Release Date: August 10, 2023
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Spirax Group PLC (SPXSF, Financial) achieved strong organic sales growth of 11% despite weaker-than-expected Biopharm demand.
- Steam Specialties sales grew 15% organically, with an operating profit margin expansion of 190 basis points.
- The integration of recent acquisitions, Vulcanic and Durex Industries, is progressing well, with Vulcanic performing ahead of initial expectations.
- The company has made significant progress on its ESG agenda, achieving a 47% reduction in Scope 1 and 2 greenhouse gas emissions against its 2019 baseline.
- Spirax Group PLC (SPXSF) declared an 8% increase in the interim dividend to 46p per share, reflecting confidence in the group's underlying growth drivers.
Negative Points
- Group operating profit margin declined by 360 basis points to 20.2% due to lower sales in high-margin businesses like Watson-Marlow.
- Watson-Marlow sales declined 21% organically, significantly impacting operating profit.
- The company faces challenges in forecasting the precise timing and pace of recovery in Biopharm and Semicon demand, leading to a cautious full-year sales growth outlook of 0% to 4%.
- Net debt increased to GBP 748 million following last year's acquisitions, with leverage at 1.8x EBITDA.
- The company incurred restructuring cash costs of GBP 5 million and a software-related noncash impairment charge of GBP 14 million, impacting statutory results.
Q & A Highlights
Q: Looking at steam, you've flagged a lower rate of IP outperformance in H2. Can you add any color to how you think about pricing versus self-generated sales in the steam demand for H2?
A: Pricing is well embedded across our group, and we consistently track cost inflation to pass through to customers, protecting margins. Inflation has come off slightly, but we continue to manage pricing proactively. Additionally, some larger project orders expected in H2 were pulled into H1, and macroeconomic softness may impact the second half. (Nicholas J. Anderson, Group Chief Executive & Nimesh Balvir Patel, CFO)
Q: Regarding the destocking impact within Watson-Marlow, can you tell us the split between hardware and consumables? Also, what is the expected lifespan of a typical pump sold into the biopharm sector?
A: In the biopharm part of Watson-Marlow, consumables average around 40% of total sales. Hardware items like pumps are low-ticket but critical, often replaced rather than repaired. The rightsizing actions taken will yield benefits in the second half, with a full beneficial impact expected next year. (Nicholas J. Anderson, Group Chief Executive & Nimesh Balvir Patel, CFO)
Q: Have your expectations changed at all on the long-term dynamics for the biopharma and semis industries in terms of growth and margins?
A: No, our expectations remain robust. The underlying demand for drugs in the biopharma sector continues to be strong, and we see the current softness as temporary. Watson-Marlow has historically grown at a compound annual growth rate of 9%, and we expect it to continue growing at high single digits in the long term. (Nicholas J. Anderson, Group Chief Executive & Nimesh Balvir Patel, CFO)
Q: Can you give us more color on the strength of the order book in steam, especially given some project deferrals?
A: The strength of the steam order book speaks to the underlying strength of the business. While some larger projects were pulled forward into H1, the order book typically builds up in the first half and then comes off. Supply chain constraints are no longer a material issue. (Nicholas J. Anderson, Group Chief Executive & Nimesh Balvir Patel, CFO)
Q: How do you view the semicon market's recovery? Do you have any indication of the shape of that bounce back?
A: The semicon market is cyclical, and while we expect a recovery, the timing and magnitude are uncertain. We service the premium end of the chip market, which is less subject to swings. Our customers provide estimates, but these are subject to change. (Nicholas J. Anderson, Group Chief Executive & Nimesh Balvir Patel, CFO)
Q: Can you provide an update on your own inventories in Watson-Marlow?
A: We don't typically hold a lot of finished product stocks in Watson-Marlow sales companies. Most stocks are in the plants as components, which are assembled rapidly against orders. Therefore, we don't have a significant risk of a bullwhip effect within our own inventories. (Nicholas J. Anderson, Group Chief Executive & Nimesh Balvir Patel, CFO)
Q: Can you explain the lower depreciation year-over-year despite higher CapEx?
A: Depreciation is higher this year compared to last year due to investments in our facilities. The adjusted cash flow table in our press release provides details, showing an increase in depreciation, reflecting our ongoing investments. (Nimesh Balvir Patel, CFO)
Q: How do you see the margin of Watson-Marlow evolving in 2024?
A: As demand recovers, additional volume will drop through at a high percentage due to restructuring and cost containment. We expect higher margins in the second half of this year compared to the first half, with further improvement into 2024. However, margins may not reach the levels seen during the pandemic. (Nimesh Balvir Patel, CFO)
Q: Are there any remaining lower-margin orders in Chromalox's order book?
A: There are still some older lower-margin projects pending, but the quality of the order book has improved significantly due to better pricing. As we debottleneck and increase capacity, we expect margins to progress to appropriate levels. (Nicholas J. Anderson, Group Chief Executive)
Q: Can you provide more details on the energy transition order book?
A: We are not providing quantified guidance on the energy transition order book at this time. However, the sentiment is positive, and the level of inquiries is strong. These are complex projects that take longer to land and deliver. (Nicholas J. Anderson, Group Chief Executive)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
