TIDMSPX
RNS Number : 7138R
Spirax-Sarco Engineering PLC
10 March 2021
News Release
Wednesday 10(th) March 2021
Resilient performance in 2020; well-placed for 2021
HIGHLIGHTS
Adjusted* 2020 2019 Reported Organic*
Revenue GBP1,193.4m GBP1,242.4m -4% -3%
Adjusted operating profit* GBP270.4m GBP282.7m -4% -1%
Adjusted operating profit
margin* 22.7% 22.8% -10 bps +40 bps
Adjusted profit before
taxation* GBP261.5m GBP274.5m -5%
Adjusted basic earnings
per share* 256.6p 265.7p -3%
Cash conversion 102% 84%
7B Statutory 2020 2019 Reported
-------------------------- ------------ ------------ ---------
Revenue GBP1,193.4m GBP1,242.4m -4%
Operating profit GBP249.0m GBP245.0m +2%
Operating profit margin 20.9% 19.7% +120 bps
Profit before taxation GBP240.1m GBP236.8m +1%
Basic earnings per share 235.5p 226.2p +4%
Dividend per share 118.0p 110.0p +7%
-- Revenue down 4%, organically down 3%; industrial production
(IP) down between 4% and 5%
-- Adjusted operating margin of 22.7%, 10 bps below 2019; up 120
bps on a statutory basis
-- Strong organic sales and profit growth in Watson-Marlow, adjusted
operating margin 33.4%
-- Steam Specialties organic sales decline broadly in line with
IP; margin down 80 bps organically
-- Electric Thermal Solutions organic sales decline 12%; margin
up 10 bps organically
-- Temporary cost containment initiatives reduced overheads by
GBP22 million
-- Net debt^ at year end GBP229 million; leverage reduced to 0.7x
EBITDA*
-- Total dividend up by 7% to 118.0p
Nicholas Anderson, Group Chief Executive, commenting on the
results said:
"Following a stronger than anticipated fourth quarter, we are
very pleased with the Group's performance in 2020, given the
unprecedented circumstances caused by the COVID-19 pandemic. These
results demonstrate our ability to adapt to the changing
requirements of our customers, the diverse nature of our end
markets and the resilience of our business model. The safety and
wellbeing of our colleagues across the globe has been our primary
concern as they support our customers throughout this challenging
period; it is thanks to their dedication that we have achieved such
results.
"Sales were down in the Steam Specialties and Electric Thermal
Solutions businesses, although their performance was still robust
given the challenging market conditions. The excellent growth in
Watson-Marlow was driven by the Pharmaceutical & Biotechnology
sector, where demand accelerated due to COVID-19 vaccine
development and production. The improved outlook for industrial
production growth, strong order book, robust prospects for
Watson-Marlow and continued investments leave us well-placed for
2021."
*Results quoted in this announcement are "adjusted" metrics,
except where otherwise stated. Organic measures are at constant
currency and exclude contributions from acquisitions and disposals.
See Note 2 to the Financial Statements for an explanation of
alternative performance measures.
^Net debt includes total borrowings, cash and bank overdrafts
but excludes IFRS 16 lease liabilities, as set out in Note 8 to the
Financial Statements.
For further information, please contact:
Nicholas Anderson, Group Chief Executive
Nimesh Patel, Chief Financial Officer
Shaun Laubscher, Investor Relations Officer
Tel: +44 (0) 7710 356611 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/4eggkoiy 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
--------------------------------- ------------ ----------- ---------------
+44 (0) 33 0551
United Kingdom and International Participant Local 0200
============ =========== ===============
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 password: Spirax-Sarco Engineering.
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 almost
7,900 people, including more than 1,900 direct sales and service
engineers. The Company's 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 Indexes.
Further information can be found at
spiraxsarcoengineering.com
RNS filter: Inside information prior to release
LEI 213800WFVZQMHOZP2W17
Chair's Statement
Introduction
In a year when industrial production was down between 4% and 5%,
and amidst a global pandemic, our robust operational and financial
performance demonstrates the commitment of our people, the strength
of our business model and the resilience of the Group.
Recognising our colleagues
On behalf of the Board, I would like to thank our colleagues
throughout the world for their outstanding individual and
collective contributions during this unprecedented time. Our teams
have pulled together, often in challenging personal circumstances
to meet the needs of our customers, enabling us to play our part in
supporting industrial processes in critical, frontline industries
including Food & Beverage, Healthcare and Pharmaceutical &
Biotechnology. They have also made exceptional efforts to provide
support to our communities, helping those who need it most. We
sincerely appreciate their hard work and dedication as we engineer
a more efficient, safer and sustainable world.
Our resilient response to a challenging year
Supporting the health and wellbeing of our people throughout the
global pandemic has and will continue to be our priority. Our
response to COVID-19 was swift and decisive, enabling us to
continue operating our manufacturing and sales companies safely and
with only a few short-duration shutdowns in the second quarter of
the year. The actions taken to protect our people and to support
our customers and communities are outlined in more detail in the
Strategic Review.
We did not lose focus on the importance of safety and made good
progress with the implementation of our plans, despite the
challenges of the year. Our continued focus on maintaining a strong
safety culture drove an improvement of both our leading and lagging
indicators, including our lost time injury rate reducing compared
to 2019.
Financial highlights
Following a stronger than anticipated fourth quarter, Group
sales in 2020 were GBP1,193.4 million (2019: GBP1,242.4 million),
down 3% on an organic basis, reflecting a robust performance
against a backdrop of a 4% to 5% contraction in global industrial
production. Currency movements had a 2% negative effect on sales
during the year, while the full year effect of sales from
Thermocoax, acquired in May 2019, increased sales by over 1%. Sales
for the Group were down 4% compared to 2019, with the currency
movement accounting for more than half of the full year revenue
decline.
Our Steam Specialties business, comprising Spirax Sarco and
Gestra, experienced an organic decline of 6%, broadly in line with
global industrial production, with sales in all three geographical
reporting segments down year-on-year.
Our Electric Thermal Solutions business, comprising Chromalox
and Thermocoax, experienced a 12% organic sales decline but ended
the year with a significantly larger order book. Chromalox secured
a US$14 million order from the US Navy, the largest single order in
our Group's history, helping bolster the yearend order book.
Watson-Marlow had an excellent year, delivering organic sales
growth of 9%. Sales to the Pharmaceutical & Biotechnology
sector grew 20% as customers redirected their activities and
expanded their manufacturing capabilities in support of COVID-19
vaccine development and production. Demand was particularly strong
in the last quarter of the year, leading to an increased order book
that will ship in 2021. Sales to the other industrial sectors
declined 3%, which resulted in the Pharmaceutical &
Biotechnology sector accounting for over 55% of Watson-Marlow sales
in 2020.
Group adjusted operating profit declined 4% to GBP270.4 million.
On an organic basis, adjusted operating profit was down 1%.
Currency movements reduced the Group adjusted operating profit by
4%, due to translation and transaction effects, while the net
impact of acquisitions and disposals added 1%.
The Group adjusted operating margin fell by 10 bps, to 22.7%,
largely due to the negative foreign exchange impact. Organically,
the adjusted operating margin increased by 40 bps despite an
organic sales decline of 3%, due in part to the strong performance
of Watson-Marlow and temporary cost containment initiatives taken
in each of our businesses. These cost initiatives mostly reduced
expenses related to travel, marketing and employment, lowering
Group overheads by GBP22 million, with most of the benefits
realised in Steam Specialties.
Statutory operating profit was up 2% at GBP249.0 million (2019:
GBP245.0 million) and the statutory operating profit margin
increased from 19.7% to 20.9% due primarily to the impact of UK and
Canadian defined benefit pension schemes being closed to future
accrual during the year.
The Group adjusted pre-tax profit was GBP261.5 million, 5% below
the prior year. Adjusted basic earnings per share was 3% behind at
256.6 pence (2019: 265.7 pence).
The pre-tax profit on a statutory basis was GBP240.1 million, up
1% on 2019 (GBP236.8 million). The statutory basic earnings per
share were 235.5 pence (2019: 226.2 pence).
Cash and dividends
Cash generation was robust throughout the year, with adjusted
cash conversion of 102% (2019: 84%), reflecting enhanced inventory
management practices that increased our customer service
performance during the pandemic while also improving cash
management. At 31(st) December 2020 we had a net debt balance of
GBP229 million, a net debt to EBITDA ratio of 0.7 times, compared
with net debt of GBP295 million at 31(st) December 2019.
The interim dividend paid on 6(th) November 2020 was 33.5 pence
per share, an increase of 5% (2019: 32.0 pence per share). The
Board is recommending an increase in the final dividend of 8% to
84.5 pence per share (2019: 78.0 pence). Subject to approval of the
final dividend by shareholders at the Annual General Meeting (AGM)
on 12(th) May 2021, the total Ordinary dividend for the year will
be 118.0 pence per share, an increase of 7% over the 110.0 pence
per share for the prior year.
Corporate governance
In September 2020, Kevin Boyd, Chief Financial Officer and
Executive Director retired from the Group. On behalf of
shareholders and the Board, I acknowledge with gratitude his
significant contribution to the Group's growth and development
during his almost five-year tenure. We wish him a happy and healthy
retirement.
Kevin's successor, Nimesh Patel, joined the Group in July 2020.
Nimesh assumed the role of Chief Financial Officer and was
appointed an Executive Director in September 2020. We were
delighted to welcome Nimesh to the Group and the Board and
appreciate the contribution he is already making. He brings 22
years of experience in senior roles, including as Group Head of
Corporate Finance for Anglo American plc and most recently Chief
Financial Officer of De Beers.
Neil Daws, Managing Director, Steam Specialties and Executive
Director also retired from the Company on 31(st) December 2020,
following an outstanding career in the Group spanning 42 years.
Neil joined us in 1978 as an apprentice and held positions in
production and design engineering, moving from Product Director in
1996 to UK Supply Director in 2003. He held many senior Divisional
roles in Steam Specialties before becoming Managing Director in
2018. Neil was appointed to the Spirax-Sarco Engineering plc Board
in 2003. On behalf of shareholders and the Board, I acknowledge
with much appreciation the substantial contribution to the Group's
growth and success achieved by Steam Specialties under Neil's
leadership.
On 1(st) January 2021, Maurizio Preziosa succeeded Neil to
become Managing Director Steam Specialties and a member of the
Group Executive Committee, following a handover period with Neil
during the fourth quarter of 2020. Maurizio joined the Group in
November 2011 as General Manager for Spirax-Sarco Italy,
progressing to the role of Regional General Manager for Southern
Europe in 2014 before becoming Divisional Director Gestra in May
2017. We are delighted to have Maurizio's experience and leadership
in this role and it is testament to the calibre of our leaders that
we were able to fulfil this key appointment from within the
Group.
The Board was pleased to welcome Angela Archon and Olivia Qiu as
independent Non-Executive Directors, following their appointment on
1(st) December 2020.
Angela held various senior executive positions within IBM
Corporation, including as Vice President, Transformation and Chief
Operating Officer of the Watson Health Division. Angela also
represented IBM for eight years as Board Liaison for The National
Action Council for Minorities in Engineering. Angela has strong
strategic and operational experience and combines her ability to
drive transformational change with a clear focus on providing
excellent customer support.
Olivia held a range of executive positions with large global
organisations, including Chief Executive Officer and Board Director
of Alcatel-Lucent Shanghai Bell. She is currently Chief Innovation
Officer with Signify (formerly Philips Lighting). Olivia has
digital transformation and innovation skills as well as strong
international business experience.
On 9(th) March 2021, we announced the appointment of Richard
Gillingwater as an Independent Non-Executive Director with
immediate effect. Richard will succeed Dr Trudy Schoolenberg as
Senior Independent Director on 1 August 2021, when Trudy will step
down from the Board after completing nine years as a Director.
Richard has held a range of executive positions within global
investment banks including Kleinwort Benson, Credit Suisse and
Barclays de Zoete Wedd. He is currently Chair at SSE plc (stepping
down at the end of March), Chair of Janus Henderson Group plc,
Senior Independent Director of Whitbread plc and Governor at the
Wellcome Trust.
All Board changes formed 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.
Outlook
The latest forecasts predict global industrial production will
grow over 7% in 2021. These forecasts are contingent on the swift
and successful roll-out of vaccination programmes across the world
and assume no emergence of new virus variants against which the
available vaccines would be materially less effective.
As always, the currency outlook remains uncertain. If current
exchange rates were to prevail for the remainder of the year there
would be a less than 4% adverse impact on sales from translation
and a more than 4% adverse impact on profit from translation and
transaction, compared with the full year 2020. Movements in
exchange rates are often volatile and unpredictable, therefore the
actual impact could be significantly different.
We anticipate most of the Group's organic revenue streams in
2021 to expand broadly in line with global industrial production
growth. Additionally, Electric Thermal Solutions ended 2020 with a
higher-than-normal order book, which should add at least a further
GBP8 million to sales in the year. Watson-Marlow experienced
extraordinary demand from the Pharmaceutical & Biotechnology
sector, which accounted for over 55% of sales in 2020, also ending
the year with a higher-than-normal order book that will ship in
2021. We anticipate this strong demand to continue in 2021, driving
organic sales growth of over 35% for that sector, with
Watson-Marlow's other industrial sectors growing organic sales in
line with global industrial production growth.
During 2021, we will step-up our revenue investments, including
for sustainability and digital initiatives, to underpin future
organic growth and trading margin progression. We believe close to
three-quarters of the GBP22 million savings achieved by the
temporary cost containment initiatives taken in 2020 will reverse
in 2021. Short-term capacity expansion initiatives in Watson-Marlow
will also generate incremental operating costs. Taken together, we
anticipate these initiatives will reduce the full year drop-through
from the organic increase in sales to operating profit to close to
30%.
We anticipate that cash conversion, which has been above 80% for
the last 5 years, will return to those levels as we step up capital
investments and increase working capital in line with revenue.
Strategic Review
Efficient, Safer, Sustainable
Our Company purpose continued to guide our decisions in 2020.
Against the backdrop of the COVID-19 pandemic, the work we do to
create a more efficient, safer and sustainable world has never been
more important. Across the globe and in the critical sectors we
serve, our teams have supported our customers to keep their
manufacturing and industrial processes operational.
Resilience and reliability when it matters
Our diverse products and solutions, which are deeply embedded in
industrial and commercial sites all over the world, combined with
our extensive engineering expertise, have helped our customers -
including those who are on the frontline in the fight against the
COVID-19 pandemic - rapidly respond to their needs.
Our direct sales business model is highly effective at
uncovering opportunities to improve the efficiency and
effectiveness of our customers' processes. By "walking our customer
sites" our engineers often identify unrecognised needs and design
bespoke engineered solutions to meet those needs. These solutions
generally have a short payback period for the customer and are
typically paid for from customers' operating budgets which means
they remain attractive even during challenging economic times.
Alongside this, we have continued to help our customers reduce
their environmental impacts, improve product quality, provide safer
working environments for their people and to achieve regulatory
compliance.
Our Group supports a diverse range of industries with over 55%
of sales destined to critical sectors such as Food & Beverage,
Pharmaceutical & Biotechnology, Healthcare and Power
Generation, which helped mitigate the impact of reduced customer
demand in cyclical sectors that suffered larger contractions during
2020. Our largest sector in 2020 was Pharmaceutical &
Biotechnology accounting for 21% of Group sales. No single customer
accounts for more than 1% of Group sales. The total proportion of
Group sales which are funded by our customer's operating budgets
remains close to 85%, with the balance coming from the customers'
capital budgets.
These market drivers and our business model have continued to
serve us well throughout the COVID-19 pandemic. Unable to
physically walk our customers' sites in many cases, our network of
more than 1,900 sales and service engineers - unique in number and
expertise amongst our competitors - rapidly embraced virtual tools
to engage with our customers and in this respect continued to
support our business model for self-generated sales, which
represent close to 35% of our Group revenue.
Although we have not been immune to the detrimental economic
impacts caused by the global pandemic, the high proportion of sales
that derive from our customers' maintenance budgets combined with
our ability to continue to self-generate sales in the wide variety
of sectors we serve, has enabled our business to be highly
resilient during this global crisis.
Performance during a difficult year
2020 has not been without its challenges and we would like to
pay tribute and give thanks to every colleague in our Group, for
their outstanding efforts and dedication in line with our Values.
Our teams have worked diligently, with innovation and
entrepreneurship, to meet the needs of our customers without losing
focus on the importance of safety, health and wellbeing.
Our response to the global pandemic has been comprehensive.
Protecting everyone in our workplaces and helping our dispersed
teams adjust to the new realities of remote working has been at the
forefront of our efforts. For our critical workforce still
accessing our facilities around the world, the measures we have
taken include the provision of medical-grade masks and hand
sanitiser, increased distancing between workstations,
implementation of one-way systems and enhanced cleaning
regimes.
We have stepped up our communications activity to connect with
colleagues working remotely at home and introduced flexible
measures to help those with responsibility for caring for loved
ones. The global roll-out of our Group Employee Assistance
Programme (EAP) ensured that everyone has access to support and
resources when and where needed. COVID-19 infection levels among
our employees have remained low, with the majority of cases being
contracted outside the workplace from family or friends. We
continue to actively monitor and engage to ensure that the risks do
not become "normalised" as time goes on.
We took decisive and early action to introduce temporary cost
containment initiatives in the first half of the year. These
included the restriction of non-essential spend, a reduction in
temporary staff and salary reductions for senior management. As we
moved into the second half of the year, the way in which our people
adapted, and the continued resilience of our business model became
clear to see. We were able to lift some temporary cost containment
measures earlier than anticipated and a number of the voluntary
salary reductions put in place in April, ceased by August with all
salary sacrifices being repaid in December. Throughout the year we
realised savings from activity curtailment as a direct consequence
of the global restrictions, such as reduced travel and lower
marketing expenditure.
Enhanced inventory management practices increased our customer
service performance during the pandemic, improving our competitive
position and our cash management.
Planning for long-term resilience
Our strategy, underpinned by six strategic themes, aims to
deliver self-generated growth that outperforms our markets.
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 our R&D investments
-- Optimise supply chain effectiveness
-- Operate sustainably and help improve our customers' sustainability
Our strategy has been in place since 2014 and has consistently
delivered strong results. Watson-Marlow and Electric Thermal
Solutions completed planned strategy refreshes during the year,
identifying the key initiatives for strategic implementation over
the next five years. In January 2021, Steam Specialties also
initiated a similarly planned exercise that will be completed
during the year.
Despite the challenges of remote working our teams launched 42
new product, service or solution offerings during the year, with 15
new product introductions in Steam Specialties, 20 in Electric
Thermal Solutions and seven within Watson-Marlow, accelerating the
Group's Product Vitality (a measure which compares total revenues
from new products, services or solutions introduced in the previous
five years, against overall Group revenue). Work continued
throughout 2020 on the development of the Group's new product
pipeline, which will support the launch of further products and
solutions in 2021.
To ensure we are well positioned to meet the growing needs of
our customers in the medium term, we continue to invest
significantly to expand both the capacity and performance of our
business. Our "future factory" initiative is driving our focus on
operational excellence in Steam Specialties; as is the
consolidation of manufacturing sites into single-site facilities
across all our businesses.
Within Electric Thermal Solutions we are well progressed with a
project to consolidate Thermocoax's four manufacturing facilities
in Normandy (France) and integrate these within a new purpose-built
facility. We expect to complete the integration by the end of this
year.
In Watson-Marlow, we are increasing capacity in some of our
existing manufacturing sites and expanding our footprint to add
further capacity. For Aflex in Yorkshire (UK), we have consolidated
four of five sites into a 16,200m(2) purpose-built facility, with
the fifth site to be integrated later this year. Additionally, we
have initiated construction of a new 11,000m(2) facility for
BioPure in Portsmouth (UK), which will commence operations towards
the end of 2021.
In 2021, we are further accelerating our investment in
Watson-Marlow to better serve our customers. The Board has approved
an US$88 million investment to build a12,800m(2) state-of-the-art
manufacturing facility on a 25.4 acre site in Massachusetts (USA),
which will significantly expand our capacity to serve customers in
the Americas region, particularly the fast-growing Pharmaceutical
& Biotechnology sector. Negotiations with local authorities and
contractors are well advanced and first customer deliveries are
expected before the end of 2022.
The additional capacity from these investments combined with
enhanced inventory management practices, which increased our
customer service performance and improved our cash management,
leaves us well positioned to better serve our customers as markets
recover.
We are also investing in digital and technology, such as
upgrading our systems to future proof our business and to identify
opportunities to create additional value for our customers, through
digital products and solutions. The global pandemic has accelerated
digital adoption and we have fast-tracked digital solutions across
the Group and for our customers. This will continue in 2021 and
beyond as we seek to accelerate digital initiatives that improve
our customer targeting, innovation, operational effectiveness and
people processes.
During 2020 we also invested in key roles within our Human
Resources organisation, including the appointment of a Group Head
of Inclusion, Diversity and Wellbeing. This reflects our aspiration
to be an increasingly inclusive employer and to create a culture
where diversity thrives. In March 2021, 31% of senior executives
across the Group are female, up from 21% in mid-2019.
Building a sustainable future
In 2020, we committed to achieve net zero greenhouse gas
emissions before 2040 and to source 50% of our electricity from
renewable sources by 2030.
To ensure we can achieve these and other important targets, we
are accelerating our investments in sustainability and we appointed
our first Group Head of Sustainability, who reports directly to the
Group Chief Executive. This important role will enable us to work
collaboratively with both internal and external stakeholders to
accelerate our sustainability performance, and that of our
customers, while addressing key global sustainability challenges.
During the final quarter of 2020 we commenced a sustainability
strategy refresh and completed a range of activities such as
stakeholder engagement, a materiality assessment, climate change
scenario analysis, and a biodiversity impact assessment. We also
commenced the development of our net zero greenhouse gas
roadmap.
We are exploring synergies within our thermal energy management
portfolio, which will enable us to combine core capabilities from
our Steam Specialties and Electric Thermal Solutions businesses to
develop our products and service capabilities for quantifiable
sustainability benefits. This will enable us to support the
evolving needs of our customers as they seek to mitigate the impact
of their operations on the environment.
The Group remains committed to organic growth as the predominant
source of growth. Nevertheless, we regularly refresh our pipeline
of acquisition opportunities across our businesses and market
sectors. We look for complementary companies that have strong
potential to underpin the Group's organic growth over the long term
at similar margin levels.
Operations Review
2019 Exchange Organic Acq'n 2020 Organic Reported
& disposal
Revenue GBP1,242.4m (GBP27.2m) (GBP37.0m) GBP15.2m GBP1,193.4m -3% -4%
----------- ---------- ---------- ----------- ----------- ------- --------
Adjusted operating
profit GBP282.7m (GBP12.0m) (GBP3.4m) GBP3.1m GBP270.4m -1% -4%
----------- ---------- ---------- ----------- ----------- ------- --------
Adjusted operating
margin 22.8% 22.7% +40 bps -10 bps
----------- ---------- ---------- ----------- ----------- ------- --------
Statutory operating
profit GBP245.0m GBP249.0m +2%
----------- ---------- ---------- ----------- ----------- ------- --------
Statutory operating +120
margin 19.7% 20.9% bps
----------- ---------- ---------- ----------- ----------- ------- --------
Introduction
Despite a challenging macro-economic environment in 2020 and a
global recession triggered by the COVID-19 pandemic, we continued
to create value for our stakeholders, invest in our businesses,
implement our strategy and ensure a strong foundation for
continued, sustainable growth. In 2020, we delivered resilient
sales and profit, experiencing a 4% revenue decline against 2019,
or a 3% decline on an organic basis. Adjusted operating profit
margin for the Group was down 10bps. Excluding the impact of
currency, the adjusted operating profit margin was up 40 bps
organically.
What we do
Our Steam Specialties, Electric Thermal Solutions and
Watson-Marlow businesses all provide engineered products, services
and solutions that play a vital role in industrial processes
worldwide. We have remained an essential supplier throughout the
global pandemic, as many of our customers operate in the critical
industries of Pharmaceutical & Biotechnology, Healthcare, Food
& Beverage and Power Generation.
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. Steam is used across a
broad range of industries, in all geographical markets and a wide
range of applications including: heating, curing, cooking, drying,
cleaning, sterilising, space heating, humidifying, vacuum packing
and producing hot water on demand.
Electrical heating solutions are a complementary medium to steam
and there are synergies in terms of the broad industrial and
geographical application. Electrical heating solutions are
particularly utilised in applications that require rapid "on-off"
control, higher temperatures, concentrated power loads, easy
installation or zero emissions at point of use.
Peristaltic and other niche pumps and associated fluid path
components are also widely used across an extensive range of
industries to address mission critical or difficult pumping needs.
Peristaltic pumps are particularly suitable for hygienic
applications (as the fluid is contained within a tube and 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 and
close to 85% of revenues derived from end users' maintenance and
operating budgets, mean that our markets closely correlate with
industrial production growth.
Market environment
Global industrial production declined 4% at the start of 2020 as
COVID-19 began spreading from Asia to Europe and the Americas. As
governments around the world enforced social restrictions to
contain the spread of the virus, global industrial production
collapsed by close to 12% in the second quarter. With social
restrictions easing in the third quarter, global industrial
production improved in the second half of the year. Across the full
year, global industrial production contracted between 4% and 5%
returning close to December 2019 levels by December 2020.
Industrial production rates were down across all regions in
2020, with Europe experiencing the worst impact, down 8%. The
Americas also experienced a significant decline in industrial
production, down 7% in both North and Latin America. Excluding
China, industrial production in Asia Pacific was down by 6%, while
industrial production grew almost 3% in China.
With revenue down 3% organically, against a 4% to 5% decline in
industrial production, we again outperformed our markets, in part
due to maintaining a focus on excellence, reacting rapidly and
decisively to the changing needs of our customer base and
continuing to invest in our internal capabilities and capacity.
Despite the continuing uncertainty surrounding Brexit throughout
2020, its impact on market confidence was very quickly overshadowed
by the global pandemic. Overall, Brexit uncertainty had a
relatively limited impact on our business during 2020 as over 90%
of our sales and operating profit are generated outside the UK.
Our direct sales business model is highly effective at
uncovering opportunities to improve our customers' performance and
this has continued to serve us well throughout the pandemic.
Our Group supports a diverse range of industries with more than
55% of sales destined to critical sectors such as Food &
Beverage, Pharmaceutical & Biotechnology, Healthcare and Power
Generation. This has helped mitigate the impact of reduced customer
demand in cyclical sectors that were affected during 2020. Our
largest sector, Pharmaceutical & Biotechnology, accounts for
21% of sales and no single customer accounts for over 1% of
sales.
Forecasters predict global industrial production growth will
reach 7% to 8% in 2021 with an exit rate of 3% to 4% in the fourth
quarter of the year. With the huge task ahead to complete the
global vaccination programme for COVID-19 and the possibility of
tighter restrictions for longer, there is still a strong element of
uncertainty at the current time.
Summary of progress in 2020
Sales
Group sales were down 4% to GBP1,193.4 million (2019: GBP1,242.4
million) and down 3% on an organic basis. Sales in Steam
Specialties were down 6% on an organic basis, with the Electric
Thermal Solutions business down 12% organically. Watson-Marlow's
sales grew 9% on an organic basis.
Acquisitions and disposals added GBP15.2 million, or 1%, while
foreign exchange had a 2% adverse impact on Group sales.
The Steam Specialties business, which accounted for 58% of Group
revenue in 2020, experienced a decline in all regions. Sales of
GBP694.1 million were down 8%, or 6% down on an organic basis.
The Electric Thermal Solutions business, which accounted for 15%
of Group revenue in 2020, delivered sales of GBP178.0 million, 4%
below 2019 and down 12% organically. Thermocoax, which joined the
Group in May 2019, delivered double-digit organic sales growth,
helping to offset a sales drop in Chromalox.
Watson-Marlow, which accounted for 27% of Group revenue in the
period, had an excellent year and delivered sales of GBP321.3
million, 7% above 2019 and 9% up on an organic basis. This growth
was largely due to increased demand from the Pharmaceutical &
Biotechnology sector, which accounted for 55% of Watson-Marlow's
sales in 2020, as customers in this market redirected their
activities and expanded their manufacturing capabilities in support
of COVID-19 vaccine development and production.
Adjusted operating profit
Group adjusted operating profit was down 4% to GBP270.4 million
and down 1% on an organic basis. The GBP3.1 million full-year
benefit from the acquisition of Thermocoax in May 2019, was more
than offset by a GBP12.0 million exchange headwind.
In the Steam Specialties business, adjusted operating profit of
GBP154.3 million was down 9% on an organic basis, and a negative
exchange impact resulted in profit being down 13% compared with
2019.
The Electric Thermal Solutions business delivered an adjusted
operating profit of GBP24.6 million, 11% down on an organic basis
and flat compared with 2019.
Watson--Marlow's adjusted operating profit was up 15%
organically, notwithstanding continued investment in the business,
and was up 12% compared with 2019 due to a currency headwind.
Adjusted operating profit margin
The Group adjusted operating profit margin of 22.7% was down 10
bps due to a negative currency impact. On an organic basis, the
adjusted operating margin improved by 40 bps.
Within the Steam Specialties business, the adjusted operating
profit margin declined 140 bps to 22.2%, as our 80 bps organic
decline was compounded by a currency headwind. Declines in adjusted
operating profit margin in EMEA and the Americas regions were
partially offset by a 200 bps organic increase in Asia Pacific.
The adjusted operating profit margin for the Electric Thermal
Solutions business was up 50 bps to 13.8% as a very positive
contribution from Thermocoax was partially offset by a small
currency headwind and an organic margin decline in Chromalox.
Watson-Marlow's operating profit margin was up 160 bps to 33.4%,
driven by a strong 180 bps organic margin expansion.
Statutory operating profit and margin
Statutory operating profit of GBP249.0 million was up from
GBP245.0 million in 2019, primarily as a result of a GBP10.5
million credit from defined benefit retirement plans in the UK and
Canada being closed to future accrual. As a result, the statutory
operating profit margin of 20.9% was up 120 bps (2019: 19.7%).
Steam Specialties: overview
2019 Exchange Organic Acq'n 2020 Organic Reported
& disposal
Revenue GBP755.4m (GBP20.6m) (GBP40.7m) - GBP694.1m -6% -8%
--------- ---------- ---------- ----------- --------- ------- --------
Adjusted operating
profit GBP177.9m (GBP9.1m) (GBP14.5m) - GBP154.3m -9% -13%
--------- ---------- ---------- ----------- --------- ------- --------
Adjusted operating -140
margin 23.6% 22.2% -80 bps bps
--------- ---------- ---------- ----------- --------- ------- --------
Statutory operating
profit GBP172.6m GBP157.8m -9%
--------- ---------- ---------- ----------- --------- ------- --------
Statutory operating
margin 22.8% 22.7% -10 bps
--------- ---------- ---------- ----------- --------- ------- --------
Market overview
Industrial production (IP) in the Europe, Middle East and Africa
(EMEA) division contracted 6% during 2020 with COVID-19 and Brexit
affecting market conditions. With the exception of the UK, which
contracted close to 9%, our large European markets saw double-digit
IP declines with France and Germany both contracting over 10% and
Italy contracting 11%. Elsewhere across EMEA, many of our smaller
markets experienced negative IP rates between 2% and 11%. The only
markets with IP growth were Norway at 4% and Turkey at 2%.
In Asia Pacific, IP contracted strongly in the first half of the
year, with the region returning to low growth in the second half as
China recovered quickly from the effects of the pandemic and
achieved industrial production growth close to 3% for the year. The
strong IP recovery in China and Korea, our second largest market in
the region, lessened the overall decline in Asia Pacific's
industrial production growth rate from over 6% to under 1%.
Singapore, Taiwan and Vietnam all experienced IP growth while
India, Japan, most of Southeast Asia and Australasia experienced
negative IP rates between 1% and 11%.
Industrial production contracted 7% across the Americas in 2020,
with the most severe impact felt in the second quarter, when IP
declined more than 15%. On a full-year basis, IP in North America
contracted 7%, while declines across Latin America varied between
1% and 13%. Aside from COVID-19, the collapse of the oil price had
an additional but varied impact across the region.
Market growth in critical sectors was resilient including in
Pharmaceutical & Biotechnology (+4%) and Food. In contrast,
sectors that are more cyclical, such as Oil & Gas (-7%),
declined significantly.
Progress in 2020
Sales of GBP694.1 million were down 8% in the Steam Specialties
business. On an organic basis, sales were down less than 6%,
reflecting the 4% to 5% contraction of industrial production across
our global markets. Sales derived from our customers' operational
and maintenance activities declined 4%, while larger project sales
related to customers' capital budgets declined almost 12%.
As a result of our focus on critical sectors, such as Food &
Beverage, Healthcare and Pharmaceutical & Biotechnology, we
have been able to continue providing products and services during
this difficult year, as steam systems are essential to many
critical manufacturing and industrial operations. Despite the
challenges brought about by COVID-19, we have still been able to
self-generate opportunities in the areas of energy savings, quality
control and production improvement, helping our customers achieve
business continuity.
At times during the year our direct sales and service engineers
were restricted from physically accessing customers' sites due to
lockdowns as a result of COVID-19 protection measures. Customer
visits at the start of the pandemic initially decreased but picked
up again as we rapidly switched to digital models of providing
service support remotely, together with new audit solutions and
remote customer training. We believe that this swift action to
maintain our customer service, together with the resilience of our
business model, contributed to our robust sales in the majority of
our core sectors.
All our manufacturing sites remained open and operational during
2020 with some exceptions including short, government-enforced
shutdowns linked with lockdowns primarily at the start of the
pandemic. We have maintained a focus on further improving customer
service and, as a result, our Steam Specialties on-time-to-request
(OTTR) customer service measure improved to over 94% on a global
basis.
Gestra sales were also down in 2020, with some scheduled
maintenance and projects in the Power Generation sector being
postponed. The biggest impacts were felt in the Oil & Gas
sector, due to the drop in oil price, and sales to distributors, as
they reduced the volume of their inventory. Sales of boiler house
control products, including the new SPECTORconnect range that was
launched in 2019, remained robust. Gestra China performed well as a
result of establishing a new operating company there in April
2019.
The temporary cost containment initiatives taken by the Steam
Specialties business were very effective at reducing costs, by over
GBP15 million, mostly in the areas of travel, advertising and
employment costs. We focused on cost reduction initiatives that
enabled us to manage the impact of the pandemic without damaging
our ability to respond quickly to a recovery. As such we continued
to invest in digital technologies, sustainability, new product
development and implementing new integrated information
systems.
Adjusted operating profit was GBP154.3 million, down 9%
organically and down 13% compared to 2019, due to a negative
currency impact. At 22.2%, the Steam Specialties business' adjusted
operating profit margin declined 140 bps and 80 bps
organically.
Statutory operating profit of GBP157.8 million was down 9% from
GBP172.6 million in 2019 for the same reasons as the decline in
adjusted operating profit.
Strategy update
Across Steam Specialties we remained focused on our "Customer
first" business strategy, despite the disruption caused by the
COVID-19 pandemic.
Our business model adapted well to the changing landscape as our
direct sales and service engineers swiftly adjusted their work
patterns, including the adoption of new digital technologies, to
maintain contact with our customers and continue self-generating
sales. Through the adoption of digital engagement tools and the
development of digital technologies which combine the Internet of
Things (IoT), cloud solutions and wearable technology to create a
virtual and augmented reality experience, our engineers are still
able to uncover problems and provide bespoke solutions to meet
customers' needs. Continuous improvement activities continued to
receive attention and delivered good results, such as an
improvement in our On-Time-To-Request (OTTR) customer service
measure.
The pandemic accelerated the roll-out of our eCommerce platform
across our operating companies in the Netherlands, UK &
Republic of Ireland, Germany, Switzerland and in our EMEA
Developing Markets in the second half of the year. The Americas
began piloting an eCommerce platform in 2020.
As the pandemic took hold, the opportunity for virtual learning
amongst our people increased significantly as our colleagues made
use of time they had available as a result of reduced travel. In
response to this, the Spirax Sarco Academy rapidly produced and
deployed curricula in support of the new ways of working, such as
"Remote Consultative Selling" and developed "Wellbeing" programmes
to help our colleagues adjust to the new realities of remote
working and living with a pandemic. The sales programmes of the
Spirax Sarco Academy are structured into levels called "belts",
with each belt representing an increasing level of expertise from
White belt (introduction to sales and specific health & safety
subjects) through to Black belt (global sector or product
specialist). The materials for our Blue belt (more advanced
technical) and Purple belt (sector) were also fast-tracked and made
available in a basic form, to enable our sales and service
engineers to accelerate
their learning, while the interactive content was being produced.
In 2020, 15 new products were released. A Clean Steam Generator
(CSG) was specifically developed to meet the needs of customers in
the Food & Beverage industry and was launched successfully,
expanding our range of CSGs. A state-of-the-art steam trap survey
tool for use by our service and survey engineers was introduced
early in the year, and we extended our range of manifolds. Gestra
successfully introduced the SPECTORconnect boiler controls
technology as a new standard in the market.
We also continued to invest in upgrades to our business
information systems in 2020. "Project OPAL", initiated in 2019,
incorporates ERP (Enterprise Resource Planning), CRM (Customer
Relationship Management), CPQ (Configure, Price, Quote) and BI
(Business Intelligence) modules. The implementation of this new
integrated system is set to improve operational effectiveness and
deliver improved customer focus and insight, as well as effective
strategic account management and rapid quoting and processing to
further improve our customer delivery performance. Among the first
countries to "go live" were Norway, Sweden, Finland and Denmark in
September, with a further six countries successfully switching to
the new CRM platform by the end of the year. Investment in
Argentina to move to a common Spirax Sarco manufacturing ERP
platform was also initiated as the first step in a multi-year
roll-out across the Americas to upgrade to a single system.
Since its acquisition in 2017, Gestra has made further progress
in line with the acquisition strategy, moving several
transformational projects into business as usual. The synergy with
Spirax Sarco will deliver further tangible results with the new
range of SPECTORconnect boiler controls range envisaged to fully
replace the current Spirax Sarco technology.
Our plans for further geographical expansion were largely on
hold during 2020. We expect this to pick up again once we see a
stable return to more normal customer demand-levels. Gestra
expanded its direct sales presence in India in 2020, with the
addition of an internal application engineering capability. During
the final quarter of 2020, we worked to set up a new Gestra
operating company in France, ready to begin trading in the first
quarter of 2021.
Health and safety of our employees remains our top priority and
in 2020 we stepped up our focus on the mental and physical
wellbeing of our colleagues, whether they are working from home or
at one of our sites, with the introduction of COVID-19 training,
enhanced sanitary regimes, enforced social distancing and correct
self-isolation procedures introduced across the entire
business.
In 2020, we also stepped up our sustainability initiatives, with
a particular focus on accelerating offerings to customers that help
them manage their environmental impacts, as well as activities to
improve our own energy efficiency and reduce our greenhouse gas
emissions.
As planned, in January 2021 we initiated a refresh of the
"Customer first" strategy to reinforce areas of success while
accelerating the strategic implementation of digital and
sustainability initiatives.
Outlook
Steam is used across a broad range of industries and in all
geographic markets, and therefore the Steam Specialties business
could not escape the effects of the COVID-19 pandemic on global
industrial production. Thanks to our resilient business model,
ability to self-generate sales and significant maintenance and
repair revenues, the organic decline of sales in 2020 was contained
to 5.5%, broadly in line with the decline in global industrial
production.
The latest forecasts predict global industrial production will
grow over 7% in 2021. Industrial production is predicted to grow
over 5% in EMEA with growth in the UK forecasted at a more modest
2%. Across the Americas, industrial production growth is predicted
to reach 6%, with North America growing over 5% and Latin America
growing over 7%. In China, industrial production is predicted to
grow a further 9% in 2021, ahead of the Asia Pacific region as a
whole that is forecasted to grow over 8%.
Typically, organic sales growth in Steam Specialties would
exceed growth of global industrial production. However, in 2021 we
anticipate that reduced demand from larger capital projects, which
lag the recovery of operational and maintenance driven demand, will
limit sales growth to slightly above global industrial
production.
In early 2021, we initiated investments to merge our Italian
businesses, which will benefit our performance in future years. We
have also planned additional revenue investments in sustainability
and new digital applications in support of organic sales growth and
stepped up the global implementation of our integrated IT systems.
We believe close to 75% of the savings derived from cost
containment initiatives taken in 2020 will reverse in 2021,
particularly in manufacturing overheads and employment costs.
As a result of the expected currency headwind and the increased
revenue investments listed above, we anticipate the adjusted
operating profit margin in 2021 to be marginally ahead of the prior
year.
Steam Specialties: Europe, Middle East and Africa (EMEA)
2019 Exchange Organic Acq'n 2020 Organic Reported
& disposal
Revenue GBP335.7m (GBP1.0m) (GBP24.7m) - GBP310.0m -7% -8%
--------- --------- ---------- ----------- --------- ------- --------
Adjusted operating
profit GBP67.0m (GBP0.9m) (GBP12.0m) - GBP54.1m -18% -19%
--------- --------- ---------- ----------- --------- ------- --------
Adjusted operating -220
margin 20.0% 17.5% bps -250 bps
--------- --------- ---------- ----------- --------- ------- --------
Statutory operating
profit GBP63.4m GBP57.7m -9%
--------- --------- ---------- ----------- --------- ------- --------
Statutory operating
margin 18.9% 18.6% -30 bps
--------- --------- ---------- ----------- --------- ------- --------
Progress in 2020
Sales of GBP310.0 million were down 8% in EMEA or 7% down on an
organic basis. Against a backdrop of over 6% industrial production
contraction, sales declined broadly in line with our markets.
Economic activity in the second half of the year returned to more
stable activity levels, as customers adapted to the new economic
landscape and ways of working.
The impact of the global recession on organic sales was felt
across all core territories, with the biggest effect in the Middle
East and Africa that contracted over 20% following the decline of
the oil price and as the region did not substantively benefit from
government stimulus packages. Our core European markets, including
the UK, Germany, Italy and France, experienced a close to 6%
organic sales decline.
EMEA adjusted operating profit of GBP54.1 million was down 18%
organically, as inventory reductions across the sales companies
globally further reduced demand levels at European manufacturing
facilities. A currency headwind further reduced the adjusted
operating profit to be down 19%. At 17.5%, the adjusted operating
margin was down by 250 bps. On an organic basis, the adjusted
operating margin was down 220 bps.
Statutory operating profit was down from GBP63.4 million to
GBP57.7 million, which is reflective of the reduced adjusted
operating profit partially offset by a credit as a result of the UK
pension schemes being closed to future accrual.
Steam Specialties: Asia Pacific
2019 Exchange Organic Acq'n 2020 Organic Reported
& disposal
Revenue GBP249.8m (GBP3.7m) (GBP11.5m) - GBP234.6m -5% -6%
--------- --------- ---------- ----------- --------- ------- --------
Adjusted operating
profit GBP72.5m (GBP1.4m) GBP1.3m - GBP72.4m +2% 0%
--------- --------- ---------- ----------- --------- ------- --------
Adjusted operating +200 +190
margin 29.0% 30.9% bps bps
--------- --------- ---------- ----------- --------- ------- --------
Statutory operating
profit GBP72.5m GBP72.4m 0%
--------- --------- ---------- ----------- --------- ------- --------
Statutory operating +190
margin 29.0% 30.9% bps
--------- --------- ---------- ----------- --------- ------- --------
Progress in 2020
Sales of GBP234.6 million were down 6% in Asia Pacific or 5%
down on an organic basis, compared to a 1% industrial production
decline. Asia Pacific is the region most exposed to larger capital
projects that were down by double digits.
Organic sales in China, our largest operating company, were down
less than 3% for the full year, as a result of almost 15% sales
decline in the first half being partially offset by a strong second
half recovery of almost 9% sales growth. While some customers were
still restricting physical site visits, we remained in close
contact, using digital methods to support them and ensure smooth
operations. Since April, sales to customers in China have continued
to recover with the economy, cushioning the sales decline in the
rest of Asia Pacific.
Our operations in Korea and Australasia experienced a similar
sales decline to China. Although initially less affected by the
pandemic, subsequent waves of infection and eventual lockdowns in
these countries impeded customer interactions and delayed
deliveries. Japan, India and Southeast Asia operations were
particularly impacted by customers delaying capital investments
when economic conditions worsened, as well as routine maintenance
work being postponed when plants and facilities closed due to
lockdowns.
Adjusted operating profit of GBP72.4 million was flat compared
to 2019 as currency movements offset an organic increase of 2%. At
30.9% the adjusted operating margin was up 200 bps organically due
to improved operational performance, a favourable sales mix and
temporary cost containment measures.
Statutory operating profit was also flat against the prior year
at GBP72.4 million.
Steam Specialties: The Americas
2019 Exchange Organic Acq'n 2020 Organic Reported
& disposal
Revenue GBP169.9m (GBP15.9m) (GBP4.5m) - GBP149.5m -3% -12%
--------- ---------- --------- ----------- --------- ------- --------
Adjusted operating
profit GBP38.4m (GBP6.8m) (GBP3.8m) - GBP27.8m -12% -28%
--------- ---------- --------- ----------- --------- ------- --------
Adjusted operating -190 -400
margin 22.6% 18.6% bps bps
--------- ---------- --------- ----------- --------- ------- --------
Statutory operating
profit GBP36.7m GBP27.8m -24%
--------- ---------- --------- ----------- --------- ------- --------
Statutory operating -300
margin 21.6% 18.6% bps
--------- ---------- --------- ----------- --------- ------- --------
Progress in 2020
Sales of GBP149.5 million were down 12% or 3% down on an organic
basis, while industrial production contracted 7% across the
region.
Organic sales in North America were down less than 9%, impacted
by the spread of COVID-19, the global recession, and the decline in
the Oil & Gas sector. Our distribution network in the USA chose
to reduce their inventory levels, due to the decline in industrial
production and market uncertainty, thereby reducing demand for our
products.
In Latin America, sales grew over 8% organically as we
experienced strong sales performance in Spirax Sarco Brazil and
Hiter Controls that were able to effectively pivot business into
new sectors, in response to the decline of the Oil & Gas and
Ethanol sectors. Argentina also achieved organic sales growth in
2020, as strong devaluation of the Peso drove local price increases
to more than offset real term demand declines. Excluding Argentina,
organic sales growth in Latin America was 3%.
Our five factories across the Americas have been able to meet
demand, helping mitigate currency effects and take market share
from our competitors who are dependent on imports. Our focus on
strategic implementation and our strong cash position has ensured
we retain sufficient inventory levels to help our customers meet
their business continuity plans.
Adjusted operating profit of GBP27.8 million was down 28% or 12%
down organically, the difference being the result of a significant
negative currency impact. The adjusted operating profit margin was
down 400 bps, strongly impacted by currency movements. On an
organic basis, the adjusted operating profit margin was down by 190
bps to 18.6%.
Statutory operating profit was down from GBP36.7 million to
GBP27.8 million, broadly in line with the reduction in adjusted
operating profit.
Electric Thermal Solutions
2019 Exchange Organic Acq'n 2020 Organic Reported
Revenue GBP186.1m (GBP1.6m) (GBP21.7m) GBP15.2m GBP178.0m -12% -4%
--------- --------- ---------- -------- --------- ------- --------
Adjusted operating
profit GBP24.7m (GBP0.5m) (GBP2.7m) GBP3.1m GBP24.6m -11% 0%
--------- --------- ---------- -------- --------- ------- --------
Adjusted operating
margin 13.3% 13.8% +10 bps +50 bps
--------- --------- ---------- -------- --------- ------- --------
Statutory operating
profit GBP7.9m GBP4.8m -39%
--------- --------- ---------- -------- --------- ------- --------
Statutory operating -150
margin 4.2% 2.7% bps
--------- --------- ---------- -------- --------- ------- --------
Market overview
The geographical footprint of the Electric Thermal Solutions
business differs greatly from Steam Specialties and Watson-Marlow,
with two-thirds of its revenue generated in the Americas and less
than 10% generated in Asia Pacific. It also has a greater weighting
of sales to the Oil & Gas, Power Generation and Semiconductor
sectors than Steam Specialties, plus lower weighting to the Food
& Beverage and Pharmaceutical & Biotechnology sectors.
Chromalox, which accounts for three-quarters of revenue in the
Electric Thermal Solutions business generates close to 75% of its
revenue in North America and therefore has a higher exposure to
industrial production in the USA that reported 7% industrial
production decline in 2020. In particular, Chromalox was impacted
by the contraction of the Oil & Gas sector and the lack of
growth in the Power Generation sector.
Thermocoax, acquired in May 2019, accounted for a quarter of
Electric Thermal Solutions' revenue in 2020. Almost 60% of sales
are directed to European markets, with 35% of sales to the USA and
less than 10% of sales supplied into Asia.
Progress in 2020
Sales of GBP178.0 million were 4% down or 12% down on an organic
basis as the additional five months of Thermocoax sales in 2020
expanded revenues by 8%. The sales decline was largely driven by
the COVID-19 pandemic, particularly in the USA, combined with the
fall in oil price. Sales to Semiconductor OEMs, a strategic sector
for the Electric Thermal Solutions business, grew significantly in
both Europe and the USA, as we expanded our offering and displaced
competitors with superior technological solutions.
Large project business declined at a faster rate than the base
business, with projects being deferred due to customer capital
expenditure reductions. However, in late 2020, Chromalox secured
the largest single order in the Group's history, a US$14 million
order from the US Navy, ending the year with a significantly higher
order book to be shipped in 2021 and 2022.
Chromalox sales declined in its core markets of Oil & Gas,
Petrochemical and Power Generation, although some specific
sub-sectors, such as Liquified Natural Gas, remained strong. The
sales of Heat Trace products also declined, impacted by
distributors reducing inventory and a milder winter in the USA, but
the rapid growth of decarbonisation efforts by countries and
industry, has proven to be a valuable growth trend for Chromalox in
2020.
In its first full year with the Group, Thermocoax benefitted
from strong growth in the Semiconductor sector and sustained growth
in the Nuclear sector. As a result of strong operational
performance and orders carried over from 2019, Thermocoax achieved
27% like-for-like sales growth in 2020.
Following a comprehensive consultation period, we agreed a
restructuring programme at our loss-making Chromalox manufacturing
facility in Soissons, France, resulting in a reduction of 34 roles
primarily in direct production. The restructuring negotiations were
completed amicably in August and with limited disruption to
operations. The site will now focus on manufacturing complex
engineered solutions for European markets, with heating elements
and components sourced from other Chromalox manufacturing
facilities. This restructuring initiative will significantly reduce
our cost base and create a more appropriately sized production
facility, which will improve the site's efficiency and help to
secure its long-term profitability.
In March 2020, we disposed of ProTrace Engineering, a small,
loss-making and non-core electrical engineering services business
in Canada which was inherited through the original acquisition of
Chromalox.
At GBP24.6 million, the adjusted operating profit was flat due
to the increased contribution from Thermocoax, however declined 11%
organically. In 2020, Chromalox closed out a loss-making customer
project that had a GBP1.7 million negative impact on operating
profit in the year.
The adjusted operating profit margin was up 50 bps to 13.8%, up
10 bps on an organic basis, driven by improved operating
efficiencies and supported by cost containment initiatives as well
as a positive mix impact from the higher margin Thermocoax.
Statutory operating profit was down 39% from GBP7.9 million in
2019 to GBP4.8 million, largely due to the restructuring costs
incurred in the business during 2020 as disclosed in Note 2 to the
Financial Statements.
Strategy update
We carried out a strategy review for the Electric Thermal
Solutions business in the first half of 2020, and the subsequent
"Engineering Premium Solutions" strategy was approved by the Board
in June. Targeting high margin, high growth sectors, the main
components of this strategy include a drive towards total customer
solutions, sustainability and sectorisation. It is designed to
deliver value to customers and stakeholders, while enhancing the
business' operating efficiency and profitability. We strengthened
our senior and executive teams through several strategic
appointments including: Vice President of Global Sales; Vice
President of Human Resources; IT Director; EH&S Director and
Manufacturing Manager in France. This enhanced leadership team will
be key to supporting the implementation of the strategy as it is
deployed to colleagues during 2021.
In February 2020, construction commenced on a new manufacturing
site and office facility in Normandy, France, to integrate
Thermocoax's four existing sites into a new purpose-built facility
which is expected to complete in the second half of 2021.
Operational improvements across the Electric Thermal Solutions
business delivered a reduction of underlying manufacturing costs,
an increase in On-Time Delivery (OTD) and improved most Health
& Safety Key Performance Indicators (KPIs).
Electric Thermal Solutions introduced 20 new products throughout
the year. Chromalox's new ChromaTrace(TM) for Buildings 1.0 design
software, a free heat tracing system design programme specially
created for the Building & Construction market, architects and
engineers, was released to the public. Chromalox also expanded its
DirectConnect(TM) MV Boiler product line to 11MW, offering the
advantages of electric process heating, emissions-free operation
and significant cost savings over low-voltage, higher installation
cost designs. Thermocoax launched two new chucks (heating plates
used during the process of atomic layer deposition) and new heating
solutions for the Semiconductor market, as well as continuing the
development of new InCore instrumentation systems for the Nuclear
sector to measure key areas of plant operation, including
temperature, neutron flux and reactor water level.
Outlook
Industrial production growth rates are forecasted to recover in
the core markets of the Electric Thermal Solutions business in
2021, with over 5% growth in the USA (that accounted for more than
60% of sales in 2020) and over 7% growth on a global basis. We will
continue to benefit from broadening our geographical direct sales
footprint, as well as from the sales of new products launched
during 2020, which align strongly with customer trends such as
decarbonisation, emissions control, energy efficiency, process
productivity and digitalisation.
We therefore anticipate underlying organic sales growth to be
similar to global industrial production growth. Electric Thermal
Solutions ended 2020 with a higher-than-normal order book, with
shipment of these orders anticipated to add at least a further GBP8
million to sales in 2021.
As a result of underlying performance improvement initiatives
progressing across Chromalox, the non-repeat of 2020 project
losses, the reversal of close to half the GBP3 million cost
containment measures and the operational gearing from the strong
sales growth, we anticipate the adjusted operating profit will
expand by more than twice the rate of the 2021 organic revenue
growth.
Watson-Marlow Fluid Technology Group (Watson-Marlow)
2019 Exchange Organic Acq'n 2020 Organic Reported
& disposal
Revenue GBP300.9m (GBP5.0m) GBP25.4m - GBP321.3m +9% +7%
--------- --------- -------- ----------- --------- ------- --------
Adjusted operating
profit GBP95.8m (GBP2.4m) GBP13.9m - GBP107.3m +15% +12%
--------- --------- -------- ----------- --------- ------- --------
Adjusted operating +180 +160
margin 31.8% 33.4% bps bps
--------- --------- -------- ----------- --------- ------- --------
Statutory operating
profit GBP82.7m GBP102.2m +24%
--------- --------- -------- ----------- --------- ------- --------
Statutory operating +430
margin 27.5% 31.8% bps
--------- --------- -------- ----------- --------- ------- --------
Market overview
Watson-Marlow was similarly impacted by economic conditions and
industrial production growth rates as those experienced by the
Steam Specialties business, albeit with a different geographical
footprint as sales carry a higher weighting in the Americas and a
lower weighting in Asia Pacific.
Progress in 2020
Sales of GBP321.3 million were up 7% or 9% up on an organic
basis.
All regions delivered strong year-on-year sales growth with Asia
Pacific particularly strong. Following the earlier impact of
COVID-19 compared with the rest of the world, China and the Asia
Pacific region sustained a faster and more robust recovery.
Demand from the Pharmaceutical & Biotechnology market was
very robust, boosted by the development of COVID-19 vaccines and
the commencement of a global production roll-out. Customers in this
sector ramped up their existing manufacturing capacity to meet the
increased COVID-19 vaccine production demand, diverting their focus
from other activities such as gene therapies. As a result, sales to
the Pharmaceutical & Biotechnology sector grew over 20% and
Watson-Marlow ended the year with a sizeable order book for
delivery in the first half of 2021.
Sales to the Food & Beverage and Water & Wastewater
sectors were also strong in 2020, but overall sales across
non-Pharmaceutical & Biotech industrial sectors were down
3%.
Serving so many critical customers on the front line of the
pandemic, it has been essential for Watson-Marlow's supply
locations to remain fully operational. Having implemented rigorous
health and safety processes on site, we have been able to operate
our manufacturing sites at close to normal capacity, with minimum
disruption throughout the height of the pandemic, no production
stoppages linked to suppliers and all suppliers remaining in
business.
The combined impact of sales growth and prudent cost controls
are reflected in Watson-Marlow's 2020 strong operating profit.
Watson-Marlow's adjusted operating profit was a record GBP107.3
million, up 12% or 15% up organically, the difference being the
result of exchange rates. The 33.4% adjusted operating profit
margin was up 160 bps or up 180 bps on an organic basis.
Statutory operating profit was up 24% from GBP82.7 million in
2019 to GBP102.2 million, for the same reasons as those improving
the adjusted operating profit and also the impact of the UK pension
scheme's closure to future accrual, as detailed in Note 2 to the
Financial Statements.
Strategy update
Watson-Marlow progressed its geographical expansion plans in
2020, establishing new sales companies in Hungary, Norway and
Finland. A new sales company was also established in Czech Republic
which began trading in January 2021.
We are investing to increase manufacturing capacity at our main
UK facility in Falmouth, including an expansion of the clean rooms
to add a third tube extrusion line, as well as trebling our offsite
warehousing capacity.
We are also investing in two new UK manufacturing facilities for
Aflex and BioPure. The new GBP23 million, 16,200m(2),
state-of-the-art manufacturing site for Aflex, in Yorkshire,
delivered its first production output during the second quarter of
2020. This facility consolidates Aflex's original five sites into
one purpose-built site, with four of these having successfully
transitioned to the new site in 2020 and the final site due to
complete its move in 2021.
In 2020, the Board approved a GBP24 million investment to
construct a new 11,000m(2) manufacturing facility in Portsmouth for
BioPure; a supplier of niche fluid path technologies for the
Pharmaceutical & Biotechnology sector, acquired in 2014. Five
times the size of the current site, the new site will also have a
six-fold increase in machines and a five-fold increase in
cleanrooms. This significant investment will further support
Watson-Marlow's strength and growth in the Pharmaceutical &
Biotechnology sector.
Manufacturing investment continued into 2021 with the
announcement of a planned new manufacturing facility in North
America. Representing an investment of US$88 million, the
12,800m(2) facility on a 25.4 acre site in Massachusetts will be
Watson-Marlow's first regional manufacturing hub in the USA and is
expected to start production by the end of 2022. When complete, the
facility will improve lead times and customer service in the USA
and its adjacent markets, significantly increase Watson-Marlow's
global capacity and speed of response to growing customer
demand.
2020 was a successful year for product launches, with seven new
products released throughout the year. In June, we commenced a
targeted launch of a revolutionary new pump head, utilising
Conveying Wave Technology (CWT), the ReNu 30 CWT, which fits onto
our existing range of Watson-Marlow Qdos pumps. The new
patented-technology pump head delivers superior accuracy and in
chemical resistance for metering and dosing applications,
establishing the next level of high performance for our industry.
An evolution in long-life chemical metering, it expands our
addressable market downstream into sectors requiring higher flow,
pressure and enhanced chemical resistance.
Also launched during the year were three new EtherNet/IP(TM)
Watson-Marlow process pumps which broaden our range and provide
digital connectivity, as well as a range of model extensions for
the MasoSine Certa(TM) pump and the MasoSine 800 pump.
During the first half of the year, Watson-Marlow also undertook
a comprehensive strategic review and the refreshed business
strategy received Board approval in June. With a strong history of
profitable growth and clear market fundamentals "Strategy 25"
focuses on further strengthening the business to sustain profitable
growth. Within the strategy we prioritise the key industries and
markets where we have potential to increase our addressable market,
accelerate people development, drive technical innovation, achieve
excellence in the supply chain and deliver improvements in our
sustainability performance.
Outlook
During 2020, many of our Pharmaceutical & Biotechnology
customers repurposed some of their capacity, which would have been
designated for gene therapy applications, towards expanding their
research and manufacturing capabilities for COVID-19 vaccine
development and production. This resulted in significantly stronger
sector demand, especially in the fourth quarter, driving the sector
to represent over 55% of sales in 2020 and end the year with a
higher-than-normal order book that will ship in 2021. Strong
COVID-19 related demand is anticipated to continue into 2021 with
customers also seeking to rebuild gene therapy related capacity
later in the year.
As a result of both stronger underlying demand and a larger
opening order book, we anticipate over 35% organic sales growth to
the Pharmaceutical & Biotechnology sector in 2021. Across
Watson-Marlow's other industrial sectors, we anticipate organic
sales growth to be consistent with global industrial
production.
Meeting this extraordinary demand growth will require additional
short-term capacity expansion investments in some of our
manufacturing facilities. Alongside this, we continue our
medium-term investment programmes to increase manufacturing
capacity across Watson-Marlow globally. As production from new
sites ramps-up, including in 2021, we anticipate some dilution to
margins as we incur additional manufacturing overheads ahead of
realising the benefits from increased sales and economies of scale.
We will also continue to invest in our direct sales and new product
development capabilities in support of future organic sales growth
and we expect the GBP3 million cost containment measures of 2020 to
reverse entirely in 2021.
The expected currency headwind combined with the increased
operational costs listed above, will partially offset the
operational gearing benefits from higher sales. We therefore
anticipate a moderate adjusted operating profit margin improvement
in 2021.
Financial Review
The Group reports under International Financial Reporting
Standards (IFRS) and also uses adjusted and organic figures where
the Board believes that they help to effectively monitor the
performance of the Group and aid readers 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 to the Financial Statements).
A reconciliation of adjusted operating profit to statutory
operating profit is provided 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. Therefore, we also refer to organic
performance measures, which strip out the effects of the movement
of foreign currency exchange rates and of acquisitions and
disposals, not included in the prior year. The Board believes that
this allows readers of the Financial Statements to gain a further
understanding of how the Group has performed.
Operating Operating Operating Operating
profit 2020 profit margin profit 2019 profit margin
2020 2019
GBPm % GBPm %
------------------------------------- ------------- --------------- ------------- ---------------
Europe, Middle East and Africa 54.1 17.5% 67.0 20.0%
Asia Pacific 72.4 30.9% 72.5 29.0%
Americas 27.8 18.6% 38.4 22.6%
------------------------------------- ------------- --------------- ------------- ---------------
Steam Specialties 154.3 22.2% 177.9 23.6%
Electric Thermal Solutions 24.6 13.8% 24.7 13.3%
Watson-Marlow 107.3 33.4% 95.8 31.8%
Corporate expenses (15.8) (15.7)
------------------------------------- ------------- --------------- ------------- ---------------
Adjusted operating profit 270.4 22.7% 282.7 22.8%
------------------------------------- ------------- --------------- ------------- ---------------
Post-retirement benefit plan
in the UK & Canada being
closed to future accrual 10.5 -
Restructuring costs (4.3) -
Amortisation of acquisition-related
intangible assets (26.6) (26.8)
Acquisition-related items - (2.6)
Reversal of acquisition-related
fair value adjustments to
inventory (1.0) (4.1)
Impairment of goodwill - (4.2)
------------------------------------- ------------- --------------- ------------- ---------------
Statutory operating profit 249.0 245.0
------------------------------------- ------------- --------------- ------------- ---------------
Revenue
Group sales in 2020 were GBP1,193.4 million (2019: GBP1,242.4
million), down 3% on an organic basis that reflects a strong
performance against a backdrop of between 4% to 5% contraction in
global industrial production. Currency movements had a 2% negative
effect on sales during the year, while the full year effect of
sales from Thermocoax, acquired in May 2019, resulted in a 1%
increase. Sales for the Group were down 4% compared to 2019.
Steam Specialties experienced an organic decline of less than
6%, reflecting the decline in global industrial production, with
sales in all three geographical reporting segments down
year-on-year: 7% in EMEA, 5% in Asia Pacific and 3% in the Americas
. Electric Thermal Solutions experienced a 12% organic sales
decline. Chromalox secured a US$14 million order from the US Navy,
the largest single order in Four Group's history, contributing to a
significantly larger order book at the end of the year.
Watson-Marlow had an excellent year, delivering organic sales
growth of 9%, as sales to the Pharmaceutical & Biotechnology
sector grew by 20%.
Adjusted operating profit and margin
Adjusted operating profit was GBP270.4 million (2019: GBP282.7
million), down 4% at reported exchange rates and 1% down on an
organic basis. Steam Specialties was down 9% compared with 2019 on
an organic basis, and a negative exchange impact resulted in profit
being 13% down on an adjusted basis. Electric Thermal Solutions was
down 11% on an organic basis and flat on an adjusted basis.
Watson--Marlow was up 15% organically and 12% up on an adjusted
basis, impacted by a currency headwind.
Currency movements negatively impacted adjusted operating profit
with translational losses of GBP8.9 million, and an additional
transactional loss of GBP3.1 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.
The net effect of the acquisition of Thermocoax in 2019 and the
disposal of ProTrace Engineering in the first half of 2020, added
1% to adjusted operating profit on a constant currency basis.
The Group adjusted operating profit margin of 22.7% was down 10
bps due to a negative currency impact. On an organic basis, the
adjusted operating margin improved by 40 bps.
Steam Specialties' adjusted operating profit margin was down 80
bps organically and 140 bps down on an adjusted basis due to the
impact of currency movements. Declines in adjusted operating profit
margin in EMEA and the Americas were partially offset by a 200 bps
organic increase in Asia Pacific. Electric Thermal Solutions was up
50 bps on an adjusted basis as a very positive contribution from
Thermocoax was partially offset by a small currency headwind and an
organic margin decline in Chromalox. Watson-Marlow was up by 160
bps driven by a strong 180 bps organic margin expansion.
Statutory operating profit and margin
Statutory operating profit of GBP249.0 million was up from
GBP245.0 million in 2019, primarily as a result of a GBP10.5
million credit from defined benefit retirement plans in the UK and
Canada being closed to future accrual. As a result, the statutory
operating profit margin of 20.9% was up 120 bps (2019: 19.7%).
Finance costs
Net finance costs increased slightly to GBP8.7 million from
GBP8.4 million in 2019. Net bank interest increased to GBP6.0
million from GBP4.9 million in 2019, due to the refinancing of the
Revolving Credit Facility and issuing of a private placement bond
in the second quarter.
Net costs under IAS 19 in respect of the Group's defined benefit
pension schemes decreased to GBP1.5 million (2019: GBP2.2 million).
The IFRS 16 interest charge for the year was GBP1.2 million (2019:
GBP1.3 million).
We anticipate total net interest charges to be at a similar
level in 2021.
Associates
The Group has one Associate holding, a 26.3% interest in
Econotherm, a heat pipe technology business. Econotherm's
performance weakened in 2020, with our share net of tax, falling to
a loss of GBP0.2 million (2019: GBP0.2 million profit).
Adjusted profit before tax
Adjusted profit before tax was GBP261.5 million (2019: GBP274.5
million), down 5% at reported exchange rates. On an organic basis,
adjusted profit before tax declined 1%.
Statutory profit before tax
The statutory profit before tax was GBP240.1 million (2019:
GBP236.8 million) and includes the items listed below that have
been excluded from the adjusted profit before tax:
-- a charge of GBP26.6 million (2019: GBP26.8 million) for the
amortisation of acquisition-related intangible assets;
-- a GBP1.0 million (2019: GBP4.1 million) reversal of acquisition-related
fair value adjustments to Thermocoax;
-- a credit of GBP10.5 million (2019: GBPnil million) resulting
from the defined benefit retirement plans in the UK and Canada
being closed to future accrual; and
-- a restructuring charge of GBP4.3 million (2019: GBPnil million)
relating to the reorganisation of Chromalox's French operations
and divestment of its small Canadian subsidiary, ProTrace.
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 decreased by
100 bps to 27.5% (2019: 28.5%), due to the claiming of additional
deductions in the year and innovation tax relief. 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 27.6%.
For 2021, we currently anticipate that based on the forecast mix
of adjusted profits, the Group effective tax rate will be
approximately 27%, absent a potential rise in the US Federal Tax
rate.
In April 2019, the European Commission's investigation into the
UK's Controlled Foreign Company regime concluded that certain
aspects constituted State Aid. This requires the UK tax authority
to recover the benefit from affected taxpayers and a Charging
Notice for GBP4.6 million was received on 1(st) March 2021. No
provision has been recognised and further details are included in
Note 5 to the Financial Statements.
Earnings per share
Adjusted basic earnings per share declined 3% to 256.6 pence
(2019: 265.7 pence). Statutory earnings per share were 235.5 pence
(2019: 226.2 pence). The fully diluted earnings per share were 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 53-year
record of dividend progress, with a compound annual increase of 11%
over that period and a 11% per annum increase over the last 10
years. The Board is proposing a final dividend of 84.5 pence per
share for 2020 (2019: 78.0 pence) payable on 21(st) May 2021 to
shareholders on the register at 23(rd) April 2021. Together with
the interim dividend of 33.5 pence per share (2019: 32.0 pence),
the total Ordinary dividend for the year is 118.0 pence per share,
an increase of 7% on the Ordinary dividend of 110.0 pence per share
in 2019.
The total amount paid in dividends during the year was GBP82.5
million, 8% above the GBP76.3 million paid in 2019.
Brexit
Despite the continuing uncertainty surrounding Brexit throughout
2020, its impact on market confidence was very quickly overshadowed
by the global pandemic. Overall, Brexit uncertainty had a
relatively limited impact on our business during 2020 as over 90%
of our sales and operating profit are generated outside the UK. In
2020, to mitigate the risk of delays at ports, we maintained over
GBP5 million of buffer stock of raw materials and components in the
UK and finished goods outside the UK.
We are well prepared and well placed to take on the challenges
and identify the opportunities resulting from the UK exiting 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 and the speed with
which we launch those products in-market, is an important element
of our strategy for growth. The Group's total spend on research and
development in 2020 was GBP12.7 million (2019: GBP13.4 million) of
which GBP2.7 million was capitalised (2019: GBP3.2 million).
Capital employed
2020 2019
Capital employed GBPm GBPm
----------------------------------------------- -------- --------
Property, plant and equipment 261.3 251.2
Right-of-use assets (IFRS 16) 36.3 40.8
Software & Development costs 37.1 36.2
Inventories 180.1 185.9
Trade receivables 226.3 240.7
Prepayments and other current assets 41.3 44.6
Trade, other payables, current provisions
and current tax (194.9) (205.0)
Capital employed 587.5 594.4
----------------------------------------------- -------- --------
Acquired intangibles including goodwill 665.6 685.4
Investment in Associate - 0.2
Post-retirement benefits (98.6) (71.3)
Net deferred tax (28.5) (43.1)
Non-current provisions and long-term payables (7.1) (5.2)
Lease liabilities (34.1) (38.9)
Net debt (228.8) (295.2)
Net assets 856.0 826.3
Adjusted operating profit 270.4 282.7
----------------------------------------------- -------- --------
Adjusted operating profit (excluding IFRS
16) 269.3 281.4
----------------------------------------------- -------- --------
Average capital employed 591.0 556.0
----------------------------------------------- -------- --------
Average capital employed (excluding IFRS
16) 552.5 535.6
----------------------------------------------- -------- --------
Return on capital employed 45.8% 50.8%
----------------------------------------------- -------- --------
Return on capital employed (excluding
IFRS 16) 48.7% 52.5%
----------------------------------------------- -------- --------
Total capital employed has decreased by 1% at reported exchange
rates and at constant currency. This compares with an organic sales
decline of 3%.
Tangible fixed assets (PPE and IFRS 16 right-of-use-assets)
increased by GBP5.6 million to GBP297.6 million.
Total working capital decreased by GBP13.4 million. The ratio of
working capital to sales (at constant currency) reduced by 40 bps
to 21.2% (2019: 21.6%), and the Group continued to hold over GBP5
million of Brexit buffer stock. Going forward, we anticipate
maintaining 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 45.8% (2019: 50.8%), due to the reduction in adjusted
operating profit and the full year effect of the adoption of IFRS
16. Excluding the effect of IFRS 16, ROCE declined 380 bps. At
constant currency, excluding acquisitions, disposals and IFRS 16,
ROCE declined by 350 bps. ROCE is defined in Note 2 to the
Financial Statements.
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 17.2% (2019: 18.7%), due to the reduction in adjusted
operating profit and the full year effect of the adoption of IFRS
16. Excluding the effect of IFRS 16, ROIC declined 130 bps. At
constant currency, excluding acquisitions, disposals and IFRS 16,
ROIC declined by 40 bps. ROIC is defined in Note 2 to the Financial
Statements.
Post-retirement benefits
The net post-retirement benefit liability under IAS 19 increased
to GBP98.6 million (2019: GBP71.3 million). Assets rose by GBP43.9
million (9%), reflecting greater than expected returns. Liabilities
rose by GBP71.2 million (13%), largely due to a change in market
conditions that resulted in reductions in the AA corporate bond
rates used to discount future cash flows.
The main UK schemes, which constitute 89% of assets, were closed
to new members in 2001 and closed to future accrual with effect
from 30(th) June 2020. 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. The Canadian scheme was also
closed to future accrual from 30(th) September 2020. Following
actuarial valuations of the three UK schemes, deficit reduction
programmes were agreed with the Trustees and contributions of
GBP4.0 million were made in 2020. The main UK scheme was subject to
an actuarial valuation during 2020 and total contributions for all
UK schemes in 2021 are expected to be GBP5.2 million.
Cash flow and treasury
2020 2019
Cash flow GBPm GBPm
------------------------------------------ -------- --------
Adjusted operating profit 270.4 282.7
Depreciation and amortisation (excluding
IFRS 16) 36.7 34.3
Depreciation of leased assets 12.1 11.3
Cash payments to pension schemes more
than the charge to adjusted operating
profit (3.9) (5.2)
Equity settled share plans 7.0 6.2
Working capital changes 13.4 (21.4)
Repayments of principal under lease
liabilities (12.2) (11.2)
Capital expenditure (including software
and development) (49.6) (62.4)
Capital disposals 1.9 3.8
------------------------------------------ -------- --------
Adjusted cash from operations 275.8 238.1
------------------------------------------ -------- --------
Net interest (7.2) (5.4)
Income taxes paid (71.9) (78.4)
Free cash flow 196.7 154.3
------------------------------------------ -------- --------
Net dividends paid (82.5) (76.3)
Purchase of employee benefit trust
shares/Proceeds from issue of shares (12.5) (12.5)
(Acquisitions)/Disposals of subsidiaries
& restructuring costs (9.4) (138.5)
Cash flow for the year 92.3 (73.0)
------------------------------------------ -------- --------
Exchange movements (25.9) 13.6
Opening net debt (295.2) (235.8)
Net debt at 31(st) December (excluding
IFRS 16) (228.8) (295.2)
IFRS 16 lease liability (34.1) (38.9)
Net debt and lease liability at 31(st)
December (262.9) (334.1)
------------------------------------------ -------- --------
Adjusted cash from operations is a measure of the cash flow
generated from our companies which reflects the components within
the control of local management. A reconciliation between this and
statutory operating cash flow can be found in Note 2 to the
Financial Statements.
Adjusted cash from operations improved by GBP37.7 million to
GBP275.8 million (2019: GBP238.1 million) representing 102% cash
conversion.
Movements in working capital are discussed in the Capital
Employed section.
The capital intensity of our business is low, with capital
expenditure typically between 4% and 6% of sales. During the year,
our capital expenditure was GBP49.6 million, equivalent to 4% of
sales. Capital expenditure decreased by GBP12.8 million,
principally as a result of expenditure incurred during 2019 on a
new purpose-built factory in the UK for Aflex. The Group continued
to invest during 2020 in other significant projects and development
of our digital capabilities.
We would expect capital expenditure in 2021 to be at the top-end
of our typical range as we invest in new production facilities for
Watson-Marlow and increase spending on projects such as OPAL.
Tax paid in the year decreased by GBP6.5 million to GBP71.9
million in line with the decrease in profitability during 2020 and
the reduction in the effective tax rate. Free cash flow increased
to GBP196.7 million (2019: GBP154.3 million) as a result of
improvements to working capital and the decrease in capital
expenditure and tax.
Dividend payments were GBP82.5 million, including payments to
minorities (2019: GBP76.3 million) and represent the final dividend
for 2019 and the interim dividend for 2020.
There was a cash outflow of GBP4.8 million related to deferred
consideration payable for the acquisition of Qonqave, a small
German pre-revenue company acquired in 2018 within Watson-Marlow as
well as an additional GBP4.6 million outflow relating to
restructuring within Electric Thermal Solutions. The net of share
purchases and new shares issued for the Group's various employee
share schemes resulted in a cash outflow of GBP12.5 million (2019:
GBP12.5 million) reflecting the move to acquire shares on the open
market rather than issue new equity.
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. While 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.
The fundamentals of our financial resilience
The operational and financial performance of our Group during
2020 - an unprecedented and challenging year - provides a strong
indicator of current and future resilience. Against the backdrop of
the global COVID-19 pandemic, we delivered a robust financial
performance and increased the dividend, while continuing to invest
in the capacity, capability, and quality of our businesses to build
a sustainable future.
Our products and solutions are used across a broad range of
industries and geographical markets, which links our business
performance to movements in global industrial production (IP). In
2020, global IP declined for only the second time in the last 20
years due to the effects of COVID-19. As in previous years, our
business model supported our outperformance against global IP due
to our ability to self-generate sales (accounting for 35% of sales)
and a significant base business in maintenance and repair sales
(accounting for 50% of sales). These sales are funded from our
customers' operating budgets. The remaining 15% of sales are
related to large projects, funded from customers' capital
expenditure budgets, which are more heavily influenced by economic
cycles. Over 55% of our sales are to defensive, less cyclical
sectors and no single customer accounts for more than 1% of Group
turnover.
Strong focus on cash generation and liquidity
We remain highly cash generative, delivering an exceptional 102%
cash conversion in 2020. This was delivered due to an inflow from
working capital as inventory and receivables were reduced through
our sustained focus on improving inventory efficiency and cash
collection, while also improving on our customer service
metrics.
The capital intensity of our business is low, with capital
expenditure typically between 4% and 6% of sales. During the year,
our capital expenditure was GBP49.6 million, equivalent to 4% of
sales, including investment in new manufacturing facilities for
Watson-Marlow.
This performance resulted in a strong year-end net debt
position, excluding leases, of GBP228.8 million (2019: GBP295.2
million) and a net debt to EBITDA ratio of 0.7 times (2019: 0.9
times). We successfully strengthened our balance sheet through a
planned refinancing programme in May, despite the impact of
COVID-19 on credit markets, raising a three year revolving credit
facility and adding new banks to the lending group as well as
issuing a US Private Placement bond. At the end of the year total
committed and undrawn debt facilities amounted to GBP350 million
and Cash & Cash Equivalents amounted to GBP224 million, giving
us headroom of GBP574 million. The average tenor of our debt is 2.5
years with the earliest contractual repayment in March 2022.
Resilience over the short, medium and long term
Our business model and the investments we have continued to make
in our business, combined with our high cash generation, position
us well to adapt to economic cycles. Our Going Concern and
Viability analysis gives us confidence in the robustness of our
business and our capital structure, even under downside
scenarios.
We have undertaken scenario-based modelling of our key risks,
which underpins our confidence in our short and medium-term
resilience. The continued implementation of our strategy, which has
been in place since 2014, supports our longer-term resilience and
we have continued to refresh this strategy, with a focus on the
changing economic, environmental and social factors and their
ability to impact our businesses in the future.
Going concern
The Group's business activities, together with the main trends
and factors likely to affect its future development, performance
and position (as well as the financial position of the Group, its
cash flows, liquidity position and borrowing facilities) are set
out in more detail in the Financial Review.
The Group has considerable financial resources and holds
contracts with a diverse range of customers and suppliers across
different geographical areas and industries.
The Group's Going Concern analysis looks at the 12-month period
from the signing of the Annual Report and Accounts. In order to
assess the Group's continued ability to trade as a Going Concern we
model both a reasonable 'worst case' scenario and a 'reverse
stress' scenario. Both scenarios support the Group's strong
positioning and ability to continue trading during the assessment
period.
The 'worst case' scenario is predicated upon an immediate 15%
reduction in Group revenue over a 12-month period, with limited
ability for the Group to respond through management of expenditure
or cashflow. This scenario is significantly more challenging than
the Group's recent experience of the impact of Covid-19 during 2020
as well as the impact of the 2008-9 financial crisis and hence is
considered to provide a reasonable 'worst case'. Under this
scenario the Group continues to trade profitably and does not
breach any of the Group's Financial Covenants.
The 'reverse stress scenario' is designed to calculate the
reduction in Group revenue, sustained over a 12-month period and
without offsetting management mitigations, which would be necessary
before the Group would breach its financial covenants. The
magnitude of this decline is considered highly unlikely,
particularly in light of the recent experience of the COVID-19
crisis, hence supporting the Group's Going Concern assertion.
The Group's credit facilities all have a leverage (defined as
net debt divided by adjusted earnings before interest, tax,
depreciation and amortisation) covenant of up to 3.5 times and the
Private Placements have an interest cover (defined as adjusted
earnings before interest, tax and amortisation divided by net bank
interest) covenant of more than 3.0 times. The Group regularly
monitors its financial position to ensure that it remains within
the terms of its covenants. As at 31(st) December 2020, interest
cover was more than 50 times and leverage was 0.7 times.
Taking all these factors into account, the Directors believe the
Group is well placed to manage its business risks successfully. The
Directors, having made appropriate enquiries, consider that the
Group has adequate resources to continue in operational existence
and that the Directors intend to do so, for at least one year from
the date the Financial Statements were signed, and that it is
appropriate to adopt the Going Concern basis in preparing the
Annual Report and Accounts.
Viability Statement
In accordance with provision 31 of the UK Corporate Governance
Code 2018, the Board has assessed the viability of the Group,
taking into account the Group's current financial position,
business strategy, the Board's risk appetite and the potential
impacts of the Group's principal risks. We set out the eight
principal risks we have identified in Note 1 to the Financial
Statements.
Based on this assessment, the Board confirms that it has a
reasonable expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due over the
three-year period to 31st December 2023.
The Board has adopted a three-year viability assessment, which
it believes to be appropriate as the timeframe is covered by the
Group's forecasts; takes into account the nature of the Group's
principal risks, a number of which are external and have the
potential to impact over short time periods; and is in alignment
with the Group's bank term-loan durations. While the Board has no
reason to believe that the Group will not be viable over a longer
period, given the inherent uncertainty involved, the Board believes
that a three-year period provides a reasonable degree of confidence
while still providing a longer-term perspective.
In making their assessment, the Board completed a robust
assessment, supported by detailed modelling, of the principal risks
facing the Group, including those that would threaten its business
model, future performance, solvency or liquidity. As part of the
review, sensitivity and stress testing were undertaken to determine
the potential impacts of the occurrence of one or more of the
principal risks on sales, profit, margin, balance sheet, cash and
return on capital employed. In addition to completing an impact
assessment of the principal risks, the Board considered the
probability of the occurrence of the principal risks, the Company's
ability to control them and the effectiveness of mitigating
actions. In every modelled scenario the Group is able to
demonstrate that it continues to remain viable.
While no Board can ever fully foresee all possible risks facing
the business in the future, the Board is of the view that a robust
assessment was undertaken of the severe but plausible scenarios
that may feasibly impact upon the business over the next three
years. Furthermore, the Board remains confident in the Group's risk
management process and the risk mitigation actions taken to address
identified risks.
Long-term resilience
The Group has a long track record, over 130 years, of
consistently adapting to changing macro-economic, environmental and
social factors supported by our business model. While our strategy
and business model lessen any material impact from our principal
risk factors, we nevertheless continuously review our markets,
listen to our customers and adapt our solutions, while working
responsibly and in line with our Values to build long-term
sustainability.
We recognise the need to anticipate and mitigate the impact of
climate-related change, although it is not classed as a principal
risk for our Group. In 2020, we refreshed our sustainability
strategy and appointed a Group Head of Sustainability, to
accelerate the implementation of our plans. We undertook analysis
to identify climate change risks which will be addressed through
our strategy.
Steam remains the world's most efficient heat transfer medium
with multiple on-site applications. We have a highly resilient
business and strategy that will remain relevant across different
climate-related scenarios, but we are not complacent and plan to
conduct further scenario and risk analysis at a business level
going forward. We continue to invest in research and development
into solutions which will reduce our environmental impact and
support our customers to reduce their energy use and carbon
emissions. We are exploring synergies within our thermal energy
management portfolio, which will enable us to combine core
capabilities from our Steam Specialties and Electric Thermal
Solutions businesses to develop our products and service
capabilities for quantifiable sustainability benefits. This will
enable us to support the evolving needs of our customers as they
seek to mitigate the impact of their operations on the
environment.
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
2020
8B Note 2020 2019* 1 January
GBPm GBPm 2019*
GBPm
----------------------------------------- -------- -------- -------- ----------
ASSETS
9B Non-current assets
Property, plant and equipment 261.3 251.2 230.8
Right-of-use assets 36.3 40.8 -
Goodwill 422.4 417.7 368.0
Other intangible assets 280.3 303.9 277.2
Prepayments 1.4 0.9 6.2
Investment in Associate - 0.2 -
Deferred tax assets 50.9 40.8 41.3
----------------------------------------- -------- -------- -------- ----------
1,052.6 1,055.5 923.5
----------------------------------------- -------- -------- -------- ----------
10B Current assets
Inventories 180.1 185.9 160.6
Trade receivables 226.3 240.7 245.1
Other current assets 31.8 35.3 32.9
Taxation recoverable 8.1 8.4 4.6
Cash and cash equivalents* 8 246.2 330.6 324.6
----------------------------------------- -------- -------- -------- ----------
692.5 800.9 767.8
----------------------------------------- -------- -------- -------- ----------
11B Total assets 1,745.1 1,856.4 1,691.3
----------------------------------------- -------- -------- -------- ----------
EQUITY AND LIABILITIES
12B Current liabilities
Trade and other payables 160.2 174.8 167.0
Provisions 6.1 3.5 5.0
Bank overdrafts* 8 22.2 162.3 137.9
Short-term borrowings 8 - - 15.7
Current portion of long-term borrowings 8 0.6 34.3 41.5
Short-term lease liabilities 8 10.3 11.1 -
Current tax payable 28.6 26.7 23.7
----------------------------------------- -------- -------- -------- ----------
228.0 412.7 390.8
----------------------------------------- -------- -------- -------- ----------
13B Net current assets 464.5 388.2 377.0
----------------------------------------- -------- -------- -------- ----------
14B Non-current liabilities
Long-term borrowings 8 452.2 429.2 365.3
Long-term lease liabilities 8 23.8 27.8 -
Deferred tax liabilities 79.4 83.9 76.8
Post-retirement benefits 98.6 71.3 85.1
Provisions 2.0 1.3 3.7
Long-term payables 5.1 3.9 2.7
----------------------------------------- -------- -------- -------- ----------
661.1 617.4 533.6
----------------------------------------- -------- -------- -------- ----------
15B Total liabilities 889.1 1,030.1 924.4
----------------------------------------- -------- -------- -------- ----------
16B Net assets 3 856.0 826.3 766.9
----------------------------------------- -------- -------- -------- ----------
17B Equity
Share capital 19.8 19.8 19.8
Share premium account 84.8 81.0 77.8
Other reserves (36.1) (10.6) 22.2
Retained earnings 786.5 735.1 646.0
----------------------------------------- -------- -------- -------- ----------
Equity shareholders' funds 855.0 825.3 765.8
Non-controlling interest 1.0 1.0 1.1
----------------------------------------- -------- -------- -------- ----------
18B Total equity 856.0 826.3 766.9
----------------------------------------- -------- -------- -------- ----------
Total equity and liabilities 1,745.1 1,856.4 1,691.3
----------------------------------------- -------- -------- -------- ----------
*The prior year comparatives for Cash and cash equivalents and
Bank overdrafts have been adjusted to reflect a reclassification to
meet the presentational requirements of IAS 32, with further detail
given within Note 1. This had no impact on the net assets of the
Group.
Spirax-Sarco Engineering plc
CONSOLIDATED INCOME STATEMENT FOR THE YEARED 31ST DECEMBER
2020
Adjusted Adj't* Total Adjusted Adj't* Total
Note 2020 2020 2020 2019 2019 2019
GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ------ -------- ------ -------- -------- ------ --------
2,
Revenue 3 1,193.4 - 1,193.4 1,242.4 - 1,242.4
Operating costs (923.0) (21.4) (944.4) (959.7) (37.7) (997.4)
----------------------- ------ -------- ------ -------- -------- ------ --------
2,
Operating profit 3 270.4 (21.4) 249.0 282.7 (37.7) 245.0
----------------------- ------ -------- ------ -------- -------- ------ --------
Financial expenses (10.1) - (10.1) (9.9) - (9.9)
Financial income 1.4 - 1.4 1.5 - 1.5
----------------------- ------ -------- ------ -------- -------- ------ --------
3,
Net financing expense 4 (8.7) - (8.7) (8.4) - (8.4)
----------------------- ------ -------- ------ -------- -------- ------ --------
Share of profit
of Associate (0.2) - (0.2) 0.2 - 0.2
----------------------- ------ -------- ------ -------- -------- ------ --------
Profit before taxation 261.5 (21.4) 240.1 274.5 (37.7) 236.8
Taxation 5 (72.0) 5.8 (66.2) (78.3) 8.5 (69.8)
----------------------- ------ -------- ------ -------- -------- ------ --------
Profit for the
period 189.5 (15.6) 173.9 196.2 (29.2) 167.0
----------------------- ------ -------- ------ -------- -------- ------ --------
Attributable to:
Equity shareholders 189.2 (15.6) 173.6 195.8 (29.2) 166.6
Non-controlling
interest 0.3 - 0.3 0.4 - 0.4
----------------------- ------ -------- ------ -------- -------- ------ --------
Profit for the
period 189.5 (15.6) 173.9 196.2 (29.2) 167.0
----------------------- ------ -------- ------ -------- -------- ------ --------
2,
Earnings per share 6
Basic earnings
per share 256.6p 235.5p 265.7p 226.2p
Diluted earnings
per share 255.8p 234.8p 264.9p 225.5p
----------------------- ------ -------- ------ -------- -------- ------ --------
Dividends 7
Dividends per share 118.0p 110.0p
Dividends paid
during the year
(per share) 111.5p 103.0p
----------------------- ------ -------- ------ -------- -------- ------ --------
*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 2020
2020 2019
GBPm GBPm
------------------------------------------------------- -------- -------
Profit for the year 173.9 167.0
-------------------------------------------------------- -------- -------
Items that will not be reclassified to profit
or loss:
Remeasurement (loss)/gain on post-retirement
benefits (40.2) 9.0
Deferred tax on remeasurement loss/(gain) on
post-retirement benefits 8.2 (1.4)
-------------------------------------------------------- -------- -------
(32.0) 7.6
------------------------------------------------------- -------- -------
Items that may be reclassified subsequently
to profit or loss:
Foreign exchange translation differences and
net investment hedges (24.5) (33.5)
Non-controlling interest foreign exchange translation
differences - (0.1)
(Loss)/profit on cash flow hedges net of tax (0.7) 3.3
-------------------------------------------------------- -------- -------
(25.2) (30.3)
------------------------------------------------------- -------- -------
Total comprehensive income for the year 116.7 144.3
-------------------------------------------------------- -------- -------
Attributable to:
Equity shareholders 116.4 144.0
Non-controlling interest 0.3 0.3
-------------------------------------------------------- -------- -------
Total comprehensive income for the year 116.7 144.3
-------------------------------------------------------- -------- -------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEARED 31ST
DECEMBER 2020
Share Share Other Retained Equity shareholders' Non- controlling Total
Capital 5B Premium reserves Earnings funds interest Equity
account GBPm GBPm
GBPm GBPm GBPm GBPm GBPm
------------------------ -------- ----------- --------- --------- -------------------- ---------------- -------
Balance at 1(st) January
2020 19.8 81.0 (10.6) 735.1 825.3 1.0 826.3
------------------------ -------- ----------- --------- --------- -------------------- ---------------- -------
Profit for the year 173.6 173.6 0.3 173.9
Other comprehensive
(expense)/income:
Foreign exchange
translation
differences and net
investment hedges - - (24.5) - (24.5) - (24.5)
Remeasurement loss
on post-retirement
benefits - - - (40.2) (40.2) - (40.2)
Deferred tax on
remeasurement
loss on post-retirement
benefits - - - 8.2 8.2 - 8.2
Cash flow hedges - - (0.7) - (0.7) - (0.7)
------------------------ -------- ----------- --------- --------- -------------------- ---------------- -------
Total other
comprehensive
expense for the year - - (25.2) (32.0) (57.2) - (57.2)
------------------------ -------- ----------- --------- --------- -------------------- ---------------- -------
Total comprehensive
(expense)/income for
the year - - (25.2) 141.6 116.4 0.3 116.7
------------------------ -------- ----------- --------- --------- -------------------- ---------------- -------
Contributions by and
distributions to owners
of the Company:
Dividends paid - - - (82.2) (82.2) (0.3) (82.5)
Equity settled share
plans net of tax - - - (8.0) (8.0) - (8.0)
Issue of share capital - 3.8 - - 3.8 - 3.8
Employee Benefit Trust
shares - - (0.3) - (0.3) - (0.3)
Transfer between - - - - - - -
reserves
------------------------ -------- ----------- --------- --------- -------------------- ---------------- -------
Balance at 31(st)
December
2020 19.8 84.8 (36.1) 786.5 855.0 1.0 856.0
------------------------ -------- ----------- --------- --------- -------------------- ---------------- -------
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 2019
Share Share Other Retained Equity shareholders' Non- controlling Total
Capital B 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
------------------------- -------- ---------- --------- --------- -------------------- ---------------- -------
Spirax-Sarco Engineering plc
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARED 31ST
DECEMBER 2020
Note 2020 2019
GBPm GBPm
---------------------------------------------- ----- -------- --------
19B Cash flows from operating activities
Profit before taxation 240.1 236.8
Depreciation, amortisation and impairment 75.4 76.6
(Profit)/loss on disposal of fixed assets (0.3) 0.4
Loss on disposal of subsidiary 0.4 -
Reversal of acquisition-related fair value
adjustments to inventory 1.0 4.1
Cash payments to the pension schemes greater
than the charge to operating profit (14.7) (5.2)
Equity settled share plans 7.0 6.2
Net financing expense 8.7 8.4
---------------------------------------------- ----- -------- --------
Operating cash flow before changes in
working capital and provisions 317.6 327.3
Change in trade and other receivables 15.1 2.4
Change in inventories 3.8 (23.8)
Change in provisions 3.3 (2.4)
Change in trade and other payables (8.7) 2.3
---------------------------------------------- ----- -------- --------
Cash generated from operations 331.1 305.8
Income taxes paid (71.9) (78.4)
---------------------------------------------- ----- -------- --------
Net cash from operating activities 2 259.2 227.4
---------------------------------------------- ----- -------- --------
20B Cash flows from investing activities
Purchase of property, plant and equipment (42.0) (50.9)
Proceeds from sale of property, plant
and equipment 2.2 3.4
Purchase of software and other intangibles (4.9) (8.3)
Development expenditure capitalised (2.7) (3.2)
Disposal of subsidiary (0.3) -
Acquisition of businesses net of cash
acquired 9 (4.8) (117.9)
Interest received 1.4 1.5
---------------------------------------------- ----- -------- --------
Net cash used in investing activities (51.1) (175.4)
---------------------------------------------- ----- -------- --------
21B Cash flows from financing activities
Proceeds from issue of share capital 2.0 2.1
Employee Benefit Trust share purchase (14.5) (14.7)
Repaid borrowings 8 (175.0) (80.2)
New borrowings 8 138.3 129.8
Interest paid (8.6) (7.0)
Repayment of lease liabilities 8 (12.2) (11.2)
Dividends paid (including minorities) 7 (82.5) (76.3)
---------------------------------------------- ----- -------- --------
Net cash used in financing activities (152.5) (57.5)
---------------------------------------------- ----- -------- --------
22B Net change in cash and cash equivalents 8 55.6 (5.5)
Net cash and cash equivalents at beginning
of period 168.3 186.7
Exchange movement 8 0.1 (12.9)
---------------------------------------------- ----- -------- --------
Net cash and cash equivalents at end of
period 8 224.0 168.3
Borrowings 8 (452.8) (463.5)
---------------------------------------------- ----- -------- --------
Net debt at end of period 8 (228.8) (295.2)
---------------------------------------------- ----- -------- --------
Lease liabilities 8 (34.1) (38.9)
---------------------------------------------- ----- -------- --------
Net debt and lease liabilities at end
of period 8 (262.9) (334.1)
---------------------------------------------- ----- -------- --------
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 2020 and 2019, although it is derived from those
accounts. Statutory accounts for the year ended 31(st) December
2019 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 2020 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 12(th) May 2021,
the final dividend will be paid on 21(st) May 2021 to shareholders
on the register at 23(rd) April 2021. No scrip alternative to the
cash dividends is being offered.
Copies of the Annual Report will be sent on 7(th) April 2021 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 .
As outlined below, there have been no significant changes in
accounting policies from those set out in the Spirax-Sarco
Engineering plc 2019 Annual Report. The accounting policies have
been applied consistently throughout the years ended 31(st)
December 2019 and 31(st) December 2020.
NEW STANDARDS AND INTERPRETATIONS ADOPTED IN THE CURRENT
YEAR
During the current year, the Group has applied a number of
amendments to IFRS Standards and Interpretations issued by the
International Accounting Standards Board (IASB) that are effective
for annual periods that begin on or after 1(st) January 2020. Their
adoption has not had a material impact on the disclosures or on the
amounts reported in these Financial Statements:
-- Amendments to References to the Conceptual Framework in IFRS
Standards;
-- Definition of a Business (Amendments to IFRS 3);
-- Definition of Material (Amendments to IAS 1 and IAS 8); and
-- Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39
and IFRS 7).
The Economy in Argentina remains subject to high inflation. At
31(st) December 2020 we have concluded that applying IAS 29
(Financial Reporting in Hyperinflationary Economies) is not
required as the impact of adopting it is not material. We will
continue to assess the position going forward.
NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED
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 IAS 1: Classification of liabilities as current
or non-current;
-- Amendments to IAS 16: Proceeds before intended use;
-- Amendments to IAS 37: Cost of fulfilling a contract; and
-- Annual Improvements to IFRS Standards 2018-2020 cycle.
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.
The transition away from London Inter-Bank Offered Rate (LIBOR),
and other Inter-Bank Offered Rates (IBORs) (together "IBOR Reform")
will remove IBOR as an interest rate benchmark for financial
instruments including the floating rate debt held by the Group.
There is uncertainty as to the timing and the methods of transition
for replacing existing IBOR benchmark rates with alternative rates.
The Group has considered whether hedge accounting relationships
continue to qualify for hedge accounting as at 31(st) December
2020. IBOR continues to be used as a reference rate in financial
markets and is used in the valuation of instruments with maturities
that exceed the expected transition deadline. Therefore, the Group
believes the current market structure supports the continuation of
hedge accounting as at 31(st) December 2020. The changes proposed
are not considered to have an immediate impact on the Group and we
will continue to monitor developments of IBOR Reform throughout
2021.
RECLASSIFICATION OF PRIOR PERIOD BALANCES
During the period, it was determined that the Group's cash and
overdrafts with notional cash pooling arrangements did not meet the
criteria for offsetting as set out in paragraph 42 of IAS 32
(Financial Instruments: Presentation) and therefore cannot be
presented net in the Statement of Financial Position. As a result,
for presentation purposes, amounts have been reclassified in the
comparative periods with the impact being an increase to both Cash
and cash equivalents and Bank overdrafts of GBP162.1m as at 31(st)
December 2019 and GBP137.5m as at 1(st) January 2019.
This change had no impact on the net assets of the Group.
GOING CONCERN
In determining the basis of preparation for the Consolidated
Financial Statements, the Directors have considered the Group's
available resources, current business activities and factors likely
to impact on its future development and performance, including the
impact of COVID-19 on the Group, which are described in the Chair's
Statement, Operating Review and Financial Review.
Following this assessment, the Board of Directors are satisfied
that the Group has sufficient resources to continue in operation
for the foreseeable future, a period of not less than 12 months
from the date of this report. Accordingly, they continue to adopt
the going concern basis in relation to this conclusion and
preparing the Consolidated Financial Statements.
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 2020 are set out below. Details of how they
link with the Group's strategy and how mitigation is managed will
be disclosed in the 2020 Annual Report.
-- 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 colleagues 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.
-- 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.
Loss of critical supplier and Health, safety and environmental
risks are no longer considered a principal risk but will continue
to be monitored.
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 including those defined as follows:
-- 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;
-- significant 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.
2020 2019
GBPm GBPm
------------------------------------------------------- ------ ------
Operating profit as reported under IFRS 249.0 245.0
Amortisation of acquisition-related intangible
assets 26.6 26.8
Impairment of goodwill - 4.2
Acquisition-related items - 2.6
Reversal of acquisition-related fair value adjustments
to inventory 1.0 4.1
Restructuring costs 4.3 -
Post-retirement benefit plans in the UK and Canada
being closed to future accrual (10.5) -
Adjusted operating profit 270.4 282.7
------------------------------------------------------- ------ ------
The related tax effects of the above are included as adjustments
in taxation as disclosed in Note 5.
Adjusted earnings per share
2020 2019
---------------------------------------------- ------ ------
Profit for the period attributable to equity
holders as reported under IFRS (GBPm) 173.6 166.6
Items excluded from adjusted operating profit
disclosed above (GBPm) 21.4 37.7
Tax effects on adjusted items (GBPm) (5.8) (8.5)
---------------------------------------------- ------ ------
Adjusted profit for the period attributable
to equity holders (GBPm) 189.2 195.8
---------------------------------------------- ------ ------
Weighted average shares (million) 73.7 73.7
---------------------------------------------- ------ ------
Basic adjusted earnings per share 256.6p 265.7p
---------------------------------------------- ------ ------
Diluted weighted average shares (million) 73.9 73.9
---------------------------------------------- ------ ------
Diluted adjusted earnings per share 255.8p 264.9p
---------------------------------------------- ------ ------
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.
2020 2019
GBPm GBPm
------------------------------------------------ ------ ------
Net cash from operating activities as reported
under IFRS 259.2 227.4
Acquisition and disposal costs - 2.5
Restructuring costs 4.3 -
Net capital expenditure excluding acquired
intangibles from acquisitions (47.4) (59.0)
Tax paid 71.9 78.4
Repayments of principal under lease liabilities (12.2) (11.2)
Adjusted cash from operations 275.8 238.1
------------------------------------------------ ------ ------
Adjusted cash conversion in 2020 is 102% (2019: 84%). Cash
conversion is calculated as adjusted cash from operations divided
by adjusted operating profit. The adjusted cash flow is included in
the Financial Review on page 28.
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
two financial measures on which Executive Directors' variable
remuneration is based.
Cash generation is adjusted operating profit after adding back
depreciation and amortisation, less cash payments to pension
schemes in excess of the charge to operating profit, equity settled
share plans, net capital expenditure excluding acquired
intangibles, working capital changes and repayment of principal
under lease liabilities. Cash generation is equivalent to adjusted
cash from operations, a reconciliation between this and net cash
from operating activities as reported under IFRS is shown on the
previous page.
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. Average invested
capital is defined as the average of the closing balance at the
current and prior year end.
An analysis of the components is as follows:
2020 2019
GBPm GBPm
----------------------------------------------- ------- -------
Total equity 856.0 826.3
Net debt 262.9 334.1
----------------------------------------------- ------- -------
Total invested capital 1,118.9 1,160.4
Average invested capital 1,139.7 1,081.6
----------------------------------------------- ------- -------
Average invested capital (excluding IFRS
16) 1,101.2 1,061.2
----------------------------------------------- ------- -------
Operating profit as reported under IFRS 249.0 245.0
Adjustments (see adjusted operating profit) 21.4 37.7
----------------------------------------------- ------- -------
Adjusted operating profit 270.4 282.7
Taxation (74.4) (80.6)
----------------------------------------------- ------- -------
Adjusted operating profit after tax 196.0 202.1
----------------------------------------------- ------- -------
Adjusted operating profit after tax (excluding
IFRS 16) 195.2 201.2
----------------------------------------------- ------- -------
Return in invested capital 17.2% 18.7%
----------------------------------------------- ------- -------
Return in invested capital (excluding IFRS
16) 17.7% 19.0%
----------------------------------------------- ------- -------
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. Average capital employed is defined as the average of the
closing balance at the current and prior year end. 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:
2020 0B 2019
GBPm GBPm
--------------------------------------- -------- --------
Property, plant and equipment 261.3 251.2
Right-of-use assets (IFRS 16) 36.3 40.8
Software & development costs 37.1 36.2
Prepayments 1.4 0.9
Inventories 180.1 185.9
Trade receivables 226.3 240.7
Other current assets 31.8 35.3
Tax recoverable 8.1 8.4
Trade, other payables and current
provisions (166.3) (178.3)
Current tax payable (28.6) (26.7)
Capital employed 587.5 594.4
--------------------------------------- -------- --------
Average capital employed 591.0 556.0
--------------------------------------- -------- --------
Average capital employed (excluding
IFRS 16) 552.5 535.6
--------------------------------------- -------- --------
Operating profit 249.0 245.0
Adjustments (see adjusted operating
profit) 21.4 37.7
--------------------------------------- -------- --------
Adjusted operating profit 270.4 282.7
--------------------------------------- -------- --------
Adjusted operating profit (excluding
IFRS 16) 269.3 281.4
--------------------------------------- -------- --------
Return on capital employed 45.8% 50.8%
--------------------------------------- -------- --------
Return on capital employed (excluding
IFRS 16) 48.7% 52.5%
--------------------------------------- -------- --------
A reconciliation of capital employed to net assets as reported
under IFRS and disclosed on the Consolidated Statement of Financial
Position is given below.
2020 2019
GBPm GBPm
---------------------------------------------- ------- -------
Capital employed 587.5 594.4
Goodwill and acquired intangibles 665.6 685.4
Investment in Associate - 0.2
Post-retirement benefits (98.6) (71.3)
Net deferred tax (28.5) (43.1)
Non-current provisions and long-term payables (7.1) (5.2)
Lease liabilities (34.1) (38.9)
Net debt (228.8) (295.2)
Net assets as reported under IFRS 856.0 826.3
---------------------------------------------- ------- -------
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.
2020 2019
GBPm GBPm
--------------------------------------- ------ ------
Net debt 228.8 295.2
IFRS 16 lease liabilities 34.1 38.9
Net debt and IFRS 16 lease liabilities 262.9 334.1
--------------------------------------- ------ ------
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 owned property, plant and equipment, software and
development costs to adjusted operating profit. Net debt is
calculated as Cash & cash equivalents less Bank overdrafts and
external borrowings (excluding IFRS 16 lease liabilities). The net
debt to EBITDA ratio is calculated as follows:
2020 2019
GBPm GBPm
------------------------------------------------- ------ ------
Adjusted operating profit 270.4 282.7
Depreciation and amortisation of property, plant
and equipment, software and development 36.7 34.3
EBITDA 307.1 317.0
------------------------------------------------- ------ ------
Net debt 228.8 295.2
------------------------------------------------- ------ ------
Net debt to EBITDA 0.7 0.9
------------------------------------------------- ------ ------
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.
The incremental impact of any acquisitions and disposals that
occurred in either the current period or prior period are excluded
from the results of the 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.
A reconciliation of the movement in revenue and adjusted
operating profit compared to the prior period is given below.
2019 Exchange Organic Acquisitions 2020 Organic Reported
and disposal
GBPm GBPm GBPm GBPm GBPm
------------------- ------- -------- ------- ------------- ------- ------- --------
Revenue 1,242.4 (27.2) (37.0) 15.2 1,193.4 -3% -4%
Adjusted operating
profit 282.7 (12.0) (3.4) 3.1 270.4 -1% -4%
Adjusted operating
margin 22.8% 22.7% +40 bps -10 bps
------------------- ------- -------- ------- ------------- ------- ------- --------
The reconciliation for each segment is included in the Review of
Operations on pages 12, 18 and 20.
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 managed and how information is presented to the
Board. This change resulted 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 changes to the
management structure in the prior year 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.
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
from 2019. No changes to the structure of operating segments have
been made during the current period.
Analysis by operating segment
2020
Revenue Total Adjusted Adjusted
operating operating operating
profit profit margin
GBPm GBPm GBPm %
---------------------------- -------- ----------- ----------- -----------
Steam Specialties 694.1 157.8 154.3 22.2%
Electric Thermal Solutions 178.0 4.8 24.6 13.8%
Watson-Marlow 321.3 102.2 107.3 33.4%
Corporate expenses (15.8) (15.8)
---------------------------- -------- ----------- ----------- -----------
Total 1,193.4 249.0 270.4 22.7%
---------------------------- -------- ----------- ----------- -----------
Net finance expense (8.7) (8.7)
Share of Loss of Associate (0.2) (0.2)
---------------------------- -------- ----------- ----------- -----------
Profit before tax 240.1 261.5
---------------------------- -------- ----------- ----------- -----------
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
------------------------------ -------- ----------- ----------- ---------------
The following table details the split of revenue by geography
for the combined Group:
2020 2019
GBPm GBPm
----------------------------------- -------- --------
1B Europe, Middle East and Africa 507.8 518.7
2B Asia Pacific 288.5 296.0
3B Americas 397.1 427.7
Total revenue 1,193.4 1,242.4
----------------------------------- -------- --------
Revenue generated by Group companies based in the USA is
GBP303.0 million (2019: GBP319.4 million), in China is GBP134.6
million (2019: GBP134.6 million) in the UK is GBP90.2 million
(2019: GBP103.5 million), in Germany is GBP109.8 million (2019:
GBP105.3 million) and the rest of the world is GBP555.8 million
(2019: GBP579.6 million).
The total operating profit for each period includes certain
items as analysed below:
2020
Amortisation Restructuring UK and Canada Reversal of Total
of acquisition-related costs pension plans acquisition-related
intangible closed to fair value
assets future accrual adjustments
to inventory
GBPm GBPm GBPm GBPm GBPm
------------------- ------------------------ -------------- ---------------- --------------------- -------
Steam Specialties (5.0) - 8.5 - 3.5
Electric Thermal
Solutions (14.5) (4.3) - (1.0) (19.8)
Watson-Marlow (7.1) - 2.0 - (5.1)
Total (26.6) (4.3) 10.5 (1.0) (21.4)
------------------- ------------------------ -------------- ---------------- --------------------- -------
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)
-------------------- ------------------------ -------------------- ------------- ------------------------ -------
Net financing income and expense
2020 2019
Income Expense Net Income Expense Net
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- ------- -------- ------ ------- -------- ------
Steam Specialties 1.3 (2.4) (1.1) 1.1 (3.3) (2.2)
Electric Thermal
Solutions - (0.3) (0.3) 0.1 (0.3) (0.2)
Watson-Marlow - (0.4) (0.4) 0.1 (0.5) (0.4)
Corporate expenses 0.1 (7.0) (6.9) 0.2 (5.8) (5.6)
--------------------- ------- -------- ------ ------- -------- ------
Total net financing
expense 1.4 (10.1) (8.7) 1.5 (9.9) (8.4)
--------------------- ------- -------- ------ ------- -------- ------
Net assets
2020 2019
Assets Liabilities Assets Liabilities
GBPm GBPm GBPm GBPm
------------------- -------- ------------ -------- ------------
Steam Specialties 640.8 (198.0) 669.4 (176.3)
Electric Thermal
Solutions 530.0 (27.5) 552.0 (36.3)
Watson-Marlow 269.1 (46.5) 255.2 (42.2)
------------------- -------- ------------ -------- ------------
1,439.9 (272.0) 1,476.6 (254.8)
Liabilities (272.0) (254.8)
Net deferred tax (28.5) (43.1)
Net current tax
payable (20.5) (18.3)
Net debt (262.9) (334.1)
------------------- -------- ------------ -------- ------------
Net assets 856.0 826.3
------------------- -------- ------------ -------- ------------
Non-current assets in the UK were GBP203.4 million (2019:
GBP187.1 million), in the USA were GBP350.8 million (2019: GBP375.8
million), in Germany were GBP168.9 million (2019: GBP165.0 million)
and in France were GBP148.9 million (2019: GBP146.5 million).
Capital additions, depreciation, amortisation and impairment
2020 27B 2019
Capital Depreciation, Capital Depreciation,
additions amortisation additions amortisation
and impairment and impairment
GBPm GBPm GBPm GBPm
---------------------------- ----------- ---------------- ----------- ----------------
Steam Specialties 34.5 36.4 57.7 35.8
Electric Thermal Solutions 3.8 20.8 81.6 18.4
Watson-Marlow 19.6 18.2 40.6 22.4
---------------------------- ----------- ---------------- ----------- ----------------
Group total 57.9 75.4 179.9 76.6
---------------------------- ----------- ---------------- ----------- ----------------
Capital additions include property, plant and equipment of
GBP42.0 million (2019: GBP59.0 million), of which GBPnil (2019:
GBP8.1 million) was from acquisitions in the period, and other
intangible assets of GBP7.6 million (2019: GBP72.0 million) of
which GBPnil (2019: GBP60.2 million) relates to acquired
intangibles from acquisitions in the period. Right-of-use asset
additions of GBP8.3 million occurred during the 12 month period to
31(st) December 2020, all of which relates to new leases entered
into during 2020. Capital additions split between the UK and rest
of the world are UK GBP28.2 million (2019: GBP36.8 million) and
rest of the world GBP29.7 million (2019: GBP143.1 million).
4. NET FINANCING INCOME AND EXPENSE
2020 2019
GBPm GBPm
-------------------------------------------- ------- ------
4B Financial expenses:
5B Bank and other borrowing interest
payable (7.4) (6.4)
6B Interest expense on lease liabilities (1.2) (1.3)
Net interest on pension scheme liabilities (1.5) (2.2)
-------------------------------------------- ------- ------
(10.1) (9.9)
-------------------------------------------- ------- ------
Financial income:
Bank interest receivable 1.4 1.5
-------------------------------------------- ------- ------
Net financing expense (8.7) (8.4)
-------------------------------------------- ------- ------
Net pension scheme financial expense (1.5) (2.2)
Interest expense on lease liabilities (1.2) (1.3)
Net bank interest (6.0) (4.9)
-------------------------------------------- ------- ------
Net financing expense (8.7) (8.4)
-------------------------------------------- ------- ------
5. TAXATION
2020 2019
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 13.8 - 13.8 14.1 - 14.1
Adjustments in respect
of prior periods (3.1) - (3.1) (1.1) - (1.1)
--------------------------- --------- ------ ------ --------- ----------------- ------
10.7 - 10.7 13.0 - 13.0
--------------------------- --------- ------ ------ --------- ----------------- ------
Foreign tax:
Current tax on income
for the period 60.4 - 60.4 56.9 - 56.9
Adjustments in respect
of prior periods 0.6 - 0.6 (0.1) - (0.1)
--------------------------- --------- ------ ------ --------- ----------------- ------
61.0 - 61.0 56.8 - 56.8
--------------------------- --------- ------ ------ --------- ----------------- ------
Total current tax charge 71.7 - 71.7 69.8 - 69.8
Deferred tax - UK 2.7 - 2.7 (0.1) - (0.1)
Deferred tax - Foreign (2.4) (5.8) (8.2) 8.6 (8.5) 0.1
--------------------------- --------- ------ ------ --------- ----------------- ------
Tax on profit on ordinary
activities 72.0 (5.8) 66.2 78.3 (8.5) 69.8
--------------------------- --------- ------ ------ --------- ----------------- ------
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 GBP5.8 million 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 (GBP6.3
million credit);
-- Reversal of acquisition-related fair value adjustments to inventory
(GBP0.3 million credit);
-- Costs related to the restructuring of Chromalox (GBP1.1 million
credit); and
-- Closure of defined benefit UK and Canada pension schemes to future
accrual (GBP1.9 million debit).
Excluding these adjustments, the tax on profit and the effective
tax rate are GBP72.0 m and 27.5% respectively.
In October 2017, the European Commission (EC) opened a State Aid
investigation into the UK's Controlled Foreign Company (CFC)
regime. In April 2019, the EC published its final decision that the
UK CFC Finance Company Exemption (FCE) constituted State Aid in
certain circumstances, following which the UK Government appealed
the decision. Similar to other UK companies, in October 2019, the
Group submitted its own appeal. The Group's benefit from the FCE in
the period from 1(st) January 2013 to 31(st) December 2020 is
approximately GBP8.6m including compound interest. On 1(st) March
2021, the Group received a Charging Notice issued by the UK tax
authority to recover a benefit of GBP4.6 million, assessed for the
period from 1(st) January 2017 to 31(st) December 2018. The Group
will make a payment in 2021 with the expectation that this is
refundable in the event of a successful appeal. The Group has not
received a Charging Notice for the balance of GBP4.0m, being
GBP2.8m for the period from 1(st) January 2013 to 31(st) December
2016 and GBP1.2m for the period from 1(st) January 2019 to the
balance sheet date. No provision has been recognised at the
year-end balance sheet date for either the Charging Notice amount
or for the estimates for the other periods.
On 3(rd) March 2021, the UK Government announced an intention to
increase the UK corporation tax rate to 25% with effect from 1(st)
April 2023. If enacted this will impact the value of our UK
deferred tax balances and the tax charged on UK profits generated
in 2023 and thereafter. We have yet to determine the full impact of
these proposed changes.
6. EARNINGS PER SHARE
2020 2019
Profit attributable to equity shareholders
(GBPm) 173.6 166.6
Weighted average shares (million) 73.7 73.7
Dilution (million) 0.2 0.2
Diluted weighted average shares
(million) 73.9 73.9
Basic earnings per share 235.5p 226.2p
Diluted earnings per share 234.8p 225.5p
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
2020 2019
GBPm GBPm
----------------------------------------------------- ------- -------
Amounts paid in the year:
Final dividend for the year ended 31(st) December
2019
of 78.0p (2018: 71.0p) per share 57.5 52.3
Interim dividend for the year ended 31(st) December
2020 of 33.5p (2019: 32.0p) per share 24.7 23.6
----------------------------------------------------- ------- -------
Total dividends paid 82.2 75.9
----------------------------------------------------- ------- -------
Amounts arising in respect of the year:
Interim dividend for the year ended 31(st) December
2020 of 33.5p (2019: 32.0p) per share 24.7 23.6
Proposed final dividend for the year ended 31(st)
December 2020 of 84.5p (2019: 78.0p) per share 62.3 57.5
----------------------------------------------------- ------- -------
Total dividends arising 87.0 81.1
----------------------------------------------------- ------- -------
8. ANALYSIS OF CHANGES IN NET DEBT, INCLUDING CHANGES IN
LIABILITIES ARISING FROM FINANCING ACTIVITIES
2020
At 1(st) Cash Acquired Exchange At
Jan flow debt* movement 31(st)
2020 Dec 2020
GBPm GBPm GBPm GBPm GBPm
---------------------------------- ---------- ------- --------- ---------- ----------
Current portion of long-term
borrowings (34.3) (0.6)
Non-current portion of long-term
borrowings (429.2) (452.2)
Short-term borrowings - -
---------------------------------- ---------- ------- --------- ---------- ----------
Total borrowings (463.5) (452.8)
---------------------------------- ---------- ------- --------- ---------- ----------
Comprising:
Borrowings (463.5) 36.7 - (26.0) (452.8)
Changes in liabilities arising
from financing (463.5) 36.7 - (26.0) (452.8)
---------------------------------- ---------- ------- --------- ---------- ----------
Cash at bank^ 330.6 (84.4) - - 246.2
Bank overdrafts^ (162.3) 140.0 - 0.1 (22.2)
---------------------------------- ---------- ------- --------- ---------- ----------
Net cash and cash equivalents 168.3 55.6 - 0.1 224.0
---------------------------------- ---------- ------- --------- ---------- ----------
Net debt (295.2) 92.3 - (25.9) (228.8)
---------------------------------- ---------- ------- --------- ---------- ----------
Lease liabilities (38.9) 12.2 (7.1) (0.3) (34.1)
---------------------------------- ---------- ------- --------- ---------- ----------
Net debt and lease liabilities (334.1) 104.5 (7.1) (26.2) (262.9)
---------------------------------- ---------- ------- --------- ---------- ----------
* Debt acquired includes both debt acquired due to acquisition,
and debt recognised on the balance sheet due to entry into new
leases under IFRS 16.
^ Prior period comparatives for Cash and cash equivalents and
Bank overdrafts have been adjusted to reflect a reclassification to
meet the presentational requirements of IAS 32, with further detail
given within Note 1. This had no impact on the net assets of the
Group.
The cash flow for borrowings net total of GBP36.7 million
consists of GBP138.3 million of new borrowings and GBP175.0 million
of repaid borrowings. This includes repayments of GBP32.0 million
and EUR96.2 million (GBP85.1 million) against a revolving credit
facility, repayments of US$25.8 million (GBP20.0 million) on the
US$200.0 million term loan, repayments of EUR41.7 million (GBP36.8
million) on the EUR50.0 million term loan, GBP32.0 million of new
drawings against a revolving credit facility and EUR120.0 million
(GBP106.1 million) of new drawings on a EUR120.0 million Private
Placement.
At 31(st) December 2020 total lease liabilities consist of
GBP10.3 million (2019: GBP11.1 million) short-term and GBP23.8
million (2019: GBP27.8 million) long-term.
2019
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^ 324.6 (5.7) - (12.9) 24.6 330.6
Bank overdrafts^ (137.9) 0.2 - - (24.6) (162.3)
--------------------------------- --------- ------- --------- ---------- ----------------- ----------
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)
--------------------------------- --------- ------- --------- ---------- ----------------- ----------
^ Prior period comparatives for Cash and cash equivalents and
Bank overdrafts have been adjusted to reflect a reclassification to
meet the presentational requirements of IAS 32, with further detail
given within Note 1. This had no impact on the net assets of the
Group.
9. PURCHASE AND DISPOSAL OF BUSINESSES
During the first quarter of 2020 the deferred consideration
payable for the acquisition of Qonqave, a small German pre-revenue
company, within the Watson-Marlow Fluid Technology business in 2018
was paid, for a value of EUR5.8 million (GBP4.8 million).
During the period, the fair value of the assets acquired as part
of the acquisition of Thermocoax Developpement and its related
group companies was reassessed. The outcome of this reassessment
was an increase to goodwill of GBP0.6 million.
On 5(th) March 2020, we completed the sale of ProTrace
Engineering, a small, non-core electrical engineering services
business in Canada to the existing management team. The total
impact of this in the Consolidated Income Statement was a cost of
GBP0.4 million which has been shown as an adjusting item as
disclosed in Note 2, included within restructuring costs.
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 2020. 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 9(th) March 2021 and is signed on its behalf by:
N.J. Anderson, Group Chief Executive N.B. Patel, 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 2019 and
2020.
Exchange rates to sterling have been as follows:
Average Average Change Closing Closing Change%
2020 2019 % 2020 2019
-------------------------- ---------- ---------- --------- ---------- ---------- ----------
Bank of England sterling
index 78.3 78.1 0% 78.5 80.3 +2%
US Dollar 1.29 1.28 -1% 1.37 1.32 -4%
Euro 1.13 1.14 +1% 1.12 1.18 +5%
Renminbi 8.93 8.83 -1% 8.94 9.23 +3%
Won 1,524 1,486 -3% 1,485 1,532 +3%
Real 6.67 5.04 -32% 7.08 5.33 -33%
Argentine Peso 91.65 61.83 -48% 114.92 79.32 -45%
A negative movement indicates a strengthening in sterling versus
that currency. When sterling strengthens against other currencies
in which the Group operates, the Group incurs a loss on translation
of the financial results into sterling.
On a translation basis, sales decreased by 2.2% and adjusted
operating profit decreased by 3.3%, while transaction also
decreased profit, giving a total reduction to profit from currency
movements of 4.4%.
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.
RNS may use your IP address to confirm compliance with the terms
and conditions, to analyse how you engage with the information
contained in this communication, and to share such analysis on an
anonymised basis with others as part of our commercial services.
For further information about how RNS and the London Stock Exchange
use the personal data you provide us, please see our Privacy
Policy.
END
FR DKCBKKBKBNNK
(END) Dow Jones Newswires
March 10, 2021 02:00 ET (07:00 GMT)
Spirax-sarco Engineering (LSE:SPX)
Historical Stock Chart
From Mar 2024 to Apr 2024
Spirax-sarco Engineering (LSE:SPX)
Historical Stock Chart
From Apr 2023 to Apr 2024