Release Date: March 11, 2020
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Strong organic sales growth across both Steam Specialties and Watson-Marlow businesses.
- Chromalox profit margin increased in the second half of 2019 to 15.1%, reflecting improved operational performance.
- Thermocoax acquisition expanded the Electric Thermal Solutions business, contributing to 15% of group revenues.
- Robust cash flow performance enabled significant capital investment while maintaining net debt levels below 1x EBITDA.
- Continued improvement in health and safety performance and sustainability metrics, with accelerated implementation of the group's sustainability strategy.
Negative Points
- Reported operating profit margin fell by 20 basis points to 22.8%.
- Overall tax rate increased to 28.5%, with an anticipated rise to 29% in the current year.
- Chromalox experienced a fall in profits on an organic level of GBP 4.5 million due to operational issues, particularly in Europe.
- Currency headwinds anticipated to impact sales by 2% and profits by 3% if February month-end rates are maintained.
- COVID-19 expected to cause a global headwind of 2% on sales and 4% on profits, with significant impact in the first half of the year.
Q & A Highlights
Q: In the past, you've been very defensive through periods of weaker growth, driven by the self-generated sales model. Is there any threat to that in a period where people are getting more cautious about letting people into their facilities due to COVID-19? Are you finding any issues in accessing customer premises?
A: Yes, where there have been outbreaks, our customers are also restricting access of external people and sometimes limiting the access of their own employees. This is a normal situation derived from COVID-19 and is seen as transitional. As soon as the outbreaks are contained, we expect to return to normal. We've seen this already in China, where the situation evolved rapidly from the beginning of February to March. We don't think this jeopardizes our business model; it's just a delay in activities.
Q: Regarding the outlook for Chromalox, given the current softness in the U.S. and the impact on the oil and gas markets, is there an additional concern as CapEx budgets get cut?
A: The exposure to the oil and gas industry for Chromalox is mid-teens percent of their sales, and for the group as a whole, it's around 7% to 8%. A lot of our work is at an OpEx level, involving maintenance, replacement, and small improvements, which continue even if capital budgets for expansions or new builds get delayed. Heat trace is about 1/4 of Chromalox's sales, and the more important part is industrial heaters and systems. So, while there are impacts from industry movements, it doesn't dramatically alter the competitiveness or outlook for the group.
Q: Can you talk a little bit about your outperformance in biopharma within Watson-Marlow? What is driving this, and are there M&A opportunities in this space?
A: The biopharma industry is booming with double-digit growth, and we've seen an acceleration in recent years. Watson-Marlow's share in this market has grown close to 50%, indicating we are gaining share. Our products are well-positioned, particularly in single-use applications. We continue to monitor M&A opportunities that fit our strategy and can supplement our organic growth. However, we don't predict M&A activities as it depends on availability and timing.
Q: Regarding the oil and gas sector, particularly in South Korea, how significant is this sector for your operations there?
A: While we haven't disclosed specific figures, oil and gas is an important part of our operations in Korea. We have a strong presence and long-standing relationships with top engineering, procurement, and construction companies. We are well-positioned to work on large projects in the region.
Q: Can you delve into the performance at Gestra, particularly given the weak core market? Have you managed to make market share gains?
A: Yes, we believe we have gained share in all geographies. In core markets like Germany and Central Europe, sales were flat due to tough conditions, but we still gained share. In the U.S. and Asia Pacific, Gestra achieved double-digit growth, indicating strong performance and share gains. The integration is progressing well, and we are meeting our objectives.
Q: What are the predominant exposures within the non-biopharma part of Watson-Marlow, and which sectors look most promising?
A: The main sectors are food and beverage, water and wastewater, environmental markets, medical devices, and OEM equipment. These sectors track more closely to global industrial production, unlike the biopharma sector, which has its own growth dynamics.
Q: What have been the bigger challenges in integrating Chromalox into Spirax, and are there opportunities for cross-selling?
A: Chromalox is similar to our steam business, serving the same markets with complementary technologies. We are rolling out revenue synergy opportunities, keeping sales organizations focused on their technologies but encouraging collaboration. For example, Chromalox's medium-voltage heaters for steam-generating boilers present exciting internal opportunities. Despite some delays, we are back on track and see significant potential.
Q: Regarding your medium-term growth strategy, where do you see further opportunities for converting distributors to direct sales? And if IP slowdown continues, what are the biggest risks to maintaining margins?
A: Opportunities for conversion vary across our businesses due to different maturity levels. Spirax-Sarco is more evolved with direct sales in 66 countries, while ETS has more opportunities globally. To counter IP slowdown, we are already implementing cost containment measures. Our biggest cost is labor, and we aim to manage this through natural churn rather than drastic cuts. Our business's resilience, with 85% of revenue from OpEx, helps maintain margins during downturns.
Q: How have customers responded to the current environment, particularly with COVID-19, compared to the end of last year?
A: The outbreak has led to severe actions by governments, especially in China. Customers have restricted access to plants, delaying order capture but not eliminating business. Our sales engineers maintain contact with customers, and we've supported critical sectors like healthcare during the crisis. We believe this is a temporary situation, and business will return to normal.
Q: Given the strong growth in Watson-Marlow, how should we think about its performance in 2020, especially in the context of your overall group guidance?
A: Watson-Marlow's biopharma sector is expected to continue growing strongly, while other sectors will track global IP. The high growth rates in 2019 set a tough comparison for 2020. We expect mid- to high single-digit organic growth for Watson-Marlow, considering the dynamics of both biopharma and other sectors.
Q: Can you provide more details on the changes in Chromalox Europe, particularly in France?
A: We have started a consultation process with Chromalox employees in France to improve operational performance, which may lead to a reduction in force. The goal is to get Chromalox's European operations back to at least breakeven by the end of next year. This is part of our broader efforts to recover Chromalox's profitability to expected levels.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
