Release Date: March 10, 2022
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Record revenues in 2021, with organic growth 13% above pre-pandemic levels.
- Exceptional 25.3% profit margin driven by strong sales growth.
- Significant progress in ESG initiatives, including a refreshed sustainability strategy and inclusion plan.
- Strong cash generation, reducing net debt to 0.35x EBITDA despite record capital investments.
- Watson-Marlow delivered outstanding results with 32% organic sales growth and 46% organic profit growth.
Negative Points
- Suspension of all trading with Russia due to geopolitical tensions, impacting 1% of group revenues.
- Challenges in Chromalox's European operations, which remain loss-making.
- Material cost inflation across various input commodities and components.
- Global supply chain disruptions impacting sales and operational performance.
- Increased revenue investments impacting profit margins, particularly in the second half of the year.
Q & A Highlights
Q: How quickly do you see higher energy prices translating into increased demand for your products?
A: Energy prices do impact our business. As energy prices rise, the incentive for customers to reduce energy consumption or improve efficiency increases, driving demand for our solutions. This process typically takes a few months as our sales engineers identify and address opportunities plant by plant.
Q: With the significant increase in CapEx, are you where you need to be now, or do you expect higher levels of CapEx to continue?
A: We are never fully where we need to be due to our high level of organic growth. We must stay ahead of the curve to respond to additional demand. Investments in capacity and modernization will continue, especially in Watson-Marlow, to support future growth.
Q: Can you reassure us that there won't be a significant drop in demand for Watson-Marlow given its exceptional growth?
A: The underlying growth in the biopharm sector, which has been around 10-14% per annum, remains strong. The COVID-19 demand wave is an additional factor, but the consistent growth in biopharm and process industries gives us confidence that there won't be a significant drop in demand.
Q: What is the update on the profitability of Chromalox in Europe, and what actions are being taken?
A: Chromalox Europe remains loss-making, but we are addressing operational issues to improve profitability. We are making progress, although not as quickly as desired. The issues are operational, and we are confident in our ability to fix them.
Q: Has the recent oil price increase driven demand from the oil and gas sector?
A: The oil and gas sector's demand is less elastic to energy price changes. Higher prices may lead to increased maintenance and efficiency improvements, but significant capital expansions are less likely. The sector's weighting in ETS has diminished since the acquisition.
Q: What is driving the growth in the process part of Watson-Marlow's business?
A: Growth is driven by geographic expansion and the displacement of other pumping technologies by our peristaltic pumps. Our R&D efforts have expanded the applications for our pumps, allowing us to gain market share from other technologies.
Q: With the record order book, is there a risk of pre-buying due to supply chain disruptions or anticipated price increases?
A: While some pre-buying may occur, especially in biopharm, the record order books are primarily driven by strong demand recovery and changes in consumer patterns. We manage price increases proactively to mitigate pre-buying impacts.
Q: What are your direct and indirect exposures to Russia and Ukraine?
A: Direct sales in Russia and Ukraine are less than 1% of group revenues. We have no manufacturing or suppliers in Russia, and indirect exposures through customers are also minimal.
Q: How are you managing labor challenges, especially in recruiting specialized salespeople?
A: Recruiting specialized salespeople remains challenging but manageable. We look for specific skills and values, and while it takes time, we are attracting talent. COVID-related absences have posed some challenges in manufacturing, but we are managing them effectively.
Q: With the balance sheet approaching breakeven, how do you plan to use excess cash?
A: We will continue to invest in our business and look for bolt-on acquisitions. If we have excess balance sheet capacity after these investments, we may consider returning capital to shareholders, as we have done in the past.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
