Release Date: August 11, 2021
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Strong organic sales growth of 17% in the first half of 2021, driven by robust demand across all three business segments.
- Operating profit increased by 37%, with a record operating profit margin of 25.3%, reflecting excellent execution and cost management.
- Watson-Marlow business achieved exceptional organic sales growth of 35%, driven by high demand in the pharmaceutical and biotechnology sectors.
- Continued strong working capital management practices delivered good cash flow performance while supporting sales without compromising on capital investments.
- Launch of the comprehensive One Planet sustainability strategy, which aligns with the UN Sustainable Development Goals and aims to achieve net-zero greenhouse gas emissions by 2030.
Negative Points
- Currency headwinds negatively impacted sales and operating profit, with a 4% adverse impact on sales and more than 4% on operating profits.
- Increased revenue investments in the second half are expected to offset the positive operational gearing effect, leading to a flat margin in H2.
- Demand for larger projects, typically driven by customers' capital expenditure budgets, remained below pre-pandemic levels.
- Challenges in managing the expansion of capacity to meet the strong demand without incurring higher costs that could impact margins.
- Potential uncertainties in the global industrial production forecast due to the evolving COVID-19 pandemic, uneven vaccination rates, and varied economic responses by different governments.
Q & A Highlights
Q: On the margin guide for H2, can you provide additional thoughts on the significant step-up in investment and the impact of cost inflation?
A: The dampening of the second half margin is not due to cost inflation but rather due to revenue investments. These investments include additional personnel in sales, service, product development, sustainability, and digital areas. Our price and cost management practices are robust, allowing us to offset inflation and protect margins.
Q: Regarding ETS, is the lower organic sales growth in the first half due to different end markets and geographical spread?
A: Yes, the order intake growth in ETS was very strong, but the sales growth was lower due to longer delivery times for ETS products. This will even out in the second half, and we expect robust growth for the full year.
Q: Can you update us on the outlook for Watson-Marlow in 2022, given the strong performance in 2021?
A: We remain confident that Watson-Marlow will see sales and profit growth in 2022. While the margin may come down slightly due to exceptional performance in 2021, we do not expect a significant drop-off.
Q: Can you elaborate on the revenue investments and their impact on capacity and operational efficiency?
A: Revenue investments include expanding capacity across all three businesses to meet strong demand. These investments are aimed at ensuring we do not lose growth opportunities and are managed to protect margins. Capacity expansions are happening in steps, and we are focused on cost-effective implementation.
Q: How does the One Planet sustainability strategy impact commercial rewards and customer relationships?
A: The strategy enhances our ability to help customers improve their sustainability performance, which can lead to stronger commercial relationships. While commercial benefits are not the primary goal, they are a positive outcome of our comprehensive sustainability efforts.
Q: Can you provide more details on the synergies between ETS and Steam Specialties, particularly in energy storage solutions?
A: The combination of steam and electric heating technologies offers significant opportunities for decarbonizing industrial processes. For example, retrofitting existing steam boilers with electric heaters can eliminate scope 1 emissions. The thermal battery is another product combining technologies from both sides.
Q: How much of the Watson-Marlow biopharma demand is related to capital spend versus consumables?
A: Most of the increased demand is related to operational expenditures rather than new facility builds. Customers are expanding capacity within existing facilities and increasing shifts, which impacts consumable usage.
Q: What is the flexibility of the cost base in Watson-Marlow if demand fluctuates?
A: We have good flexibility in managing capacity and headcount. While we are expanding capacity to meet current demand, we can redeploy resources if there is a downturn. We are confident in our ability to manage costs effectively.
Q: What is the trajectory of ETS margins, and are there any changes in the performance of underlying assets?
A: We are on track to achieve above 20% margins for ETS over the next 4-5 years. We are making progress in improving operational performance and are confident in our plans.
Q: Can you provide more color on the process industries and medical devices segments of Watson-Marlow?
A: These segments are performing strongly, with growth well ahead of industrial production. The team continues to do an excellent job in these areas.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
