Spirax Group Plc

Hello, and thanks for joining us for this presentation of Spirax Group's 2024 results. So I'm joined by Louisa Burdett today, and by now you all know her well. Actually, this is the first set of results that Louisa is presenting as our CFO. And I'd like to start by acknowledging the hugely positive impact she's had on our group since she joined us last July. So let me now summarize our 2024 performance. All three businesses delivered organic growth as well as margins in line with our expectations. And full year group organic sales growth of 4% was well ahead of global IP of 1.7%. Growth was delivered against the backdrop of a challenging trading environment characterized by, firstly, third-party IP forecasts that were revised downwards throughout the year in light of shifting macroeconomic risks. In particular, the second half recovery that was forecast for IP did not materialize. Secondly, a significant headwind to our STS business in China, which I highlighted at this time last year. Thirdly, a slower and more gradual recovery in biopharm orders than we had expected at the beginning of the year. And finally, material currency headwinds to growth and margins. Against this backdrop, we focused our efforts on delivering against the operational priorities that are within our control and advancing the execution of our strategy. I'm really pleased with the strong positive trajectory in ETS. Our priority for this business is to improve the margin to 20% and deliver on its high growth potential. Supported by improving manufacturing throughput, we delivered organic sales growth of 10% and a margin improvement to 16%. And we are seeing a significant pipeline of customer inquiries for our decarbonization-related electrification solutions. So we're on the right path to delivering on our targets. In SDS, organic sales growth was 1%, but outside China, we delivered strong growth of 4% against the comparable IP of 0.8%. And in Watson Marlowe, which grew organically by 3%, we saw strong growth in process industries, compensating for broadly flat sales from BioPharm. In both cases, our growth was achieved through focusing on our target sectors and delivering on our solution selling. We protected margins in 2024 through continued pricing discipline and efficiency savings. Our group margin was 20.1% despite the partial reversal of prior year cost containment actions. And importantly, we increased investment in our future growth. And we returned to higher cash conversion at 87%, supported by working capital improvement and lower capital expenditure, reflecting our focus on maximising manufacturing capacity utilisation. Having set out our intent at the capital markets event in October, we've also taken decisive action to simplify our organization and better position the group to deliver long-term, highly profitable organic sales growth. Louisa and I will talk about this more later, but the restructuring activity began at pace in January and is proceeding to plan. Now, it's just over a year since I became CEO, and I'm very encouraged by the progress that we've made in that time. The actions we've taken will put us in a stronger position to deliver on our financial objectives for the future and on our future growth potential. Most importantly, I'd like to thank my colleagues around the world for their commitment as we executed on the operational priorities within our control. I spoke about a challenging trading environment. Let me now expand on what we faced in 2024. Now, thermal energy management is necessary in almost all industrial production processes, and we're present in almost all sectors and regions across the world. So global IP growth is an important lead indicator across our businesses. as customers manage their production capacity, productivity and efficiency in line with anticipated demand. Equally, we aim to outperform IP growth through execution of our business model and our strategy. So through our local direct sales force and deep understanding of customer processes, we help them improve cost efficiency when times are hard, and we help them improve productivity and capacity when times are good. With this in mind, let's now turn to the IP forecasts. Global IP growth for the full year was 1.7%, and a much weaker 0.8%, excluding China. The top left chart shows the downward revision in forecasts throughout the year. Following weak IP growth in the first half, the forecast improvement in the second half didn't materialize, as shown in the top right chart. Actual growth was 1% excluding China. This was not limited to a handful of sectors or countries, but reflects more caution from customers more broadly. IP has been lower for longer than we and many others had expected. We saw industrial production fall compared to 2023 in key markets, the USA, Germany, France, Italy, and the UK, which represent over 50% of group sales. This is only the third time in four decades, as far back as we have consistent and reliable data, that we've seen contraction in all of these markets at the same time. For China, IP forecasts remain uncertain with a wide range of expectations across different providers. What we're seeing in China is a meaningful slowdown in the expansion of customers' manufacturing capacity in light of increasing barriers to global trade. Looking to 2025, CHR's forecast for global IP is 2.1% and 1.9% excluding China. First half growth, excluding China, is forecast at 1.7%. And again, growth is weighted towards the second half with 2.1%. This requires healthy sequential growth quarter on quarter above the rate achieved in the second half of last year. In the current highly uncertain macroeconomic environment, these forecasts follow a familiar pattern. So we're taking a cautious approach to IP in 2025. We recognize IP is likely to be weaker in the short term with potential for further disruption from tariffs and other geopolitical events. Wherever it eventually lands, we are confident that we will continue to outperform IP in 2025. We're closely monitoring the situation with tariffs and assessing the impact on our operations. In all three businesses, we manufacture in the USA to meet a significant proportion of domestic demand. So through a combination of this regional manufacturing changes to sourcing and our price management, we're prepared to respond to the effects of tariffs. But the precise impact is difficult to gauge while uncertainty remains high, particularly around the broader consequences for the macroeconomic outlook. Now, I also recognize that an important part of our group and Watson Marlowe, namely our BioPharm business, has been going through a period of volatility. And so we felt that this year it was important to share some additional insight to help explain our sales growth and our guidance. As a reminder, BioPharm accounts for 12% of group and 50% of Watson Marlowe sales. In 2024, we saw the beginning of a recovery in new order intake from BioPharm customers with double digit growth, albeit this was off a low base. And that followed a decline in orders of over 50% by the end of 2023 from the COVID related peak in 2021. We saw good growth in end user customer orders and sales, which account for about three quarters of total BioPharm sales. Large OEM customers also improved from a low base, although with high month-to-month volatility. So we saw orders improving from large OEM customers, but sales to these customers declined. Looking to the chart on the right-hand side of this slide, you will see that total buyer farm sales were above orders in 2024, as they have been in recent years, supported by the large carried forward order book. our order book has now normalized. That means that going forward, sales growth will be driven by new order intake. Now, while we anticipate continued double-digit recovery in biopharm orders, this is coming off a low base, so sales growth will be below orders growth. Hopefully, that gives you a little bit of insight into the quite complex moving parts and also why we expect a more gradual recovery in biopharm the underlying drivers of biopharm demand remain robust, as is reflected in the end-user activity that we're seeing. So I'll now hand over to Louisa to share more detail of our financial performance in 2024 and set the outlook for 2025.

Thanks, Nimesh. Good morning, everyone. Before I start, I'd like to draw your attention to a couple of presentational points. The numbers we will be discussing today are the adjusted results and a reconciliation between statutory and operating profit is included in the appendix. And then our definition of organic growth excludes the effect of currency movements on sales and profit. And of course, we didn't have any M&A in the period. So as guided, the effect of currency in the year was minus 5% on sales and minus 8% on operating profit. Our full year numbers were in line with the expectations we set out at our half one results. And from a group perspective, sales were 4% higher year on year, well ahead of IP and driven by growth in all three of our businesses. Operating profit also grew 4% on an organic basis and operating margin of 20.1% was 10 bps higher organically. Net financing costs were slightly lower than our guide of £45 million, but £4 million higher year on year due to the annualised impact of a higher coupon rate on debt, which was refinanced at the end of 2023. As expected, our effective tax rate increased 100 bps to 26.5%. Adjusted EPS of 286.3 pence per share was 8% lower year-on-year. That was above the decline in operating profit due to the higher net finance expense and the increase in the effective tax rate. We are increasing our full-year dividend by 3%, reflecting our confidence in a return to higher levels of growth and margin. So on the sales bridge on your next slide, as noted, currency movements had a negative impact of 74 million pounds or 5% on full year sales. In STS, full year organic sales growth was 1%. Having declined in the first half, Sorry, having declined 1% in the first half, the business returned to growth of 3% in the second. To explain the relative growth rates in the first and second half, it's worth remembering that we had a strong comp in the first half of 2023 due to the post-COVID expansionary investment phase in China, which was followed by weaker demand in the second half of 2023. In ETS, full-year organic sales growth was a pleasing 10%, with a strong second-half performance of 15%. That reflects operational improvements in process heating, which Nimesh will talk about later on. Watson Marlowe sales grew 3% organically, and as expected, BioPharm sales were broadly flat in absolute terms versus 2023, albeit with some month-to-month volatility. Sales to process industry customers, which are more correlated to IP, performed well throughout the year, particularly in the second half. The bridge on the next page details the movements in adjusted operating profit for the year. Currency movements had a negative impact of £28 million, or 8%. Profit in steam grew 1% organically, in line with the 1% organic growth in sales. During 2023, we moderated our investment in steam, but during 2024, we sought to retain an appropriate mix of cost with discipline on the base overhead whilst protecting investment for the future. The operating margin in STS at 23.5% was broadly unchanged organically year on year. In ETS, profit grew by 13% organically, with stronger growth in the second half driven by improvements at our Ogden manufacturing facility alongside good progress at Volcanic. Growth was partially offset by ongoing investment to deliver those operational improvements and some historic orders that could not be repriced for inflation. The full year operating margin in ETS was 16%, up 50 bps organically. We saw strong margin improvement in process heating year on year, but lower margins year on year in equipment heating as higher Semicon did not meaningfully recover. Watson Marlowe delivered organic profit growth of 11% and 180 bps increase in margin, benefiting from the operating leverage of the increase in sales. Corporate costs were 2% of group sales with increased investments to support key strategic initiatives in digital and sustainability. So turning to our cash flow, our operating profit to cash conversion rate was 87% because of improvements in working capital and decisions that we took on capital expenditure. Capital expenditure of 84 million pounds was 5% of group sales. Alongside our normal maintenance capital, we invested 29 million pounds in our new low and medium voltage production facility in Ogden, which will come online in the early second half of this year. But during the second half of 2024, we made two active decisions about our capital programme. First, as part of our review of manufacturing footprint and capacity, we put construction of a new manufacturing facility in Gestre, Germany, on hold. And second, with the exception of Thermocoax France, we deferred our planned ERP spend whilst we aligned on the concept of a global common design for all three businesses. Nimesh will build on both of these two points later in our update when we talk about operational excellence. In recent years, we have invested in expansion projects in Watson Marlowe and ETS. We're now coming through that period of higher capital expenditure versus our historic rates. And in 2025, we anticipate CapEx as a percentage of sales to be around the 5% to 6% range. And the CapEx mix in 2025 will include increased ERP costs offset by lower spend on that Ogden building as this investment completes. Back in 2024, we were pleased that our ratio of working capital to sales improved on a constant currency basis by 1% to 21.9%, with a focus on inventory and overdue receivables. And we ended the year with lower net debt of £596 million, which equates to 1.6 times EBITDA. I'll now talk you through on the next slide through some of the key drivers of our operational performance, and within that context, give you our 2025 guidance, which we're giving for the first time today. Many of the themes that we saw in 2024 continue into 2025. So if I start with STS on the left, In 2024, full-year organic sales outside of China was 4%, well ahead of global IP excluding China of 0.8%. But we have talked previously about the decline in large orders in China following the period of post-COVID expansionary investment. And as a result, in 2024, sales in China, which were 17% of STS, in 2023 were 13% lower. MRO sales did increase by double digits in 2024, but they are not yet compensating for this continued weakness. And again, later on, Nimesh will share some of the actions we are taking to really drive that MRO pivot. In STS, looking forward to 2025, we expect trading conditions in China to remain challenging. And we are also seeing the impact of global instability in Korea, which is STS's second largest market in Asia. So weaker trading in China and Korea will be offset by growth ahead of IP in our other markets. And if we put these two things together, we expect Steam to deliver low single-digit organic sales growth with margin remaining broadly level with 2024. Moving on to ETS in the middle. We've already talked about our strong operational progress in process heating during 2024, and we are also seeing early signs of Semicon demand improvement from a low base. So supported by a continuation of these two trends in 2025, we anticipate mid to high single digits organic sales growth for the ETS business. Margin progress will also continue, although until we are at full volume the costs associated with the new building in Ogden will temper the rate of margin expansion. And then finally, to Watson Marlow on the right, Nimesh has already mentioned the total biopharm sales remaining above orders in 2024 because we were carrying forward that large order book. But we did see the beginnings of a recovery in new order intake off a very low base. And that pattern continues to support our view that this will be a gradual U-shaped recovery. So in 2025, for the Watson Marlowe business as a whole, we anticipate mid-single-digit organic sales growth, and that's driven by the assumed continuing recovery in biopharm orders, and in addition, process industries outperforming IP. And this will deliver high single-digit organic profit growth and an increase in margin compared to 2024. On the next slide, at a group level, we guide on an organic basis, and this is based on restating our 2024 results for the impact of exchange rate movements in 2025. So if exchange rates at the beginning of March were to prevail for the remainder of the year, 2024 sales would be approximately 2% lower at £1,637 million and 2024 adjusted operating profit approximately 4% lower at £320 million, resulting in an FX adjusted margin of 19.6%. And that FX headwind is driven by the pound strengthening against various of the basket of our trading currencies. In 2025, we anticipate organic growth in group revenues consistent with that achieved in 2024 with modestly higher growth in the second half. Group adjusted operating profit margin is expected to be ahead of that currency adjusted margin of 19.6 that I've just talked about for 2024 with mid single digit organic growth in adjusted operating profit. As we noted at our Capital Markets Day, I would like to remind you that we are forecasting a return of a variable compensation charge in 2025 of the order of about 15 to 20 million pounds in aggregate across our three businesses and in corporate. We had a good start in 2024 and we are continuing to target procurement savings in 2025, which we expect to generate savings in the mid-teen millions and that will partially offset these incremental remuneration charges coming back into the P&L. Our corporate costs will be approximately 40 million, reflecting increases in investments for growth initiatives that are centrally funded. And these investments, plus others within the three businesses, will be funded through the restructuring programme, which we've noted in our R&S today. This programme will realise annualised savings of approximately £35 million, with about 40% of this achieved in 2025. The cash costs to deliver this programme are expected to be approximately £35 million, plus non-cash costs of about £5 million, a total therefore of £40 million, focused on improving our organisational efficiency and closing some manufacturing sites across the world. And Nimesh will expand on both of those points very shortly. The £40 million exceptional costs are excluded from our adjusted operating profit and also from our margin guidance. And then finally, I would like to draw your attention to the appendix where we have some other group guidance factors around financing costs, ETR, CapEx and cash conversions. So my final slide just reiterates our medium term margin goal of reaching a 22 to 23% operating profit margin whilst continuing to invest sensibly. At the Capital Markets Day event, we laid out the four building blocks of this multi-year bridge. Organic growth of around 200 bps. Secondly, around 150 bps of financial benefit from operating improvements. Thirdly, incremental investments of around 100 bps to support our longer-term growth. And fourthly, procurement savings targeted to help offset variable compensation returning in 2025. All of these actions still apply, and we have started to deliver on them in 2025, the first year of this medium-term plan. We remain focused on those medium-term goals, and Nimesh will now take you through how we are delivering our Together for Growth strategy objectives. Thank you.

Thank you, Louisa. So I briefly want to remind everyone of that journey we're on as we set out at the Capital Markets event in October. We've got a clear objective to deliver on the medium-term objectives that Louisa just explained, and as set out on the right-hand side of this slide, in the long-term, we expect to go further, enhancing long-term organic growth, margins, and shareholder returns. I set out on the left of this slide a reminder that we've got three strong growth engines sharing a common business model that's enabled us to deliver consistent organic growth ahead of IP over many years and through multiple economic cycles. Our direct sales engineers sell value creating solutions to solve customers problems. We're evolving this differentiated model to be more connected with customers locally, directly and digitally to anticipate and meet their increasing complex needs. In the center of this slide, you'll see we have a very significant addressable market opportunity in front of us. that we are well positioned to capture through our Together for Growth strategy, which is fundamentally about two things. Firstly, we will accelerate the rate of compounding organic growth in the long term by making targeted investments, which will enable us to capture the significant opportunities we see ahead, generating attractive returns. This includes investment in digital and services and in our unique expertise in thermal energy efficiency and decarbonisation. And secondly, we will generate the funding capacity for these investments from self-help by focusing on our operational priorities, whether that is through commercial excellence, how we build on our sales capacity and capability, operational excellence, how we become more productive and efficient in our manufacturing, or organizational fitness. how we improve the way we work across the organization to better serve our customers and better leverage our resources. And we're already making good progress on our delivery, as you'll see on the next slide, which sets out progress in 24 and priorities for 2025. My confidence... in delivering on the opportunity ahead is rooted in the leadership team. Most recently, Stuart Robey joined us as managing director of Watson Marlowe after I asked Andrew Mines to lead ETS. This new team with over 50% being either new or new in role has a blend of a deep understanding of the group, but new ideas and experienced external perspective to go alongside that, all of which will support our execution. Now, I'll summarize the progress we're making in these early days, executing on our strategy, starting with the operational priorities and commercial excellence. In 2024, we increased the number of customer facing sales colleagues. And in STS and Watson Marlowe, our sectorized sales focus helped us grow well ahead of IP, increasing market share in those target sectors. We're strengthening our position in new high growth sectors by leveraging regional teams expertise to support colleagues, for example, from China in the electric vehicle battery sector as our customers explore new manufacturing locations. We launched new products, for example, in Watson Marlowe with WM Architect, supporting self-generated solution selling in the biopharm sector through bespoke approaches to connecting disparate systems along the fluid pathway. And QDOS High Flow, a chemical metering and dosing pump which further expands our addressable market in process industries. I'll shortly also give you an example of how we're growing MRO sales from our installed base in STS. In 2025, our focus is on maximizing the productivity of our direct sales engineers, including increasing customer facing time and the number of customer visits to drive growth in a weaker macroeconomic environment. Now, in operational excellence, during 2024, we started delivering procurement savings within and across all three businesses and will continue to increase those savings in 2025. We also consolidated our manufacturing footprint in the USA, closing a number of smaller manufacturing sites in ETS and Watson Marlowe. This represents the initial steps to optimize our footprint while retaining regional manufacturing that is critical to delivering high levels of customer service. Our focus is on mainly smaller sites or where we manufacture more standard products. Earlier this year, we announced the closure of our STS facility in Mexico, with production moving to the USA. And we are putting on hold the previously planned construction of a new Gestra facility in Germany. As we make progress, we will have greater flexibility in how we manage our manufacturing footprint, and we will continue to review how best to optimize and extract value from our fixed capital. moving to organizational fitness in january 2025 we initiated a series of organizational changes we're reducing our management layers and consolidating activity which can be better leveraged across operating companies regionally for example our product technical expertise our field servicing and repairs teams and our digital services skills These have been built individually in larger operating companies and will now serve as a center of excellence for all local companies in the region based on where the opportunity is greatest. These organizational changes are being supported with common processes built into our systems. So turning briefly to ERP during 2024, we moved from three separate business-led programs to align around a single global common design. In the second half, we successfully completed the ERP implementation at Thermocoax in France. This project was already underway, but allowed us to test key design principles ahead of developing our common approach. I am really pleased with the pace at which we have moved to execution across our operational priorities. And our restructuring is the first significant activity of this nature that we've ever undertaken across our group. Louisa talked you through the financial benefits, which are material and will support our investment in future growth. But what I want to emphasize are the benefits of building a simpler, more agile, more scalable organization with simplified internal processes and increased customer facing time for our sales colleagues. This slide is a deeper dive into two important areas that shaped our performance in 2024. Earlier, I spoke about the challenge facing STS in China as customers slowed the expansion of manufacturing capacity with these large projects accounting for 60% of sales. I think it's helpful to explain how we've been reshaping this business as an example of commercial excellence and driving growth in MRO. Taking advantage of expertise from within STS, China has now completed a mapping of its significant installed base, targeting the most attractive growth opportunities. Added MRO-focused sales engineers in larger regions where the opportunities are more concentrated. as well as developing and deploying training for large project-focused engineers to identify and self-generate MRO solutions while also realigning their incentives. As a result, MRO sales growth in China in 2024 was in the double digits, and we're expecting a further year of double-digit growth in 2025. And of course, MRO comes at more attractive margins being funded from customers' OPEX rather than CAPEX budgets. The second example on this slide is of operational excellence, focused on our Ogden plant, where throughout 2024, we've been focused on increasing shipments against a strong order book. As you know, improving manufacturing throughput is a critical step towards delivering a 20% margin in ETS. As a reminder, Ogden manufactures large low voltage and medium voltage heaters, and these also support our decarbonization solutions. On the slide you can see a photo of a recently shipped triple-stack heater for a mission-critical application on a chemical customer's site. This is one of only a handful of such heaters manufactured in the past decade, and we have made almost all of these because of our reliable performance in the field. Our Ogden operational improvement started with leadership changes in ETS and the local team. we're focused on improving key processes to meet customers' bespoke requirements without compromising efficiency and lead times. These include implementing controls over complex designs, improving the interface between sales, engineering and manufacturing that created past production challenges. Addressing this quote-to-cash process shortens lead times in design engineering, improves resource planning and production scheduling, and enables us to better manage customer change requests, thereby delivering higher throughput and improved efficiency. So after several years of flat output, we saw material improvement in shipments. We delivered a double-digit increase in Chromalock sales, with Ogden shipments increasing by close to 40%, leading to an overdue backlog reduction of over 20%, as well as improved margins through operating leverage. During 2025, we expect further improvements. Separately, the expansion of the Ogden facility specialising in the manufacture of medium voltage solutions is progressing well and remains on track for completion during 2025 and will help to further reduce lead times. Let's turn now to look briefly at some of the areas on which we are focusing to drive that future growth. These are longer dated investments delivering multi-year returns, and we've made good progress in 2024. First, digital and services. We're augmenting customer relationships by being even more connected with them, both physically and now digitally. In this way, we walk the plant and we walk the data. In 2024, we increased paid-for digital customer connections to over 10,000 assets, principally STS steam traps and heat exchangers, across 1,000 customer sites. And in Watson Marlowe, we successfully trialed our machine learning-enabled Bradel connected pump in the wastewater sector, predicting blockages in the fluid path. As an example of the return on investment, an international brewery customer asked us to help resolve significant steam loss. Typically, customers complete steam trap surveys annually, meaning failures remain undetected for long periods. Through our EcoBolt steam trap monitoring, we see process performance and energy consumption and detect failures in critical operations. Every failed trap costs over £3,000 in energy lost and 13 tonnes in CO2 emissions over a year, and we were able to replace those traps within weeks, growing our MRO sales. So you see how we've become even more knowledgeable on our customers' processes, increased the frequency of engagement, and thereby are able to anticipate their needs. Our work with this customer has also led to additional solution sales beyond these steam traps. Turning to the progress we're making on our decarbonisation opportunity, which is delivered by combining complementary expertise from STS and ETS to significantly expand our addressable market. The focus of our investment here is on technology and capability. During 2024, we continued to refine our proprietary technology to decarbonize the generation of steam through electrification and ETS technology, launching additional pilots. And we expanded our solutions portfolio with an investment in emerging technology, high temperature heat pumps to generate steam. We also made good progress in developing new resistive heating products that operate at higher voltages and higher temperatures. Similarly, we finalized the design of our decarbonization operating model, which you will recall is a critical first step in ensuring we have the appropriate resources and structures in place to leverage our STS and ETS resources effectively. In 2025, in both digital and decarbonization, we will continue with our proof of concept pilots. Now, bringing everything together. I would summarize our performance in 2024 as follows. We met considerable external macroeconomic headwinds that were facing us by focusing on the controllables to deliver organic growth well ahead of IP, with margins in all three of our businesses in line with our expectations. We are a new leadership team that has come together well, developing our growth strategy, setting our financial objectives, and aligning the organization behind our operational and investment priorities. I'm proud of our colleagues who have risen to the challenge as reflected in the results, including delivering on our guidance for the second half of 2024, increasing manufacturing throughput in ETS, delivering growth well ahead of IP in STS outside China and in Watson Marlowe process industries. And in the first part of 2025, we've taken early action on restructuring. I am confident that we have a clear and executable plan and the right team focused on delivering it. Turning to 2025, we're not expecting a meaningfully improved trading environment. And as I've said, we're taking a cautious view on outlook for IP. Against this backdrop, we're confident of making further good progress this year as we continue to focus on the controllables. In 2025, we anticipate organic growth in group revenues consistent with that achieved in 2024 and well ahead of IP. And group adjusted operating profit margin to be ahead of the currency adjusted 19.6% margin in 2024, driving mid single digit organic growth in adjusted operating profit. Through our Together for Growth strategy, we're continuing to build the platform from which we will deliver on our medium term financial objectives and long term compounding organic growth at attractive margins while also making progress in 2025. Thank you.