sales growth than we did previously. So for Watson Marlowe, we anticipate mid-single digit organic revenue growth for the full year, with incremental sales dropping through to profit at a high rate, supporting margin progress. Bringing this guidance together for the group, we therefore expect second half organic growth to be stronger than the first half, which will support mid-single digit organic sales growth for the full year. And we anticipate that the adjusted operating profit margin will be in line with the currency adjusted 20% that we achieved in 2023, reflecting our mix of sales, with lower sales from higher margin STS in China, a greater proportion of group sales from ETS, and the partial reversal of 2023's temporary cost containment measures. We also expect strong FX headwinds to continue as Phil has guided. Now, moving to look at the medium and long term, let me update you on some of the work we've been doing. We are planning a capital markets presentation in October where we will present our longer term commercial, operational and financial priorities. Today, I'd like to share with you some early thoughts, which, as I mentioned earlier, are informed by the time I've spent in our local operating companies and with my colleagues. My aim being to see the Spirax group through a different lens and to educate myself by listening. Working together with my new executive team, we have sought to take a fresh and an objective look at our group to assess our strengths, what can we do better, as well as our opportunities and how we must adapt. Through this process, this is how I see the Spirax group and the things that we do well today, which we will preserve. Our products, solutions, and expertise are critical to the operating efficiency and safety of our customers' industrial thermal energy and fluid technology processes. Our organic growth and industry-leading margins are achieved through a unique business model, engineer-led direct sales, a focus on consultative solution selling, and pricing based on customer economics. We benefit from being highly diversified across geographic regions and sectors with a high proportion of sales from defensive end markets. And because our sales are mostly funded from customers' operational budgets rather than their capital expenditure. Looking forward, I believe that the value we have delivered to our customers over the past 136 years remains just as relevant today. But importantly and additionally, We can and will benefit from new structural drivers of growth. Through our end market and sector exposures, we are attractively positioned, thanks to the work of my predecessor, and through the fundamental strengths which I've just described. But we recognize there is work to do to get after these opportunities by targeting investments towards new growth drivers and focusing on the opportunities we have for self-help, operational improvements, that we can make to help us be both more effective and more efficient, helping us to fund the investments we need to make. Through these actions, I believe that we will be able to accelerate our long-term compounding organic growth at attractive margins. And as you heard in the first half results, we're not waiting to get after these opportunities. We've made some tough decisions on people. We've invested where it's important to our future, despite the challenging environment, and we are driving manufacturing improvement and consolidation. So I want to talk about four things this morning. How well positioned we are to capitalize on four key global trends that are shaping our customers' businesses. These are the growth drivers for us as we position ourselves to meet their future needs. how we are focusing investment on growth opportunities that will help us strengthen our bonds with our customers, how we're accelerating the pace at which we deliver operational improvements through self-help programs, and what this means for our growth. These four points are encapsulated in our work to develop a new group strategy, aligning around a common set of objectives for our businesses, preserving what we do well and focusing on self-help and growth drivers We call this evolving for tomorrow's world. We are working to position Spirex Group to benefit from global trends that will drive our long-term compounding growth for decades to come. Starting with the emerging middle class characterized by an additional 800 million plus people, largely across Asia and Africa. This demographic will drive increasing consumption, impacting sectors such as food and beverage, and energy and power, as well as mining, sectors which today account for over a third of our sales. This increase in demand will drive the need first for process efficiency and productivity improvements, and secondly, for capacity expansion across our customers' operations, all areas in which we are a leader. Moving to resource efficiency and sustainability, our customers are setting reduction targets for greenhouse gas emissions and water use. Today, industrial thermal energy accounts for 20% of global carbon emissions, which is comparable to global transportation. Reducing energy waste is what STS has been doing for over 100 years, building a deep understanding of our customers' industrial processes. The unique combination we have of STS and ETS and our products to reduce customers' carbon dependency through the electrification of thermal processes is a powerful differentiator for the Spirax group in developing decarbonization solutions, both for the generation of steam, which tackles 30% of all industrial carbon emissions, but also through the electrification of thermal energy generated from burning directly fossil fuels, accounting for a further 60%. Through our electrical thermal energy expertise in ETS, we are also supporting expansion of the nuclear and energy sectors as the world moves away from fossil fuel dependency. And within Watson Marlowe, we are leading in the wastewater sector. The next global trend, an aging global population, is going to need increased health care provision, with the pharmaceutical and biotechnology sectors, as well as health care, accounting for close to a quarter of our sales. principally in STS and Watson Marlowe. Over the next decade, it's expected that one in six people in the world will be aged 65 or over, close to doubling this global population to 1.5 billion people. And we all expect this older generation to be significantly wealthier than the younger generations following them. This is fueling innovation in the biopharm sector to develop and produce new treatments Through Watson Marlowe, we are already a world leading provider of products and solutions to the biopharm sector that is growing at above 10% per annum. And finally, we're also investing to expand our addressable market in other growth sectors driven by changing lifestyles. For example, through our industrial equipment heating division in ETS, we are a leading provider of critical thermal energy solutions to the Semicon sector. Watson Marlowe is building a presence in the future food sector, which includes working with cell-based protein startups as they seek to address global food shortages through more sustainable production with technologies that are highly adjacent to BioPharm. And both SCS and Watson Marlowe have built a presence in the complex production chain of electric vehicle batteries. Overall, these four trends underscore our potential for growth. through the structural attractiveness of our existing end markets and scope to expand our addressable markets. And this is how we will sustain and accelerate our compounding growth over decades. So let's now look at how we're going to target our investment in these large and growing addressable markets to strengthen our existing bonds with our customers by delivering solutions to the problems that matter to them. And we're uniquely placed across STS and ETS to influence the energy transition choices facing our customers through the trust we have established with them, our technical expertise, and our process insight. This energy transition will have a multifaceted impact on our businesses over several years. So starting with the decarbonization of steam, helping our customers optimize their use of steam and therefore their energy consumption has long been our focus, historically to reduce costs and now also to reduce emissions. That's not new, but it is important. What's new is our developing range of target zero products and solutions that only we as a group with both steam and electric thermal expertise together can do. So for example, as I said earlier, we're piloting our first of all products to decarbonize steam generating boilers working in customer sites. And as we learn from these pilots, we're continuing to develop this technology ahead of full commercialization. And as you heard, we are pursuing new technologies to build our range of solutions to bring a more comprehensive offering to our customers. So high temperature heat pump technology further expands our electrification products. But let me explain for a minute why it's important. High temperature heat pumps will be utilized in critical applications where steam is used directly in our customers' industrial processes, essentially our target niche. This will be a highly engineered, bespoke technology allowing our customers to recycle waste process heat to generate steam, while reducing their operating costs and carbon emissions. This is not the same as hot water heat pumps, which are a commodity technology utilized in low temperature applications that contribute towards decarbonization in less critical processes and usually alongside existing steam systems. Through becoming a broader solutions provider to our customers, we'll be best placed to advise on the breadth of technologies available and what's most appropriate for their process needs while meeting their emission reduction targets. What is clear is that the decarbonization of steam generation represents a significant expansion of our addressable market. To successfully deliver this capability, we are now working to design an operating model to bring together customer insight and sector-based expertise from across STS and ETS for the decarbonization of steam. And we will build on our capability in design engineering and the manufacturing of bespoke products. Secondly, The broader scope for electrification of thermal energy beyond heavy users of steam is an opportunity to support customers to reduce their carbon emissions and it is significant. Through the industrial process heating division of ETS, we already have a leading competitive position and innovative technologies such as medium voltage offerings. But we need to invest further in R&D to expand our technology. For example, developing higher temperature elements and products capable of operating at higher voltages, all of which will increase our addressable market opportunity. Now turning to digital. We are investing in technologies to accelerate the delivery of our business model through increased cost customer bonding based on deeper insights. Digital will enable us to leverage the expertise of our direct sales engineers by more frequently accessing data from our customers processes which will drive more solutions and an enhanced ability to demonstrate how we deliver economic value to them. And of course, alongside all of these things, we'll be investing to make sure that we develop our organizational capability, building the new skills and ways of working that will be needed to serve our customers' evolving needs. As I've listened to my colleagues' perspectives on the group and where we stand today, it's also clear to me that we have scope for self-help. By which I mean how we prioritise operational improvement opportunities and then accelerate the pace at which we deliver. Areas that I believe we need to focus on, which will allow us to strengthen our foundations, include leveraging best practice across our geographies and businesses to further embed execution of our business model, growing the proportion of our revenues from self-generated solutions and deepening our understanding of customers' evolving needs to increase our competitive advantage. Improving the efficiency of our manufacturing facilities in all three businesses, something that was not previously a focus given the group's high growth and high margins. Reducing the organizational complexity that is built up as we've grown from under 70 operating companies to over 140 and improving our systems and processes across the group to address areas of past underinvestment. And delivering value from ETS, focusing on operational improvements and integrating the four acquisitions, benefiting from increased collaboration and revenue synergy potential. These self-help areas will help us fund our future growth and we'll speak more about them in October. But what does this mean for our growth? Through the actions I've outlined in the long term, I believe we can accelerate the rate at which we deliver compounding organic growth in sales and profit. I've outlined some of the areas where we'll need to invest to deliver on this potential, which will be funded by our growth. And of course, this is not an overnight transformation. In the medium term, we can sustain our good historical track record of mid single digit organic sales growth and mid to high single digit organic profit growth. And while SCS remains a very high quality business, today, our higher growth businesses, ETS and Watson Marlowe, account for close to 50% of group sales. So the mix of sales and profit growth across our three strong businesses will be different from the past. We also have an important self-help opportunity to drive top line and bottom line growth while creating the capacity for investment and increasing our adjusted operating profit margin to between 22 and 23%. Our organic growth in profit combined with management of our invested capital through capital discipline Working capital efficiency and strong cash generation will also deliver improving returns on capital.