Release Date: March 09, 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 14% organic sales growth in 2022, driven by volume growth and price increases.
- All three business segments outperformed their markets, exiting the year with record-high order books.
- The company completed strategic acquisitions, including Vulcanic and Durex Industries, which are expected to enhance long-term growth prospects.
- Watson-Marlow segment saw a strong 16% organic sales growth, with significant contributions from the pharmaceutical and biotechnology sectors.
- The adjusted operating profit margin of 23.6% in 2022 is comparable to the highest margins in the company's history, excluding the exceptional 2021 margin.
Negative Points
- Global industrial production growth weakened significantly, impacting overall market conditions.
- Cash flow conversion was lower at 57%, driven by record capital expenditures and inventory rebuilding.
- The effective tax rate remained high at 25%, with expectations of a marginal increase in 2023.
- The company faced significant cost inflation in raw materials, energy, and freight, which required proactive price management to mitigate.
- Watson-Marlow's adjusted operating profit margin declined by 390 basis points due to the full-year impact of 2021 revenue investments and costs associated with new facility transitions.
Q & A Highlights
Q: Can you talk about the drivers of strong growth in Watson-Marlow's process industry side and expectations for 2023?
A: The growth is driven by Watson-Marlow's ability to expand its addressable market through new product development and acquisitions, displacing other pumping technologies. The process industries correlate to industrial production (IP) but also benefit from market share gains and globalization of the Watson-Marlow brand. Additionally, sectors like food and beverage and water/wastewater are resilient and fast-growing, contributing to outperformance.
Q: What is the reason for the strong exit rate into 2024 for Watson-Marlow, and how does the shift from COVID-related demand to gene and cell therapy impact margins?
A: The strong exit rate is due to rightsizing efforts and the impact of revenue investments kicking in during the second half. The shift to gene and cell therapy does not significantly impact margins as the same products used for COVID vaccines are repurposed for other drugs. The underlying demand for biopharmaceutical drugs remains strong, and the industry is expected to continue growing.
Q: Can you explain the profit bridge for 2023 and the impact of revenue investments and integration costs?
A: The group expects a small progression in the margin for 2023, with no significant impact from revenue investments as seen in 2022. Steam Specialties is expected to see margin improvement due to volume growth and operational gearing. Watson-Marlow's margin is expected to remain similar to 2022, while ETS's margin will be slightly below 18% due to integration costs for acquisitions.
Q: What are the order intake trends in the semiconductor sector for ETS, and how does it impact the business?
A: Demand in the semiconductor sector was strong last year but weakened towards the end. The acquisition of Durex Industries factored in this cycle. The reshoring of semiconductor production in the U.S. will benefit ETS, as major market leaders are key customers. The products sold are mission-critical and have a small value relative to the equipment, ensuring continued demand.
Q: How does the mix of larger CapEx-driven orders and regional performance impact Steam Specialties' margins?
A: Larger CapEx-driven orders, which account for about 15% of revenues, have slightly lower margins than the base business. However, the Asia Pacific region, which has a higher proportion of these orders, is a higher-margin business overall. The mix effect is not significant enough to cause major swings in margins.
Q: Are there any capacity constraints across the group, and how are they being addressed?
A: The only significant capacity constraint is in the Ogden plant of ETS, which is being addressed through a planned expansion. Investments in Watson-Marlow's manufacturing capacity have been made to support strong growth, and no other major constraints are expected for 2023.
Q: What is the price/volume split for 2022, and how should we think about it for 2023?
A: While the exact split is not disclosed, 2022 saw significant volume growth with price increases offsetting inflation. For 2023, mid-single-digit growth is expected with lower inflation, indicating continued volume growth.
Q: Why is there a need for capacity reduction in Watson-Marlow despite a positive outlook?
A: The capacity reduction is due to overinvestment in resources during the peak of demand. The rightsizing is aimed at aligning resources with the expected strong demand in the second half of 2023 and beyond, while protecting margins.
Q: How should we think about the margin progression for ETS beyond 2023?
A: The margin progression for ETS will continue as the legacy businesses (Chromalox and Thermocoax) improve. The newly acquired divisions (Vulcanic and Durex) will see margin improvements over a 2-3 year cycle as investments are made to bring them up to group standards.
Q: Can you provide more details on the customer acceptance of Target Zero Solutions and its impact on future growth?
A: Target Zero Solutions have seen strong interest, particularly in Europe. Some orders have already been taken and commissioned. The adoption rate is influenced by the cost differential between fossil fuels and electricity, but the shift towards decarbonization is expected to drive future growth.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
