TIDMSPX
RNS Number : 6889F
Spirax-Sarco Engineering PLC
11 March 2020
News Release
Wednesday 11(th) March 2020
Strong organic growth despite weak industrial production
growth
HIGHLIGHTS
Adjusted* 2019 2018 Reported Organic
Revenue GBP1,242.4m GBP1,153.3m +8% +6%
Adjusted operating profit* GBP282.7m GBP264.9m +7% +7%
Adjusted operating profit
margin* 22.8% 23.0% -20 bps +10 bps
Adjusted profit before
taxation* GBP274.5m GBP254.6m +8%
Adjusted basic earnings
per share* 265.7p 250.0p +6%
Cash conversion** 84% 91%
7B Statutory 2019 2018 Reported
--------------------------- ------------ ------------ ---------
Revenue GBP1,242.4m GBP1,153.3m +8%
Operating profit GBP245.0m GBP299.1m -18%
Operating profit
margin 19.7% 25.9% -620 bps
Profit before taxation GBP236.8m GBP288.8m -18%
Basic earnings per
share 226.2p 303.1p -25%
Dividend per share 110.0p 100.0p +10%
-- Reported revenue growth of 8%, organic revenue
growth of 6%
-- Adjusted operating margin of 22.8%, up 10 bps organically*
-- Strong organic sales growth in Steam Specialties
and Watson-Marlow
-- Chromalox operating margin increased to 15.1% in
H2
-- Net debt^ of GBP295.2 million as at 31(st) December
2019, 0.9x EBITDA*
-- Statutory operating profit down 18% due to non-recurring
gain on disposal in 2018
-- Final dividend increased by 10% to 78.0p
Nicholas Anderson, Group Chief Executive, commenting on the
results said:
"We are pleased to report strong organic sales growth of 6% in
2019, ahead of global industrial production growth rates, and
organic adjusted operating profit growth of 7%. Both the Steam
Specialties and Watson-Marlow businesses benefited from the
successful implementation of our strategy, achieving strong organic
sales and profit growth, while margins in Chromalox increased in
the second half as operational efficiency initiatives began to
deliver results.
Political and economic uncertainty, as well as COVID-19,
continue to dampen global industrial production growth forecasts,
although we currently assume that conditions will begin to improve
during the second half of the year. We remain cautious currently on
the economic outlook, but confident in our ability to self-generate
growth through the implementation of our strategy and to outperform
our markets."
*All profit measures exclude certain items, which totalled a
charge of GBP37.7 million (2018: credit GBP34.2 million), as set
out in Note 2.
**Cash conversion measures the percentage of adjusted cash from
operations to adjusted operating profit, as set out in Note 2.
Organic percentage growth measures are at constant currency and
exclude contributions from M&A, as set out in Note 2.
^Net debt includes total borrowings, cash at bank and bank
overdrafts but excludes IFRS 16 lease liabilities, as set out in
Note 8.
For further information, please contact:
Nicholas Anderson, Group Chief Executive
Kevin Boyd, Chief Financial Officer
Shaun Laubscher, Investor Relations Officer
Tel: 020 7638 9571 at Citigate Dewe Rogerson until 6.00 p.m.
Audio webcast
The meeting with analysts will be available as a live audio
webcast at 9.00 a.m. on the Company's website at
www.spiraxsarcoengineering.com or via the following link:
https://edge.media-server.com/mmc/p/orgpdxht and a recording
will be made available on the website shortly after the
meeting.
Telephone dial-in
The meeting with analysts will also be available via a full
conference call with Q&A facility, at 9.00 a.m., using the
instructions provided below:
Location Purpose Phone Type Number
--------------------------------- ------------ ----------- ------------------
United Kingdom and International Participant Local +44 (0)2071 928000
============ =========== ==================
1. 5-10 minutes prior to the call start time, call the participant
dial-in number listed above.
2. Provide the audio operator with the Conference ID number: 8148626.
About Spirax--Sarco Engineering plc
Spirax--Sarco Engineering plc is a thermal energy management and
niche pumping specialist. It comprises three world--leading
businesses: Steam Specialties, for the control and management of
steam; Electric Thermal Solutions, for advanced electrical process
heating and temperature management solutions; and Watson-Marlow,
for peristaltic pumping and associated fluid path technologies. The
Steam Specialties and Electric Thermal Solutions businesses provide
a broad range of fluid control and electrical process heating
products, engineered packages, site services and systems expertise
for a diverse range of industrial and institutional customers. Both
businesses help their end users to improve production efficiency,
meet their environmental sustainability targets, improve product
quality and enhance the safety of their operations. Watson--Marlow
provides solutions for a wide variety of demanding fluid path
applications with highly accurate, controllable and virtually
maintenance free pumps and associated technologies.
The Group is headquartered in Cheltenham, UK, has strategically
located manufacturing plants around the world and employs over
8,000 people, of whom over 1,600 are direct sales and service
engineers. Its shares have been listed on the London Stock Exchange
since 1959 (symbol: SPX) and it is a constituent of the FTSE 100
and the FTSE4Good index.
Further information can be found at
www.spiraxsarcoengineering.com
RNS filter: Inside information prior to release
LEI 213800WFVZQMHOZP2W17
Adjusted results quoted in the text below are referred to as
"adjusted" (see Note 2). Organic measures, which also represent
alternative performance measures, are at constant currency and
exclude contributions from acquisitions and disposals.
Chair's Statement
Introduction
2019 marked the 60(th) anniversary of Spirax-Sarco Engineering's
listing on the London Stock Exchange. Throughout this period we
have consistently focused on delivering sustainable value to
shareholders, while providing products and services to help
engineer a more efficient, safer and sustainable world.
Against a backdrop of slowing industrial production growth rates
we have had another successful year, delivering record sales and
adjusted operating profit and welcoming electric thermal solutions
specialist, Thermocoax, into the Group. We are therefore proposing
a 10% increase in the final dividend, taking the total dividend to
110.0p, an increase of 10%, ensuring that our shareholders continue
to benefit from the value we create. Throughout the year we helped
our customers to manage their industrial processes and, by
delivering small, bespoke engineered solutions to customers, we
created value for them as we improved the efficiency, safety and
sustainability of their existing systems. We estimate that energy
management products sold by our Steam Specialties business in 2019
will save our customers 7.2 million tonnes of carbon emissions a
year - the equivalent of the annual carbon absorption of
approximately 327 million mature trees - thereby ensuring that our
value creation goes beyond our customers and the financial markets
to also help tackle the global challenge of climate change. [1]
Financial highlights
Sales for the year were GBP1,242.4 million, an organic increase
of over 6%, strongly exceeding global industrial production growth
of 1.0%. [2] Currency movements had no effect on sales during 2019,
while acquisitions and disposals resulted in a 1% net increase.
Thermocoax, which joined the Group on 13(th) May 2019, added
GBP27.9 million to sales. HygroMatik was divested on 30(th)
November 2018 and as a result made no contribution to sales in 2019
. The Group's reported sales were 8% higher than 2018.
Our Steam Specialties business, comprising Spirax Sarco and
Gestra, performed strongly, with sales up 6% organically and gains
in all three geographical reporting segments. Our Watson-Marlow
Fluid Technology business had an exceptional year, with organic
sales growth of over 12%. Sales in our Electric Thermal Solutions
business, comprising Chromalox and Thermocoax, were down 1%
organically.
On an organic basis, Group adjusted operating profit increased
by 7% to GBP282.7 million. The Steam Specialties business saw
organic adjusted operating profit growth of 10%, while
Watson-Marlow was up 11%. Chromalox saw an organic adjusted
operating profit decline of 19%, following a challenging first half
of the year, but recovered in the second half. Translation and
transaction currency movements reduced the Group adjusted operating
profit by 1%, while the net impact of the acquisition and disposal
added 1%. Total adjusted operating profit was also up 7% on a
reported basis. Statutory operating profit fell to GBP245.0 million
(2018: GBP299.1 million) and the statutory operating profit margin
fell from 25.9% to 19.7% due primarily to the non-recurring
disposal in 2018.
The Group adjusted operating margin fell by 20 bps, to 22.8%,
due to the disposal of the highly profitable but non-strategic
HygroMatik business and a negative exchange impact. Organically,
the adjusted operating margin grew by 10 bps.
The Group adjusted pre-tax profit was GBP274.5 million, 8% ahead
of the prior year. Adjusted basic earnings per share was 6% ahead
at 265.7 pence (2018: 250.0 pence).
The pre-tax profit on a statutory basis was GBP236.8 million,
down 18% on 2018 (GBP288.8 million), which benefited from
non-recurring gains on disposals (GBP53.9 million). Further details
can be found in Note 2 to the Financial Statements. Over the last
two years, statutory pre-tax profit grew 23%. The statutory basic
earnings per share was 226.2 pence (2018: 303.1 pence).
Cash and dividends
Cash generation was robust throughout the year, with good
adjusted cash conversion of 84% (2018: 91%), reflecting the strong
organic revenue growth. On 13(th) May 2019 we acquired Thermocoax
for EUR156 million (GBP135 million) on a cash-free, debt-free
basis. The acquisition was financed from existing cash and debt
facilities. At 31(st) December 2019 we had a net debt balance of
GBP295.2 million, a net debt to EBITDA ratio of 0.9 times, compared
with net debt of GBP235.8 million at 31(st) December 2018.
The interim dividend for 2019, paid on 8(th) November 2019, was
raised by 10% to 32.0 pence per share (2018: 29.0 pence per share).
The Board is recommending an increase in the final dividend of 10%
to 78.0 pence per share (2018: 71.0 pence). Subject to approval of
the final dividend by shareholders at the Annual General Meeting
(AGM) on 13(th) May 2020, the total Ordinary dividend for the year
will be 110.0 pence per share, an increase of 10% over the 100.0
pence per share for the prior year.
Corporate governance
We were pleased to welcome Caroline Johnstone to the Board as an
independent Non--Executive Director on 5(th) March 2019. Caroline
is a member of the Audit, Remuneration and Nomination Committees,
and Chair of the Employee Engagement Committee. In her executive
career she was a partner in PricewaterhouseCoopers (PwC) until
2009, where she worked extensively with large global organisations
on turnaround, culture change, delivering value from mergers and
acquisitions and cost optimisation programmes. Her financial,
people and advisory skills, together with her international
business experience across a range of different industries will
benefit the further development of the Group.
Clive Watson, Senior Independent Director and Chair of the Audit
Committee, stepped down from the Board following the conclusion of
the AGM, having served for nine years. On behalf of the Board, I
express my thanks to Clive for the valuable contribution he made to
the operations of the Board during his tenure.
As a result of Clive's departure, Kevin Thompson joined the
Board as an independent Non-Executive Director and Chair of the
Audit Committee. Between 1998 and 2018, Kevin held the role of
Group Finance Director at Halma plc, before which he was their
Group Financial Controller, having qualified as a Chartered
Accountant with PwC. He brings a depth of financial, tax and
treasury expertise to the Board, as well as broad experience in
other areas, including mergers and acquisitions.
Dr Trudy Schoolenberg was appointed Senior Independent Director,
following the AGM in May.
On 31(st) December 2019, Jay Whalen, President of the
Watson-Marlow Fluid Technology Group and an Executive Director,
retired following 28 years with the Company, nine years as
President and over seven years on the Board. On behalf of
shareholders and the Board, I gratefully acknowledge the
substantial contribution that Jay has made to the Group. Under
Jay's leadership Watson-Marlow experienced significant growth and
development, becoming an important and highly successful part of
the Group.
Jay Whalen's successor, Andrew Mines, joined the Group in
November 2019 becoming Managing Director of Watson-Marlow on 1(st)
January 2020 and joining the Group Executive Committee. As of 1(st)
January 2020 the composition of the Board returned to nine members,
six of whom are Non-Executive Directors.
On 11(th) March 2020 we announced that Kevin Boyd, Chief
Financial Officer and Executive Director, had informed the Board of
his desire and intention to retire from the Group before the end of
2020, following an orderly handover of his duties to a successor.
On behalf of shareholders, the Board acknowledges with gratitude
the significant contribution to the Group's growth and prosperity
made by Kevin and we wish him a happy and healthy retirement.
The Board has initiated a process to search for a suitable
external candidate to succeed Kevin and will make a further
announcement concerning the appointment of a new Chief Financial
Officer once that process has been completed.
All Board changes were part of the succession planning
undertaken by the Nomination Committee to recruit Non-Executive
Directors with the skills and experience required to support the
implementation of our strategy for growth.
Employees
On behalf of the Board, I would like to thank all our employees
throughout the world for their individual and collective
contributions that have enabled us to deliver another strong set of
results in 2019. I would also like to welcome our Thermocoax
colleagues into the Group.
The health, safety and well-being of our employees has been, and
will remain, our top priority throughout the duration of the
COVID-19 outbreak. To date, none of our employees globally, or
their immediate family, have tested positive for COVID-19. We have
taken multiple actions to protect employees and will continue to
monitor and respond accordingly, as the situation develops.
COVID-19
China is the largest territory within the Steam Specialties
business and the second largest in the Group, accounting for close
to 11% of global sales and 8% of our employee base. Approximately
75% of what we sell in China is made in our two Chinese
manufacturing facilities, while only GBP10 million worth of
materials is sourced annually from China for use in our global
manufacturing facilities. Due to the COVID-19 outbreak in late
January and the delayed return to work following the Lunar New Year
holiday, for both ourselves and our customers, trading in China
during February was significantly down on expectations. The
majority of this shortfall came from our inability to interact with
our customers, either because they had not returned to work or due
to travel restrictions. By the end of February, our Chinese
manufacturing operations were rapidly returning to normal levels of
activity, while working closely with their local suppliers to
restore our required levels of inbound supply. With reported
Chinese infection rates now in decline and provided no resurgence
occurs, we assume a return to normal levels of business in China by
the end of the second quarter and some recovery of lost business in
the second half of the year.
Throughout February, our supply chains outside China remained
robust, however the recent COVID-19 outbreak beyond China has made
it very difficult to assess the global impact on our business, as
the situation is evolving on a daily basis. We have modelled a
number of scenarios and currently assume the most likely is that
the impact on industrial production globally will be less intense
than China's experience. This scenario also assumes the full impact
to be contained within the first half of the year with global
industrial production recovering in the second half of 2020. We
have already initiated a number of cost containment actions to
mitigate the adverse impact of COVID-19 on our business globally,
without compromising our ability to capitalise on growth
opportunities in the second half of this year. Based on the above
assumptions, we currently anticipate an impact on annual Group
sales and adjusted operating profit of around 2% and 4%
respectively, almost entirely affecting the first half of the year.
Nevertheless, as the situation is evolving rapidly, the final
impact could be significantly different.
Outlook
Global industrial production growth rates, which are a good
indicator of our market conditions, slowed throughout the year
resulting in an annual growth rate of 1.0% in 2019, compared with
3.1% in 2018. Even before the global spread of the COVID-19 virus,
there remained a degree of uncertainty regarding industrial
production growth rates in 2020. In their latest forecasts,
published in February, Oxford Economics suggested that global
industrial production would contract in the first quarter of 2020,
before recovering slightly in the second half of the year, with a
global growth rate for the year of 0.8%, comprising a 0.3%
contraction in developed markets and 2.4% growth in emerging
markets. However, given the global spread of the COVID-19 virus, we
expect a further deterioration in 2020.
While industrial production growth rates are a strong indicator
of conditions in our markets, we are enhancing our ability to
outperform our markets through the implementation of our strategy
and our focus on self-generated growth. Recent acquisitions within
the Electric Thermal Solutions market, but also those in the Steam
Specialties and Watson-Marlow businesses, provide opportunities for
future organic growth as we broaden their global presence,
strengthen their direct sales business model, improve efficiencies
and invest for growth.
Currency had little impact on the 2019 results. The currency
outlook for 2020 remains uncertain, as Brexit trade negotiations,
COVID-19 and US/China tariff negotiations continue to cause
volatility. If current exchange rates were to prevail for the
remainder of the year there would be a negative 2% impact on sales
from translation and a negative 3% impact on profit from
translation and transaction, compared with the full year 2019.
Movements in exchange rates are often volatile and unpredictable,
therefore the actual impact could be significantly different.
Modelling the effect of COVID-19 is extremely difficult; however
our current best estimate, based on the assumptions outlined
earlier, is that it will impact 2020 sales by 2% and profit by 4%,
with almost all the impact affecting the first half of the year.
Nevertheless, as the situation is evolving rapidly, the final
impact could be significantly different.
The full-year effect from the Thermocoax acquisition in May 2019
is expected to add c.1% revenue growth to the Group in 2020.
Against a very uncertain macroeconomic backdrop, we currently
estimate that the combination of the twin headwinds of currency and
COVID-19 will offset the underlying organic growth in the
business.
Despite these headwinds, we will strive to maintain the Group
adjusted operating profit margin in 2020 at a similar level to
2019.
Strategic Review
Engineering every day
As a result of our broad industrial and geographical reach, the
diversity of our products and our extensive process expertise, our
engineered products and solutions are deeply embedded in industrial
and commercial sites all over the world. Every day, our engineering
expertise contributes to the creation of a more efficient, safer
and sustainable world as we help our customers t o increase their
operating efficiency, reduce their environmental impacts, improve
product quality, provide safer working environments for their
employees and achieve regulatory compliance. As we do this we
create sustainable value for all our stakeholders.
Business model
Our direct sales business model is highly effective at
uncovering opportunities to improve our customers' processes. Our
extensive global network of over 1,600 sales and service engineers
is unique in number and expertise amongst our competitors. As they
walk our customers' sites, our specialist engineers are able to
identify often unrecognised needs and design bespoke engineered
solutions to meet those needs. These engineered solutions generally
have a relatively short payback period of around 24 months or less
and are typically paid for out of our customers' operational
budgets. Purchasing decisions are therefore made at operational
level from budgets which are less likely to be cut in times of
recession.
This "self-generated growth" element of our business, combined
with the high proportion of sales that derive from end users'
maintenance and operating budgets, and the wide diversity of the
markets we serve, both geographically and by industry sector, makes
our business highly resilient, although not immune, to economic
downturns.
Strategy for growth
Six years ago we undertook an extensive strategic review and
developed our business strategy, the aim of which is to deliver
self-generated growth that outperforms our markets. To accomplish
this we are focusing on six strategic themes that are designed to
help us do better what we already do well, increase the
effectiveness of our direct sales engineers, leverage our strengths
in key sectors, take advantage of the most attractive
opportunities, expand our addressable markets, and align and direct
our resources more effectively to improve business performance.
Our six strategic themes are:
-- increase direct sales effectiveness through market sector focus;
-- develop the knowledge and skills of our expert sales and service
teams;
-- broaden our global presence;
-- leverage R&D investments;
-- optimise supply chain effectiveness; and
-- operate sustainably and help improve our customers' sustainability.
As we implement our strategy we ensure that we have the right
products, in the right places, at the right times and the highly
skilled people with the expertise to provide industry-leading
solutions to customers.
While our strategy is primarily one of organic growth, we
supplement organic growth through the acquisition of businesses
that meet stringent strategic and financial criteria. Acquisitions
are generally bolt-ons that expand the capabilities of our
businesses through new technologies, skills and geographic
coverage, or that increase our addressable market.
Our strategy remains relevant and appropriate for our growing
Group and, in 2019, we again saw the benefits of its implementation
as we achieved growth strongly ahead of our markets.
Strategic implementation
During 2019, progress continued on the implementation of our
strategic priorities and we believe that this was a significant
contributing factor to the good financial results and strong
organic growth achieved during the year. Some brief examples of
progress are outlined below, with further information provided for
each business within the Review of Operations.
We have continued to increase the alignment between our direct
sales force and our target industries, with a number of our new
products developed specifically to meet the needs of a particular
industry. For example, in 2019 Spirax Sarco launched its first
Clean Steam Generator designed specifically for the Healthcare
industry. Third party validated to deliver steam that meets quality
standard EN285, the new generator offers healthcare customers the
highest steam quality when sterilising equipment, reducing
contamination risk and improving patient safety. The launch of the
new generator is being supported by tailored marketing materials
and a "sterilise once" marketing campaign, that demonstrates an
understanding of our Healthcare customers' steam applications and
the challenges they face, and articulates how we can help them
overcome them. We have also delivered additional training to our
sales engineers to ensure they understand the value that this
product will deliver to customers.
Our direct sales business model requires a local sales presence
to unlock the self-generated sales that are only possible as a
result of having expert sales and service engineers on-the-ground,
visiting customers and identifying their problems. A key element of
our strategy is the geographic expansion of our direct sales
presence, to increase coverage and customer access to this
expertise. Four new operating companies began trading in 2019:
Watson-Marlow Philippines, Watson-Marlow Colombia, Watson-Marlow
Iberia and Gestra China. In addition, Spirax Sarco established a
direct presence in Bosnia & Herzegovina, Honduras and Qatar for
the first time. Chromalox expanded its direct sales presence,
entering Korea and Hungary, and Gestra strengthened its presence in
Asia Pacific and the Americas. In addition, five new direct sales
offices came into the Group through acquisition: Thermocoax France,
Germany, UK, USA and China, which strengthen the geographical
presence of our Electric Thermal Solutions business in Europe and
Asia.
The success of our business model relies on the expertise of our
sales and service teams. Investing in the professional development
of our people is an essential element of our strategy. For example,
during 2019 we continued to develop and roll out the programmes of
the Spirax Sarco Academy. The Academy's programmes are structured
in levels, called "belts", with each "belt" being allocated a
colour and representing an increasing level of expertise. During
the year we completed the translation of the "Green belt" into 15
languages, in addition to English, and rolled these out across the
Steam Specialties business. We also developed the course materials
for the "Blue belt" in English and began to roll these out in our
English-speaking companies during the year. In addition, we
developed a "Consultative Selling" programme of materials and
rolled this out in English and began working on a "Sales Management
Development" programme, which we will continue to develop further
in 2020.
We continued to focus on the delivery of our Sustainability
Strategy, a core component of our business strategy and delivered
good progress against many of our targets. For example, as a result
of investment in safe-working controls in our recently acquired
businesses, Behavioural Based Safety (BBS) training and safety
campaigns we reduced our over three-day lost time injury rate from
4.9 per 1,000 employees in 2018, to 3.6 per 1,000 employees in
2019. We rolled out a Group Employee Volunteering Policy, which
entitles all Company employees to up to three days of paid
volunteering leave per year, and the number of employee
volunteering hours increased by 9%, compared with the prior year.
We made good progress in reducing our waste generation and also saw
a small reduction in water use intensity. Our greenhouse gas
emissions intensity saw a small increase, of 1%, during 2019. While
the increase was partially as a result of improved reporting and
also business growth, we recognise that more needs to be done to
ensure a return to the downward trend that we have seen in recent
years. Throughout the year, through our bespoke, engineered
solutions we continued to deliver significant energy, water and
carbon emissions savings for our customers.
Acquisition
During 2019, we acquired Thermocoax Developpement and all of its
group companies (Thermocoax) for a cash-free, debt-free
consideration of EUR156 million (GBP135 million). Thermocoax is a
leading designer and manufacturer of highly engineered electric
thermal solutions for critical applications in high added-value
industries. Its core technology is mineral insulated cable, which
comprises single or multiple conductor wires insulated by magnesium
oxide, all enclosed within a tubular metal sheath. This
construction is extremely robust compared with standard polymer
insulated cables and highly resistant to extreme environments such
as high temperatures, pressures, vibration and radiation. These
cables are transformed into bespoke high value-added functional
products, such as heaters and sensors, for specialised, highly
certified, critical applications. A particular advantage of
Thermocoax's cable heaters is that they are small in size and low
in weight compared with conventional tubular heaters, allowing
precise delivery of heat.
Thermocoax is headquartered near Paris, France and has four
manufacturing facilities in Normandy, one in Georgia, USA and a
further facility in Heidelberg, Germany.
Upon acquisition, Thermocoax along with Chromalox, became part
of our newly named Electric Thermal Solutions business. Both
companies have a strong reputation amongst customers and
well-recognised brands, which they will retain. Thermocoax is a
good strategic fit for the Group, doubling our Electric Thermal
Solutions business in Europe and Asia. At the same time, Chromalox
has the scale, contacts and reputation in the USA that will support
faster penetration of Thermocoax into that market.
In September 2019, Dominique Mallet was appointed President of
the Electric Thermal Solutions business. Dominique was the Chief
Executive Officer of Thermocoax for over five years and has a
strong track record of successfully growing businesses in sectors
relevant to the Electric Thermal Solutions business.
Thermocoax was accretive to Group earnings in 2019.
Sustainable value creation
Throughout the year our diverse stakeholder base benefited from
our value creation as we utilised our direct sales business model
to meet customer needs, implemented our strategy for growth and
delivered a good financial return for investors. We achieved this
while operating sustainably, in a way that we believe preserves
value for future generations and takes into account the current and
future needs of all our stakeholder groups.
Review of Operations
2018 Exchange Organic Acq'n 2019 Organic Reported
& disposal
Revenue GBP1,153.3m - GBP73.9m GBP15.2m GBP1,242.4m +6% +8%
----------- --------- -------- ----------- ----------- ------- --------
Adjusted operating
profit GBP264.9m (GBP2.0m) GBP18.2m GBP1.6m GBP282.7m +7% +7%
----------- --------- -------- ----------- ----------- ------- --------
Adjusted operating
margin 23.0% 22.8% +10 bps -20 bps
----------- --------- -------- ----------- ----------- ------- --------
Statutory operating
profit GBP299.1m GBP245.0m -18%
----------- --------- -------- ----------- ----------- ------- --------
Statutory operating -620
margin 25.9% 19.7% bps
----------- --------- -------- ----------- ----------- ------- --------
Introduction
Despite a very low growth macro-economic environment in 2019 we
achieved strong organic growth and delivered record revenue and
adjusted operating profit. We created value for our stakeholders,
continued to invest in our businesses and implement our strategy to
ensure a strong foundation for continued, sustainable growth.
Market environment
Our Steam Specialties, Electric Thermal Solutions and
Watson-Marlow businesses all provide engineered products, services
and solutions that play a critical role in industrial processes
worldwide.
Steam is used across a broad range of industries, in all
geographical markets, for a wide range of applications including
heating, curing, cooking, drying, cleaning, sterilising, space
heating, humidifying, vacuum packing and producing hot water on
demand. Steam is relatively easy to control, environmentally safe,
clean and sterile, and is capable of transferring large energy
loads (in the form of heat) into industrial processes. A
complementary medium to steam, with a similarly broad industrial
and geographic reach, electrical heating solutions are particularly
utilised in applications that require rapid "on-off" control,
higher temperatures, easy installation, or zero-emissions at point
of use.
Peristaltic and other niche pumps and associated fluid path
components are widely used across an extensive range of industries
to address mission critical or difficult pumping problems.
Peristaltic pumps are particularly suitable for hygienic
applications (as the fluid is contained within a tube, sterile
tubing creates a sterile pump), precise metering or low-shear
applications, as well as handling corrosive or abrasive materials
that would otherwise damage the pump.
The wide applicability of our products across a broad range of
industries, combined with our extensive geographical presence mean
that conditions in our markets closely correlate with industrial
production growth rates.
Throughout 2019 global industrial production growth declined
each quarter, continuing the downward trend that commenced in 2018.
Averaging 1.0% for the year, global industrial production growth
was significantly lower than the 3.1% seen in 2018 and much weaker
than initially forecast. Emerging markets saw 3.0% growth while
mature markets experienced a 0.5% contraction compared with the
prior year. With organic revenue growth of 6% we significantly
outperformed our markets, as a result of the successful
implementation of our strategy for growth.
The continuing uncertainty surrounding Brexit had an impact on
market confidence and contributed to the negative industrial
production growth rates seen in the UK and Europe in 2019.
Nevertheless, while dampening market confidence in the UK and some
of our European markets, overall Brexit uncertainty had a
relatively limited impact on our business as a whole during 2019 as
around 93% of our revenue and profit was generated outside of the
UK during the year.
Forecasters are currently expecting global industrial production
growth to slow further in 2020, to average 0.8% for the year, but
with the COVID-19 outbreak still evolving we assume this could
deteriorate further. Looking forward we remain cautious and are
planning for the continuation of a low-growth environment
throughout 2020.
Summary of progress in 2019
Sales
Overall the Group achieved organic sales growth of over 6%, with
6% organic growth in the Steam Specialties business and over 12%
organic growth in Watson-Marlow. Within the Electric Thermal
Solutions business, sales were down 1% in Chromalox at constant
currency, following a strong 9% sales growth in 2018. Thermocoax,
which joined the Group on 13(th) May, contributed sales of GBP27.9
million for the period under ownership. HygroMatik was divested on
30(th) November 2018 and as a result made no contribution to sales
in 2019, compared with GBP12.7 million in the prior year.
At GBP1,242.4 million, Group sales were up 8% (2018: GBP1,153.3
million). Although varying by business and geography, foreign
exchange had no overall impact on Group sales.
Geographically, the Steam Specialties business, which accounted
for 61% of Group revenue in 2019, saw growth in all regions. Sales
of GBP755.4 million, were up 3% on a reported basis, 6% on an
organic basis.
The Electric Thermal Solutions business, which accounted for 15%
of Group revenue in 2019, achieved sales of GBP186.1 million, 20%
ahead of the prior year, with the increase a result of the
acquisition of Thermocoax. On an organic basis, sales were 1%
lower.
Watson-Marlow accounted for 24% of Group revenue in 2019 and
delivered GBP300.9 million of sales, a 13% increase over the prior
year, up 12% organically. Growth was achieved across all geographic
regions.
Adjusted operating profit
Group adjusted operating profit was 7% ahead of the prior year
on an organic basis and, at GBP282.7 million, was also up 7% at
reported exchange rates including acquisitions and disposals. The
strong growth reflects the increase in revenue, a net 1% positive
impact from the acquisition of Thermocoax and disposal of
HygroMatik, and margin expansion in the Steam Specialties business,
partially offset by a 1% negative translational and transactional
exchange impact, slight margin dilution in Watson-Marlow as we
invest to maintain growth and margin dilution from Chromalox due to
operational issues in the first half of the year, particularly in
Europe.
Within the Steam Specialties business, adjusted operating profit
of GBP177.9 million was 10% higher than the prior year on an
organic basis, with all three geographical segments delivering
organic adjusted operating profit growth. On a reported basis,
adjusted operating profit was 5% ahead, reflecting the divestment
of HygroMatik on 30(th) November 2018 and the resulting non-repeat
of GBP3.8 million of adjusted operating profit that the business
contributed in 2018, as well as a GBP4.8 million adverse impact
from currency movements.
Adjusted operating profit in the Electric Thermal Solutions
business, at GBP24.7 million, was up 8% on the prior year on a
reported basis. Chromalox had adjusted operating profit of GBP19.3
million, down 19% organically as we address unsatisfactory
performance in the company's French operations, respond to
manufacturing inefficiencies and continue to step up our
investments for future growth and improved profitability. All of
the Chromalox profit decline occurred in the first half of 2019.
Thermocoax contributed GBP5.4 million to adjusted operating profit.
Currency movements increased adjusted operating profit by 4%.
Watson--Marlow's organic adjusted operating profit grew by 11%,
despite continued investment in the business. Reported growth of
13% was aided by a currency tailwind.
Adjusted operating profit margin
At 22.8% the Group adjusted operating profit margin was 20 bps
lower than the prior year, due to the disposal of the highly
profitable but non-strategic HygroMatik business and a negative
exchange impact. On an organic basis, the Group margin increased 10
bps.
Within the Steam Specialties business, the adjusted operating
profit margin increased by 40 bps on a reported basis to 23.6%,
driven by margin progress across all three geographical segments,
offset by the disposal of the highly profitable HygroMatik business
and a negative exchange impact. Organically, the adjusted operating
profit margin increased by 100 bps. On a reported basis, the
adjusted operating profit margin of the Electric Thermal Solutions
business fell 140 bps to 13.3% as a result of lower profitability
in Chromalox in the first half of the year, partially offset by a
small positive exchange impact and Thermocoax's higher adjusted
operating profit margin of 19.5%. On an organic basis the margin
fell by 270 bps, wholly due to the first half deterioration, but
the margin was 30 bps higher in the second half of the year
compared to the same period in 2018. Watson-Marlow's operating
margin was 20 bps lower, 60 bps lower on an organic basis, as we
continue to invest in the business to sustain growth.
Statutory operating profit and margin
Statutory operating profit decreased from GBP299.1 million to
GBP245.0 million, as a result of the non-repeat of the profit on
disposal of HygroMatik (GBP47.4 million), the disposal of property
(GBP6.5 million) and a credit resulting from the post-retirement
benefit plan in the USA being frozen to future accrual (GBP6.0
million), which all contributed to statutory profit in 2018. As a
result the margin fell from 25.9% to 19.7%.
Steam Specialties: overview
2018 Exchange Organic Acq'n 2019 Organic Reported
& disposal
Revenue GBP733.5m (GBP7.4m) GBP42.0m (GBP12.7m) GBP755.4m +6% +3%
--------- --------- -------- ----------- --------- ------- --------
Adjusted operating
profit GBP170.1m (GBP4.8m) GBP16.4m (GBP3.8m) GBP177.9m +10% +5%
--------- --------- -------- ----------- --------- ------- --------
Adjusted operating +100
margin 23.2% 23.6% bps +40 bps
--------- --------- -------- ----------- --------- ------- --------
Statutory operating
profit GBP222.5m GBP172.6m -22%
--------- --------- -------- ----------- --------- ------- --------
Statutory operating -750
margin 30.3% 22.8% bps
--------- --------- -------- ----------- --------- ------- --------
Market overview
Europe, Middle East and Africa (EMEA) as a whole saw a small
contraction in industrial production during 2019. Brexit, political
unrest and economic challenges affected market conditions and
dampened industrial production growth rates in several countries.
Our large European markets were particularly challenging, with
industrial production down 3.4% in Germany, down 0.6% in the UK and
down 1.2% in Italy, compared with the prior year. Of our larger
European markets, only France saw growth, but at a low rate of just
0.5%. Elsewhere across EMEA, the picture was more mixed with some
of our smaller markets such as Belgium, Denmark, Egypt, Russia,
Spain and Sweden seeing growth between 0.9% and 4.4%, but other
markets, such as the Netherlands, Norway, South Africa and Turkey,
experiencing contraction.
Excluding China, Asia Pacific saw industrial production contract
by 0.3%, as export-dependent economies were affected by the trade
dispute between China and the USA, resulting in investment
decisions to carry inventory, expand capacity or build new plants,
being delayed or cancelled. Including China, industrial production
in Asia Pacific grew by 2.5% . The industrial production growth
rate in China slowed for the first three quarters and averaged 5.7%
for the year. Korea, our second largest market in the region, saw
contraction of 1.1% for the year as a whole, with a more marked
contraction in the first half of the year that eased somewhat in
the second half. Japan, Singapore, Thailand and Taiwan also
experienced negative industrial production growth rates. Elsewhere
in the region, industrial production growth was more mixed, with
good growth in Vietnam, Indonesia and the Philippines, moderate
growth in Australasia and low growth of 1.0% in India.
Within the Americas, industrial production growth slowed in
consecutive quarters in North America, compared with the same
period in the prior year, turning negative in the second half and
averaging 0.6% for the year. Canada saw a 1.1% contraction for the
year. The USA started the year relatively strongly but its
industrial production growth rate slowed each quarter and reached a
negative 0.9% in the final quarter and averaged 0.8% for the year.
Market conditions in Latin America were challenging, with an
average contraction of 1.7% for the region for the year. With the
exception of some of our smaller markets in the region, such as
Colombia and Costa Rica, which saw low growth, all of our key
markets in the region experienced declining industrial production
in 2019. Argentina saw the strongest contraction, of nearly 5%, as
the country experienced the political uncertainty of a regime
change and continued to suffer from a significant currency
devaluation and recessionary conditions. Mexico continued to
experience uncertainty, primarily as a result of trade tensions
between the USA and China and the impact of the US Administration's
influence on corporations off-shoring production, resulting in a
1.6% contraction. Brazil experienced a 1.1% decline in industrial
production during 2019.
Progress in 2019
Against a backdrop of low or negative industrial production
growth in many of our core markets during 2019, good progress was
made in the Steam Specialties business. With organic revenue growth
of 6%, we significantly outperformed our markets, delivering
GBP755.4 million of revenue in 2019. On a reported basis, revenue
was up 3%, impacted by the sale of HygroMatik in November 2018 and
a negative impact from exchange movements.
Adjusted operating profit of GBP177.9 million was also strongly
ahead; up 10% on an organic basis and up 5% on a reported basis.
Reported growth was lower than organic growth due to the divestment
of highly profitable HygroMatik and a negative exchange impact. At
23.6%, the Steam Specialties business' adjusted operating profit
margin was up 100 bps organically and up 40 bps on a reported
basis.
Gestra, which joined the Steam Specialties business in May 2017,
generates over 40% of its sales in Germany and thus has a high
exposure to conditions in that market. As outlined above, Germany
experienced a marked contraction in industrial production growth in
2019. The German chemical industry, a key sector for Gestra, was
particularly weak throughout the year, as were OEM boiler makers,
who were affected by softening global demand and lower industrial
production growth rates. In addition, distributor sales were
affected by political and economic uncertainty in Europe. Despite
these headwinds and a very tough comparison against 10% growth in
2018, Gestra outperformed its markets maintaining sales at 2018
levels and growing its order book, while increasing the adjusted
operating profit margin by 110 bps.
On 3(rd) December 2018 we announced the disposal of HygroMatik.
In 2018 HygroMatik reported sales of GBP12.7 million and GBP3.8
million of adjusted operating profit.
Statutory operating profit decreased from GBP222.5 million to
GBP172.6 million primarily as a result of a number of non-recurring
events in 2018; the profit on the disposal of HygroMatik (GBP47.4
million), the disposal of property (GBP6.5 million) and a credit
resulting from the post-retirement benefit plan in the USA being
frozen to future accrual (GBP6.0 million).
Steam Specialties: Europe, Middle East and Africa (EMEA)
2018 Exchange Organic Acq'n 2019 Organic Reported
& disposal
Revenue GBP344.4m (GBP3.6m) GBP7.6m (GBP12.7m) GBP335.7m +2% -3%
--------- --------- ------- ----------- --------- ------- --------
Adjusted operating profit GBP69.3m (GBP0.8m) GBP2.3m (GBP3.8m) GBP67.0m +4% -3%
--------- --------- ------- ----------- --------- ------- --------
Adjusted operating margin 20.1% 20.0% +30 bps -10 bps
--------- --------- ------- ----------- --------- ------- --------
Statutory operating
profit GBP111.5m GBP63.4m -43%
--------- --------- ------- ----------- --------- ------- --------
Statutory operating -1,350
margin 32.4% 18.9% bps
--------- --------- ------- ----------- --------- ------- --------
Progress in 2019
Despite the zero-growth environment across the region as a whole
and industrial production contraction in most of our core markets,
sales in EMEA increased by 2% on an organic basis. At reported
exchange rates and including the GBP12.7 million loss of revenue
due to the divestment of HygroMatik, sales of GBP335.7 million were
down 3% on the prior year.
Organic sales for Spirax Sarco companies were ahead in most
countries in the region, including our mature markets of the UK,
Germany, Italy and France, where market conditions were
particularly poor, reflecting the successful implementation of our
strategy. Our focus on helping customers to identify process,
productivity, energy and sustainability improvements, and our
ability to offer bespoke, engineered solutions that deliver
customer value - self-generated small project sales - offset a
reduction in large capital projects in the region that was caused
by market uncertainty. Maintenance, repair and overhaul (MRO) base
business was also robust.
The Pharmaceutical sector was a good driver of growth for a
number of our sales companies in Central and Eastern Europe, sales
into the Healthcare industry were generally robust and our
strategic focus on the Food and Beverage industries delivered
growth across the region, particularly in France and South Africa.
Growth in these priority sectors helped to offset a small decline
in OEM business, Oil & Gas and a weakness in the German
Chemical industry, while a heightened focus on our strategic
accounts, with an accompanying increase in the number of energy
audits and steam system surveys, delivered good results.
As outlined earlier, Gestra, whose sales in EMEA accounted for
85% of its total revenue, struggled to make progress in very
challenging markets that were predominantly showing negative growth
and finished the year with a 2% organic decline in EMEA.
At GBP67.0 million, adjusted operating profit was 3% behind, due
to the divestment of HygroMatik in November 2018 and a currency
headwind. Organically, adjusted operating profit was up 4%,
reflecting the organic sales growth and margin enhancement. The
adjusted operating margin decreased by 10 bps to 20.0%, due to the
divestment of highly profitable HygroMatik. Organically, the margin
improved by 30 bps, primarily as a result of growth in
self-generated project sales, which generally have higher margins
than larger capital projects, and improvements to profitability in
Gestra's European operations.
Statutory operating profit decreased from GBP111.5 million to
GBP63.4 million, primarily due to the GBP47.4 million profit from
the sale of HygroMatik in 2018.
Steam Specialties: Asia Pacific
2018 Exchange Organic Acq'n 2019 Organic Reported
& disposal
Revenue GBP232.7m GBP0.1m GBP17.0m - GBP249.8m +7% +7%
--------- -------- -------- ----------- --------- ------- --------
Adjusted operating
profit GBP63.9m GBP0.3m GBP8.3m - GBP72.5m +13% +14%
--------- -------- -------- ----------- --------- ------- --------
Adjusted operating +140 +150
margin 27.5% 29.0% bps bps
--------- -------- -------- ----------- --------- ------- --------
Statutory operating
profit GBP69.9m GBP72.5m +4%
--------- -------- -------- ----------- --------- ------- --------
Statutory operating -100
margin 30.0% 29.0% bps
--------- -------- -------- ----------- --------- ------- --------
Progress in 2019
Sales of GBP249.8 million were up 7% on both an organic and
reported basis.
China saw strong, double-digit growth and Korea, our second
largest market in the region, saw good growth despite challenging
market conditions. Elsewhere in the region sales were more mixed
with strong growth in Singapore, India, and robust growth in Taiwan
and New Zealand, but lower sales in Australia and some of our
smaller markets such as the Philippines, Indonesia and Vietnam,
against tough compares.
Sales growth in the region came from a combination of large
project orders, self-generated business and MRO sales. Gestra,
which has a small presence in the region, saw double-digit growth
and benefited from the new sales company in China, which began
trading in April 2019.
We are very pleased with the performance of our Indian
operation, which was established as a sales and manufacturing
location in 2016. As a result of strong domestic revenue growth and
an increase in inter-company manufacturing volume, the company
achieved a "break-even" position in 2019, one year ahead of plan,
and we look forward to seeing continued sales and profitability
growth in 2020.
Adjusted operating profit of GBP72.5 million increased 13%
organically, with a small positive impact from exchange resulting
in a reported increase of 14%. The adjusted operating margin of
29.0% was ahead 140 bps organically due to operational gearing from
volume growth, active price management and increased localisation
of products from our manufacturing plants in China and India, which
more than covered increased costs elsewhere in the business.
Statutory operating profit increased from GBP69.9 million to
GBP72.5 million despite the profit on the disposal of property
(GBP6.5 million) in 2018.
Steam Specialties: The Americas
2018 Exchange Organic Acq'n 2019 Organic Reported
& disposal
Revenue GBP156.4m (GBP3.9m) GBP17.4m - GBP169.9m +11% +9%
--------- --------- -------- ----------- --------- ------- --------
Adjusted operating
profit GBP36.9m (GBP4.3m) GBP5.8m - GBP38.4m +18% +4%
--------- --------- -------- ----------- --------- ------- --------
Adjusted operating +120
margin 23.6% 22.6% bps -100 bps
--------- --------- -------- ----------- --------- ------- --------
Statutory operating
profit GBP41.1m GBP36.7m -11%
--------- --------- -------- ----------- --------- ------- --------
Statutory operating
margin 26.3% 21.6% -470 bps
--------- --------- -------- ----------- --------- ------- --------
Progress in 2019
At GBP169.9 million, sales were ahead 9% on a reported basis,
and up 11% on an organic basis, with a 2% negative impact from
currency movements. Excluding our Argentine business, where the
further devaluation of the currency distorts both organic growth
(due to large price increases) and currency movements, organic
growth was 5% and reported growth 10%.
Organic sales were up 6% in North America. Both Spirax Sarco and
Gestra achieved strong organic sales growth in the USA as we
expanded our direct sales presence. Our customer facing employees
in the USA and throughout the region are benefiting from training,
delivered through the Spirax Sarco Academy, which equips them with
the consultative selling tools to help them uncover our customers'
process challenges and deliver the bespoke thermal energy solutions
needed to resolve them. While strengthening our direct sales
presence, we have continued to work with our distribution network
to drive growth.
In Latin America, organic sales were ahead 20%, with good
organic growth across all but one of our operations in the region
and a positive benefit from Argentina's US dollar-denominated
pricing. Excluding Argentina, organic sales growth was 8% in the
region. Hiter, our Brazilian controls business, which we acquired
in 2016, delivered another record year of double-digit growth and
expanded its overseas sales footprint. Our Spirax Sarco company in
Brazil also performed strongly, despite the country's challenging
economic conditions. Argentina performed well to withstand the very
difficult economic landscape, benefiting from in-country
manufacturing and dollar-based pricing. Only Mexico struggled to
secure growth and saw a fall in sales.
Gestra, which has a relatively small local presence in the
region, continued to strengthen its direct sales presence in the
Americas, while maintaining its long-standing distribution
relationships. The Steam Specialties business' dual brand strategy
and sectorised market approach is enabling both Gestra and Spirax
Sarco to achieve growth and offer customer choice in the region. As
a result, during 2019 Gestra saw strong double-digit growth in the
Americas.
Adjusted operating profit in the Americas was ahead of the prior
year; up 4% to GBP38.4 million. On an organic basis, adjusted
operating profit was up 18%. Unlike 2018, reported profit in
Argentina fell back as organic growth failed to offset currency
devaluation. The reported adjusted operating profit margin was down
100 bps to 22.6% due to the impact of currency. On an organic
basis, the margin rose 120 bps in the region. Excluding Argentina,
the increase was 60 bps.
Statutory operating profit reduced from GBP41.1 million to
GBP36.7 million as a result of the non-repeat of a credit from the
post-retirement benefit plan in the USA being frozen to future
accrual (GBP6.0 million).
Steam Specialties strategy update
Throughout 2019 we continued to implement the "Customer First"
Steam Specialties business strategy, with all three geographic
segments benefiting from the resulting operational
improvements.
The ability of our sales and service engineers to self-generate
sales through uncovering problems and providing bespoke solutions
to meet customers' needs, became increasingly important in the
negative or low-growth global industrial production environment
during 2019. Five years of intensive strategic execution,
investments in our direct sales business model and extensive
training delivered through the Spirax Sarco Academy were reflected
in the above-market growth achieved in 2019.
While strengthening and consolidating our position in our mature
and emerging markets, we continued to expand our geographic
footprint. In 2019 we established a Spirax Sarco direct presence in
Bosnia & Herzegovina, Honduras and Qatar and our newly
established Gestra company in China commenced trading. We also
strengthened Gestra's direct sales presence in the Asia Pacific and
Americas regions.
Our strategic focus on our priority sectors delivered good
results, although OEMs and Oil & Gas were affected by the poor
market conditions. A focus on customer steam quality, with customer
educational campaigns, targeted marketing materials and the
development of a new clean steam generator designed specifically
for the Healthcare industry, delivered results in both the
Healthcare and Food & Beverage industries.
In 2019 we initiated project OPAL, the implementation of a new
integrated IT system to improve operational effectiveness and
deliver improved customer focus and insight, effective strategic
account management and rapid quoting and processing to further
improve our customer delivery performance. The new system will
incorporate ERP (Enterprise Resource Planning), CRM (Customer
Relationship Management), CPQ (Configure, Price, Quote) and BI
(Business Intelligence) modules. It is envisaged that the roll-out
will extend over five years. We also continued to invest in our
manufacturing sites through our "Future factory" programme, for
example upgrading CNC machines in the UK, making improvements to
the machining centres in Brazil, Argentina and Mexico, and stepping
up capital investments in Gestra's manufacturing facility in
Germany, leading to increased manufacturing efficiencies.
In the final quarter of the year, Gestra released the new
SPECTORconnect boiler control range, offering customers unrivalled
safety features, tools to enable them to monitor boiler efficiency,
improve maintenance and better prevent breakdown, as well as
improved digital monitoring to enable customers to have a better
understanding of on-site energy usage.
We have continued to strengthen our safety culture, with
intensive BBS (Behavioural Based Safety) training rolled out to
managers during 2019, which is continuing into 2020, and the
continued implementation of our Sustainability Strategy in support
of all our stakeholders.
Steam Specialties outlook
The latest forecasts suggest that the global industrial
production growth rate will remain low throughout the year,
averaging 0.8% in 2020. Developed markets are expected to contract
by an average 0.3% for the year, while the emerging markets are
expected to grow 2.4%.
The UK, France, Germany and Italy are all currently forecasted
to contract further in 2020, with conditions elsewhere in EMEA
remaining broadly positive, although at low levels. The average
growth rate is forecasted to be 0.9% for the region as a whole.
Within the Americas, conditions in the USA are expected to slow
further with year-on-year industrial production rates contracting
by 0.5%. Within Latin America, conditions are expected to remain
challenging, but returning to low growth of around 0.7% for the
region as a whole, if Brazil, in particular, picks up as
forecasted. Within Asia Pacific, Chinese growth is expected to slow
further, although conditions elsewhere in the region may be
slightly better than seen in 2020.
The Steam Specialties business has a higher exposure to the
unfolding COVID-19 situation, which we anticipate could further
reduce global industrial production growth in the first half of the
year. We are therefore planning for a low-growth environment and
the continuation of challenging market conditions in 2020.
Nevertheless, thanks to our resilient business model, ability to
self-generate sales, significant maintenance and repair revenues,
broad geographic reach and the successful implementation of our
strategy, we remain confident in our ability to continue
outperforming our markets.
Electric Thermal Solutions
2018 Exchange Organic Acq'n 2019 Organic Reported
Revenue GBP154.6m GBP5.1m (GBP1.5m) GBP27.9m GBP186.1m -1% +20%
--------- -------- --------- -------- --------- ------- --------
Adjusted operating
profit GBP22.8m GBP1.0m (GBP4.5m) GBP5.4m GBP24.7m -19% +8%
--------- -------- --------- -------- --------- ------- --------
Adjusted operating -270 -140
margin 14.7% 13.3% bps bps
--------- -------- --------- -------- --------- ------- --------
Statutory operating
profit GBP12.1m GBP7.9m -35%
--------- -------- --------- -------- --------- ------- --------
Statutory operating -360
margin 7.8% 4.2% bps
--------- -------- --------- -------- --------- ------- --------
Market overview
Chromalox, which accounted for 85% of revenue in the Electric
Thermal Solutions business in 2019, generates 80% of its revenue in
North America and thus has a high exposure to industrial production
growth rates in the USA and Canada, which slowed markedly during
the year, averaging just 0.6%. A number of Chromalox's market
sectors, such as Power Generation and Marine, saw positive growth
in 2019 but this was offset by a slowdown in other sectors, such as
OEM, Oil & Gas and Chemical, which account for around 47% of
sales. The company saw a strong contraction in the Oil & Gas
industry in EMEA as economic conditions in the region and political
unrest in the Middle East delayed projects and hampered growth.
Shipbuilding, offshore projects and Liquefied Natural Gas markets
strengthened compared with the prior year and Chromalox saw
progress in these industries, particularly in Asia Pacific.
Thermocoax, acquired in May, accounted for 15% of the Thermal
Electric Solutions business' revenue in 2019. The company has a
high exposure to industrial production growth rates in Europe with
three quarters of its revenue generated through its companies in
France, Germany and the UK. Industrial production contracted in
Europe in 2019, creating a difficult operating environment. By
industry, Thermocoax saw progress in OEM semiconductor markets,
Aeronautics and Space, but found conditions more challenging in the
Nuclear sector where global uncertainty, particularly in China and
India, led to project delays.
Progress in 2019
The Electric Thermal Solutions business delivered GBP186.1
million of sales in 2019, up 20% on a reported basis, with
Thermocoax adding GBP27.9 million for the seven and a half months
under ownership. A 3% exchange tailwind more than offset a 1%
organic decline in Chromalox's revenue.
Chromalox delivered GBP158.2 million of sales in 2019, a 1%
organic decline following strong 9% organic growth in 2018. We saw
sustained maintenance, repair and overhaul demand and continued the
positive trend towards an increasing number of smaller projects and
standard product sales, to offset a decline in large,
custom-engineered capital project sales. This trend was
particularly noticeable in the Heat Trace product line, which saw a
reduction in heavy industry projects towards more engineering
services and material sales. A focus on small projects and
recurring revenue also produced an uplift in Component Technology
sales, particularly in the renewable energy sector. We benefited
from the direct sales presence that we established in Latin America
(Brazil and Chile) in 2018 and saw good growth in these countries
in 2019. Sales in Asia Pacific also saw growth in 2019.
In the full year of 2019, sales in Thermocoax fell by 5% at
constant currency, partially due to disruption by the acquisition
process in the first part of the year and partially as a result of
customer rescheduling of shipments in the latter part of the year.
This had the result of expanding the order book by 18% in the
year.
Adjusted operating profit was GBP24.7 million for the Electric
Thermal Solutions business up 8% on a reported basis due to the
acquisition of Thermocoax and a 4% currency tailwind. On an organic
basis, profit was down 19% due to the operational issues,
particularly in Europe, encountered in the first half of the year
by Chromalox.
The adjusted operating profit margin for the Electric Thermal
Solutions business as a whole was down 140 bps with a 270 bps
organic decline in Chromalox, partially offset by the higher
operating margin of Thermocoax and a positive contribution from
currency. In August 2019, we reported the disappointing
profitability of Chromalox in the first half of the year, with an
operating profit margin of 9.7%. Chromalox's second half operating
margin was much stronger at 15.1%, which was above the 14.7% full
year margin achieved in 2018, as we began to see indications of
operational performance improvement resulting from actions
initiated in the first half of the year. Thermocoax's adjusted
operating margin was 19.5% for the period under ownership.
Statutory operating profit decreased from GBP12.1 million to
GBP7.9 million due to the amortisation of acquired intangibles
recognised on the acquisition of Thermocoax.
Strategy update
We welcomed electric thermal solutions specialist, Thermocoax,
into the Group in May 2019. Thermocoax expands our technical
offering to customers, particularly in highly regulated and
high-tech industries such as Nuclear, Aeronautic, Space, Power
Generation and Semiconductor. It also doubles the Electric Thermal
Solutions business footprint in Europe and Asia, which can be
leveraged to improve Chromalox's access to those markets. At the
same time, Chromalox's strong brand and presence in North America,
will support faster market penetration for Thermocoax into that
important market.
Chromalox and Thermocoax both have strong, well-respected brands
and they will maintain these within the newly renamed Electric
Thermal Solutions business. In September 2019, Thermocoax's Chief
Executive Officer, Dominique Mallet, was appointed President of the
Electric Thermal Solutions business. We are confident that the
business will benefit from Dominique's experienced leadership.
Chromalox launched a variety of new products during 2019,
including a new Medium Voltage electric steam generator, utilising
the company's patented DirectConnect technology; the ProtoAir IIoT
Gateway, that can be installed with any Chromalox digitally enabled
product to provide seamless real time connectivity to the Cloud
allowing for remote access and monitoring; and a wide range of
"pick and ship" products, including heaters, flanges and control
panels, which feature universal designs allowing for fast quoting,
fast delivery and competitive pricing, when compared with more
customer-bespoke products.
During 2019, we broadened Chromalox's direct sales footprint,
establishing an initial direct sales presence in Korea and Hungary,
to better support customers in those countries.
In addition to investing for long-term growth, Chromalox
undertook a range of initiatives to improve profitability
throughout the year, including the adoption of Spirax Sarco price
management tools, a strategic pricing review and reducing central
costs.
In February 2020 we announced to our workforce in Chromalox
France the intention to reorganise the operation to reduce losses
and help bring the European operation of Chromalox to break-even by
the end of 2021. This will entail a restructuring of the supply
chain to reduce manufacturing activity in France, which will result
in a reduction of the workforce. Also, in early March we divested
Chromalox's small Canadian subsidiary, ProTrace, which made a loss
of GBP0.2 million in 2019. The combined cost of these two projects,
which is estimated to be GBP4.2 million, will be taken as an
adjusting item in 2020. The annualised benefit, which should begin
to be seen from July 2020 is in the region of GBP1.2 million.
Outlook
Industrial production growth rates are forecasted to remain low
or contract further in the core markets of the Electric Thermal
Solutions business in 2020, with many of the factors affecting
economic and political uncertainty during 2019 continuing into the
current year. Nevertheless, the business is well-placed to make
progress in 2020. We will continue to benefit from broadening our
geographical direct sales footprint and the new products that were
launched during the last quarter of 2019 and early in 2020 align
strongly with customer trends such as decarbonisation, emissions
control, energy efficiency, process productivity and digitisation,
and should contribute to sales growth in 2020. We remain confident
that all these actions will offset the inevitable market headwind
resulting from the unfolding COVID-19 situation.
Watson-Marlow Fluid Technology Group (Watson-Marlow)
2018 Exchange Organic Acq'n 2019 Organic Reported
& disposal
Revenue GBP265.2m GBP2.3m GBP33.4m - GBP300.9m +12% +13%
--------- -------- -------- ----------- --------- ------- --------
Adjusted operating profit GBP84.8m GBP1.8m GBP9.2m - GBP95.8m +11% +13%
--------- -------- -------- ----------- --------- ------- --------
Adjusted operating margin 32.0% 31.8% -60 bps -20 bps
--------- -------- -------- ----------- --------- ------- --------
Statutory operating
profit GBP77.5m GBP82.7m +7%
--------- -------- -------- ----------- --------- ------- --------
Statutory operating
margin 29.2% 27.5% -170 bps
--------- -------- -------- ----------- --------- ------- --------
Market overview
Industrial production growth is also a good indicator of
economic conditions in Watson-Marlow's markets because of the
company's wide geographical spread and diversity of end user
industries. With a smaller but broadly similar geographic footprint
to the Steam Specialties business, the market overview commentary
found within the Steam Specialties business commentary is largely
applicable to the Watson-Marlow business. However, Watson-Marlow's
much greater weighting (c.50% of sales) to the Pharmaceutical &
Biotechnology industry means that it is more affected by conditions
in that market, than the Group as a whole. Throughout the year, the
Pharmaceutical & Biotechnology market remained buoyant, as did
the Medical Diagnostics, Mining and Water & Environmental
industries, which are all key sectors for Watson-Marlow. General
industrial markets were more challenging, reflecting the low
industrial production growth rates globally.
Progress in 2019
Watson-Marlow delivered sales of GBP300.9 million in 2019, a 13%
reported increase, with exceptional organic growth of 12% and a 1%
currency tailwind. Strong organic sales growth was delivered across
all geographical regions.
Within Europe and the Middle East, Watson-Marlow again achieved
strong growth across most of our territories, including
double-digit growth in the UK. Our relatively new sales companies
in Ireland and the UAE both delivered excellent growth. Across the
region, growth was largely driven by sales into the
Biopharmaceutical sector with our BioPure, Flexicon, Watson-Marlow
Tubing and Watson-Marlow Pumps products and solutions all achieving
double-digit growth. General Industry and Food & Beverage sales
were down slightly, hampered by the poor industrial production
growth rates in the region and against a strong compare. In Asia
Pacific, sales were also well ahead of the prior year, with China,
Korea and Japan all performing strongly, and with excellent growth
in some of our smaller markets. The Biopharmaceutical and Medical
sectors were key drivers of growth in the region. Within the
Americas, the Biopharmaceutical, Medical, Environmental and Mining
industries all saw good growth, with sales growth in all countries
in the region, with the exception of Mexico which was flat
year-on-year.
Aflex, which was acquired at the end of November 2016, delivered
solid growth, benefiting from the continuing conversion of
distributor to direct sales across many of Watson-Marlow's direct
sales territories. Work continues apace on the construction of
Aflex's new purpose-built factory in the UK, which will consolidate
the company's four UK factories onto one site, increasing capacity
and production efficiency. The new facility, at a cost of over
GBP20 million, is on schedule for completion in mid-2020.
Watson-Marlow's adjusted operating profit was GBP95.8 million,
up 13% at reported exchange rates and up 11% organically, with a 2%
exchange tailwind. At 31.8% the reported adjusted operating profit
margin was down 20 bps. On an organic basis, the margin fell by 60
bps due to increased investment to sustain above market levels of
growth.
Statutory operating profit increased from GBP77.5 million to
GBP82.7 million although the margin fell by 170 bps to 27.5%.
Strategy update
Watson-Marlow's geographic expansion continued in 2019, with new
sales companies established and trading in the Philippines,
Colombia and Iberia (Spain and Portugal). The preparatory work was
also completed for a new sales company to begin trading in Hungary
in 2020.
During the year we broadened our direct sales product portfolio
as our sales operations in Austria, Switzerland, Italy, Japan,
India, Brazil and South Africa began selling Aflex products
directly to their customer base, with sales growing as a
result.
New product development remains a key strategic priority, with a
number of product launches during the year, including the Qdos ReNu
PU pumphead, developed specifically to address the pumping needs of
the Wastewater Treatment industry; a new range of Puresu(R)
assemblies, combining Watson-Marlow tubing with BioPure connectors
and fittings, assembled, sterilised and ready for use; an expansion
of BioPure's gasket range, using new materials to meet consistent
quality demands for Bioprocessing; and Flexicon FPC60, a highly
accurate peristaltic fill and finishing system that allows users to
create their own bespoke filling solution to suit small-batch
applications. The Qdos ReNu PU pumphead, in particular, has
outperformed expectations, delivering sales more than double its
plan in the first six months following launch in June 2019.
Throughout 2019, following the acquisition of a small,
pre-revenue company in January 2018, we continued to develop an
innovative product that will expand the technical capabilities of
peristaltic pumps and extend the life of pump consumables, reducing
maintenance and downtime for customers. We expect our first product
as a result of this acquisition to be launched in the summer of
2020. As a result, a deferred "earn-out" of EUR5.8 million (GBP5.2
million) was paid in the first quarter of 2020.
Outlook
Globally, industrial production growth rates are expected to
remain low throughout 2020. We remain confident in our ability to
strongly outperform industrial production growth as Watson-Marlow's
core industries, notably Pharmaceutical, Biotechnology,
Biopharmaceutical and Medical devices, look to remain strong. Going
into 2020 we have a strong pipeline of new products for launch
during the year. We will continue to convert Aflex product sales
from distributor to direct, utilising our global direct sales
network to leverage growth. In recent years we have seen excellent
growth in our new sales companies as we expand into new territories
and we anticipate this continuing in our three new companies
established in 2019, as well as in our other recently established
companies. We anticipate that Watson-Marlow will have a lower
exposure to the effects of the unfolding COVID-19 situation due to
its strong position in the Biopharmaceutical industry, which we
assume will be less impacted. As result of all of these factors, we
are well positioned to continue to deliver above-market organic
sales growth in 2020.
Financial Review
The Group reports under International Financial Reporting
Standards (IFRS) and also uses adjusted and organic figures where
the Board believe that they help to effectively monitor the
performance of the Group and aid users of the Financial Statements
to draw comparisons with our peers. Certain alternative performance
measures also form a meaningful element of Executive Directors'
variable remuneration and some are used in calculating debt
covenants. Adjusted results quoted in the text below are referred
to as "adjusted" (see Note 2). A reconciliation of adjusted
operating profit to statutory operating profit is given below and
more detail can be found in Note 2 to the Financial Statements.
As we are a multi-national Group of companies that trade in a
large number of foreign currencies and regularly acquire and
sometimes dispose of companies, we also refer to organic
performance measures. Organic measures strip out the effects of the
movement of foreign currency exchange rates and of acquisitions and
disposals. The percentage organic growth or decline is measured as
the constant currency movement in those businesses that were part
of the Group at the end of the current year and the beginning of
the prior year, i.e. excluding the effects of any acquisitions or
disposals made in either year. The Board believe that this allows
users of the Financial Statements to gain a further understanding
of how the Group has performed.
Operating Operating Operating Operating
profit 2019 profit margin profit 2018 profit margin
2019 2018
GBPm % GBPm %
-------------------------------------- ------------- --------------- ------------- ---------------
Europe, Middle East and Africa 67.0 20.0% 69.3 20.1%
Asia Pacific 72.5 29.0% 63.9 27.5%
Americas 38.4 22.6% 36.9 23.6%
-------------------------------------- ------------- --------------- ------------- ---------------
Steam Specialties 177.9 23.6% 170.1 23.2%
Electric Thermal Solutions 24.7 13.3% 22.8 14.7%
Watson-Marlow 95.8 31.8% 84.8 32.0%
Corporate expenses (15.7) (12.8)
-------------------------------------- ------------- --------------- ------------- ---------------
Adjusted operating profit 282.7 22.8% 264.9 23.0%
-------------------------------------- ------------- --------------- ------------- ---------------
Profit on disposal of businesses - 47.4
Profit on disposal of property - 6.5
Post-retirement benefit plan
in the USA being frozen to
future accrual - 6.0
Equalising guaranteed minimum
pensions for the UK post-retirement
benefit plans - (0.7)
Amortisation of acquisition-related
intangible assets (26.8) (25.2)
Acquisition-related items (2.6) 0.2
Reversal of acquisition-related
fair value adjustments to
inventory (4.1) -
Impairment of goodwill (4.2) -
-------------------------------------- ------------- --------------- ------------- ---------------
Statutory operating profit 245.0 299.1
-------------------------------------- ------------- --------------- ------------- ---------------
Revenue
The Group achieved a strong financial result in 2019 against a
background of declining industrial production growth. Total sales
grew 8% to GBP1,242.4 million (2018: GBP1,153.3 million) with
organic sales growth of 6%. Watson-Marlow had an exceptional year,
delivering 12% organic growth, with all regions performing well.
Sales grew by 6% organically in the Steam Specialties business,
with growth of 2% in EMEA, 7% in Asia Pacific and 11% in the
Americas. Sales in the Electric Thermal Solutions business grew by
20% boosted by the acquisition of Thermocoax, on an organic basis
sales were down 1%. The net effect of the acquisition of Thermocoax
in May 2019 and the divestment of HygroMatik at the end of November
2018, added 1% to sales.
In aggregate, currency had no effect on sales, with losses in
the Steam Specialties business being compensated for by gains in
the Watson-Marlow and Electric Thermal Solutions businesses. If
recent exchange rates were to prevail for the rest of 2020 we would
expect to see a negative 2% impact to sales on translation when
compared to 2019.
Adjusted operating profit and margin
Adjusted operating profit of GBP282.7 million (2018: GBP264.9
million) was 7% ahead at reported exchange rates and 7% ahead on an
organic basis. On an organic basis the Steam Specialties business
saw adjusted operating profit increase by 10% with 4% growth in
EMEA, 13% growth in Asia Pacific and 18% growth in the Americas.
Watson-Marlow's adjusted operating profit grew 11% on an organic
basis while the Electric Thermal Solutions business fell back 19%
due to Chromalox's poor performance in the first half of the
year.
Currency movements depressed adjusted operating profit by less
than 1% with translational losses of GBP4.6 million being partially
offset by a transactional gain of GBP2.6 million. The main
transactional exposure flow affecting the Group is the export of
products from our factories in the UK, invoiced in sterling, less
the import of goods from overseas Group factories and third parties
priced predominately in euros and US dollars. The net exposure is
approximately GBP100 million. If recent exchange rates prevail for
the rest of 2020 we would expect to see a negative impact to profit
of 3% due to transactional and translation foreign exchange
movements.
The net effect of the acquisition made in 2019 and disposal in
2018 was to add less than 1% to adjusted operating profit on a
constant currency basis.
The adjusted operating profit margin in the Steam Specialties
business grew 40 bps to 23.6% despite the dilutionary impact of
currency and eleven months less of the high margin HygroMatik
business, which was sold in 2018. Excluding these effects, margin
growth was 100 bps. Watson-Marlow's reported margin fell 20 bps to
31.8%, a fall of 60 bps at constant currency. The Electric Thermal
Solutions business' margin fell by 140 bps although it was boosted
by currency and the acquisition of Thermocoax in the middle of May
2019. On an organic basis it fell 270 bps as a result of the
operational issues in Chromalox in the first half of the year. The
margin in Chromalox in the second half of the year expanded 600 bps
over the 9.1% reported in the first half, to 15.1%, which compares
with 14.8% in the second half of 2018 and 14.7% in the full year.
Overall the Group's reported adjusted operating profit margin fell
by 20 bps to 22.8% due to the dilutionary impacts of currency and
HygroMatik leaving the Group. On an organic basis, the Group margin
improved by 10 bps.
Statutory operating profit and margin
Statutory operating profit decreased from GBP299.1 million to
GBP245.0 million, as a result of the non-repeat of the profit on
disposal of HygroMatik (GBP47.4 million), the disposal of property
(GBP6.5 million) and a credit resulting from the post-retirement
benefit plan in the USA being frozen to future accrual (GBP6.0
million), which all contributed to statutory profit in 2018. As a
result, the margin fell from 25.9% to 19.7%.
Finance costs
Net finance costs fell from GBP10.3 million to GBP8.4 million.
Net bank interest decreased from GBP8.3 million in 2018 to GBP4.9
million reflecting lower interest rates and reduced levels of debt,
in particular that denominated in US dollars.
Net costs under IAS 19 in respect of the Group's defined benefit
pension schemes increased marginally to GBP2.2 million (2018:
GBP2.0 million).
In 2019, the Group adopted IFRS 16 (Leases). The IFRS 16
interest charge for the year was GBP1.3 million (2018: GBPnil
million).
We anticipate total net interest charges to be at a similar
level in 2020.
Associates
The Group has one Associate holding, a 26.3% interest in
Econotherm, a heat pipe technology business. Econotherm's
performance improved in 2019, with our share net of tax, rising to
GBP0.2 million (2018: GBPnil million).
Adjusted profit before tax
The adjusted profit before tax of GBP274.5 million (2018:
GBP254.6 million) was 8% ahead of the prior year. As outlined
earlier, currency movements were negative in the year. At constant
currency, adjusted profit before tax increased by 10%.
Statutory profit before tax
The statutory profit before tax was GBP236.8 million (2018:
GBP288.8 million) and includes the items listed below that have
been excluded from the adjusted profit:
-- a charge of GBP26.8 million (2018: GBP25.2 million) for the
amortisation of acquisition-related intangible assets;
-- a charge of GBP4.2 million for the impairment of goodwill (2018:
GBPnil million)
-- a charge of GBP2.6 million for acquisition costs relating to
Thermocoax (2018: GBP0.2 million credit); and
-- reversal of acquisition-related fair value adjustments to inventory
on the acquisition of Thermocoax, GBP4.1 million (2018: GBPnil
million).
The principal reasons for the movement between years are
explained in the "Statutory operating profit and margin" section
above.
Taxation
The tax charge on the adjusted profit before tax increased by 90
bps to 28.5% (2018: 27.6%), due primarily to a reduction in the
benefit the Group received from its internal financing structures
in 2019. The Group's overall tax rate reflects the blended average
of the tax rates in nearly 50 tax jurisdictions around the world in
which the Group trades and generates profit. The Group comprises in
the region of 130 operating units, the majority of which are small,
reflecting our local direct sales business model. On a statutory
basis the Group's effective tax rate was 29.5%.
For the year to 31(st) December 2020 we currently anticipate
that, based on the forecast mix of adjusted profits, the Group
effective tax rate will be comparable to 2019, at approximately
29%.
Earnings per share
Adjusted basic earnings per share increased by 6% to 265.7 pence
(2018: 250.0 pence). Statutory earnings per share was 226.2 pence
(2018: 303.1 pence). The fully diluted earnings per share was not
materially different in either year.
Dividends
The Group has a progressive dividend policy where dividend
payments follow underlying earnings per share growth while
maintaining prudent levels of dividend cover. The aim is to provide
sustainable, affordable dividend growth, building on our 52 year
record of dividend progress, with a compound annual increase of 11%
over that period and a 12% per annum increase over the last 10
years. The Board is proposing a final dividend of 78.0 pence per
share for 2019 (2018: 71.0 pence) payable on 22(nd) May 2020 to
shareholders on the register at 24(th) April 2020. Together with
the interim dividend of 32.0 pence per share (2018: 29.0 pence),
the total Ordinary dividend for the year is 110.0 pence per share,
an increase of 10% on the Ordinary dividend of 100.0 pence per
share in 2018.
The total amount paid in dividends during the year was GBP76.3
million, 13% above the GBP67.3 million paid in 2018.
Acquisitions
Acquisitions are an important complement to our strategy for
organic growth.
Dedicated resource remains focused on identifying opportunities
to add attractive businesses that closely match our strategic,
industrial and commercial requirements. Our three broad acquisition
criteria are:
-- geographic expansion, typically through the acquisition of
a distributor in a developing market;
-- products that can be integrated into our existing businesses;
and
-- related acquisitions that fit alongside our existing Steam
Specialties, Watson-Marlow or Electric Thermal Solutions businesses.
On 13(th) May 2019 we acquired Thermocoax for EUR156 million
(GBP135 million) on a cash--free, debt--free basis. The acquisition
was financed from existing cash and debt facilities. Thermocoax,
headquartered near Paris, France, is a leading designer and
manufacturer of highly engineered electrical thermal solutions for
critical applications in high added-value industries and together
with Chromalox forms our Electric Thermal Solutions business. For
more information on Thermocoax see the "Acquisition" section of the
Strategic Review.
Brexit
About 93% of the Group's sales and operating profit are made
outside the UK, reducing the risk to the Group from the United
Kingdom's decision to leave the European Union. That said, we are
net exporters from the UK, importing approximately GBP45 million
raw materials and components and exporting in the region of GBP170
million of finished goods to our sales companies around the world.
In 2018, to mitigate the risk of delays at ports, we made the
decision to build a month's buffer stock of raw materials and
components in the UK and finished goods outside the UK equating to
an additional two weeks' usage ahead of the then planned exit date
of 31(st) March 2019. Given that the Transition Period now extends
to the 31(st) December 2020, we currently plan to maintain this
buffer stock of GBP5 million into 2021.
We have modelled potential tariff impacts and believe that these
would be more than compensated for by a devaluation in sterling if
a "no-deal" Brexit were to occur following the end of the
Transition Period.
We are well prepared and well placed to take on the challenges
and identify the opportunities resulting from a UK exit from the
EU. We have navigated periods of economic and political uncertainty
in many different places around the world and have a long and
successful history of doing so.
Research and development
The development of innovative new products, getting those
products to market faster and sold more effectively, is an
important element of our strategy for growth. Overall the Group's
total spend on research and development in 2019 was GBP13.4 million
(2018: GBP12.4 million) of which GBP3.2 million was capitalised
(2018: GBP1.6 million).
IFRS 16
The adoption of IFRS 16 from 1(st) January 2019 has resulted in
the inclusion of GBP40.8 million of right-of-use assets in the
Statement of Financial Position at 31(st) December 2019 together
with a lease liability of GBP38.9 million. In the year to 31(st)
December 2019, operating profit was increased by GBP1.3 million,
which was matched by an increase in lease liability interest of
GBP1.3 million, giving a zero net impact to the Income Statement.
Further information can be found in Note 1.
Capital employed
2019 2018
Capital employed GBPm GBPm
----------------------------------------------- -------- --------
Property, plant and equipment 251.2 230.8
Right-of-use assets (IFRS 16) 40.8 -
Inventories 185.9 160.6
Trade receivables 240.7 245.1
Prepayments and other current assets 44.6 43.7
Trade, other payables, current provisions
and current tax (205.0) (195.7)
Capital employed 558.2 484.5
----------------------------------------------- -------- --------
Intangibles including goodwill 721.6 645.2
Investment in Associate 0.2 -
Post-retirement benefits (71.3) (85.1)
Net deferred tax (43.1) (35.5)
Non-current provisions and long-term payables (5.2) (6.4)
Lease liabilities (38.9)
Net debt (295.2) (235.8)
Net assets 826.3 766.9
Adjusted operating profit 282.7 264.9
----------------------------------------------- -------- --------
Adjusted operating profit (excluding IFRS
16) 281.4 264.9
----------------------------------------------- -------- --------
Average capital employed 521.4 482.2
----------------------------------------------- -------- --------
Average capital employed (excluding IFRS
16) 501.0 482.2
----------------------------------------------- -------- --------
Return on capital employed 54.2% 54.9%
----------------------------------------------- -------- --------
Return on capital employed (excluding
IFRS 16) 56.2% 54.9%
----------------------------------------------- -------- --------
Total capital employed has increased by 15% at reported exchange
rates. If the effects of currency, the acquisition of Thermocoax
and IFRS 16 are excluded growth was 7%. This compares with organic
sales growth of 7%.
Tangible fixed assets (PPE and IFRS 16 right-of-use-assets)
increased by GBP61.2 million to GBP292.0 million. Changes in
exchange rates reduced fixed assets by GBP8.3 million, GBP8.1
million came from the acquisition of Thermocoax and GBP40.8 million
from the adoption of IFRS 16, giving an underlying increase of
GBP20.6 million, or 9%.
Total working capital increased by GBP12.7 million. The ratio of
working capital to sales reduced by 70 bps to 21.3% (2018: 22.0%).
On a constant currency basis, excluding acquisitions and disposals,
underlying working capital as a percentage of sales improved by 30
bps to 21.5% despite the building of GBP5 million of Brexit buffer
stock and increasing Gestra's inventory to improve customer service
levels. Going forward, we would expect a similar percentage of
working capital to sales.
Return on capital employed (ROCE)
ROCE measures effective management of fixed assets and working
capital relative to the profitability of the business. ROCE
decreased to 54.2% (2018: 54.9%), due to the adoption of IFRS 16.
At constant currency, excluding acquisitions and disposals and IFRS
16, ROCE increased by 310 bps. ROCE is defined in Note 2.
Return on invested capital (ROIC)
ROIC measures the return on invested capital, both equity and
debt, relative to the adjusted operating profit after tax. ROIC
fell to 18.7% (2018: 19.3%), due to the acquisition of Thermocoax
and the adoption of IFRS 16. At constant currency, excluding
acquisitions and disposals and IFRS 16, ROIC increased by 120 bps.
ROIC is defined in Note 2 to the Financial Statements.
Post-retirement benefits
The net post-retirement benefit liability under IAS 19 fell to
GBP71.3 million (2018: GBP85.1 million). Assets rose by GBP46.8
million (11%), reflecting greater than expected returns.
Liabilities rose by GBP33.0m (6%), largely due to changes in market
conditions, which resulted in reductions in the AA corporate bond
rates used to discount future cash flows.
The main UK schemes, which constitute 88% of assets, were closed
to new members in 2001 but have remained open to future service
accrual. These schemes continue to be managed under a dynamic
de-risking strategy whereby asset and liability values are
monitored on a daily basis by the asset manager and appropriate
asset allocation decisions taken as the funding level improves
against pre-agreed trigger points. Following actuarial valuations
of the three UK schemes, we agreed deficit reduction programmes
with the Trustees and additional contributions of GBP4.0 million
were made in 2019. Further contributions at the same rate per annum
have been agreed until 2021. Actuarial valuations of the UK schemes
will be undertaken in 2020.
Cash flow and treasury
2019 2018
Cash flow GBPm GBPm
------------------------------------------ -------- --------
Adjusted operating profit 282.7 264.9
Depreciation and amortisation (excluding
IFRS 16) 34.3 32.9
Depreciation of leased assets 11.3 -
Cash payments to pension schemes more
than the charge to adjusted operating
profit (5.2) (4.6)
Equity settled share plans 6.2 5.7
Working capital changes (21.4) (22.5)
Repayments of principal under lease (11.2) -
liabilities
Capital additions (including software
and development) (62.4) (43.4)
Capital disposals 3.8 9.9
------------------------------------------ -------- --------
Adjusted cash from operations 238.1 242.9
------------------------------------------ -------- --------
Net interest (5.4) (6.7)
Income taxes paid (78.4) (61.6)
Free cash flow 154.3 174.6
------------------------------------------ -------- --------
Net dividends paid (76.3) (67.3)
Purchase of employee benefit trust
shares/Proceeds from issue of shares (12.5) (5.0)
(Acquisitions)/Disposals of subsidiaries
(including costs) (138.5) 48.8
Cash flow for the year (73.0) 151.1
------------------------------------------ -------- --------
Exchange movements 13.6 (13.3)
Opening net debt (235.8) (373.6)
Net debt at 31(st) December (excluding
IFRS 16) (295.2) (235.8)
IFRS 16 lease liability (38.9) -
Net debt and lease liability at 31(st)
December (334.1) (235.8)
------------------------------------------ -------- --------
Adjusted cash from operations is a measure of the cash flow
generated from our companies over which the local management have
control. A reconciliation between this and statutory operating cash
flow can be found in Note 2 to the Financial Statements.
Adjusted cash from operations fell by GBP4.8 million to GBP238.1
million (2018: GBP242.9 million) representing 84% cash conversion.
If we exclude the capital spend on the new Aflex facility this
would rise to 90%.
Movements in working capital are discussed above.
Capital additions increased by GBP19.0 million. The most
significant addition in the year was the GBP15.7 million spend on
the construction of a new purpose-built factory in the UK for Aflex
Hose, which will consolidate the existing four locations into a
single facility, giving capacity for future growth while increasing
efficiencies and providing a dedicated production line for
Pharmaceutical products. It is estimated that a further GBP6
million will be spent in 2020 in completing the project.
Looking forward, we would expect capital expenditure in 2020 to
be at a similar level of approximately GBP65 million as we finish
the Aflex facility but increase spending on project OPAL, the
implementation of a global IT system for the Steam Specialties
business. We generate significant cash and our first priority is to
reinvest in the business, taking opportunities to generate good
returns from increased efficiency, reduced costs and
flexibility.
Tax paid in the year increased by GBP16.8 million to GBP78.4
million as tax rates rose and the Group grew. Free cash flow,
defined in the table above, fell to GBP154.3 million (2018:
GBP174.6 million) as a result of the increase in capital
expenditure and tax.
Dividend payments were GBP76.3 million, including payments to
minorities (2018: GBP67.3 million) and represent the final dividend
for 2018 and the interim dividend for 2019.
There was a cash outflow, including fees, of GBP137.6 million on
the acquisition of Thermocoax, as well as an additional GBP0.9
million outflow relating to the acquisition of various distribution
rights. The net of share purchases and new shares issued for the
Group's various employee share schemes gave a cash outflow of
GBP12.5 million (2018: GBP5.0 million) reflecting the move to
acquire shares on the open market rather than issue new equity.
Due to the acquisition of Thermocoax, net debt increased from
GBP235.8 million to GBP295.2 million at 31(st) December 2019, an
expansion of GBP59.4 million. This equates to a net debt to EBITDA
ratio of 0.9 times (2018: 0.8 times) excluding IFRS 16. EBITDA is
defined in Note 2 and the components of net debt are disclosed in
Note 8.
The Group's Income Statement and Statement of Financial Position
are exposed to movements in a wide range of different currencies.
This stems from our direct sales business model, with a large
number of local operating units. These currency exposures and risks
are managed through a rigorously applied Treasury Policy, typically
using centrally managed and approved simple forward contracts to
mitigate exposures to known cash flows and avoiding the use of
complex derivative transactions. The largest exposures are to the
euro, US dollar, Chinese renminbi and Korean won. Whilst currency
effects can be significant, the structure of the Group provides
some mitigation through our regional manufacturing presence,
diverse spread of geographic locations and through the natural
hedge of having a high proportion of our overhead costs in the
local currencies of our direct sales operating units.
Capital structure
The Board keeps the capital requirements of the Group under
regular review, maintaining a strong financial position to protect
the business and provide flexibility of funding for growth. The
Group earns a high return on capital, which is reflected in strong
cash generation over time. Our capital allocation policy remains
unchanged. Our first priority is to maximise investment in the
business to generate further good returns in the future, aligned
with our strategy for growth and targeting improvement in our key
performance indicators. Next, we prioritise finding suitable
acquisitions that can expand our addressable market through
increasing our geographic reach, deepening our market penetration
or broadening our product range. Acquisition targets need to
exhibit a good strategic fit and meet strict commercial, economic
and return on investment criteria. When cash resources
significantly exceed expected future requirements, we would look to
return capital to shareholders, as evidenced by special dividends
declared in respect of 2010, 2012 and 2014. However, in the near
term, we will look to reduce our financial leverage prior to
considering new returns of capital to shareholders.
Spirax-Sarco Engineering plc
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31ST DECEMBER
2019
8B Note 2019 2018
GBPm GBPm
----------------------------------------- -------- -------- --------
ASSETS
9B Non-current assets
Property, plant and equipment 251.2 230.8
Right-of-use assets 1 40.8 -
Goodwill 417.7 368.0
Other intangible assets 303.9 277.2
Prepayments 0.9 6.2
Investment in Associate 0.2 -
Deferred tax assets 40.8 41.3
----------------------------------------- -------- -------- --------
1,055.5 923.5
----------------------------------------- -------- -------- --------
10B Current assets
Inventories 185.9 160.6
Trade receivables 240.7 245.1
Other current assets 35.3 32.9
Taxation recoverable 8.4 4.6
Cash and cash equivalents 8 168.5 187.1
----------------------------------------- -------- -------- --------
638.8 630.3
----------------------------------------- -------- -------- --------
11B Total assets 1,694.3 1,553.8
----------------------------------------- -------- -------- --------
EQUITY AND LIABILITIES
12B Current liabilities
Trade and other payables 174.8 167.0
Provisions 3.5 5.0
Bank overdrafts 8 0.2 0.4
Short-term borrowings 8 - 15.7
Current portion of long-term borrowings 8 34.3 41.5
Short-term lease liabilities 1, 8 11.1 -
Current tax payable 26.7 23.7
----------------------------------------- -------- -------- --------
250.6 253.3
----------------------------------------- -------- -------- --------
13B Net current assets 388.2 377.0
----------------------------------------- -------- -------- --------
14B Non-current liabilities
Long-term borrowings 8 429.2 365.3
Long-term lease liabilities 8 27.8 -
Deferred tax liabilities 83.9 76.8
Post-retirement benefits 71.3 85.1
Provisions 1.3 3.7
Long-term payables 3.9 2.7
----------------------------------------- -------- -------- --------
617.4 533.6
----------------------------------------- -------- -------- --------
15B Total liabilities 868.0 786.9
----------------------------------------- -------- -------- --------
16B Net assets 3 826.3 766.9
----------------------------------------- -------- -------- --------
17B Equity
Share capital 19.8 19.8
Share premium account 81.0 77.8
Other reserves (10.6) 22.2
Retained earnings 735.1 646.0
----------------------------------------- -------- -------- --------
Equity shareholders' funds 825.3 765.8
Non-controlling interest 1.0 1.1
----------------------------------------- -------- -------- --------
18B Total equity 826.3 766.9
----------------------------------------- -------- -------- --------
Total equity and liabilities 1,694.3 1,553.8
----------------------------------------- -------- -------- --------
Spirax-Sarco Engineering plc
CONSOLIDATED INCOME STATEMENT FOR THE YEARED 31ST DECEMBER
2019
Adjusted Adj't* Total Adjusted Adj't* Total
Note 2019 2019 2019 2018 2018 2018
GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ------ -------- ------ -------- -------- ------ -------
2,
Revenue 3 1,242.4 - 1,242.4 1,153.3 - 1,153.3
Operating costs (959.7) (37.7) (997.4) (888.4) 34.2 (854.2)
----------------------- ------ -------- ------ -------- -------- ------ -------
2,
Operating profit 3 282.7 (37.7) 245.0 264.9 34.2 299.1
----------------------- ------ -------- ------ -------- -------- ------ -------
Financial expenses (9.9) - (9.9) (11.4) - (11.4)
Financial income 1.5 - 1.5 1.1 - 1.1
----------------------- ------ -------- ------ -------- -------- ------ -------
3,
Net financing expense 4 (8.4) - (8.4) (10.3) - (10.3)
----------------------- ------ -------- ------ -------- -------- ------ -------
Share of profit
of Associate 0.2 - 0.2 - - -
----------------------- ------ -------- ------ -------- -------- ------ -------
Profit before taxation 274.5 (37.7) 236.8 254.6 34.2 288.8
Taxation 5 (78.3) 8.5 (69.8) (70.4) 5.0 (65.4)
----------------------- ------ -------- ------ -------- -------- ------ -------
Profit for the
period 196.2 (29.2) 167.0 184.2 39.2 223.4
----------------------- ------ -------- ------ -------- -------- ------ -------
Attributable to:
Equity shareholders 2 195.8 (29.2) 166.6 183.9 39.2 223.1
Non-controlling
interest 0.4 - 0.4 0.3 - 0.3
----------------------- ------ -------- ------ -------- -------- ------ -------
Profit for the
period 196.2 (29.2) 167.0 184.2 39.2 223.4
----------------------- ------ -------- ------ -------- -------- ------ -------
2,
Earnings per share 6
Basic earnings
per share 265.7p 226.2p 250.0p 303.1p
Diluted earnings
per share 264.9p 225.5p 249.1p 302.0p
----------------------- ------ -------- ------ -------- -------- ------ -------
Dividends 7
Dividends per share 110.0p 100.0p
Dividends paid
during the year
(per share) 103.0p 91.0p
----------------------- ------ -------- ------ -------- -------- ------ -------
*Adjusted figures exclude certain items, as set out and
explained in the Financial Review and as detailed in Note 2. All
amounts relate to continuing operations.
Spirax-Sarco Engineering plc
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE
YEARED
31ST DECEMBER 2019
2019 2018
GBPm GBPm
------------------------------------------------------- ------- ------
Profit for the year 167.0 223.4
-------------------------------------------------------- ------- ------
Items that will not be reclassified to profit
or loss:
Remeasurement gain/(loss) on post-retirement
benefits 9.0 (5.9)
Deferred tax on remeasurement (gain)/loss on
post-retirement benefits (1.4) 1.2
-------------------------------------------------------- ------- ------
7.6 (4.7)
------------------------------------------------------- ------- ------
Items that may be reclassified subsequently
to profit or loss:
Foreign exchange translation differences and
net investment hedges (33.5) 4.2
Non-controlling interest foreign exchange translation (0.1) -
differences
Profit/(loss) on cash flow hedges net of tax 3.3 (0.1)
-------------------------------------------------------- ------- ------
(30.3) 4.1
------------------------------------------------------- ------- ------
Total comprehensive income for the year 144.3 222.8
-------------------------------------------------------- ------- ------
Attributable to:
Equity shareholders 144.0 222.5
Non-controlling interest 0.3 0.3
-------------------------------------------------------- ------- ------
Total comprehensive income for the year 144.3 222.8
-------------------------------------------------------- ------- ------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEARED 31ST
DECEMBER 2019
Share Share Other Retained Equity shareholders' Non-controlling Total
Capital 25B Premium reserves Earnings funds interest Equity
Account GBPm GBPm
GBPm GBPm GBPm GBPm GBPm
------------------------ -------- ------------ --------- --------- -------------------- --------------- -------
Balance at 1(st) January
2019 19.8 77.8 22.2 646.0 765.8 1.1 766.9
------------------------ -------- ------------ --------- --------- -------------------- --------------- -------
Adoption of IFRS 16 (2.4) (2.4) - (2.4)
Balance at 1(st) January
2019 (restated) 19.8 77.8 22.2 643.6 763.4 1.1 764.5
Profit for the year 166.6 166.6 0.4 167.0
Other comprehensive
(expense)/income:
Foreign exchange
translation
differences and net
investment hedges - - (33.5) - (33.5) (0.1) (33.6)
Remeasurement gain
on post-retirement
benefits - - - 9.0 9.0 - 9.0
Deferred tax on
remeasurement
gain on post-retirement
benefits - - - (1.4) (1.4) - (1.4)
Cash flow hedges - - 3.3 - 3.3 - 3.3
------------------------ -------- ------------ --------- --------- -------------------- --------------- -------
Total other
comprehensive
(expense)/income for
the year - - (30.2) 7.6 (22.6) (0.1) (22.7)
------------------------ -------- ------------ --------- --------- -------------------- --------------- -------
Total comprehensive
(expense)/income for
the year - - (30.2) 174.2 144.0 0.3 144.3
------------------------ -------- ------------ --------- --------- -------------------- --------------- -------
Contributions by and
distributions to owners
of the Company:
Dividends paid - - - (75.9) (75.9) (0.4) (76.3)
Equity settled share
plans net of tax - - - (5.4) (5.4) - (5.4)
Issue of share capital - 3.2 - - 3.2 - 3.2
Employee Benefit Trust
shares - - (4.0) - (4.0) - (4.0)
Transfer between
reserves - - 1.4 (1.4) - - -
------------------------ -------- ------------ --------- --------- -------------------- --------------- -------
Balance at 31(st)
December
2019 19.8 81.0 (10.6) 735.1 825.3 1.0 826.3
------------------------ -------- ------------ --------- --------- -------------------- --------------- -------
Other reserves represent the Group's translation, net investment
hedge, cash flow hedge, capital redemption and Employee Benefit
Trust reserves.
The non-controlling interest is a 2.5% share of Spirax-Sarco
(Korea) Ltd held by employee shareholders.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEARED 31ST
DECEMBER 2018
Share Share Other Retained Equity shareholders' Non- controlling Total
Capital 26B Premium reserves Earnings funds interest Equity
account GBPm GBPm
GBPm GBPm GBPm GBPm GBPm
----------------------- -------- ------------ --------- --------- -------------------- ---------------- -------
Balance at 1(st)
January
2018 19.8 75.1 19.3 494.2 608.4 1.1 609.5
----------------------- -------- ------------ --------- --------- -------------------- ---------------- -------
Adoption of IFRS 15 - - - 0.7 0.7 - 0.7
Balance at 1(st)
January
2018 (restated) 19.8 75.1 19.3 494.9 609.1 1.1 610.2
Profit for the year 223.1 223.1 0.3 223.4
Other comprehensive
(expense)/income:
Foreign exchange
translation
differences and net
investment
hedges - - 4.2 - 4.2 - 4.2
Remeasurement loss on
post-retirement
benefits - - - (5.9) (5.9) - (5.9)
Deferred tax on
remeasurement
loss on
post-retirement
benefits - - - 1.2 1.2 - 1.2
Cash flow hedges - - (0.1) - (0.1) - (0.1)
----------------------- -------- ------------ --------- --------- -------------------- ---------------- -------
Total other
comprehensive
income/(expense) for
the year - - 4.1 (4.7) (0.6) - (0.6)
----------------------- -------- ------------ --------- --------- -------------------- ---------------- -------
Total comprehensive
income
for the year - - 4.1 218.4 222.5 0.3 222.8
----------------------- -------- ------------ --------- --------- -------------------- ---------------- -------
Contributions by and
distributions to owners
of the Company:
Dividends paid - - - (67.0) (67.0) (0.3) (67.3)
Equity settled share
plans net of tax - - - (0.3) (0.3) - (0.3)
Issue of share capital - 2.7 - - 2.7 - 2.7
Employee Benefit Trust
shares - - (1.2) - (1.2) - (1.2)
----------------------- -------- ------------ --------- --------- -------------------- ---------------- -------
Balance at 31(st)
December
2018 19.8 77.8 22.2 646.0 765.8 1.1 766.9
----------------------- -------- ------------ --------- --------- -------------------- ---------------- -------
In 2018, included in Foreign exchange translation differences
and net investment hedges is GBP0.3m for historic currency
translation gains transferred to the income statement relating to
the disposal of a subsidiary.
Spirax-Sarco Engineering plc
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARED 31ST
DECEMBER 2019
Note 2019 2018
GBPm GBPm
------------------------------------------------- ----- -------- --------
19B Cash flows from operating activities
Profit before taxation 236.8 288.8
Depreciation, amortisation and impairment 76.6 58.1
Loss/(profit) on disposal of fixed assets 0.4 (8.6)
Profit on disposal of subsidiary - (47.4)
Reversal of acquisition-related fair value 4.1 -
adjustments to inventory
Cash payments to the pension schemes greater
than the charge to operating profit (5.2) (10.1)
Equity settled share plans 6.2 5.7
Net financing expense 8.4 10.3
------------------------------------------------- ----- -------- --------
Operating cash flow before changes in
working capital and provisions 327.3 296.8
Change in trade and other receivables 2.4 (16.0)
Change in inventories (23.8) (15.5)
Change in provisions (2.4) 0.8
Change in trade and other payables 2.3 8.1
------------------------------------------------- ----- -------- --------
Cash generated from operations 305.8 274.2
Income taxes paid (78.4) (61.6)
------------------------------------------------- ----- -------- --------
Net cash from operating activities 2 227.4 212.6
------------------------------------------------- ----- -------- --------
20B Cash flows from investing activities
Purchase of property, plant and equipment (50.9) (33.5)
Proceeds from sale of property, plant
and equipment 3.4 11.9
Purchase of software and other intangibles (8.3) (8.3)
Development expenditure capitalised (3.2) (1.6)
Disposal of subsidiary - 51.5
Acquisition of businesses net of cash
acquired 9 (117.9) (2.7)
Interest received 1.5 1.1
------------------------------------------------- ----- -------- --------
Net cash (used) in/from investing activities (175.4) 18.4
------------------------------------------------- ----- -------- --------
21B Cash flows from financing activities
Proceeds from issue of share capital 2.1 1.8
Employee Benefit Trust share purchase (14.7) (6.7)
Repaid borrowings 8 (80.2) (111.6)
New borrowings 8 129.8 0.1
Interest paid (7.0) (7.7)
Repayment of lease liabilities 8 (11.2) -
Dividends paid (including minorities) 7 (76.3) (67.3)
------------------------------------------------- ----- -------- --------
Net cash used in financing activities (57.5) (191.4)
------------------------------------------------- ----- -------- --------
22B Net change in cash and cash equivalents 8 (5.5) 39.6
Net cash and cash equivalents at beginning
of period 186.7 151.6
Exchange movement 8 (12.9) (4.5)
------------------------------------------------- ----- -------- --------
Net cash and cash equivalents at end of
period 8 168.3 186.7
Borrowings 8 (463.5) (422.5)
------------------------------------------------- ----- -------- --------
Net debt at end of period 8 (295.2) (235.8)
------------------------------------------------- ----- -------- --------
Lease liabilities (including IFRS 16 transition
adjustment) 8 (38.9) -
------------------------------------------------- ----- -------- --------
Net debt and lease liabilities at end
of period 8 (334.1) (235.8)
------------------------------------------------- ----- -------- --------
NOTES TO THE FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
The Consolidated Financial Statements have been prepared in
accordance with International Financial Reporting Standards (IFRS)
adopted for use in the European Union (EU) and therefore comply
with Article 4 of the EU IAS legislation and with those parts of
the Companies Act 2006 that are applicable to companies reporting
under IFRS. IFRS includes the standards and interpretations
approved by the International Accounting Standards Board (IASB)
including International Accounting Standards (IAS) and
interpretations issued by the IFRS Interpretations Committee
(IFRIC).
The financial information included in this News Release does not
constitute statutory accounts of the Group for the years ended
31(st) December 2019 and 2018, but is derived from those accounts.
Statutory accounts for the year ended 31(st) December 2018 have
been reported on by the Group's auditor and delivered to the
Registrar of Companies. Statutory accounts for the year ended
31(st) December 2019 have been audited and will be delivered to the
Registrar of Companies following the Company's Annual General
Meeting. The report of the auditors for both years was (i)
unqualified, (ii) did not include a reference to any matters to
which the auditors drew attention by way of emphasis without
qualifying their report, and (iii) did not contain a statement
under Section 498 (2) or (3) of the Companies Act 2006.
If approved at the Annual General Meeting on 13(th) May 2020,
the final dividend will be paid on 22(nd) May 2020 to shareholders
on the register at 24(th) April 2020. No scrip alternative to the
cash dividends is being offered.
Copies of the Annual Report will be sent on 27(th) March 2020 to
shareholders who have requested a hard copy and can be obtained
from our registered office at Charlton House, Cirencester Road,
Cheltenham, Gloucestershire, GL53 8ER. The Report will also be
available on our website at www.spiraxsarcoengineering.com .
With the exception of IFRS 16 and IFRIC 23, adopted in the
current year, as outlined below, there have been no significant
changes in accounting policies from those set out in the
Spirax-Sarco Engineering plc 2018 Annual Report. The accounting
policies have been applied consistently throughout the years ended
31(st) December 2018 and 31(st) December 2019.
NEW STANDARDS AND INTERPRETATIONS ADOPTED IN THE CURRENT
YEAR
IFRS 16 (Leases)
The Group adopted IFRS 16 (Leases) using the cumulative catch-up
approach on 1(st) January 2019. IFRS 16 introduces new requirements
for lessee and lessor accounting, with the distinction between
operating lease and finance lease no longer applying for lessees.
Under IFRS 16, a lessee is required to recognise assets and
liabilities for all leases with a term of more than 12 months,
unless the underlying asset is of a low value when new. The new
standard also requires depreciation of the asset to be recognised
separately from the interest expense on the lease liability.
As a result of adopting IFRS 16, the difference between the
asset and liability recognised on 1(st) January 2019 has been shown
as an adjustment to opening retained earnings within the
Consolidated Statement of Changes in Equity. Comparative
information has not been restated and is therefore presented under
IAS 17.
The exemptions taken by the Group on transition are detailed
below. The weighted average incremental borrowing rate applied to
the lease liabilities at 1(st) January 2019 was 3.2%.
The Group has elected to use the following transition practical
expedients:
(a) The definition of a lease in accordance with IAS 17 and IFRIC
4 will continue to be applied to leases entered or changed before
1(st) January 2019, and as a result we have not reassessed whether
a contract is or contains a lease on transition.
(b) Leases with a determined lease term of less than 12 months remaining
from 1(st) January 2019 have been treated as short term.
(c) Initial direct costs have been excluded from the measurement
of the right-of-use asset for all leases entered into or changed
before 1(st) January 2019.
Furthermore, the Group has also elected to make use of the
following exemptions provided by IFRS 16:
(a) Leases with a determined lease term of 12 months or less from
the commencement of the lease will be treated as short term
and therefore not included in the right-of-use asset or lease
liability. Instead, lease costs will be recognised on a straight
line basis across the life of the lease.
(b) Leases for which the underlying asset is of low value when new
will be exempt from the requirements to value a right-of-use
asset and lease liability. Instead, lease costs will be recognised
on a straight line basis across the life of the lease. To apply
this exemption, a threshold of GBP5,000 has been utilised to
define "low value".
(c) Lease and non-lease components will not be separated; therefore,
each lease component and any associated non-lease component
will be accounted for as a single component.
(d) Where applicable, IFRS 16 will be applied to a portfolio of
leases with similar characteristics.
The impact on the Financial Statements on transitioning is as
follows:
Statement of Financial Position
(a) Right-of-use assets were capitalised, totalling GBP41.2m. The
majority of this value (GBP27.2m) results from leased property
where the Group leases a number of office and warehouse sites
in a number of geographical locations. GBP5.1m relates to the
reclassification of long-term prepayments held at 31(st) December
2019 to Right-of-use assets at 1(st) January 2019. The remaining
GBP8.9m is largely made up of leased motor vehicles, where the
Group makes use of leasing cars for sales and service engineers
at a number of operating company locations.
(b) Deferred tax assets were recognised at the date of transition
of GBP0.5m..
(c) Lease and non-lease components will not be separated; therefore,
each lease component and any associated non-lease component
will be accounted for as a single component.
(d) As a result of the Group using the cumulative catch-up approach,
all property lease assets were valued as if IFRS 16 had always
applied since the commencement of those leases with the cumulative
effect being an adjustment to opening retained earnings. This
led to a difference between the right-of-use assets capitalised
(excluding the GBP5.1m reclassification of long-term prepayments
held at 31(st) December 2018), deferred tax assets recognised
and the corresponding lease liability. The difference between
these values of GBP2.4m has been recognised as an adjustment
to opening retained earnings.
Income Statement
(a) The impact on the Income Statement for the year-ended 31(st)
December 2019 is an increase in operating profit of GBP1.3m
compared to the operating profit had IAS 17 continued to apply.
This is made up of a reduction in operating lease rentals of
GBP12.6m offset by a depreciation charge of GBP11.3m. Once the
additional GBP1.3m of lease liability interest is taken into
account, the overall impact on profit before tax in the year
ended 31(st) December 2019 is GBPnil..
(b) The total expense relating to exempt leases (being short-term,
low value or variable lease payments not included in the lease
liability) was GBP2.5m.
Statement of Cash Flows
(a) Net cash inflow from operating activities for the year ended
31(st) December 2019 increased by GBP12.5m as a result of the
payments made on lease liabilities being reclassified from cash
generated from operations to financing activities.
(b) Net cash outflow from financing activities increased by GBP12.5m
as a result of the above..
(c) There is no impact on the net change in cash and cash equivalents
as a result of IFRS 16.
IFRIC 23 (Uncertainty Over Income Tax Treatments)
The Group adopted the guidance set out in IFRIC 23 (Uncertainty
Over Income Tax Treatments). International Accounting Standard
(IAS) 12 specifies how to account for current and deferred tax, but
not how to reflect the effects of uncertainty.
The guidance issued by the IFRIC in IFRIC 23 provides
requirements that add to the requirements in IAS 12 by specifying
how to reflect the effects of uncertainty in accounting for income
taxes. The guidance issued by IFRIC provides clarification on when
to recognise a liability arising from an uncertainty, how to
measure the uncertainty, the unit of account to be used, the risk
of detection of uncertainty and how to consider changes in facts
and circumstances that impact on the measurement. The impact from
adoption of the guidance in IFRIC 23 is no change in the provision
at 1(st) January 2019.
In addition to IFRS 16 and IFRIC 23 during the current year, the
Group has applied a number of amendments to IFRS Standards and
Interpretations issued by the IASB that are effective for annual
periods that begin on or after 1(st) January 2019. Their adoption
has not had a material impact on the disclosures or on the amounts
reported in these Financial Statements. These amendments are listed
below.
-- Amendments to IFRS 9 (Financial Instruments): Prepayment Features
with Negative Compensation.
-- Amendments to IAS 28 (Investments in Associates and Joint Ventures):
Long-term Interests in Associates and Joint Ventures.
-- Annual Improvements to IFRS Standards 2015-2017 Cycle Amendments
to IFRS 3 Business Combinations, IFRS 11 Joint Arrangements,
IAS 12 Income Taxes and IAS 23 Borrowing Costs.
-- Amendments to IAS 19 (Employee Benefits): Plan Amendment, Curtailment
or Settlement.
NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED
There are a number of new standards, amendments to standards and
interpretations that are not yet effective for the year ended
31(st) December 2019 and have, therefore, not been applied in
preparing these Consolidated Financial Statements.
At the date of authorisation of these Financial Statements, the
Group has not applied the following new and revised IFRS Standards
that have been issued but are not yet effective:
-- IFRS 17 (Insurance Contracts);
-- IFRS 10 and IAS 28 (amendments): Sale or Contribution of Assets
between an Investor and its Associate or Joint Venture;
-- Amendments to IFRS 3 (Business Combinations): Definition of a
business;
-- Amendments to IAS 1 (Presentation of Financial Statements) and
IAS 8 (Accounting Policies, Changes in Accounting Estimates and
Errors): Definition of material; and
-- Conceptual Framework: Amendments to References to the Conceptual
Framework in IFRS Standards.
The Directors do not expect that the adoption of the Standards
listed above will have a material impact on the Financial
Statements of the Group in future periods.
As reported in the Review of Operations, the economy in
Argentina underwent a period of high inflation during 2019. Whilst
applying IAS 29 (Financial Reporting in Hyperinflationary
Economies) to the Financial Statements is not required for the
period ended 31(st) December 2019 as the impact is not material, we
will continue to assess the position going forward and consider its
applicability in the light of economic developments in Argentina
and the materiality of their results to the Group.
GOING CONCERN
Having made appropriate enquiries, the Directors consider that
the Group has adequate resources to continue in operational
existence for 12 months from the date of this release and that
therefore it is appropriate to adopt the going concern basis in
preparing the Annual Report.
PRINCIPAL RISKS
The Group has processes in place to identify, evaluate and
mitigate the principal risks that could have an impact on the
Group's performance. The principal risks together with a
description of why they are relevant and if the significance of the
risk has changed during 2019 are set out below. Details of how they
link with the Group's strategy and how mitigation is managed will
be disclosed in the 2019 Annual Report on pages 20-25.
-- Economic and political instability
The Group operates worldwide and maintains operations in
territories that have historically experienced economic or
political instability. This type of instability, which includes the
uncertainties of regime change, creates risks for our locally based
direct operations and broader risks to credit, liquidity and
currency.
This risk has increased due to various factors including the
trade tensions between North America and China in 2019, the
deterioration in the Argentine economy and the continued tensions
in the Middle East.
-- Significant exchange rate movements
The Group reports its results and pays dividends in sterling.
Operating and manufacturing companies trade in local currency. With
sales companies and manufacturing spread across the globe, the
nature of the Group's business necessarily results in exposure to
exchange rate volatility.
-- Cybersecurity
Cybersecurity risks include risks from malware, accident,
statutory and legislative requirements, malicious actions and other
unauthorised access by third parties.
-- Failure to realise acquisition objectives
Whilst the Group mitigates this risk in various ways, including
through comprehensive due diligence, professional advisers and
contractual protections, amongst others, there are some variables
that are uncontrollable or difficult to control, such as economic
conditions, culture clashes and employee movement. Therefore, these
could impact acquisition objectives .
-- Loss of manufacturing output at any Group factory
The risk includes loss of output as a result of natural
disasters, industrial action, accidents or any other cause. Loss of
manufacturing output at any important plant risks serious
disruption to sales operations.
-- Breach of legal and regulatory requirements (including ABC laws)
We operate globally and must ensure compliance with laws and
regulations wherever we do business. As we grow into new markets
and territories, we must continually review and update our
operations and procedures, and ensure our employees are fully
informed and educated in all applicable legal requirements. This is
particularly important with respect to anti-bribery and corruption
(ABC) legislation. Breaching any of these laws or regulations could
have serious consequences for the Group.
-- Inability to identify and respond to changes in customer needs
This risk could lead to a loss of business as a result of a
failure to respond rapidly to changes in the needs of customers or
technology shifts.
New principal risk given the importance of changing customer
requirements.
-- Solution specification failure
This risk relates to loss of output at a customer plant due to
faulty product potentially leading to customer product
contamination and/or loss of manufacturing output and thereby
contractual liability and loss of sales.
Now a principal risk due to reassessment of the risk across all
businesses.
Loss of critical supplier and Health, safety and environmental
risks are no longer considered a principal risk but will continue
to be monitored.
The possibility of a "no deal" Brexit has created economic
uncertainties for the business. The Group's Risk Management
Committee has taken action to mitigate these uncertainties as
outlined in the Risk Management section of the 2019 Annual Report
on page 21. The Group has prepared for the risks of delays at ports
and the application of tariffs for goods moving in and out of
Europe, as disclosed, above, in the Financial Review on page 56 in
the 2019 Annual Report. However, we are also poised to take
advantage of opportunities that are presented and to mitigate any
adverse trading impact on the Group.
The Group has considered the effects of COVID-19 and currently
do not consider it a principal risk, but will continue to carefully
monitor the situation as it develops.
The 2019 Financial Statements were approved by the Board of
Directors and authorised for issue on 10(th) March 2020.
2. ALTERNATIVE PERFORMANCE MEASURES
The Group reports under IFRS and also uses alternative
performance measures where the Board believe that they help to
effectively monitor the performance of the Group, users of the
Financial Statements might find them informative and an aid to
comparison with our peers. Certain alternative performance measures
also form a meaningful element of Executive Directors' variable
remuneration. Net debt to EBITDA is also a covenant assessed for
external borrowing purposes. A definition of the alternative
performance measures included in the Annual Report and a
reconciliation to the closest IFRS equivalent are disclosed
below.
Adjusted operating profit
Adjusted operating profit excludes items that are considered to
be significant in nature and/or quantum and where treatment as an
adjusted item provides stakeholders with additional useful
information to assess the period-on-period trading performance of
the Group and an aid to comparison with our peers. The Group
excludes such items which management have defined as:
-- amortisation and impairment of acquisition-related intangible
assets;
-- impairment of goodwill;
-- costs associated with acquisitions and disposals;
-- reversal of acquisition-related fair value adjustments to inventory;
-- changes in deferred consideration payable on acquisitions;
-- profit or loss on disposal of subsidiary;
-- restructuring costs;
-- certain foreign exchange gains and losses on borrowings;
-- significant profits or losses on disposal of property; and
-- significant plan amendments and/or legal rulings requiring
a past service cost or credit for post-retirement benefit plans.
A reconciliation between operating profit as reported under IFRS
and adjusted operating profit is given below.
2019 2018
GBPm GBPm
------------------------------------------------------- ------ ------
Operating profit as reported under IFRS 245.0 299.1
Amortisation of acquisition-related intangible
assets 26.8 25.2
Impairment of goodwill 4.2 -
Acquisition-related items 2.6 (0.2)
Reversal of acquisition-related fair value adjustments
to inventory 4.1 -
Profit on disposal of subsidiary - (47.4)
Profit on disposal of property - (6.5)
Equalising guaranteed minimum pensions for the
UK post-retirement benefit plans - 0.7
Post-retirement benefit plan in the USA being
frozen to future accrual - (6.0)
Adjusted operating profit 282.7 264.9
------------------------------------------------------- ------ ------
The related tax effects of the above are included as adjustments
in taxation as disclosed in Note 5.
Adjusted earnings per share
2019 2018
---------------------------------------------- ------ ------
Profit for the period attributable to equity
holders as reported under IFRS (GBPm) 166.6 223.1
Items excluded from adjusted operating profit
disclosed above (GBPm) 37.7 (34.2)
Tax effects on adjusted items (GBPm) (8.5) (5.0)
Adjusted profit for the period attributable
to equity holders (GBPm) 195.8 183.9
---------------------------------------------- ------ ------
Weighted average shares (million) 73.7 73.6
---------------------------------------------- ------ ------
Basic adjusted earnings per share 265.7p 250.0p
---------------------------------------------- ------ ------
Diluted weighted average shares (million) 73.9 73.8
---------------------------------------------- ------ ------
Diluted adjusted earnings per share 264.9p 249.1p
---------------------------------------------- ------ ------
Basic adjusted earnings per share is defined as adjusted profit
for the period attributable to equity holders divided by the
weighted average number of shares in issue. Diluted adjusted
earnings per share is defined as adjusted profit for the period
attributable to equity holders divided by the diluted weighted
average number of shares.
Basic and diluted EPS calculated on an IFRS profit basis are
included in Note 6.
Adjusted cash flow
A reconciliation showing the items that bridge between net cash
from operating activities as reported under IFRS to an adjusted
basis is given below. Adjusted cash from operations is used by the
Board to monitor the performance of the Group, with a focus on
elements of cashflow, such as Net capital expenditure, which are
subject to day to day control by the business.
2019 2018
GBPm GBPm
------------------------------------------------ ------ ------
Net cash from operating activities as reported
under IFRS 227.4 212.6
Acquisition and disposal costs 2.5 0.2
Net capital expenditure excluding acquired
intangibles from acquisitions (59.0) (31.5)
Tax paid 78.4 61.6
Repayments of principal under lease liabilities (11.2) -
Adjusted cash from operations 238.1 242.9
------------------------------------------------ ------ ------
Adjusted cash conversion in 2019 is 84% (2018: 91%). Cash
conversion is calculated as adjusted cash from operations divided
by adjusted operating profit. The adjusted cash flow is included in
the Financial Review.
Cash generation
Cash generation is one of the Group's key performance indicators
used by the Board to monitor the performance of the Group and
measure the successful implementation of our strategy. It is one of
three financial measures on which Executive Directors' variable
remuneration is based.
2019 2018
GBPm GBPm
------------------------------------------- ------ ------
Adjusted operating profit 282.7 264.9
Depreciation and amortisation (excluding
IFRS 16 depreciation) 34.3 32.9
Cash payments to pension schemes in excess
of charge to P&L (5.2) (4.6)
Equity settled share plans 6.2 5.7
Working capital changes (21.4) (22.5)
Cash generation 296.6 276.4
------------------------------------------- ------ ------
A reconciliation showing the items that bridge between net cash
from operating activities as reported under IFRS to cash generation
is shown below.
2019 2018
GBPm GBPm
----------------------------------------------- ------ ------
Net cash from operating activities as reported
under IFRS 227.4 212.6
Acquisition and disposal costs 2.5 0.2
Tax paid 78.4 61.6
Depreciation of right-of-use assets (IFRS
16) (11.3) -
(Loss)/Profit on disposal of fixed assets (0.4) 2.0
Cash generation 296.6 276.4
----------------------------------------------- ------ ------
Return on invested capital (ROIC)
ROIC measures the after tax return on the total capital invested
in the business. It is calculated as adjusted operating profit
after tax divided by average invested capital.
An analysis of the components is as follows:
2019 2018
GBPm GBPm
----------------------------------------------- ------- -------
Total equity 826.3 766.9
Net debt 334.1 235.8
----------------------------------------------- ------- -------
Total invested capital 1,160.4 1,002.7
Average invested capital 1,081.6 992.9
----------------------------------------------- ------- -------
Average invested capital (excluding IFRS
16) 1,061.2 992.9
----------------------------------------------- ------- -------
Operating profit as reported under IFRS 245.0 299.1
Adjustments (see adjusted operating profit) 37.7 (34.2)
----------------------------------------------- ------- -------
Adjusted operating profit 282.7 264.9
Taxation (80.6) (73.1)
----------------------------------------------- ------- -------
Adjusted operating profit after tax 202.1 191.8
----------------------------------------------- ------- -------
Adjusted operating profit after tax (excluding
IFRS 16) 201.2 191.8
----------------------------------------------- ------- -------
Return in invested capital 18.7% 19.3%
----------------------------------------------- ------- -------
Return in invested capital (excluding IFRS
16) 19.0% 19.3%
----------------------------------------------- ------- -------
Return on capital employed (ROCE)
ROCE measures effective management of fixed assets and working
capital relative to the profitability of the business. It is
calculated as adjusted operating profit divided by average capital
employed. More information on ROCE can be found in the Capital
Employed and ROCE sections of the Financial Review.
An analysis of the components is as follows:
2019 0B 2018
GBPm GBPm
--------------------------------------- -------- --------
Property, plant and equipment 251.2 230.8
Right-of-use assets (IFRS 16) 40.8 -
Prepayments 0.9 6.2
Inventories 185.9 160.6
Trade receivables 240.7 245.1
Other current assets 35.3 32.9
Tax recoverable 8.4 4.6
Trade, other payables and current
provisions (178.3) (172.0)
Current tax payable (26.7) (23.7)
Capital employed 558.2 484.5
--------------------------------------- -------- --------
Average capital employed 521.4 482.2
--------------------------------------- -------- --------
Average capital employed (excluding
IFRS 16) 501.0 482.2
--------------------------------------- -------- --------
Operating profit 245.0 299.1
Adjustments (see adjusted operating
profit) 37.7 (34.2)
--------------------------------------- -------- --------
Adjusted operating profit 282.7 264.9
--------------------------------------- -------- --------
Adjusted operating profit (excluding
IFRS 16) 281.4 264.9
--------------------------------------- -------- --------
Return on capital employed 54.2% 54.9%
--------------------------------------- -------- --------
Return on capital employed (excluding
IFRS 16) 56.2% 54.9%
--------------------------------------- -------- --------
A reconciliation of capital employed to net assets as reported
under IFRS and disclosed on the Consolidated Statement of Financial
Position is given below.
2019 2018
GBPm GBPm
---------------------------------------------- ------- -------
Capital employed 558.2 484.5
Goodwill and other intangible assets 721.6 645.2
Investment in Associate 0.2 -
Post-retirement benefits (71.3) (85.1)
Net deferred tax (43.1) (35.5)
Non-current provisions and long-term payables (5.2) (6.4)
Lease liabilities (38.9) -
Net debt (295.2) (235.8)
Net assets as reported under IFRS 826.3 766.9
---------------------------------------------- ------- -------
Net debt including IFRS 16 lease liabilities
A reconciliation between net debt and net debt including IFRS 16
is given below. A breakdown of the balances that are included
within net debt is given within Note 8. Net debt excludes IFRS 16
lease liabilities to enable comparability with prior years.
2019 2018
GBPm GBPm
--------------------------------------- ------ ------
Net debt 295.2 235.8
IFRS 16 lease liabilities 38.9 -
Net debt and IFRS 16 lease liabilities 334.1 235.8
--------------------------------------- ------ ------
Net debt to earnings before interest, tax, depreciation and
amortisation (EBITDA)
To assess the size of the net debt balance relative to the size
of the earnings for the Group we analyse net debt as a proportion
of earnings before interest, tax, depreciation and amortisation
(EBITDA). EBITDA is calculated by adding back depreciation and
amortisation of property, plant and equipment, software and
development costs to adjusted operating profit. Net debt excludes
the IFRS 16 lease liabilities. The net debt to EBITDA ratio is
calculated as follows:
2019 2018
GBPm GBPm
------------------------------------------------- ------ ------
Adjusted operating profit 282.7 264.9
Depreciation and amortisation of property, plant
and equipment, software and development 34.3 32.9
EBITDA 317.0 297.8
------------------------------------------------- ------ ------
Net debt 295.2 235.8
------------------------------------------------- ------ ------
Net debt to EBITDA 0.9 0.8
------------------------------------------------- ------ ------
The components of net debt are disclosed in Note 8.
Organic measures
As we are a multi-national Group of companies, who trade in a
large number of foreign currencies and regularly acquire and
sometimes dispose of companies, we also refer to organic
performance measures throughout the News Release. These strip out
the effects of the movement of foreign currency exchange rates and
of acquisitions and disposals. The Board believe that this allows
users of the accounts to gain a further understanding of how the
Group has performed.
Exchange translation movements are assessed by re-translating
prior period reported values to current period exchange rates.
Exchange transaction impacts on operating profit are assessed on
the basis of transactions being at constant currency between
years.
Any acquisitions and disposals that occurred in either the
current period or prior period are excluded from the results of
both the prior and current period at current period exchange
rates.
The organic percentage movement is calculated as the organic
movement divided by the sum of the prior period and exchange.
The organic bps change in adjusted operating margin is the
difference between the current period margin excluding acquisitions
and disposals and the prior period margin at current period
exchange rates excluding acquisitions and disposals.
A reconciliation of the movement in revenue and adjusted
operating profit compared to the prior period is given below.
2018 Exchange Organic Acquisitions 2019 Organic Reported
and disposal
GBPm GBPm GBPm GBPm GBPm
------------------- ------- -------- ------- ------------- ------- ------- --------
Revenue 1,153.3 73.9 15.2 1,242.4 +6% +8%
Adjusted operating
profit 264.9 (2.0) 18.2 1.6 282.7 +7% +7%
Adjusted operating
margin 23.0% 22.8% +10 bps -20 bps
------------------- ------- -------- ------- ------------- ------- ------- --------
The reconciliation for each segment is included in the Review of
Operations.
3. SEGMENTAL REPORTING
As required by IFRS 8 (Operating Segments), the following
segmental information is presented in a consistent format with
management information considered by the Board.
Following recent material acquisitions into the Group, the
composition of the Group's Reportable Segments changed in the
financial year ended 31(st) December 2019 to align with both how
the business is now managed alongside how information is now
presented to the Board and the Executive Committee. This change
results in Steam Specialties being reported as one single
consolidated operating segment. In previous years Steam Specialties
was an aggregation of three separate operating segments, EMEA,
Americas and Asia Pacific, however recent changes to the management
structure resulted in the creation of a separate Steam Specialties
management team reporting to the Chief Executive and Chief
Financial Officer on the consolidated Steam Specialties results.
Comparative results have not been restated, as the Steam
Specialties total was previously disclosed as a subtotal to the
three previous geographic operating segments.
Following the acquisition of Thermocoax in May 2019, the
Chromalox operating segment was renamed to Electric Thermal
Solutions which now includes the combination of both businesses in
2019. No other changes to the structure of operating segments have
been made.
Analysis by operating segment
2019
Revenue Total Adjusted Adjusted
operating operating 23B operating
profit profit margin
GBPm GBPm GBPm %
------------------------------ -------- ----------- -------------- ---------------
Steam Specialties 755.4 172.6 177.9 23.6%
Electric Thermal Solutions 186.1 7.9 24.7 13.3%
Watson-Marlow 300.9 82.7 95.8 31.8%
Corporate expenses (18.2) (15.7)
------------------------------ -------- ----------- -------------- ---------------
Total 1,242.4 245.0 282.7 22.8%
------------------------------ -------- ----------- -------------- ---------------
Net finance expense (8.4) (8.4)
Share of profit of Associate 0.2 0.2
------------------------------ -------- ----------- -------------- ---------------
Profit before tax 236.8 274.5
------------------------------ -------- ----------- -------------- ---------------
2018
Revenue Total Adjusted Adjusted
operating operating 24B operating
profit profit margin
GBPm GBPm GBPm %
------------------------------ -------- ----------- ----------- ---------------
Steam Specialties 733.5 222.5 170.1 23.2%
Electric Thermal Solutions 154.6 12.1 22.8 14.7%
Watson-Marlow 265.2 77.5 84.8 32.0%
Corporate expenses (13.0) (12.8)
------------------------------ -------- ----------- ----------- ---------------
Total 1,153.3 299.1 264.9 23.0%
------------------------------ -------- ----------- ----------- ---------------
Net finance expense (10.3) (10.3)
Share of profit of Associate - -
------------------------------ -------- ----------- ----------- ---------------
Profit before tax 288.8 254.6
------------------------------ -------- ----------- ----------- ---------------
The following table details the split of revenue by geography
for the combined Group:
2019 2018
GBPm GBPm
----------------------------------- -------- --------
1B Europe, Middle East and Africa 518.7 487.3
2B Asia Pacific 296.0 269.8
3B Americas 427.7 396.2
Total revenue 1,242.4 1,153.3
----------------------------------- -------- --------
Net revenue generated by Group companies based in the USA is
GBP319.4m (2018: GBP288.8m), in China is GBP134.6m (2018:
GBP118.5m) in the UK is GBP103.5m (2018: GBP103.7m), in Germany is
GBP105.3m (2018: GBP118.0m) and the rest of the world is GBP579.6m
(2018: GBP524.3m).
The total operating profit for each period includes certain
items as analysed below:
2019
Amortisation Acquisition-related Impairment Reversal Total
of acquisition-related items of Goodwill of acquisition-related
intangible fair value
assets adjustments
to inventory
GBPm GBPm GBPm
GBPm GBPm
-------------------- ------------------------ -------------------- ------------- ------------------------ -------
Steam Specialties (5.3) - - - (5.3)
Electric Thermal
Solutions (12.7) - - (4.1) (16.8)
Watson-Marlow (8.8) (0.1) (4.2) - (13.1)
Corporate expenses - (2.5) - - (2.5)
-------------------- ------------------------ -------------------- ------------- ------------------------ -------
Total (26.8) (2.6) (4.2) (4.1) (37.7)
-------------------- ------------------------ -------------------- ------------- ------------------------ -------
2018
Amortisation Profit Acquisition-related Equalising USA pension Total
of on disposal items GMP for plan frozen
acquisition-related of subsidiary the UK pension to future
intangible and property plans accrual
assets
GBPm GBPm GBPm GBPm GBPm GBPm
---------------- -------------------- --------------- -------------------- --------------- ------------- -------
Steam
Specialties (6.7) 53.9 (0.1) (0.7) 6.0 52.4
Electric
Thermal
Solutions (10.7) - - - - (10.7)
Watson-Marlow (7.8) - 0.5 - - (7.3)
Corporate
expenses - - (0.2) - - (0.2)
---------------- -------------------- --------------- -------------------- --------------- ------------- -------
Total (25.2) 53.9 0.2 (0.7) 6.0 34.2
---------------- -------------------- --------------- -------------------- --------------- ------------- -------
Net financing income and expense
2019 2018
Income Expense Net Income Expense Net
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ------- -------- ------ ------- -------- -------
Steam Specialties 1.1 (3.3) (2.2) 0.9 (2.8) (1.9)
Electric Thermal Solutions 0.1 (0.3) (0.2) 0.1 (0.1) -
Watson-Marlow 0.1 (0.5) (0.4) 0.1 (0.2) (0.1)
Corporate expenses 0.2 (5.8) (5.6) - (8.3) (8.3)
---------------------------- ------- -------- ------ ------- -------- -------
Total net financing
expense 1.5 (9.9) (8.4) 1.1 (11.4) (10.3)
---------------------------- ------- -------- ------ ------- -------- -------
Net assets
2019 2018
Assets Liabilities Assets Liabilities
GBPm GBPm GBPm GBPm
------------------- -------- ------------ ------------- ------------
Steam Specialties 669.4 (176.3) 683.6 (195.9)
Electric Thermal
Solutions 552.0 (36.3) 409.3 (28.9)
Watson-Marlow 255.2 (42.2) 227.9 (38.7)
------------------- -------- ------------ ------------- ------------
1,476.6 (254.8) 1,320.8 (263.5)
Liabilities (254.8) (263.5)
Net deferred tax (43.1) (35.5)
Net current tax
payable (18.3) (19.1)
Net debt (334.1) (235.8)
------------------- -------- ------------ ------------- ------------
Net assets 826.3 766.9
------------------- -------- ----------------- -------- ------------
Non-current assets in the UK were GBP187.1m (2018: GBP157.1m),
in the USA were GBP375.8m (2018: GBP393.5m), in Germany were
GBP165.0m (2018: GBP169.4m) and in France were GBP146.5m (2018:
GBP15.1m).
Capital additions, depreciation, amortisation and impairment
2019 27B 2018
Capital Depreciation, Capital Depreciation,
additions amortisation additions amortisation
and impairment and impairment
GBPm GBPm GBPm GBPm
---------------------------- ----------- ---------------- ----------- ----------------
Steam Specialties 57.7 35.8 27.9 30.1
Electric Thermal Solutions 81.6 18.4 6.0 13.6
Watson-Marlow 40.6 22.4 18.6 14.4
---------------------------- ----------- ---------------- ----------- ----------------
Group total 179.9 76.6 52.5 58.1
---------------------------- ----------- ---------------- ----------- ----------------
Capital additions include property, plant and equipment of
GBP59.0m (2018: GBP33.5m), of which GBP8.1m (2018: GBP0.2m) was
from acquisitions in the period and other intangible assets of
GBP72.0m (2018: GBP19.0m) of which GBP60.2m (2018: GBP9.1m) relates
to acquired intangibles from acquisitions in the period.
Right-of-use asset additions of GBP48.9m occurred during the 12
month period to 31(st) December 2019, of which GBP36.1m relates to
additions on 1(st) January 2019 as a result of transition to IFRS
16, GBP11.7m relates to new leases entered into in 2019 and GBP1.1m
from acquisitions. Capital additions split between the UK and rest
of the world are UK GBP36.8m (2018: GBP20.1m) and rest of the world
GBP143.1m (2018: GBP32.4m).
4. NET FINANCING INCOME AND EXPENSE
2019 2018
GBPm GBPm
-------------------------------------------- ------ -------
4B Financial expenses:
5B Bank and other borrowing interest
payable (6.4) (9.4)
6B Interest expense on lease liabilities (1.3) -
Net interest on pension scheme liabilities (2.2) (2.0)
-------------------------------------------- ------ -------
(9.9) (11.4)
-------------------------------------------- ------ -------
Financial income:
Bank interest receivable 1.5 1.1
-------------------------------------------- ------ -------
Net financing expense (8.4) (10.3)
-------------------------------------------- ------ -------
Net pension scheme financial expense (2.2) (2.0)
Interest expense on lease liabilities (1.3) -
Net bank interest (4.9) (8.3)
-------------------------------------------- ------ -------
Net financing expense (8.4) (10.3)
-------------------------------------------- ------ -------
5. TAXATION
2019 2018
Analysis of charge in Adjusted Adj't Total Adjusted Adj't Total
period GBPm GBPm GBPm GBPm GBPm GBPm
UK corporation tax:
Current tax on income
for the period 14.1 - 14.1 7.6 - 7.6
Adjustments in respect
of prior periods (1.1) - (1.1) 0.4 - 0.4
--------------------------- ----------- ------- ------- ----------- ----------------- -------
13.0 - 13.0 8.0 - 8.0
--------------------------- ----------- ------- ------- ----------- ----------------- -------
Foreign tax:
Current tax on income
for the period 56.9 - 56.9 58.5 0.3 58.8
Adjustments in respect
of prior periods (0.1) - (0.1) 0.9 - 0.9
--------------------------- ----------- ------- ------- ----------- ----------------- -------
56.8 - 56.8 59.4 0.3 59.7
--------------------------- ----------- ------- ------- ----------- ----------------- -------
Total current tax charge 69.8 - 69.8 67.4 0.3 67.7
Deferred tax - UK (0.1) - (0.1) 0.1 - 0.1
Deferred tax - Foreign 8.6 (8.5) 0.1 2.9 (5.3) (2.4)
--------------------------- ----------- ------- ------- ----------- ----------------- -------
Tax on profit on ordinary
activities 78.3 (8.5) 69.8 70.4 (5.0) 65.4
--------------------------- ----------- ------- ------- ----------- ----------------- -------
The Group's tax charge in future years is likely to be affected
by the proportion of profits arising and the effective tax rates in
the various territories in which the Group operates.
The Group's tax charge includes a credit of GBP8.5m in relation
to certain items excluded from adjusted operating profit as
disclosed in Note 2. The tax impacts of these items are:
-- amortisation of acquisition-related intangible assets (GBP6.7m
tax credit);
-- reversal of acquisition-related fair value adjustments to inventory
(GBP1.3m tax credit); and
-- acquisition-related items (GBP0.5m tax credit).
6. EARNINGS PER SHARE
2019 2018
-------------------------------------------- ------- -------
Profit attributable to equity shareholders
(GBPm) 166.6 223.1
Weighted average shares (million) 73.7 73.6
Dilution (million) 0.2 0.2
-------------------------------------------- ------- -------
Diluted weighted average shares
(million) 73.9 73.8
-------------------------------------------- ------- -------
Basic earnings per share 226.2p 303.1p
-------------------------------------------- ------- -------
Diluted earnings per share 225.5p 302.0p
-------------------------------------------- ------- -------
Basic and diluted earnings per share calculated on an adjusted
profit basis are included in Note 2. The dilution is in respect of
unexercised share options and the Performance Share Plan.
7. DIVIDS
2019 2018
GBPm GBPm
----------------------------------------------------- ------- -------
Amounts paid in the year:
Final dividend for the year ended 31(st) December
2018
of 71.0p (2017: 62.0p) per share 52.3 45.7
Interim dividend for the year ended 31(st) December
2019 of 32.0p (2018: 29.0p) per share 23.6 21.3
----------------------------------------------------- ------- -------
Total dividends paid 75.9 67.0
----------------------------------------------------- ------- -------
Amounts arising in respect of the year:
Interim dividend for the year ended 31st December
2019 of 32.0p (2018: 29.0p) per share 23.6 21.3
Proposed final dividend for the year ended 31st
December 2019 of 78.0p (2018: 71.0p) per share 57.5 52.3
----------------------------------------------------- ------- -------
Total dividends arising 81.1 73.6
----------------------------------------------------- ------- -------
8. ANALYSIS OF CHANGES IN NET DEBT, INCLUDING CHANGES IN
LIABILITIES ARISING FROM FINANCING ACTIVITIES
At 1(st) Cash Acquired Exchange Reclassification At
Jan flow debt movement 31(st)
2019 Dec 2019
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------- --------- ------- --------- ------------- ----------------- ----------
Current portion of long-term
borrowings (41.5) (34.3)
Non-current portion
of long-term borrowings (365.3) (429.2)
Short-term borrowings (15.7) -
--------------------------------- --------- ------- --------- ------------- ----------------- ----------
Total borrowings (422.5) (463.5)
--------------------------------- --------- ------- --------- ------------- ----------------- ----------
Comprising:
Borrowings (422.2) (49.6) (18.2) 26.5 - (463.5)
Finance leases (0.3) - - - 0.3 -
--------------------------------- --------- ------- --------- ------------- ----------------- ----------
Changes in liabilities
arising from financing (422.5) (49.6) (18.2) 26.5 0.3 (463.5)
--------------------------------- --------- ------- --------- ------------- ----------------- ----------
Cash at bank 187.1 (5.7) - (12.9) - 168.5
Bank overdrafts (0.4) 0.2 - - - (0.2)
--------------------------------- --------- ------- --------- ------------- ----------------- ----------
Net cash and cash equivalents 186.7 (5.5) - (12.9) - 168.3
--------------------------------- --------- ------- --------- ------------- ----------------- ----------
Net debt (235.8) (55.1) (18.2) 13.6 0.3 (295.2)
--------------------------------- --------- ------- --------- ------------- ----------------- ----------
Lease liabilities (including
IFRS 16 transition adjustment) (39.0) 11.2 (12.6) 1.8 (0.3) (38.9)
--------------------------------- --------- ------- --------- ------------- ----------------- ----------
Net debt and lease liabilities (274.8) (43.9) (30.8) 15.4 - (334.1)
--------------------------------- --------- ------- --------- ------------- ----------------- ----------
The cash flow for borrowings net total of GBP49.6m consists of
GBP129.8m of new borrowings and GBP80.2m of repaid borrowings. This
includes repayments of US$51.6m (GBP39.0m) on the US$200.0m term
loan, EUR96.2m (GBP81.5m) of new drawings against revolving credit
facilities, EUR50m (GBP48.3m) of new drawings on a euro term loan,
CNY119.7m (GBP13.0m) of repayments on an overdraft facility and
EUR8.3m (GBP7.0m) of repayments on a euro term loan.
At 31st December 2019 total lease liabilities consist of
GBP11.1m short-term and GBP27.8m long-term.
9. PURCHASE OF BUSINESSES
The provisional fair value accounting for the acquisition of
Thermocoax Developpement is shown below:
Fair value
GBPm
--------------------------------------------------------- -----------
Non-current assets:
Property, plant and equipment 8.1
Right-of-use assets 1.1
Acquired intangibles 59.3
Software and other intangibles 0.3
Deferred tax assets 0.5
69.3
--------------------------------------------------------- -----------
Current assets:
Inventories 15.6
Trade receivables 8.5
Other current assets 3.6
Cash and cash equivalents 4.6
--------------------------------------------------------- -----------
32.3
Total assets 101.6
--------------------------------------------------------- -----------
Current liabilities:
Trade payables 4.2
Other payables and accruals 6.5
Provisions 0.2
Short-term borrowings 18.2
Short-term lease liabilities 0.3
Current tax payable 2.0
31.4
--------------------------------------------------------- -----------
Non-current liabilities:
Long-term lease liabilities 0.8
Deferred tax liabilities 17.2
Long-term payables 0.5
Post-retirement benefit plans 0.3
--------------------------------------------------------- -----------
18.8
--------------------------------------------------------- -----------
Total liabilities 50.2
--------------------------------------------------------- -----------
Total net assets 51.4
Goodwill 70.0
--------------------------------------------------------- -----------
Total 121.4
--------------------------------------------------------- -----------
Satisfied by
--------------------------------------------------------- -----------
Cash paid 121.4
Total consideration 121.4
--------------------------------------------------------- -----------
Reconciliation to acquisition of businesses net of cash
acquired in the Consolidated Statement of Cash Flows
Cash paid for the Thermocoax business and debt repaid
on the acquisition date 139.6
Debt repaid on acquisition date (18.2)
--------------------------------------------------------- -----------
Cash paid for the Thermocoax business 121.4
Less cash acquired in the Thermocoax business (4.6)
Cash paid for acquired intangibles from distributors 1.1
--------------------------------------------------------- -----------
Acquisition of businesses net of cash acquired 117.9
--------------------------------------------------------- -----------
1. On a debt-free, cash-free basis the cash outflow for acquisitions
was GBP135.0m consisting of GBP121.4m paid to the sellers, GBP18.2m
of debt repaid on the acquisition date less cash acquired of
GBP4.6m.
2. The acquisition of 100% of the equity in Thermocoax Developpement
and all of its group companies (Thermocoax) was completed on
the 13(th) May 2019. The acquisition method of accounting has
been used. Consideration of GBP121.4m was paid on completion.
Separately identified intangibles are recorded as part of the
provisional fair value adjustment. The acquired intangibles
relate to customer relationships, brand names, trademarks, manufacturing
designs and core technology. The goodwill recognised represents
the skilled workforce acquired and the opportunity to achieve
synergies from being part of a larger Group. Goodwill arising
is not expected to be tax deductible.
Due to their contractual dates, the fair value of receivables
acquired approximate to the gross contractual amounts receivable.
The amount of gross contractual receivables not expected to
be recovered is immaterial.
The acquisition has generated GBP27.9m of revenue and GBP5.4m
of adjusted pre-tax profit since acquisition. Had the acquisition
been made on 1(st) January 2019, the Thermocoax revenue and
adjusted pre-tax profit would have been approximately GBP42m
and GBP8m respectively.
Thermocoax is headquartered near Paris, France and has four
manufacturing facilities in Normandy, France, one in Georgia,
USA and a further facility in Heidelberg, Germany. Thermocoax
is a leading designer and manufacturer of highly engineered
electrical thermal solutions for critical applications in high
added value industries. Thermocoax will enhance and add significantly
to Spirax-Sarco Engineering plc's Electric Thermal Solutions
business, delivering thermal energy solutions to customers.
3. In addition to the acquired intangibles recognised for the acquisition
of Thermocoax, GBP0.9m of acquired intangibles were recognised
during the period for the acquisition of intangibles from distributors.
Of this GBP0.7m was paid in the period with GBP0.2m deferred.
In addition deferred consideration of GBP0.4m was paid during
2019 for acquired intangibles recognised prior to 2019.
4. GBP2.5m of acquisition costs were incurred during the period.
5. During the period the deferred consideration payable for the
acquisition of a small German pre-revenue company within the
Watson-Marlow Fluid Technology business was reassessed. The
result of this reassessment was that deferred consideration
of EUR5.8m remained appropriate and that no changes were required.
The deferred consideration of EUR5.8m (GBP5.2m) was paid in
the first quarter of 2020..
10. RESPONSIBILITY statement OF THE DIRECTORS ON THE ANNUAL
REPORT
The Responsibility Statement below has been prepared in
connection with the Company's full Annual Report for the year
ending 31(st) December 2019. Certain parts thereof are not included
within this announcement.
We confirm to the best of our knowledge:
-- the Financial Statements, prepared in accordance with IFRS as
adopted by the EU, give a true and fair view of the assets, liabilities,
financial position and profit and loss of the company and the
undertakings included in the consolidation taken as a whole;
-- the Strategic Report includes a fair review of the development
and performance of the business and the position of the Company
and the undertakings included in the consolidation taken as a
whole, together with a description of the principal risks and
uncertainties they face; and
-- the Annual Report and Financial Statements, taken as a whole,
are fair, balanced and understandable and provide the information
necessary to assess the Company's performance, business model
and strategy.
This Responsibility Statement was approved by the Board of
Directors on 10(th) March 2020 and is signed on its behalf by:
N.J. Anderson, Group Chief Executive K.J. Boyd, Chief Financial
Officer
11. Cautionary statement
All statements other than statements of historical fact included
in this document, including, without limitation, those regarding
the financial condition, results, operations and businesses of
Spirax-Sarco Engineering plc and its strategy, plans and objectives
and the markets and economies in which it operates, are
forward-looking statements. These forward-looking statements which
reflect management's assumptions made on the basis of information
available to it at this time, involve known and unknown risks,
uncertainties and other important factors which could cause the
actual results, performance or achievements of Spirax-Sarco
Engineering plc or the markets and economies in which we operate to
be materially different from future results, performance or
achievements expressed or implied by such forward-looking
statements. Spirax-Sarco Engineering plc and its Directors accept
no liability to third parties in respect of this report save as
would arise under English law. Accordingly, any liability to a
person who has demonstrated reliance on any untrue or misleading
statement or omission shall be determined in accordance with
schedule 10A of the Financial Services and Markets Act 2000. It
should be noted that schedule 10A contains limits on the liability
of the Directors of Spirax-Sarco Engineering plc so that their
liability is solely to Spirax-Sarco Engineering plc.
12. EXCHANGE RATE IMPACTS
Whilst not an IFRS disclosure or part of the audited accounts,
set out below is an additional disclosure that highlights the
movements in a selection of exchange rates between 2018 and
2019.
Exchange rates to sterling have been as follows:
Average Average Change Closing Closing Change%
2019 2018 % 2019 2018
-------------------------- ---------- ---------- --------- ---------- ---------- ----------
Bank of England sterling
index 78.1 78.3 0% 80.3 76.6 -5%
US Dollar 1.28 1.33 4% 1.32 1.27 -4%
Euro 1.14 1.13 -1% 1.18 1.11 -6%
Renminbi 8.83 8.82 0% 9.23 8.74 -6%
Won 1,486 1,461 -2% 1,532 1,421 -8%
Real 5.04 4.85 -4% 5.33 4.94 -8%
Argentine Peso 61.83 37.44 -65% 79.32 47.96 -65%
[1] CO saving tree equivalent is based on the European
Environment Agency's estimated figure of 22kg of carbon absorbed
per mature tree each year.
[2] Source for industrial production growth figures: Oxford
Economics, February 2020.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR KKKBBKBKBNND
(END) Dow Jones Newswires
March 11, 2020 03:00 ET (07:00 GMT)
Spirax (LSE:SPX)
Historical Stock Chart
From Jun 2024 to Jul 2024
Spirax (LSE:SPX)
Historical Stock Chart
From Jul 2023 to Jul 2024