TIDMSPX
RNS Number : 3719S
Spirax-Sarco Engineering PLC
09 March 2023
News Release
Thursday 9(th) March 2023
Strong performance in 2022; anticipate good growth in 2023
Statutory 2022 2021 Reported
-------------------------- ------------ ------------ ----------
Revenue (+) GBP1,610.6m GBP1,344.5m +20%
Operating profit GBP318.8m GBP320.9m -1%
Operating profit margin 19.8% 23.9% -410 bps
Profit before taxation GBP308.1m GBP314.5m -2%
Basic earnings per share 305.1p 318.3p -4%
Dividend per share 152.0p 136.0p +12%
Adjusted 2022 2021 Reported Organic*
-------------------------- ------------ ------------ --------- ---------
Revenue (+) GBP1,610.6m GBP1,344.5m +20% +14 %
Adjusted operating
profit GBP380.2m GBP340.3m +12% +7 %
Adjusted operating
profit margin 23.6% 25.3% -170 bps -160 bps
Adjusted profit before
taxation GBP370.6m GBP333.9m +11%
Adjusted earnings per
share 377.2p 338.9p +11%
Adjusted cash conversion 57% 82%
-- Revenues up 20% or 14% organically; driven by volume growth and price increases to protect
margins
-- Statutory operating profit down 1% due to revenue investments, ETS restructure and acquisition
costs
-- Adjusted operating profit of GBP380.2 million up 12% or 7% organically
-- Adjusted operating profit margin of 23.6%, down 170 bps due to revenue investments
-- Steam Specialties organic sales up 12%; Cotopaxi acquisition enhances Digital growth capabilities
-- Electric Thermal Solutions organic sales up 14%; strategic acquisitions of Vulcanic and Durex
Industries
-- Watson-Marlow organic sales up 16%; Biopharm** normalising, Process Industries up strongly
-- Net debt^ increased to 1.5x EBITDA* on a pro-forma basis, following ETS acquisitions
-- Adjusted cash conversion lower at 57% due to record capital investment and inventory rebuilding
-- Total dividend up by 12% to 152.0 pence; maintaining 55-year CAGR track record at 11%
Nicholas Anderson, Group Chief Executive, commenting on the
results said:
"The strong performance of our Group in 2022, delivering 14%
organic sales growth and 23.6% adjusted operating profit margin in
a volatile geopolitical and weakening macroeconomic environment, is
testament to the Group's robust strategies and business model, as
well as our resilience through economic cycles. All three
Businesses outperformed their markets while progressing our
sustainability and inclusion agendas. In 2022, we also completed
the strategic acquisitions of Vulcanic and Durex Industries that
significantly enhance the scale, competitive positioning and growth
prospects of the ETS Business.
"We remain confident in our ability to self-generate growth and
protect margins, while navigating the uncertainties ahead. In 2023,
we anticipate mid-single-digit growth over 2022 Group pro-forma
sales, with mid-to-high single digit growth in Steam Specialties
and ETS, as well as Watson-Marlow sales slightly below 2022.
Watson-Marlow's extraordinary COVID vaccine-related demand should
complete its normalisation cycle in 2023, with growth returning in
the second half. Therefore, we look forward to delivering another
year of overall double-digit sales growth, together with a small
progression in the Group's adjusted operating profit margin and
improved cash conversion."
(+) The term 'sales' is used interchangeably with 'revenue' when
describing the financial performance of the business.
* Organic measures are at constant currency and exclude
contributions from acquisitions and disposals (with our Russian
operating companies treated as disposals from the date at which the
Group suspended all trading with and within Russia).
^Net debt includes total borrowings, cash and bank overdrafts
but excludes lease liabilities, as set out in Note 8 to the
Financial Statements.
** Biopharm refers to sales made to the Pharmaceutical &
Biotechnology sector
See Note 2 to the Financial Statements for an explanation of
alternative performance measures.
For further information, please contact:
Nimesh Patel, Chief Financial Officer
Mal Patel, Head of Investor Relations
Audio webcast
The meeting with analysts will be available as a live audio
webcast at 9.00 am on the Company's website at
www.spiraxsarcoengineering.com or via the following link:
https://edge.media-server.com/mmc/p/8pxn2ptq and a recording
will be made available on the website shortly after the
meeting.
Conference Call
The meeting with analysts will also be available via a full
conference call with Q&A facility, at 9.00 am, participants
must register in advance using the provided link below:
https://register.vevent.com/register/BIfa826711e66447009d83ecb13b46511e
After completing the conference call registration, you will
receive dial-in details on screen and via email.
About Spirax--Sarco Engineering plc
Spirax--Sarco Engineering plc is a thermal energy management and
niche pumping specialist. It comprises three world--leading
Businesses: Steam Specialties, for the control and management of
steam; Electric Thermal Solutions, for advanced electrical process
heating and temperature management solutions; and Watson-Marlow,
for peristaltic pumping and associated fluid path technologies. The
Steam Specialties and Electric Thermal Solutions Businesses provide
a broad range of fluid control and process heating products,
engineered packages, site services and systems expertise for a
diverse range of industrial and institutional customers. Both
businesses help their customers improve process efficiencies, meet
environmental sustainability targets, improve product quality and
enhance the safety of their operations. Watson--Marlow provides
solutions for a wide variety of demanding fluid path applications
with highly accurate, controllable and virtually maintenance-free
pumps and associated technologies.
The Group is headquartered in Cheltenham (UK), has 40
strategically located manufacturing plants around the world and
employs more than 10,400 people, including more than 2,100 direct
sales and service engineers. The Company's shares have been listed
on the London Stock Exchange since 1959 (symbol: SPX) and it is a
constituent of the FTSE 100 and the FTSE4Good Indexes.
Further information can be found at
www.spiraxsarcoengineering.com
RNS filter: Inside information prior to release
LEI 213800WFVZQMHOZP2W17
Chair's Statement
Leading with Purpose
In a volatile year for the world's economies, the effects of the
deteriorating macroeconomic situation were felt across our global
societies, impacting our Group's stakeholders in many different
ways. In these more challenging times, the Board has remained
focused on ensuring the decisions we make create value for all our
stakeholders and is pleased with the Group's strong and resilient
performance.
During 2022, the Board engaged effectively and continued to
reflect stakeholder views in our decision making. This was
evidenced when making investment decisions such as increasing our
manufacturing capacity, improving our sustainability performance,
accelerating our Digital Strategy and the introduction of our Group
Inclusion Plan. The Board also considered the impact we have on
stakeholders when taking more difficult decisions, such as the
closure of our loss-making manufacturing facility in Soissons
(France) and the Group's withdrawal from Russia.
Our commitment to inclusion, equity and diversity
Our Board is diverse ethnically, culturally and in terms of
gender, bringing value to our Group, because of our Board members'
rich diversity of perspectives and experiences, enabling them to
better understand and consider the needs of all our
stakeholders.
At the end of December 2022, the Board met the 40% female
representation target and with three members of the Board coming
from a minority ethnic background, we exceeded the Parker Review
target of at least one individual. The Board composition was stable
during 2022 and our focus for the year was on Board consolidation
and succession planning for senior leadership.
Given the increasing importance placed on sustainability by all
stakeholders, the Board supported elevating the representation of
this area to the Group Executive Committee (GEC) level, with Sarah
Peers, Group Director of Sustainability, becoming a member of the
GEC effective 1st October 2022.
The Board was pleased to approve and oversee the implementation
of the Group's Inclusion Plan in 2022, noting the impact it is
already having across the Group. In 2022, we continued increasing
the number of women in senior roles across the Group and improving
gender balance in our senior leadership team (GEC plus their direct
reports) which reached 34% female representation by October 2022.
Although usual attrition and employee changes in the fourth quarter
reduced this to 32% at the year-end, we anticipate female
representation in our senior leadership will return to 34% by April
2023 and we remain committed to reaching at least 40% female
representation across our senior leadership. We are also pleased
that our global graduate programme again achieved its goal of 50%
female intake for the year.
To further strengthen our focus on inclusion and equity leading
to greater diversity in our Group, we approved a set of refreshed
Diversity goals at our December meeting. The goals are published in
our Annual Report and reaffirm our commitment to having a female
Chair, Senior Independent Director, Chief Executive or Chief
Financial Officer by the end of 2025, in line with the
recommendations of the FTSE Women Leaders Review (formerly
Hampton-Alexander).
We are fully supportive of the Group's continued activity to
champion these important societal changes. In 2022, Nimesh Patel,
Chief Financial Officer, became a Co-Chair of the FTSE Women
Leaders Review and Nicholas Anderson, Group Chief Executive, is now
an Ambassador for the 25x25 campaign, which is seeking to achieve
25 female CEOs in the FTSE100 by 2025. We became signatories to the
UN Women's Empowerment Principles and the UN LGBTI Standards of
Conduct for Business, building on previous commitments, including
as signatories to the Change the Race Ratio campaign which we began
supporting in 2021.
Although not yet required to do so, we have voluntarily reported
on all diversity and inclusion data which complies with the
Financial Reporting Conduct's new disclosure rules on this topic in
respect of Board composition. These disclosures are also published
in our Annual Report.
Board highlights
The Board met nine times in 2022. This included two ad hoc
meetings to address the acquisitions of Vulcanic and Durex
Industries. The Board was actively and directly involved in
progressing the Group's 'One Planet: Engineering with Purpose'
Sustainability Strategy. Other highlights in the year included
visits to three operating companies in the UK and USA. The Board
also reviewed and approved strategy updates for Digital and Health
& Safety. Eight colleague engagement focus groups were held and
the Board undertook a full organisational and succession review
down to the level of GEC-3.
The Board has overseen a year of significant investment to
support the Group's sustainable growth over the long term. In
addition to delivering a very strong financial performance, we are
pleased with the progress made by Executive Management in advancing
the Group's strategic agenda across different dimensions, creating
significant value for all our stakeholders in ways that are
meaningful to them.
In addition to three acquisitions designed to create
sustainable, long-term value for shareholders, the Group also
closed its loss-making Chromalox facility in Soissons (France) and
fully exited Russia. Investments in additional supply capacity,
factory modernisation, IT systems and Digital are helping our
Businesses do even better what they already do well. Our
collaborative and proactive approach has created mutual benefit
across our global supplier networks during these more challenging
times. The launch of new-to-world decarbonisation solutions,
created through a cross-Business collaboration between Steam
Specialties and Electric Thermal Solutions (ETS), will support our
customers to achieve their sustainability goals and protect our
environment. The Group launched its Inclusion Plan and global
commitments to ensure all 10,400 colleagues across the globe can
thrive by feeling included and supported. The outstanding efforts
of our teams working in support of our community engagement
framework 'Giving today for a better tomorrow', continue making a
positive difference to the local communities in which they
operate.
Board changes
On 31st January 2023, we reported that, for personal reasons,
Olivia Qiu stepped down as a Non-Executive Director. On behalf of
our shareholders the Board acknowledges with gratitude Olivia's
significant contribution since her appointment. We have initiated
the process to appoint another Non-Executive Director with the
skills and experience required to support the implementation of our
strategies and our commitments to inclusion and diversity.
Board effectiveness
In 2022, we conducted a Board effectiveness review with our
external advisors Egon Zehnder, which enabled us to evaluate
progress on the recommendations made in the 2021 review. The
conclusions were positive and showed an improvement across all the
key dimensions. The review highlighted the need for the Board to
allow more time for keeping up with industry trends and competitor
activity to better evaluate potential future risks and
opportunities.
Dividends
The Directors are proposing the payment of a final dividend of
109.5 pence per share, an increase of 12% (2021: 97.5 pence).
Subject to approval of the final dividend by shareholders at the
Annual General Meeting on Wednesday 10th May 2023, the total
Ordinary dividend for the year will be 152.0 pence per share, an
increase of 12% over the 136.0 pence per share for the prior
year.
Chief Executive's Review
ENGINEERING OUR DIFFERENCE
A war in Europe, global supply chain disruptions,
COVID-19-related economic slowdown in China, rising energy prices
and heightened inflationary pressures turned 2022 into a very
challenging year, contributing to a significant weakening in global
Industrial Production Growth (IP). I am, therefore, extremely proud
of the way in which our teams successfully navigated these
challenges to deliver strong financial results, as well as
advancing the implementation of our strategies to benefit all our
stakeholders.
We entered 2022 fully prepared for a softening in IP after the
very strong 7.7% expansion of 2021. However, Russia's attack on
Ukraine resulted in tragic consequences for the people of that
country, with the economic shock reverberating immediately around
the globe. The combined impact of further global supply chain
disruptions, as well as significantly higher energy costs, raised
inflation to levels the world has not seen in 40 years and
progressively weakened the global economic outlook throughout the
year. For the full year 2022, IP at 2.7% was materially lower than
the 4.4% forecasted in February 2022 ahead of our 2021 Full Year
Results.
Against this backdrop, all three Businesses outperformed their
markets to deliver strong double-digit organic sales growth. This
follows our Group's resilient performance during the COVID-19
pandemic in 2020, when we outperformed the IP decline, as well as
our subsequent double-digit growth in 2021 when the world began
recovering from the effects of the pandemic.
The Group adjusted operating profit margin of 23.6% in 2022, is
comparable to the highest margins achieved in our Company's
history, excluding the exceptional 25.3% adjusted operating profit
margin achieved in 2021.The difference, in line with our guidance
last year, is due to the full-year impact of the 2021 revenue
investments, in addition to investments made in 2022 to support
sustainable, future growth.
In what has been another incredibly busy year, we continued
placing the health, safety and wellbeing of our colleagues at the
centre of everything we do. This included expanding the role of the
Group Health & Safety Director and launching a new Group Safety
Framework. Disappointingly, our Lost Time Accident (LTA) rates (per
100,000 work hours) rose slightly to 0.12 in 2022, compared to the
all-time low rate of 0.10 in 2021. However, these rates are
materially lower than in prior years (0.23 in 2020 and 0.26 in
2019), which suggests the lower 2021 rate may have been a positive
anomaly vis-a-vis the Group's general trend.
I'm grateful for the commitment, expertise and efforts of our
teams across the world. Our colleagues, supported by our Company
Purpose, strong culture and Values, robust business model and
strategy, have once again demonstrated the resilience of our Group
that remains well positioned to continue growing and adapting to
economic cycles. In 2022, this resilience helped us deliver a
strong financial performance, while creating benefits for all
stakeholders through our sustainability and inclusion
initiatives.
Self-generating growth
Our long track record of helping customers meet their
efficiency, safety and sustainability goals, through our direct
sales model and solutions focus, became even more critical in 2022
amidst swiftly rising energy prices, as well as the increasing
demand from customers seeking to decarbonise their industrial
processes in line with net zero commitments.
Our direct sales business model, which always involved 'walking
our customers' sites' and now includes 'walking our customers'
data', through the evolution of our digital capabilities, is highly
effective at uncovering opportunities to improve the efficiency and
effectiveness of our customers' processes.
These self-generated solutions are becoming a larger part of our
sales mix and remain attractive even during challenging economic
times, as they are typically paid for from customers' operating
budgets and have a short payback period. Approximately 85% of Group
sales continue to be funded from our customers' operational
budgets.
The increasing commitments to net zero targets will have a
profound effect on industrial activity over the coming decades and
is an additional source of growth for our Group over at least the
next 30 years. To address the opportunities arising from the
decarbonisation of industrial processes, we have invested
significantly in the development of sustainable products and
solutions that help customers meet their own sustainability goals.
In 2022, we launched new-to-world ' TargetZero' decarbonisation
solutions, created through an internal collaboration between Steam
Specialties and Electric Thermal Solutions (ETS). You can read more
about the benefits of the three ' TargetZero ' solutions, branded
'ElectroFit', 'Steam Battery' and 'SteamVolt', on page 21 of the
Operating Review.
The scale of the decarbonisation opportunity is unprecedented,
as direct burning of fossil fuels is the most prevalent manner of
transferring thermal energy into industrial processes and only 5%
of industrial process heating is currently generated by
electricity. There are, however, several factors that will
influence the adoption rate of decarbonisation solutions. Most
notably, the rates of progress towards net zero in different
countries, the infrastructure requirements and the capacity to
deliver that infrastructure quickly, as well as the relatively
higher costs of electricity compared to hydrocarbon fuels. It is
still too early in the cycle to predict the precise rate of
adoption, which is why we anticipate this opportunity will play out
globally for at least the next 30 years.
Delivering value to all our stakeholders
Our strategy seeks to achieve organic revenue growth that
consistently outperforms our markets. In the Operating Review
section, you can read more about how each of our three Businesses
are advancing the implementation of their strategy in line with our
six strategic themes.
I am delighted with the progress made on all fronts during 2022,
as we worked hard and in challenging circumstances to engineer our
difference for all our stakeholders.
Colleagues
We continued to invest in the development and wellbeing of our
colleagues to help them feel supported and included. We believe
that diverse teams bring diversity of thought and experience,
helping us become a better and higher performing business. Combined
with an inclusive and equitable working culture, this fuels our
continued growth, creating opportunities for everyone.
In February 2022, our Group Inclusion Plan, 'Everyone is
Included' became effective. This gives all colleagues, everywhere,
the opportunity to benefit from our ten Group Inclusion
Commitments. The impact of ' Everyone is Included' has been far
reaching and made a tangible difference to the lives of many
colleagues who tell us they feel more welcomed, included and proud
of our Group.
In September 2022, we recognised the impact of the
cost-of-living crisis on colleagues worldwide and brought forward
our annual pay review from March to January 2023. We set
above-market pay increases country-by-country at levels designed to
materially mitigate the purchasing power eroded by inflation, which
for the UK meant a pay increase of 7.1% for the wider employee
base, which excluded senior executive leaders who received a
reduced pay increase. Following its success in 2022, we also
awarded another paid Wellbeing Day in 2023 to all colleagues
globally.
In December 2022, the Board approved a refreshed set of
Diversity goals. Our focus on inclusion remains a priority and
these Diversity goals will help accelerate our progress in support
of sustainable growth.
Customers
To keep delivering for our customers, we strengthened our direct
business model by investing in the expansion and training of our
direct sales teams, in digital technology solutions and introduced
multiple new products, including innovative new-to-world
decarbonisation solutions.
To better serve our customers, we expanded our manufacturing
capacity and increased our regional supply chain capabilities. Our
capital investments in 2022 included a significant proportion of
our US$106 million investment in a 14,000m(2) state-of-the-art,
sustainable, multi-brand manufacturing facility for Watson-Marlow
in Devens, Massachusetts (USA). In 13 months the project went from
'breaking ground' to 'first customer shipment' in December 2022.
This facility, which will shorten supply chains and provide
enhanced support for customers across the Americas, is scheduled to
ramp-up during 2023.
A new facility for Watson-Marlow's BioPure brand was also
completed in 2022 to support increased demand from customers in the
Biotechnology & Pharmaceutical sector. The GBP37 million
facility located in Portsmouth (UK), shipped its first customer
deliveries at the end of the Q1 2022 and has enabled BioPure to
double its previous output.
We are planning a US$58 million investment in ETS to materially
expand the existing manufacturing facility at Ogden, Utah (USA).
The new 9,600m(2) extension will expand the current footprint by
almost 60% and is scheduled to complete by the end of 2024.
Around the Group, we also invested significantly in equipment
modernisation and process automation to support and expand our
manufacturing capacity.
Environment
Since refreshing our sustainability goals in June 2021,
including our commitment to achieve net zero emissions in scopes 1
and 2 by 2030, we made good progress in line with our targets.
Through our 'One Planet: Engineering with Purpose' Sustainability
Strategy, we continued to build on our responsible business
foundations and have successfully embedded across the Group our six
sustainability initiatives. These focus on net zero greenhouse gas
(GHG) emissions, biodiversity net gain, improved environmental
performance of our operations, sustainable products, supply chain
sustainability and community engagements, with good progress made
in every area.
We are executing on our net zero roadmap for 2030. By the end of
2022, we reduced our GHG emissions by 41%, compared to our 2019
baseline. We also introduced a new electric vehicle leasing portal
in the UK, as the first step towards a global transition to
electric vehicles across the Group. Other highlights of our
sustainability progress include the introduction of self-generation
of renewable energy at four of our manufacturing sites and that 57%
of our electricity use now comes from renewable sources, largely
through green energy contracts. To protect biodiversity, we
partnered with the World Land Trust for a second consecutive year
to offset by 1x our global operating footprint, as well as our
colleagues implementing a further 78 biodiversity projects across
our Group operating companies in 2022.
During 2022, we saved our customers 17.7 million tonnes of CO(2)
, 235 million GJ of energy and 88.4 million m(3) of water through a
select range of product categories sold, as well as launching our
new-to-world 'TargetZero' decarbonisation solutions. You can read
more about our commitment to sustainability, as well as the
progress we are making, in our Annual Report.
Communities
Through our community engagement programme 'Giving today for a
better tomorrow' , our teams have gone above and beyond in our
local communities, using their paid volunteering leave to deliver
more than 22,000 volunteering hours while our Group-wide charitable
giving (cash and in-kind) exceeded GBP900,000. In addition, we
supported 51 community projects nominated by colleagues across the
Group, through donations of over GBP1 million by our new Group
Education Fund. The Fund, which aims to provide equitable access to
education, is particularly focused on helping women and girls
achieve their potential and encouraging pathways to careers in
science and engineering through a variety of grass roots
initiatives.
Suppliers
During the year, we relaunched our Supplier Sustainability Code
in 17 languages and started to roll out a new Supplier
Sustainability Portal to support our collaborative journey towards
a more sustainable supply chain. Double-digit inflation in certain
raw materials led to challenges for our suppliers too, as some
companies struggled to manage the impacts of such sharp price
increases. Recognising this, we supported our suppliers through
these challenging and uncertain times, de-risking their businesses
by flexing our pricing agreements while maintaining our supply of
raw materials and components.
Shareholders
We invested close to GBP540 million in three important
acquisitions to accelerate the implementation of our Digital
Strategy and expand our ETS Business.
The acquisition of Cotopaxi, a digitally-enabled global energy
consulting and optimisation company, is enabling Steam Specialties
to digitally enhance its customer bonding through the provision of
physical and digital connections to customers' infrastructure and
equipment, using Cotopaxi's proprietary STRATA platform. STRATA
generates critical insights that are used to better understand
industrial customers' management and use of Water, Air, Gas, Energy
and Steam (WAGES). We are also installing Cotopaxi's solutions
across our Group manufacturing sites to improve our own WAGES
efficiency, in line with our sustainability targets.
To support the growth of ETS, Vulcanic and Durex Industries
became part of our Group on 29th September and 30th November,
respectively. Vulcanic is a European leader in industrial process
heating solutions and Durex Industries, based in the USA, is a
specialist in custom electric thermal solutions for ultra-critical
applications of industrial equipment. Vulcanic and Durex Industries
have rebalanced the geographic footprint of ETS between the USA and
Europe, adding an additional 11 manufacturing sites.
The acquisitions also support a more effective deployment of the
ETS strategy, 'Engineering Premium Solutions'. The introduction of
dual brand strategies, which has proven to be highly successful for
the Steam Specialties Business with Spirax Sarco and Gestra, aligns
each brand with their chosen strategic market sectors for
growth.
As the lead brands within ETS for electric process heating,
Chromalox and Vulcanic will support the effective deployment of our
industry-leading decarbonisation solutions alongside Steam
Specialties. Thermocoax and Durex Industries are the lead brands
for ultra-critical heating solutions for industrial equipment,
being well positioned to capitalise on the growing demand for
increasingly stringent thermal energy requirements in
high-technology equipment within market sectors with high barriers
to entry.
The acquisitions of Vulcanic and Durex Industries added over
1,100 colleagues. The integration of both companies mirrors the
successful integration processes deployed on previous acquisitions
and builds upon lessons learnt. Integration began immediately
following completion and we are very encouraged by the positive
engagement by new colleagues, as well as constructive
collaborations already unfolding. These acquisitions have
significantly grown ETS which now accounts for 22% of Group
revenues on a pro-forma basis. Steam Specialties and
Watson-Marlow's share of Group revenues accordingly reduced to 50%
and 28% respectively.
More details on Cotopaxi are provided on page 20 of the
Operating Review and on pages 22 and 23 we have set out more
details about Vulcanic and Durex Industries.
The role of digital technologies for our Group is to enhance our
existing business model across the four main adaptive processes of
customer targeting, operational effectiveness, innovation and
people management. During 2022 we completed the development of our
Digital Strategy, as well as its implementation framework. We also
recruited an experienced Digital leader who joined in early March
2023 to accelerate the implementation of our Digital Strategy
across the Group.
We also invested in new technologies, systems and controls to
improve efficiencies, communications and collaboration, as well as
strengthen our resilience. This includes ERP, BI and CRM systems,
product configurators, a new colleague engagement platform, smart
manufacturing capabilities and enhanced internal controls
capabilities. We also strengthened cyber defences and operational
IT, as well as laying the foundations for the IT integration of
Vulcanic and Durex Industries.
All of these initiatives contributed to a stronger, more
balanced and more sustainable Group that delivered differentiated
financial returns to shareholders in 2022 and is well positioned
for the future.
Financial Review
The Group reports under International Financial Reporting
Standards (IFRS) and references 'adjusted' and 'organic'
alternative performance measures where the Board believes that they
help to effectively monitor the performance of the Group and
support readers of the Financial Statements in drawing comparisons
with past performance. Certain alternative performance measures are
also relevant in calculating a meaningful element of Executive
Directors' variable remuneration and our debt covenants.
Alternative performance measures referenced in the text below are
further explained in Note 2 to the Financial Statements. The term
'adjusted' is not defined under IFRS and may therefore not be
comparable with similarly titled measures reported by other
companies. Alternative performance measures are not considered to
be a substitute for, or superior to, IFRS measures.
As a multi-national Group of companies, we trade in a large
number of currencies and occasionally acquire or dispose of
companies. Therefore, we also refer to 'organic' alternative
performance measures, which strip out the effects of the movement
of currency exchange rates and of acquisitions and disposals not
included in the prior year. The Board believes that these measures
allow readers of the Financial Statements to gain a further
understanding of how the Group has performed.
Summary of performance in 2022
2021 Exchange Organic Acquisitions 2022 Organic Reported
& disposals*
Revenue GBP1,344.5m GBP52.5m GBP191.6m GBP22.0m GBP1,610.6m +14% +20%
------------ --------- ---------- -------------- ------------ -------- ---------
Adjusted operating profit GBP340.3m GBP13.0m GBP23.5m GBP3.4m GBP380.2m +7% +12%
------------ --------- ---------- -------------- ------------ -------- ---------
Adjusted operating profit -160 -170
margin 25.3% 23.6% bps bps
------------ --------- ---------- -------------- ------------ -------- ---------
Statutory operating profit GBP320.9m GBP318.8m -1%
------------ --------- ---------- -------------- ------------ -------- ---------
-410
Statutory operating margin 23.9% 19.8% bps
------------ --------- ---------- -------------- ------------ -------- ---------
*Results include the impact of (i) the acquisition of Cotopaxi,
Durex Industries and Vulcanic and (ii) the treatment of our Russian
operating companies as disposals from the date at which the Group
suspended all trading with and within Russia.
Sales
Group sales increased by 20% to GBP1,610.6 million (2021:
GBP1,344.5 million), up 14% organically. Currency movements and
acquisitions (net of the disposal of our Russian operations) both
had a positive effect on sales of 4% and 2%, respectively.
Organic sales growth was significantly ahead of global IP of
2.7% across all three Businesses as we successfully navigated
global supply chain disruptions and a weakening macroeconomic
environment to deliver a strong increase in volumes. Our proactive
price management practices also allowed us to offset significant
inflation in raw material costs, protecting our adjusted operating
profit margin.
Steam Specialties sales of GBP866.0 million (54% of Group
revenue) grew 15% in 2022 or 12% organically. This very strong
performance, significantly ahead of IP, was delivered despite the
challenging macroeconomic environment. Demand growth exceeded sales
growth across all Divisions, with a higher proportion of larger
orders compared to 2021, as customers' capital expenditure
continued to recover from pandemic-driven reductions.
Electric Thermal Solutions (ETS) sales of GBP256.1 million (16%
of Group revenue) grew 41% or 14% on an organic basis, with the
difference due to currency movements and acquisitions that had a
positive effect of 7% and 18%, respectively. Strong organic growth
in both Thermocoax (driven by the Semiconductor and Aerospace &
Defence sectors) and Chromalox (led by decarbonisation solutions)
was achieved despite continuing disruptions in the global supply
chain, although these constraints began to ease in the second half
of 2022.
Chromalox's manufacturing facility in Ogden, Utah (USA) remained
capacity constrained as it transitions to focus on more complex and
bespoke industrial heating solutions, supporting the
decarbonisation of buildings and industrial processes. During the
year, we continued investing in further operational improvements as
well as increasing capacity in Ogden. These factors, together with
strong demand growth, resulted in ETS carrying a record order book
into 2023, underpinning sales in the year ahead.
We completed the acquisitions of Vulcanic and Durex Industries
towards the end of the year with both companies delivering strong
double-digit sales growth in 2022, driven by the same
decarbonisation trend and Semiconductor sector growth benefiting
Chromalox and Thermocoax. Including the acquisitions of Vulcanic
and Durex Industries on a twelve-month pro-forma basis, ETS sales
would be GBP382.9 million.
Watson--Marlow sales of GBP488.5 million (30% of Group revenue)
grew 20% or 16% organically supported by our strong order book.
Sales to the Pharmaceutical & Biotechnology sector grew close
to 15% organically, while sales to Process Industries sectors grew
19%, significantly ahead of global IP. In the second half of 2022,
as expected, COVID-19 vaccine-related demand began to normalise as
effects of the pandemic moderated and our customers began to work
through their existing stocks, repurposing COVID-19 vaccine
production to meet the continued strong underlying demand for cell
and gene therapy medications. As a result, Watson-Marlow saw a
reduction in overall demand in 2022 and Pharmaceutical &
Biotechnology customers also rescheduled some deliveries from our
order book into 2023.
During the fourth quarter of 2022, steps were taken to
appropriately right-size capacity and overhead support costs in
Watson-Marlow, which included factory labour reductions. Further
actions are underway in early 2023, ensuring Watson-Marlow is able
to both meet customers' needs and protect our adjusted operating
profit margin.
Adjusted operating profit
Group adjusted operating profit of GBP380.2 million (2021:
GBP340.3 million) grew 12%, or 7% organically, the difference being
due to 4% favourable currency movements and a net 1% contribution
from acquisitions less the impact of the disposal of our Russian
operations. Adjusted operating profit in Steam Specialties, ETS and
Watson-Marlow grew organically by 8%, 23% and 3% respectively.
Adjusted operating profit margin
Group adjusted operating profit margin in 2022 was 23.6%, down
170 bps from the exceptional 25.3% of 2021. Organically the margin
was down 160 bps, driven by the full year impact of revenue
investments made during 2021 and the additional revenue investments
of 2022 to support future growth, partially offset by the benefits
of operational gearing from higher sales. To note, the 2021 Group
adjusted operating profit margin of 25.3% would have been
approximately 200 bps lower, had we incurred the full-year cost of
revenue investments made during that year.
Steam Specialties adjusted operating margin of 23.8% was down
120 bps or 90 bps organically. Our lower margin, compared to the
exceptionally high level of 2021, reflects the full year impact of
prior year revenue investments, partially offset by the benefits of
operational gearing from higher sales. During 2022, we continued
investing in support of future revenue growth, with an expansion in
sales-related headcount and new product development, as well as
digital and sustainability initiatives.
ETS adjusted operating profit margin was 15.6%, up 240 bps or
100 bps on an organic basis, with the difference due to the
positive impact from the acquisitions of Vulcanic and Durex
Industries, which have a combined margin similar to the overall
Group margin. Strong sales growth, supported by increased volumes,
resulted in operational gearing benefits with positive effects on
organic margin progression.
During 2022, both Chromalox and Thermocoax shipped a high
proportion of orders from their existing order book that were
booked in 2021 or earlier, when future inflation expectations were
lower. These orders did not benefit from price increases in 2022
and their margin was adversely impacted by higher raw material cost
inflation, as well as higher freight costs. In 2023, we anticipate
margin improvements as we increase the shipment of orders taken in
2022 and 2023.
Thermocoax, which has a higher proportion of sales to OEMs on
medium-term contracts and was impacted by one-off costs associated
with the ramp-up of our new manufacturing facility in Normandy
(France), experienced a contraction in 2022 adjusted operating
profit margin. Chromalox adjusted operating profit margin increased
in 2022, with overhead reductions from the closure of the Soissons
(France) facility having a positive effect in the fourth quarter.
The full year impact of this plant closure will contribute to
further margin progression in 2023.
Including the acquisitions of Vulcanic and Durex Industries on a
twelve-month pro-forma basis, ETS adjusted operating profit margin
would have exceeded 18.0%.
Watson-Marlow's 32.8% adjusted operating profit margin was down
390 bps against the exceptional margin of 2021 and 400 bps down on
an organic basis. However, Watson-Marlow's adjusted operating
profit margin in 2022 was still 100 bps higher than its 2019
pre-pandemic margin. The lower adjusted operating profit margin was
driven by the full year impact of 2021 revenue investments, which
had an impact of over 200 bps, as well as costs associated with the
transition of BioPure to a new facility in Portsmouth (UK) and the
ramp-up of our new facility in Devens, Massachusetts (USA), which
together had an impact of over 150 bps.
Currency movements
The Group's Income Statement and Statement of Financial Position
are exposed to movements in a wide range of different currencies.
This stems from our direct sales business model, with a large
number of local operating companies. These currency exposures and
risks are managed through a rigorously applied Treasury Policy,
typically using centrally managed and approved simple forward
contracts to mitigate exposures to forecast future cash flows and
avoiding the use of complex derivative transactions. The largest
exposures are to the euro, US dollar, Chinese renminbi and Korean
won. While currency effects can be significant, the structure of
the Group provides some mitigation through our regional
manufacturing presence, diverse spread of geographic locations and
through the natural hedge of having a high proportion of our
overhead costs in the local currencies of our operating
companies.
Currency movements positively impacted adjusted operating profit
by close to 4% with a translational benefit of GBP12.2 million and
an additional transactional benefit of GBP0.8 million. The
translation benefit reflects the impact of the weakening of
sterling during 2022 against the currencies in which the Group
generated its adjusted operating profit. The main transactional
exposure flow affecting the Group is the export of products from
our factories in the UK, invoiced in sterling, less the import of
goods from overseas Group factories and third parties priced
predominately in euros and US dollars. The net exposure to
transactional currency movements is approximately GBP150
million.
Statutory operating profit and margin
Statutory operating profit was down 1% to GBP318.8 million
(2021: GBP320.9 million) and the statutory operating profit margin
of 19.8% was down 410 bps (2021: 23.9%). Statutory operating profit
and statutory operating profit margin are impacted by the same
drivers as explained in the adjusted operating profit sections
above, as well as the reconciling items detailed below:
-- A charge of GBP23.7 million (2021: GBP21.4 million) for the
amortisation of acquisition-related intangible assets
-- Accelerated depreciation and other associated one-off costs
of GBP4.2 million relating to the Group Head Office building
in Cheltenham (UK), which is being comprehensively re-developed
-- A restructuring charge of GBP15.5 million, primarily relating
to Chromalox's manufacturing operation in Soissons (France)
-- A loss on disposal of GBP7.1 million relating to the Group's
Russian operating companies, including associated disposal
costs
-- A charge of GBP9.1 million for costs related to the acquisitions
of Cotopaxi, Vulcanic and Durex Industries
-- A charge of GBP1.8 million from the reversal of fair value
adjustments to inventory on the acquisition of Vulcanic
Net financing expense
During the fourth quarter of 2022, the Group raised new euro and
US dollar denominated debt, which in aggregate amounted to GBP509
million. The weighted average interest rate on these new debt
facilities is 4.8%. As a result, net bank interest increased to
GBP8.4 million (2021: GBP4.0 million).
Net costs under IAS 19 in respect of Group defined benefit
pension schemes decreased to GBP0.8 million (2021: GBP1.3 million)
and lease interest charges for the year increased to GBP1.5 million
(2021: GBP1.1 million).
As a result, adjusted net financing expenses increased to GBP9.6
million (2021: GBP6.4 million) and on a statutory basis net
financing expenses increased to GBP10.7 million (2021: GBP6.4
million), with the difference being the costs of arranging the
acquisition debt financing.
Net financing expenses are expected to increase in 2023 as a
result of the full-year effect of the acquisition-related debt.
Profit before tax
Adjusted profit before tax was up 11% to GBP370.6 million (2021:
GBP333.9 million). Statutory profit before tax was down 2% to
GBP308.1 million (2021: GBP314.5 million). The reconciling items
between adjusted profit before tax and statutory profit before tax
are shown above and in Note 2 to the Financial Statements.
Taxation
The Group tax rate reflects the blended average of rates in tax
jurisdictions around the world in which the Group trades and
generates profit. The Group adjusted effective tax rate decreased
by 10 bps to 25.0% (2021: 25.1%) and on a statutory basis the Group
effective tax rate was 27.0% (2021: 25.3%).
The Group adjusted effective tax rate is lower than our forecast
for 2022 by close to 100 bps due to initiatives that delivered both
one-off benefits and structural changes, reducing the rate in 2022
and on an ongoing basis. For 2023, we currently anticipate that,
based on a forecast mix of profits, including the effect of the
Vulcanic and Durex Industries acquisitions, the Group adjusted
effective tax rate will be marginally higher than the 2022
rate.
On 8th June 2022, the European Union (EU) General Court
published its decision on the appeals for annulment made against
the European Commission's (EC) 2019 decision that certain aspects
of the UK's Controlled Foreign Company regime constituted State
Aid, finding in favour of the EC. The UK Government has appealed
the decision of the EU General Court.
Whilst the EU General Court ruling was in favour of the EC, our
assessment is that there are grounds for successful appeal. As a
result, we have continued to recognise a receivable of GBP4.9
million in the Consolidated Statement of Financial Position. This
relates to the full amount paid to HM Revenue & Customs for
Charging Notices received in 2021. The Group has not received a
Charging Notice for either the benefit received prior to 2017,
which is estimated to be GBP2.8 million, or the benefit received
during 2019 of GBP1.0 million. No provisions have currently been
recognised relating to these amounts and therefore they remain a
contingent liability at 31st December 2022. Further details are
included in Note 5 to the Financial Statements.
Earnings per share
Adjusted basic earnings per share increased by 11% to 377.2
pence (2021: 338.9 pence), consistent with the increase in adjusted
operating profit. Statutory basic earnings per share were 305.1
pence (2021: 318.3 pence). The statutory fully diluted earnings per
share were not materially different to the statutory basic earnings
per share per share in either year.
Dividends
The Group has a progressive dividend policy under which dividend
payments follow underlying earnings per share growth while
maintaining prudent levels of dividend cover. The aim is to provide
sustainable, affordable dividend growth, building on our 55-year
record of dividend progress, with a compound annual increase of 11%
over that period and over the last ten years. The Board is
proposing a final dividend of 109.5 pence per share for 2022 (2021:
97.5 pence) payable on 19th May 2023 to shareholders on the
register at 21st April 2023. Together with the interim dividend of
42.5 pence per share (2021: 38.5 pence), the total Ordinary
dividend for the year is 152.0 pence per share, an increase of 12%
on the Ordinary dividend of 136.0 pence per share in 2021.
The total amount paid in dividends during the year was GBP103.6
million, 14% above the GBP91.0 million paid in 2021.
Capital employed
2022 2021
Capital employed GBPm GBPm
----------------------------------------------------- -------- --------
Property, plant and equipment 384.5 277.4
Right-of-use assets 67.2 62.9
Software & Development costs 44.5 38.9
Inventories 290.0 201.3
Trade receivables 341.1 272.3
Prepayments and other current assets 100.6 61.7
Trade, other payables, current provisions
and current tax payable (335.4) (255.3)
Capital employed 892.5 659.2
----------------------------------------------------- -------- --------
Acquired intangibles including goodwill 1,159.1 628.0
Investment in Associate - -
Post-retirement benefits (52.1) (44.7)
Net deferred tax (59.1) (35.7)
Non-current provisions and long-term payables (15.0) (6.2)
Lease liabilities (65.2) (60.1)
Net debt (690.4) (130.5)
Net assets 1,169.8 1,010.0
Adjusted operating profit 380.2 340.3
----------------------------------------------------- -------- --------
Adjusted operating profit (excluding acquisitions,
disposals and leases) 369.9 339.2
----------------------------------------------------- -------- --------
Average capital employed 775.9 621.5
----------------------------------------------------- -------- --------
Average capital employed (excluding acquisitions,
disposals and leases) 677.5 571.9
----------------------------------------------------- -------- --------
Return on capital employed 49.0% 54.7%
----------------------------------------------------- -------- --------
Return on capital employed (excluding acquisitions,
disposals and leases) 54.6% 59.3%
----------------------------------------------------- -------- --------
Capital employed increased by GBP233.3 million to GBP892.5
million, including GBP68.6 million from acquisitions. On an organic
basis, excluding the impact of currency movements, acquisitions and
disposals, capital employed increased by GBP136.9 million. Tangible
fixed assets (PPE and right-of-use-assets) increased by GBP111.4
million to GBP451.7 million, principally as a result of
acquisitions and expenditure on new manufacturing capacity for
Watson-Marlow.
The capital intensity of our business is low with capital
expenditure typically amounting to between 4% and 6% of sales.
Record capital expenditure of GBP117.5 million in 2022 was
equivalent to 7% of sales, delivering new manufacturing capacity
for Watson-Marlow, including the BioPure facility in Portsmouth
(UK) and new facility in Devens, Massachusetts (USA), as well as
other significant projects to advance our 'One Planet: Engineering
with Purpose' Sustainability Strategy and development of our
digital capabilities. Excluding our investment in new construction
projects, capital expenditure, as a percentage of sales, would have
been at the low end of our typical range.
We are expecting capital expenditure in 2023 to be similar, as a
percentage of sales, to 2022 and above the top end of our
historical range. In 2023, we will begin the expansion of our ETS
manufacturing facility in Ogden, Utah (USA), to meet customer
demand for our decarbonisation solutions. We anticipate capital
investment in 2024 will remain above historical levels while we
complete new construction projects.
Total working capital increased by GBP91.9 million and the ratio
of working capital to sales was 24.6% (2021: 21.3% on a constant
currency basis), including the impact of acquisitions. Adjusting
for the full year effect of acquisitions and disposals on a
twelve-month pro-forma basis, the ratio of working capital to sales
was 22.8%. The increase in working capital was driven by a recovery
in the level of inventory as global supply chain constraints eased,
alongside a net cash outflow across trade receivables and trade
payables, largely due to business growth. Going forward, we
anticipate maintaining a similar percentage of working capital to
sales.
Return on capital employed (ROCE)
ROCE reduced by 570 bps to 49.0% (2021: 54.7%, 2020: 48.9%).
Excluding the impacts of acquisitions, disposals and leases, ROCE
decreased by 470 bps to 54.6% (2021: 59.3%, 2020: 48.9%), driven by
an increase in both capital investment and working capital that
more than offset growth in adjusted operating profit. ROCE is
defined in Note 2 to the Financial Statements.
Return on invested capital (ROIC)
ROIC decreased by 370 bps to 18.3% (2021: 22.0%, 2020: 17.8%),
primarily as a result of the acquisitions of Vulcanic and Durex
Industries. Excluding the impacts of acquisitions, disposals and
leases, ROIC decreased by 90 bps to 22.0% (2021: 22.9%, 2020:
17.8%). ROIC is defined in Note 2 to the Financial Statements.
Post-retirement benefits
The net post-retirement benefit liability under IAS 19 increased
to GBP52.1 million (2021: GBP44.7 million). Assets decreased by 39%
to GBP341.6 million (2021: GBP560.7 million), primarily due to the
impact of interest rate increases on fixed income investments.
Liabilities decreased by 35% to GBP393.7 million (2021: GBP605.4
million), largely due to an increase in AA corporate bond rates
used to discount future cash flows.
The main UK schemes, which constitute 83% of assets, were closed
to new members in 2001 and closed to future accrual in 2020. These
schemes continue to be managed under a de-risking strategy whereby
asset and liability values are closely monitored by our asset
manager with appropriate asset allocation decisions taken as the
funding level improves.
Cash flow and treasury
2022 2021
Cash flow GBPm GBPm
-------------------------------------------- ----------------------------------- ------------
Adjusted operating profit 380.2 340.3
Depreciation and amortisation 36.0 35.7
Depreciation of leased assets 13.4 11.4
Cash payments to pension schemes more
than the charge to adjusted operating
profit (5.3) (5.6)
Equity settled share plans 8.9 9.2
Working capital changes (91.9) (39.5)
Repayments of principal under lease
liabilities (12.9) (11.7)
Capital expenditure (including software
and development) (117.5) (64.1)
Capital disposals 4.0 2.0
------------------------------------------------------------ ------------------- ------------
Adjusted cash from operations 214.9 277.7
------------------------------------------------------------ ------------------- ------------
Net interest (8.8) (5.1)
Income taxes paid (90.0) (78.1)
Free cash flow 116.1 194.5
------------------------------------------------------------ ------------------- ------------
Net dividends paid (103.6) (91.0)
Purchase of employee benefit trust shares/Proceeds
from issue of shares (19.0) (24.6)
(Acquisitions)/Disposals of subsidiaries (538.3) -
Restructuring costs (3.2) -
Cash flow for the year (548.0) 78.9
------------------------------------------------------------ ------------------- ------------
Exchange movements (11.9) 19.4
Opening net debt (130.5) (228.8)
Net debt at 31(st) December (690.4) (130.5)
Lease liability (65.2) (60.1)
Net debt and lease liability at 31(st)
December (755.6) (190.6)
------------------------------------------------------------ ------------------- ------------
A reconciliation between adjusted cash from operations and
statutory operating cash flow can be found in Note 2 to the
Financial Statements.
As expected, adjusted cash from operations was lower than
previous years, decreasing by GBP62.8 million to GBP214.9 million
(2021: GBP277.7 million) with 57% cash conversion (2021: 82%), due
to planned record capital expenditure of GBP117.5 million (2021:
GBP64.1 million) and an increase in total working capital of
GBP91.9 million (2021: GBP39.5 million). Excluding our investment
in new construction projects and the rebuilding of inventory, 2022
cash conversion would have been higher than the prior year and in
line with the Group's historical performance.
Tax paid in the year increased by GBP11.9 million to GBP90.0
million as a result of the increase in profit before tax in 2022.
Free cash flow for the year was GBP116.1 million (2021: GBP194.5
million).
Dividend payments, including payments to minorities, were
GBP103.6 million (2021: GBP91.0 million), and reflect the final
dividend for 2021, as well as the interim dividend for 2022. Share
purchases net of new shares issued for the Group's various employee
share schemes resulted in a cash outflow of GBP19.0 million (2021:
GBP24.6 million). Acquisitions (net of disposals) during the year
amounted to GBP538.3 million (2021: GBPnil), primarily driven by
the purchase consideration for Vulcanic and Durex Industries.
Restructuring spend during the year was GBP3.2 million due to the
closure of Chromalox's manufacturing operations in Soissons
(France).
Financing and liquidity
Net debt at the end of the year was GBP690.4 million (2021:
GBP130.5 million), including debt raised to finance the
acquisitions of Vulcanic and Durex Industries, with a net debt to
EBITDA ratio of 1.7 times (2021: 0.35 times). On a pro-forma basis,
including a full-year of EBITDA for companies acquired during the
year, the net debt to EBITDA ratio is 1.5 times. At the end of the
year total committed and undrawn debt facilities amounted to
GBP285.3 million alongside a net cash balance of GBP243.8 million.
The average tenor of our debt is over four years with the next
contractual repayment maturity in September 2023. Since the end of
the year the Group has successfully exercised the first of two
options to extend the maturity of our GBP400 million revolving
credit facility by an additional year to April 2028.
Capital structure
The Board keeps the capital requirements of the Group under
regular review, maintaining a strong financial position to protect
the business against risks that could impact trading while
providing flexibility to invest for future growth. The Group earns
a high return on capital, which is reflected in strong cash
generation over time. Our capital allocation policy remains
unchanged. Our first priority is to maximise organic investment in
the business to drive future growth. Next, we prioritise investing
in acquisitions that can expand our addressable market through
increasing our geographic reach, deepening our market penetration,
or broadening our product range. Acquisition targets are required
to exhibit a strong strategic fit whilst meeting strict commercial,
economic and return on investment criteria. When cash resources
significantly exceed expected future requirements, we would look to
return capital to shareholders, as evidenced by special dividends
declared in respect of 2010, 2012 and 2014. In the near term, we
will look to reduce our financial leverage, which increased during
the year as a result of the acquisitions of Vulcanic and Durex
Industries, prior to considering one-off returns of capital to
shareholders.
Group Outlook
Forecasts for 2023 IP have trended steadily downwards since
February 2022 and are now at 0.7%, reflecting the likelihood of
recession in developed markets and low growth in emerging markets.
Against this uncertain macroeconomic backdrop, our resilient
business model, ability to self-generate sales and significant
proportion of demand from maintenance and repairs, underpins our
confidence in another year of progress for the Group.
If exchange rates at the end of February were to prevail for the
remainder of the year, there would be a tailwind impact of between
approximately 1% and 2% on sales and adjusted operating profit.
Movements in exchange rates are often volatile and unpredictable so
the actual impact could be significantly different. Therefore, our
guidance excludes any impact from currency movements.
The full year effect of the acquisitions of Vulcanic and Durex
Industries on a twelve-month pro-forma basis, net of the disposal
of our Russian operations, would have expanded Group revenues by
almost 8% to GBP1,734 million in 2022.
During the second half of 2022, COVID-19 related demand from
Watson-Marlow's Pharmaceutical & Biotechnology customers began
to normalise and, in the first two months of 2023, we have
continued to see a level of demand consistent with the fourth
quarter of 2022, which still ended with untypically strong order
book levels. In the first half of 2023, we expect these customers
to continue utilising their existing stocks and reschedule
deliveries from our order book. However, with strong underlying
demand for cell and gene therapy applications in the Pharmaceutical
& Biotechnology sector, as well as Process Industry
applications, we anticipate significantly higher demand in the
second half of 2023 as excess customer stocks are depleted,
although defining the precise timing and scale of any recovery
remains difficult. Therefore, excluding any impact from currency
movements for the full-year 2023, we anticipate Watson-Marlow's
overall sales for 2023, to be slightly below 2022, as lower sales
to the Pharmaceutical & Biotechnology sector will be largely
offset by strong growth of its Process Industry sectors.
The Steam Specialties and ETS Businesses also opened 2023
supported by record order books, so we anticipate mid-to-high
single-digit growth over 2022 pro-forma sales, driven by volume
growth above IP and proactive price management practices that
offset inflation of wages, energy and materials to protect
margins.
Assuming no material deterioration in forecasted IP and
excluding any impacts from currency movements, we anticipate
mid-single-digit growth over 2022 Group pro-forma sales, together
with a small progression to the Group's adjusted operating profit
margin. As Watson-Marlow's sales will be strongly weighted to the
second half of the year, we anticipate the Group's sales phasing in
2023 will also be more weighted to the second half than the typical
48%: 52% phasing of previous years. Based on increased operational
gearing in the second half, as well as the full benefit in the
second half of first half cost saving initiatives in Watson-Marlow
to right-size capacity and overhead support costs, we anticipate
the Group's adjusted operating profit phasing in 2023 will be more
weighted to the second half than the 44%: 56% phasing of 2020.
Cash conversion of 57% in 2022 was impacted by a rebuilding of
inventory as global supply chain disruptions eased, as well as a
step-up in capital investment as we expanded our manufacturing
capacity to support future growth. In 2023, we anticipate cash
conversion will improve to above 70% with capital investment
remaining at approximately 7% of sales driven by project
completions and the expansion of Chromalox's manufacturing facility
in Ogden, Utah (USA).
Therefore, we look forward to delivering another year of overall
double-digit sales growth, together with a small progression in the
Group's adjusted operating profit margin and improved cash
conversion.
Operating Review
Market environment
Global industrial production growth(1) (IP) was 2.7% in 2022,
compared to 7.7% in 2021. All regions recorded positive IP,
although growth was below the level achieved in 2021 when the
global economy bounced back strongly from the COVID-19
pandemic-related impacts of 2020.
IP Performance 2022 IP Performance 2021
Europe, Middle East
& Africa +2.5% +6.8%
-------------------- --------------------
of which, Europe +1.7% +8.3%
-------------------- --------------------
North America +3.9% +4.9%
-------------------- --------------------
Latin America +1.3% +6.2%
-------------------- --------------------
Asia Pacific +3.1% +8.3%
-------------------- --------------------
of which, China +3.8% +8.7%
-------------------- --------------------
([1]) Source for industrial production data: Oxford Economics,
23rd February 2023
IP was strongest in the first half of 2022 at 2.8%, despite a
demanding comparator in 2021. IP slowed in the second half although
at 2.6% industrial production remained higher than the second half
of 2021. In the final quarter of 2022, sequential IP growth over
the third quarter moved into negative territory, contracting 0.5%.
For the full year 2022, IP of 2.7% was materially lower than the
forecasted 4.4% at the time of our 2021 Full Year results in March
2022. Russia's invasion of Ukraine on 24th February 2022 and the
consequential impact on global supply chains and energy prices, as
well as other inflationary pressures, dampened the global economic
outlook that weakened progressively throughout 2022.
In Asia Pacific, IP was 3.1%, significantly lower when compared
to the strong 8.3% expansion in 2021, reflecting the reintroduction
of lockdowns in China, particularly in Shanghai. In the Americas,
IP was 3.9% in North America but only 1.3% in Latin America, with
Brazil registering a minor IP contraction over 2021. In EMEA, IP
contracted 3.6% in the UK with Germany, France and Italy broadly
flat.
In March 2022, we suspended all Group trading with or within
Russia and commenced the process of exiting our Spirax Sarco and
Watson-Marlow operations in Russia. This process concluded in July,
with the disposal of our Russian operating companies. The impact on
our 2022 results was small as Russia accounted for close to 1% of
Group revenues in 2021.
In our largest sectors, Pharmaceutical & Biotechnology and
Food & Beverage, which accounted for 41% of Group pro-forma
sales in 2022, IP was 0.9% and 1.8% respectively. In the OEM sector
(12% of Group pro-forma sales in 2022) IP was 5.8% and in the Oil
& Gas sector that accounted for 5% of 2022 Group pro-forma
sales, IP was 1.7%.
During the last year, forecasts(1) for 2023 IP have trended
downwards, from 4.0% in February 2022 to 0.7% in February 2023,
reflecting ongoing geopolitical tensions, rising interest rates to
combat high levels of inflation and the potential for recession in
some countries.
Steam Specialties
2021 Exchange Organic Acquisitions 2022 Organic Reported
& disposals*
Revenue GBP754.9m GBP19.1m GBP95.6m (GBP3.6m) GBP866.0m +12% +15%
---------- --------- --------- -------------- ---------- -------- ---------
Adjusted operating
profit GBP188.7m GBP3.5m GBP15.7m (GBP1.8m) GBP206.1m +8% +9%
---------- --------- --------- -------------- ---------- -------- ---------
Adjusted operating -120
profit margin 25.0% 23.8% -90 bps bps
---------- --------- --------- -------------- ---------- -------- ---------
Statutory operating
profit GBP186.8m GBP196.2m +5%
---------- --------- --------- -------------- ---------- -------- ---------
Statutory operating -200
margin 24.7% 22.7% bps
---------- --------- --------- -------------- ---------- -------- ---------
*Includes the impact of (i) the acquisition of Cotopaxi and (ii)
the treatment of Spirax Sarco Russia as a disposal from the date at
which the Group suspended all trading with and within Russia.
Progress in 2022
Steam Specialties comprises our two world-leading product brands
of Spirax Sarco and Gestra and operates across three geographic
Divisions: Europe, Middle East and Africa (EMEA), Asia Pacific and
the Americas. The OEM sector represented 19% of Steam Specialties
total sales, while Food & Beverage and Healthcare accounted for
29% and 3% respectively.
Steam Specialties sales of GBP866.0 million grew 15% in 2022 or
12% organically. This very strong performance combined strong
volume growth ahead of IP, despite the challenging macroeconomic
environment, with proactive price management practices that offset
significant raw material, energy and wage cost inflation to protect
margins. The strong volume growth delivered benefits from
operational gearing, supporting revenue investments to drive future
organic sales growth.
Demand growth exceeded sales growth across all Divisions,
expanding order books, with a higher proportion of larger orders
compared to 2021, as customers' capital expenditure continued to
recover from pandemic-driven reductions.
EMEA generated 11% organic sales growth. In the UK, Germany,
France and Italy, the four largest markets in EMEA which
collectively represent over 60% of regional sales, IP progressively
weakened during the year and turned negative in the final quarter.
There was a strong recovery in demand from the marine sector in
Italy, as the outlook for worldwide travel improved due to the
relaxation of COVID-19 restrictions that enabled cruise ships to
start operating again.
Asia Pacific achieved 10% organic sales growth despite lower IP
and the challenges in China caused by COVID-19 related lockdowns,
particularly in Shanghai. The region benefited from a recovery in
large orders funded from customers' capital budgets, which account
for a higher proportion of sales than in the rest of the world.
China, our largest market in the region representing over 50% of
sales, achieved 8% organic sales growth compared to 3.8% IP. In
Korea, our second largest market in Asia Pacific, organic sales
increased by 11%, significantly above IP of 1.6%.
In the Americas, sales grew 20% organically against a mixed
backdrop for IP. In the USA, the largest market in the region,
representing around 50% of the Americas, sales were up 11% compared
to IP of 3.9%. This outperformance against IP reflects good
progress in implementing our strategy to drive higher growth from
direct sales, compared to growth through distributors, as well as
our focus on the Healthcare and Chemical sectors which grew
strongly.
In Latin America, which accounts for over 40% of the Americas'
sales, there was strong volume growth in the largest markets of
Argentina and Brazil, driven mainly by the Food & Beverage
sector, Chemicals and Oil & Gas sectors, as well as good price
management practices to offset higher inflationary pressures and
protect margin.
Steam Specialties adjusted operating profit grew 9% to GBP206.1
million, up 8% organically. The adjusted operating profit margin
was 23.8%, down 120 bps or 90 bps organically. Statutory operating
profit of GBP196.2 million was up 5% from GBP186.8 million in
2021.
Our lower adjusted operating profit margin, compared to the
exceptionally high level of 2021, reflects the full year impact of
prior year revenue investments, partially offset by the benefits of
operational gearing from higher sales. Had we incurred the
full-year cost of these revenue investments in 2021, Steam
Specialties 25.0% adjusted operating profit margin would be reduced
by close to 200 bps. During 2022, we continued investing further to
support future revenue growth, with an expansion of sales-related
headcount and new product development, as well as digital and
sustainability initiatives.
Gestra's adjusted operating profit margins increased for the
full year and exceeded the 20% threshold achieved in 2021, the
highest since we acquired the company in 2017.
Business strategy update
In 2021, Steam Specialties launched its refreshed business
strategy, Customer first(2) (Cf(2) ) and 2022 represented the first
full year of its implementation. The refreshed strategy builds on
the original Customer first strategy that has been in place since
2014 and focuses on mega trends such as customer insight,
sustainability, innovation, digital and inclusivity.
Increase direct sales effectiveness through market sector
focus
Following the acquisition of Gestra in 2017, Steam Specialties
adopted a sector-driven dual brand strategy. Aligning market
sectors that offer the best opportunities with the brand that is
traditionally strongest in that sector, ensures that we are
well-placed to grow sales at above IP rates. For example, Gestra
delivered 40% sales growth in the Chemicals sector as a result of
its strong presence, while Spirax Sarco generated growth of 7% in
the Healthcare sector, as hospitals sought to catch-up on deferred
maintenance expenditure.
In January 2022, Steam Specialties completed the acquisition of
Cotopaxi, a digitally enabled global energy consulting and
optimisation specialist, to further accelerate the implementation
of our Digital Strategy. Cotopaxi's proprietary software platform,
STRATA, generates critical insights that are used to better
understand industrial customers' management and use of Water, Air,
Gas, Energy and Steam (WAGES). Cotopaxi's digital solutions
experience in steam installations has enhanced our ability to
connect to customers' systems and analyse their data, generating
further opportunities and solutions that support system uptime,
reduce waste and increase efficiency.
We continued to implement Customer Value Propositions (CVPs) to
support our customers' changing requirements and needs. During
2022, our teams tailored a CVP to support lithium mining projects
in Argentina for the automotive battery sector.
Develop the knowledge and skills of our expert sales and service
teams
We continued to invest in our direct sales force and
self-generated sales capability through our Sales Excellence
training that is delivered by our Steam Academy. Following the
acquisition of Cotopaxi, training now includes modules on our
digital capabilities and the value that can be generated for our
customers.
Broaden our global presence
Steam Specialties has direct sales capabilities in 66 countries
and we continue establishing a stronger sales presence in parts of
the world that have previously been under-represented. In 2022,
this included parts of Africa and the Middle East with a
substantial step-up in the recruitment of direct sales engineers
across those regions.
Leverage our research and development (R&D) investments
We continued to invest in new product development across Steam
Specialties and released multiple new products during 2022, to
support the efficient use and control of steam, including the
'TargetZero' decarbonisation solutions (for more information see
below). Due to our relentless focus on innovation, in 2022 Steam
Specialties exceeded their long-held Product Vitality (PV) target
which compares the revenue from new products, services or solutions
introduced in the previous five years to total revenue.
Optimise supply chain effectiveness
In 2021, we created a Global Supply Chain organisation
responsible for all Steam Specialties manufacturing sites around
the world, to further improve the efficiency of our operations.
This global organisation enables the adoption of consistent supply
chain methodologies and accelerates the sharing of best practices
across the 11 Steam Specialties manufacturing sites, while
accelerating investments in plant modernisation. In common with
most businesses, Steam Specialties experienced considerable
disruption to its supply chain over the past two years with an
adverse impact on customer service levels. During 2022, we
successfully mitigated materials shortages by expanding our
supplier base while also increasing our sales volume.
Operate sustainably and help improve our customers'
sustainability
We work closely with our customers to understand their
sustainability goals and provide solutions to optimise their energy
and water usage, as well as decarbonise steam generation. The Group
developed a suite of innovative 'TargetZero' decarbonisation
solutions through the Thermal Synergy Solutions project, a
collaboration between Steam Specialties and ETS designed to
decarbonise customers' industrial processes, including the raising
of steam. 'ElectroFit', replaces industrial boilers' fossil
fuel-fired heating elements with an in-situ conversion to electric
heating elements, eliminating the boiler's scope 1 greenhouse gas
(GHG) emissions while minimising plant disruptions and retaining
the existing boiler infrastructure. 'Steam Battery' is an energy
storage system using steam, which retains the thermal energy until
required and decouples the electric energy generation from the
thermal energy use. 'SteamVolt' uses the patented Chromalox Medium
Voltage (MV) technology to provide electric heating solutions at
industrial scale to decarbonise the raising of steam, as well as
other industrial processes. These solutions were successfully
tested on customer sites and we started accepting orders in the
second half of 2022.
Alongside our drive to help customers meet their sustainability
goals, we are also taking steps to meet the Group's ambitious
target of achieving net zero scope 1 and scope 2 GHG emissions by
2030. In 2022 Steam Specialties initiated a GBP5.9 million
investment programme to decarbonise our UK manufacturing facility
in Cheltenham (UK), through the installation of all three
'TargetZero' solutions for the electrification of our on-site
gas-fired boilers. Upon completion by the end of 2023, this project
will eliminate the site's scope 1 emissions and our purchased
electricity requirements (scope 2 emissions) will be satisfied by
green energy contracts.
During the first half of 2023 we will also implement Cotopaxi's
STRATA platform across the 11 Steam Specialties manufacturing
locations, enabling us to monitor our efficiency and sustainability
performance in real time, using the insights to make changes that
eliminate waste and reduce consumption.
During the year, our colleagues were involved with more than 50
biodiversity projects across the Business. With projects including,
the installation of beehives in Italy, a roof garden in China, a
wildlife pond in the UK, as well as mangrove protection and tree
planting in Indonesia and Argentina.
Focus for 2023
We anticipate a more challenging macroeconomic environment in
2023 for both our customers and ourselves. We will continue to
support our customers with solutions that improve the safety and
efficiency of their industrial processes, thereby reducing their
operating costs. With our 'TargetZero' solutions, we will also
support their journeys towards zero GHG emissions while completing
the decarbonisation of our UK manufacturing facility.
In key regions such as the USA, Middle East and Africa, we are
focused on expanding our direct sales presence and our direct
engagement with customers. We will also leverage our investments in
digital capabilities, supported by Cotopaxi, to further enhance our
understanding of customers' operations and how to best support
them.
Steam Specialties Outlook
IP forecasts for 2023 have trended steadily downwards since
February 2022 and are now at 0.7%, reflecting the likelihood of
industrial recessions in developed markets and lower growth in
emerging markets. Against this weak macroeconomic backdrop, our
resilient business model, ability to self-generate sales,
significant proportion of maintenance and repair sales and strong
order books underpin our confidence in the growth outlook for Steam
Specialties. Excluding any impact from currency movements, we
currently anticipate mid-to-high single-digit growth, over 2022
pro-forma sales, driven by volume growth above IP and proactive
price management practices that offset inflation of wages, energy
and materials to protect margins.
We also anticipate a more typical drop-through from the
increased sales to adjusted operating profit of close to 35%,
leading to further improvement in our adjusted operating profit
margin.
Electric Thermal Solutions
2021 Exchange Organic Acquisitions 2022 Organic Reported
& disposals*
Revenue GBP181.3m GBP13.2m GBP27.4m GBP34.2m GBP256.1m +14% +41%
---------- --------- --------- -------------- ---------- -------- ---------
Adjusted operating
profit GBP24.0m GBP1.9m GBP5.9m GBP8.1m GBP39.9m +23% +66%
---------- --------- --------- -------------- ---------- -------- ---------
Adjusted operating +100 +240
profit margin 13.2% 15.6% bps bps
---------- --------- --------- -------------- ---------- -------- ---------
Statutory operating
profit GBP11.1m GBP7.3m -34%
---------- --------- --------- -------------- ---------- -------- ---------
Statutory operating -320
margin 6.1% 2.9% bps
---------- --------- --------- -------------- ---------- -------- ---------
*Includes the impact of the acquisition of Durex Industries and
Vulcanic.
Acquisitions
During the last four months of 2022, the Group's Electric
Thermal Solutions Business (ETS) completed the acquisitions of
Vulcanic and Durex Industries, strengthening coverage of attractive
end-market sectors and geographies to broaden the platform for
strong organic growth of the Business.
Vulcanic
On 29th September, we completed the acquisition of Vulcanic, a
European leader of industrial heating solutions that is
headquartered in Paris (France) with ten manufacturing facilities
worldwide. Chromalox generates close to three-quarters of its sales
in the Americas, whereas Vulcanic generates around 80% of its sales
in EMEA. Vulcanic complements Chromalox through its strong position
in the Food & Beverage and OEM sectors, while serving different
markets than Chromalox within the Oil & Gas and Chemicals
sectors. Vulcanic comprises several product brands that are each
individually strong in their respective sectors. We have appointed
an experienced leader for Vulcanic from within our Group and the
integration is progressing well.
We are implementing a dual brand strategy for Chromalox and
Vulcanic, modelling the highly successful approach in Steam
Specialties that aligns the Spirax Sarco and Gestra brands with
specific strategic growth sectors. As the lead brands within ETS
for electric process heating, including the decarbonisation of
industrial processes, Chromalox and Vulcanic will support the
effective deployment of our industry leading decarbonisation
solutions alongside Steam Specialties.
Durex Industries
On 30th November, we completed the acquisition of Durex
Industries, a US-based specialist in custom precision thermal
solutions with embedded electric heating, cooling and sensing
technologies for ultra-critical applications within complex
industrial equipment, with headquarters and manufacturing
facilities in Cary, Illinois (USA). OEMs accounted for almost 90%
of sales with approximately 60% of sales to the Semiconductor
sector.
Durex Industries is a highly complementary brand to Thermocoax,
with minimal customer overlap and over 80% of its sales in North
America, whereas over 60% of Thermocoax's sales are in EMEA. As the
lead brands within ETS for ultra-critical thermal solutions for
industrial equipment, Thermocoax and Durex Industries are well
positioned to capitalise on the growing demand for increasingly
stringent thermal heating requirements in high technology equipment
and will accelerate the development of ETS' critical OEM
business.
We have retained the existing strong management of Durex
Industries and they are working collaboratively across ETS to
identify opportunities that accelerate the growth of each
brand.
Market overview
Following the acquisitions of Vulcanic and Durex Industries, the
Americas and EMEA will represent 56% and 32% of sales respectively
on a pro-forma basis.
ETS has a different balance of end markets when compared to the
rest of the Group with 18% of sales to the Semiconductor sector and
12% to the Power Generation sector on a pro-forma basis.
Our customers' focus on the decarbonisation of their critical
industrial processes, in line with their own sustainability and net
zero goals, continues to drive strong demand for both Chromalox and
Vulcanic products and solutions. The rate of adoption over time of
our decarbonisation solutions remains difficult to predict due to
varying rates of progress towards net zero in different countries,
capacity to deliver the necessary infrastructure quickly, as well
as the relatively higher cost of electricity compared to gas.
Therefore, we anticipate this market opportunity will unfold
globally over at least the next 30 years.
During 2022, Semiconductor demand grew strongly with the
proportion of ETS sales to the sector increasing. We anticipate
demand will be lower in 2023 due to consumer spending on
electronics being impacted by a weaker macroeconomic environment,
as well as a slowdown in the expansion of Semiconductor
manufacturing capacity. Through Thermocoax and Durex Industries,
ETS supplies complex solutions for precise thermal control,
incorporated by OEMs into Wafer Fabrication Equipment (WFE) for
more advanced Semiconductor products utilised in higher-end
applications. We expect that these niche positions will partially
mitigate the impact of an overall reduction in Semiconductor
demand. Additionally, there is an opportunity for our solutions to
replace incumbent suppliers in the WFE aftermarket, further
mitigating cyclicality in the new-build market.
Progress in 2022
ETS sales grew 41% to GBP256.1 million or 14% on an organic
basis, with the difference due to acquisitions and currency
tailwinds.
During 2022, ETS benefitted from strong overall demand growth,
significantly ahead of IP and above the growth in sales. Growth in
Thermocoax was driven by the Semiconductor sector, with increasing
end user demand for sophisticated digital equipment and from the
Aerospace & Defence sector, due to demand for sensing and
heating technologies in satellites supporting mobile
telecommunications networks. Chromalox experienced increasing
demand for decarbonisation solutions.
Vulcanic and Durex Industries delivered strong double-digit
growth in sales driven by the same decarbonisation trend and
Semiconductor sector growth benefiting Chromalox and Thermocoax.
Including the acquisitions of Vulcanic and Durex Industries on a
twelve-month pro-forma basis, ETS sales would be GBP382.9 million
in 2022.
Manufacturing continued being impacted by disruptions in the
global supply chain, although these constraints are beginning to
ease. Shipments from our manufacturing facility in Ogden, Utah
(USA) remained capacity constrained during 2022 as it transitions
to focus primarily on bespoke industrial heating solutions,
increasingly utilising our patented Medium Voltage (MV) technology
for the decarbonisation of buildings and industrial processes.
Throughout the year we continued investing to increase capacity in
Ogden, as well as making further operational improvements to
support manufacturing of more complex and bespoke solutions. The
capacity constraints were compounded by strong demand growth and
resulted in ETS carrying a record order book into 2023,
underpinning strong sales growth in the year ahead.
Sales from Chromalox EMEA contracted year-on-year following the
announcement, in May 2022, of our plans to close the loss-making
manufacturing plant in Soissons (France). This facility was
successfully decommissioned in September, three months ahead of
schedule, with minimal disruptions. The costs associated with the
closure (GBP14.5 million) are included as an adjusting item in the
Consolidated Income Statement as disclosed in Note 2 to the
Financial Statements. The acquisition of Vulcanic restores the
capability to manufacture in Europe some of the products previously
sourced from the Soissons facility.
ETS adjusted operating profit grew 66% to GBP39.9 million and
was up 23% on an organic basis, the difference being due to
acquisitions and currency movements. Statutory operating profit of
GBP7.3 million was down 34% from GBP11.1 million in 2021, driven by
the restructuring of Chromalox's manufacturing operation in
Soissons (France).
ETS adjusted operating profit margin of 15.6% was up 240 bps and
100 bps organically, with the difference due to the fourth quarter
contributions from the Vulcanic and Durex Industries acquisitions
that had a combined operating margin similar to the overall Group
margin.
During 2022, both Chromalox and Thermocoax shipped a high
proportion of orders from their existing order book that were
booked in 2021 or earlier.These orders did not benefit from the
2022 price increases so the margins achieved were adversely
impacted by high materials cost inflation and higher freight costs.
Nickel-based alloys, electrical components, petrochemical and resin
products, all experienced double-digit cost inflation.
Price increases were applied to new orders taken in 2022 to
protect operating margins from this higher cost inflation, with
further price increases being applied to new orders received in
2023. Although we still have some orders to be delivered that were
taken in 2021, we anticipate some margin progression in 2023 as we
increase the shipment of orders taken in 2022 and 2023.
Thermocoax experienced an adjusted operating profit margin
decline in 2022, due to our higher proportion of sales on
medium-term contracts and an adverse impact of one-off costs
associated with the ramp-up of our new manufacturing facility in
Normandy (France). Chromalox adjusted operating profit margin
increased strongly in 2022, driven by operational gearing from
sales volume growth above IP and improved price management
practices to offset cost inflation on new orders that was partially
offset by the lower margins of some older orders shipped in 2022,
as well as a small benefit of overhead reductions in the fourth
quarter from the closure of the Soissons (France) facility.
Including the acquisitions of Vulcanic and Durex Industries on a
twelve-month pro-forma basis, ETS adjusted operating margin would
be above 18.0%.
Business strategy update
ETS implemented a strategy refresh during 2020, resulting in the
launch of their 'Engineering Premium Solutions' (EPS) strategy. An
important component of this strategy is the drive towards 'Total
Customer Solutions' moving from being mostly product centric to
becoming more focused on selling solutions to higher-growth sectors
in which we are well positioned. We also continued strengthening
our business development function and increasing our focus on new
product innovation, with demonstrable technological advantages and
quantified sustainability benefits. We made good progress in
advancing our strategic agenda in line with the Group's six
strategic themes:
Increase direct sales effectiveness through market sector
focus
Since reshaping our strategy to prioritise focus on strategic
sectors that represent over 50% of our addressable market, we have
realised higher growth in these targeted sectors and increased our
proportion of direct sales.
We have also continued identifying opportunities for ETS to
leverage its position as part of our Group by adopting best
practice from other parts of the organisation. In 2022, this led to
the launch of a revised 'go to market' strategy in EMEA and Asia
Pacific, following its successful roll out in the Americas, which
optimises the number of accounts assigned to individual direct
sales engineers.
Develop the knowledge and skills of our expert sales and service
teams
We have continued to invest in our self-generated sales
capability by developing the skills and knowledge of our direct
sales engineers through the ETS Academy. Building on the success of
the Steam Specialties' Academy, the ETS Academy was completed in
the third quarter of 2022 and utilises virtual and visual assets to
provide a rich and immersive experience for our direct sales teams
and end-user customers. Additionally, our sales teams have been
undertaking Sales Excellence training to develop or refresh
skillsets in consultative value-based selling.
Chromalox has launched several Customer Value Propositions
(CVPs) focused on its decarbonisation and net zero solutions during
the year, which required specific training, marketing materials and
decarbonisation calculators for the Engineered Chemicals,
Sustainable Energy and Oil & Gas sectors.
Broaden our global presence
The acquisitions of Vulcanic and Durex Industries provide an
improved geographical balance of the ETS Business globally and will
support organic growth by leveraging customer bases, products and
technologies. Over the coming years we will implement our
integration plans that also accelerate the adoption of our market
sector driven dual brand strategy on a global scale.
Leverage our research and development (R&D) investments
ETS is evolving its electrification solutions for
decarbonisation and sustainability, which remain important growth
drivers as we build a significant pipeline of opportunities.
By combining our core capabilities with Steam Specialties, we
have been able to develop synergies within our thermal energy
management portfolio that enabled the 'Thermal Solutions Synergy'
team to design new industry-leading products that deliver
significant sustainability benefits for customers. The new-to-world
'TargetZero' solutions are covered in more detail in the Steam
Specialties update on page 21. ETS has also been collaborating with
Watson-Marlow to release a new product for its Aflex Hose product
brand in 2023.
In addition to the ' TargetZero ' decarbonisation solutions
developed with Steam Specialties, ETS developed and launched
multiple new products to market in 2022 from both the Chromalox and
Thermocoax Divisions. The new Chromalox products include a portable
air heater designed for safely heating server rooms and a safe
water heater, certified to heat potable water. In addition to range
extensions, Thermocoax also launched two new-to-world products to
support the fabrication of 3nm semiconductor chips, as well as
radiation-hardened heating cables for aerospace applications.
Optimise supply chain effectiveness
During 2022, we continued investing in further operational
improvements, as well as increasing manufacturing capacity in
Ogden, Utah (USA). In order to ensure sufficient capacity to
satisfy the anticipated long-term demand for Chromalox's Medium
Voltage technologies that also support decarbonisation, we are
planning a US$58 million investment to materially expand the Ogden
facility. The new 9,600m2 extension will expand the current
footprint by almost 60% by the end of 2024 and includes geothermal
heating, as well as solar panels for on-site renewable energy
supply.
In Normandy (France), Thermocoax's four separate sites came
together in a new purpose-built, state-of-the-art manufacturing
facility. Production ramped-up during the first half of 2022 as the
teams adjusted to working in a single facility and secured all the
process qualifications needed for the critical industrial
applications that support the Semiconductor, Aerospace and Defence
sectors. The plant is fully aligned to our 'One Planet: Engineering
with Purpose' Sustainability Strategy, with the implementation of
solar panels to self-generate electricity, as well as waste
reduction and on-site biodiversity projects.
Operate sustainably and help improve our customers'
sustainability
During the year ETS continued to implement our 'One Planet:
Engineering with Purpose' Sustainability Strategy, which included
the installation of 1.2 GWh of renewable energy supply at three of
our sites in Nuevo Laredo (Mexico), Heidelberg (Germany) and
Normandy (France). We completed net zero roadmaps at all
manufacturing sites and rolled out environmental compliance
calendars to ensure business continuity at key locations including
Ogden and LaVergne, Tennessee (USA).
Focus for 2023
During 2023, we will focus on implementing the integration plans
for Vulcanic and Durex Industries, as well as accelerating growth
opportunities through collaboration with Chromalox and Thermocoax.
We will align the 'go to market' dual brand strategy for Chromalox
and Vulcanic in Europe during the first half of the year.
Product developments will focus on the next generation of Medium
Voltage (MV) technology and Heat Trace systems, supporting
decarbonisation and temperature management of commercial
infrastructure. ETS is engaged with multiple partners, including
universities, cities and agencies, working to decarbonise their
district heating systems. We will also focus on leveraging
Vulcanic's presence in Europe to increase the penetration of our
Heat Trace systems, which is currently lower than in North
America.
Operationally, our focus will be on increasing manufacturing
output from our site at Ogden, as well as implementing our plant
modernisation and sustainability initiatives. We will also progress
the expansion of our Ogden facility.
ETS outlook
The full year effect of the Vulcanic and Durex Industries
acquisitions, on a twelve-month pro-forma basis, would result in
ETS sales in 2022 of GBP382.9 million with an adjusted operating
profit margin above 18.0%.
We opened 2023 with record order books, which underpins our
confidence of achieving another year of good sales volume growth
above IP, particularly as we continue to expand our manufacturing
capacity to increase shipments. Strong customer demand for
decarbonisation solutions will remain a driver of ETS sales growth,
although Semiconductor demand that grew strongly in 2022 and
accounted for 18% of ETS sales on a pro-forma basis, is likely to
be lower in 2023. As Vulcanic and Durex Industries were acquired in
late 2022, these Divisions of ETS have not yet managed to fully
embed our Group's proactive price management practices so their
sales growth rates in 2023 will benefit less from pricing.
Consequently, excluding any impact from currency movements in 2023,
we anticipate mid-to-high single-digit growth, over 2022 ETS
pro-forma sales, albeit slightly lower growth than at Steam
Specialties.
Operational gearing from increased sales, continued proactive
price management practices that offset cost inflation, a higher
proportion of order book shipments that benefit from improved
pricing and the full year benefit of lower overheads resulting from
the closure of the Soissons facility in France, are expected to
drive further adjusted operating profit margin improvements for the
Chromalox and Thermocoax Divisions of ETS. We anticipate the
adjusted operating profit margin of the Vulcanic and Durex
Industries Divisions will decline in 2023, compared to their full
year pro-forma margins achieved in 2022, as they derive less
benefits from the 2023 price increases and we step up the revenue
investments planned for their integration. Consequently, we
anticipate ETS adjusted operating profit margin in 2023 will be
slightly below 18.0%.
Watson-Marlow
2021 Exchange Organic Acquisitions 2022 Organic Reported
& disposals*
Revenue GBP408.3m GBP20.2m GBP68.6m (GBP8.6m) GBP488.5m +16% +20%
---------- --------- --------- -------------- ---------- -------- ---------
Adjusted operating
profit GBP150.0m GBP7.6m GBP5.3m (GBP2.9m) GBP160.0m +3% +7%
---------- --------- --------- -------------- ---------- -------- ---------
Adjusted operating -400 -390
profit margin 36.7% 32.8% bps bps
---------- --------- --------- -------------- ---------- -------- ---------
Statutory operating
profit GBP145.4m GBP154.4m +6%
---------- --------- --------- -------------- ---------- -------- ---------
Statutory operating -400
margin 35.6% 31.6% bps
---------- --------- --------- -------------- ---------- -------- ---------
*Includes the impact of the treatment of Watson-Marlow Russia as
a disposal from the date at which the Group suspended all trading
with and within Russia.
Market overview
Watson-Marlow sales to the Pharmaceutical & Biotechnology
sector, which now accounts for around 60% of sales, have
historically grown at close to 20% per annum. This was driven by
advances in cell and gene therapies, as well as a move towards
single-use manufacturing processes.
In 2020 and 2021, the sector experienced exceptional growth
driven by its role in developing and producing COVID-19 vaccines,
with Watson-Marlow sales growing 22% and 43% respectively. During
the period between the fourth quarter of 2020 and the second
quarter of 2022, our Pharmaceutical & Biotechnology customers
experienced exceptionally strong demand for vaccines as the
industry estimated that at least two doses would be required for a
significant proportion of the global population in order to defeat
the pandemic, which potentially could be followed by boosters or
new vaccines to combat new variants of the virus. As such, capacity
additions accelerated and production ramped-up, leading to
increased demand for equipment and consumables. This exceptional
demand exceeded Watson-Marlow's manufacturing capacity,
notwithstanding our multiple capacity expansion initiatives,
leading to an increase in the order book, which remained well above
pre-pandemic levels at the end of 2022.
COVID-19 vaccine global adoption rates turned out to be much
lower than the World Health Organisation (WHO) and most governments
anticipated, especially in many developing economies. Nevertheless,
the severity of the virus and its symptoms have subsided due to the
effectiveness of the vaccines, despite lower-than-anticipated doses
being administered. With lower forecasted demand and excess vaccine
inventory, production has slowed. In the second half of 2022, as
expected, Watson-Marlow's COVID-19 related demand began
normalising, with many customers postponing new orders and
rescheduling delivery dates of orders already placed. As a result,
Watson-Marlow's full year sales to the Pharmaceutical &
Biotechnology sector grew close to 15% in 2022 and untypically,
over 50% of sales occurred in the first half of the year.
Demand growth in Process Industries was significantly above IP,
supported by sector specific programmes to accelerate demand, such
as in Food & Beverage and Water & Wastewater sectors, as
well as new product introductions.
Following the rapid growth in COVID-19 related demand in 2021
and the first half of 2022, Watson-Marlow expanded capacity at its
existing manufacturing facilities with additional shifts and new
equipment, which also helped mitigate the impact of global supply
chain disruptions. As demand started normalising in the second half
of 2022, steps were taken to appropriately right-size capacity and
overhead support costs, which included factory labour reductions in
the fourth quarter of 2022. Further actions are underway in early
2023, ensuring we are able to both meet our customers' needs and
protect our adjusted operating profit margin.
Progress in 2022
Watson-Marlow sales grew 20% to GBP488.5 million, or 16% up on
an organic basis. Sales to the Pharmaceutical & Biotechnology
sector grew close to 15% organically and sales to Process
Industries sectors grew 19%, significantly ahead of global IP. This
level of growth reflects both strong volume increases and our
proactive price management practices that offset inflationary cost
pressures to protect margin.
Watson-Marlow's adjusted operating profit grew 7% to a record
GBP160.0 million, driven by strong sales growth and partially
offset by revenue investments to support future growth.
Organically, adjusted operating profit grew 3%, the difference
being the impact of currency and the disposal of our high margin
Russian operation.
Watson-Marlow's adjusted operating profit margin of 32.8%
declined 390 bps from the exceptional margin of 2021. Despite
declining 400 bps on an organic basis, the margin remains 100 bps
above the 2019 pre-pandemic margin. Statutory operating profit grew
6% from GBP145.4 million in 2021 to GBP154.4 million in 2022.
The reduction in adjusted operating profit margin was driven by
the full year impact of 2021 revenue investments, which had an
impact of over 200 bps, as well as costs associated with the
transition of BioPure to a new facility in Portsmouth (UK) and the
ramp-up of our new facility in Devens, Massachusetts (USA), which
together had an impact of over 150 bps.
Business strategy update
Strategy25 is Watson-Marlow's five-year organic growth strategy,
building momentum to drive sustainable growth that outperforms our
markets and create value for all stakeholders. We made good
progress in advancing our strategy agenda in line with the Group's
six strategic themes:
Increase direct sales effectiveness through market sector
focus
During 2022, Watson-Marlow increased its direct sales workforce
and continued embedding our sector driven approach to understand
customers' processes, identifying opportunities for improvement and
proposing solutions. For example, we have been working with
lithium-ion battery customers to use our Bredel APEX pumps and hose
solutions to accurately dose, meter and transfer the liquids
required for automotive battery production. We are also supporting
our customers in the Water treatment sector with high accuracy
chemical dosing solutions that have facilitated reduced chemical
usage, helping them to achieve their sustainability and cost
goals.
Develop the knowledge and skills
In 2022, we invested in over 40,000 hours of training, learning
and development for colleagues across all areas of Watson-Marlow.
This included the development and deployment of a global training
programme for our direct sales engineers to enhance consultative
selling skills as we evolve towards our total solutions
approach.
Broaden our global presence
During the fourth quarter of 2022 we completed the construction
and first phase of production fit-out at our new state-of-the-art
manufacturing facility in Devens, Massachusetts (USA), with the
first customer deliveries shipped before the end of the year, as
planned. This milestone was achieved in 13 months of breaking
ground at the factory, demonstrating strong project management and
governance, as well as cross-continental collaboration of our
teams, set against significant supply chain and inflationary
challenges.
Leverage our research and development (R&D) investments
During 2022, we opened our first dedicated Innovation Centre to
support the Business globally. From its location close to our
factory in Falmouth (UK), this state-of-the-art facility will
support all new product developments and is the hub for evolving
our Digital Strategy across all products, services, manufacturing
processes and core enterprise systems. These ongoing investments
are critical to support the quality and consistency of our
operations and ensure we continue to deliver value to all our
stakeholders.
We launched multiple new products during the year, including an
expansion of our digital capability across the core pump range,
with a communication protocol used to collect data and control
equipment over Ethernet systems. We also launched BioPure-branded
hose assemblies, which enable customers to specify a completely
customisable solution based on their technical specifications, as
well as fully integrated Flexmag single-use pressure sensing
systems to extend our fluid path solutions.
Optimise supply chain effectiveness
During 2022, we made significant progress in expanding
Watson-Marlow's manufacturing capacity. The new Biopure facility in
Portsmouth (UK) commenced production in March 2022 and has enabled
a doubling of capacity, following the successful transition to this
new location. Injection moulding machines, which were temporarily
located at subcontractor sites to increase capacity, are also being
relocated to the new BioPure facility.
Due to global supply chain disruptions and the impact of
transitioning to a new facility, we took the decision to hold more
inventory to ensure continuity of supply, working with our partners
to identify risks and opportunities.
Operate sustainably and help improve our customers'
sustainability
Watson-Marlow has established a new dedicated business
sustainability team to develop a deeper understanding of our
product life cycle sustainability impact, drive engagement and
accelerate progress on our commitments to the Group's 'One Planet:
Engineering with Purpose' Sustainability Strategy.
In 2022, our Aflex Hose facility in Yorkshire (UK) identified
that 50% of their annual oil consumption could be filtered,
recycled and re-used in the site's braiding machines. This large
strong reduction in waste oil volume will support Watson-Marlow to
achieve its goal of 10% waste reduction by 2025, as well as
reducing costs. We have installed solar panels which generate 1.2
GWh of renewable energy at our new manufacturing facility at
Devens, Massachusetts (USA).
Focus for 2023
Our focus for 2023 will include implementing our Operational
Excellence Framework, an integrated planning process to better
align resources across the demand and supply processes, with the
aim of driving efficiency improvements across production and
procurement that de-risk our supply chain and reduce costs. In
support of our 'One Planet: Engineering with Purpose'
Sustainability Strategy, Cotopaxi's STRATA platform is being
deployed across all Watson-Marlow's manufacturing operations to
better monitor our sustainability footprint and drive reductions in
consumption and waste. The ramp-up of the new Devens site will
continue throughout 2023, supporting the tightly controlled
validation and phased transfer of product brands to the
state-of-the-art manufacturing facility.
Watson-Marlow outlook
COVID-19 related demand from Pharmaceutical & Biotechnology
customers began to normalise in the second half of 2022 and in the
first two months of 2023 we continued seeing a level of demand
consistent with the fourth quarter of 2022. In the first half of
2023, we expect that customers will continue working through their
existing stocks of our products and may still defer some deliveries
from our order book, while repurposing their production to meet
continued strong underlying demand growth for cell and gene therapy
applications. In the second half of 2023, we anticipate a return of
customers' demand growth, although defining the precise timing and
scale of the recovery remains difficult.
For the full year 2023, we anticipate Watson-Marlow sales to the
Pharmaceutical & Biotechnology sector will be lower than 2022.
However, this decline will be largely offset by Process Industries
sales growth, driven by volume growth above IP and continued
proactive price management practices to offset cost inflation and
protect margins. Therefore, excluding any impact from currency
movements, we anticipate overall Watson-Marlow sales in 2023 will
be slightly below 2022, with over 55% of full year sales occurring
in the second half of the year.
As Watson-Marlow continues driving proactive price management
practices across all market sectors, slightly lower sales in 2023
implies mid-to-high single-digit sales volume decline, with
resulting negative operational gearing. During the fourth quarter
of 2022 and first months of 2023, Watson-Marlow has taken steps to
appropriately right-size manufacturing capacity and reduce overhead
support costs in order to offset the adverse impact of lower sales
volumes on Watson-Marlow's adjusted operating profit margin. As a
result, we anticipate the full year adjusted operating profit
margin in 2023 will remain at a similar level to 2022, with close
to 65% of full year operating profit occurring in the second half
of the year.
Charges relating to the right-sizing of manufacturing capacity
and reduction in overhead support costs are expected to be excluded
from 2023 adjusted operating profit as defined in Note 2 to the
Financial Statements.
PRINCIPAL RISKS AND FINANCIAL RESILIENCE
Principal Risks
The Group has processes in place to identify, evaluate and
mitigate the Principal Risks that could have an impact on the
Group's performance. A top-down risk review in 2022 highlighted an
increased risk to our supply chain as a result of the impact of
global inflation. Our Principal Risks have been revised in
recognition of this impact and are set out below together with a
description of why they are relevant. Details of how they link with
the Group's strategy, an explanation of the change in risk and how
each risk is managed will be disclosed in the 2022 Annual
Report.
Economic and political instability - Increased compared to
2021
The Group operates worldwide and maintains operations in
territories that have historically experienced economic or
political instability, including regime changes. In addition to the
potential impact on our local operations, this instability also
increases credit, liquidity and currency risks.
This risk has increased due to escalating global political
uncertainties and a weakening macroeconomic outlook, partially
offset by declining COVID-19 related risks.
Significant exchange rate movements - Consistent compared to
2021
The Group reports its results and pays dividends in sterling.
Sales and manufacturing companies trade in local currency. With our
local presence in markets across the globe, the nature of our
business necessarily results in exposure to exchange rate
volatility.
Cybersecurity - Increased compared to 2021
Cybersecurity risks include theft of information, malware,
ransomware and compliance with evolving statutory and legislative
requirements. Risks may manifest through a direct attack on our
business or through our supply chain.
This risk has increased due to rising geopolitical tensions and
sophisticated, state-backed cyber attacks.
Loss of manufacturing output at any Group factory - Consistent
compared to 2021
The risk includes loss of output as a result of natural
disasters, industrial action, accidents or other causes. Loss of
manufacturing output from our larger plants risks serious
disruption to Group sales.
Failure to realise acquisition objectives - Consistent compared
to 2021
The Group mitigates this risk in various ways, including through
comprehensive due diligence, professional advisers, contractual
protections and comprehensive integration planning. However, there
are some variables that are difficult to control, such as adverse
economic conditions, or the loss of key employees, which could
impact acquisition objectives.
Loss of critical supplier - Increased compared to 2021
This risk relates to the loss of a critical supplier that could
result in manufacturing constraints and delayed deliveries to
customers.
This risk has increased on account of global supply chain
constraints, the impacts of COVID-19-related lockdowns and the war
in Ukraine.
Breach of legal and regulatory requirements (including ABC laws)
- Consistent compared to 2021
We operate globally and must ensure compliance with laws and
regulations wherever we do business. As we grow into new markets
and territories we continually review and update our operating
procedures and ensure our colleagues are fully informed and
educated in all applicable legal requirements, such as with respect
to anti-bribery and corruption (ABC) legislation. Breaching any of
these laws or regulations could have serious consequences for the
Group.
Inability to identify and respond to changes in customer needs -
Consistent compared to 2021
This risk could lead to a reduction in demand from a failure to
respond to changes in the needs of customers or technology
shifts.
Climate change risks
Although not a Principal Risk, Climate change has been elevated
to risk 9 in our Risk Register in 2022. Our Group Director of
Sustainability became a member of the Risk Management Committee in
2022 in recognition of the increasing importance of this risk.
Following a comprehensive review, our description of this risk was
updated in the Group Risk Register, aligning with the TCFD
framework and recognising that climate change is not a singular
risk, but a combination of physical and transitional risks that
will emerge differently under various scenarios.
The updated risk was extensively discussed at Risk Management
Committee meetings, to ensure alignment and agreement on the
definition and scope, the likelihood and velocity of the risk, as
well as the Group's appetite for the risk.
Climate change-related risks are currently deemed to be low for
the Group (based on assessment of likelihood, impact and control)
and climate change is not identified as a Principal Risk. However,
a number of the key risks associated with climate change are
already managed through other Principal Risks on the Group Risk
Register. These include physical risks - notably the impact of a
climate-related event on our manufacturing operations, specifically
the loss of a manufacturing site, or our supply chain - and
transition risks - such as failure to meet changing market
needs.
Based on this assessment we believe that our risk management
processes are adequate and appropriate for the level of risk.
During 2022, management of the Group's climate-change risk
mitigation activities was overseen by the Board, the Group
Executive Committee and the Group Sustainability Management
Committee.
Emerging risks
Following the disposal our Russian operating companies, we are
continuing to monitor the conflict in Ukraine and its subsequent
impact on our Group, including rising energy costs, increasing
inflationary pressures and corresponding interest rate rises in an
effort to curb inflation. These risks have been partially offset by
a reduction in COVID-19 related risks.
The fundamentals of our financial resilience
The strong operational and financial performance of the Group
during 2022 continues to reflect the resilience of our business
model. Alongside completing the acquisitions of Vulcanic and Durex
Industries, we have continued to focus on organic opportunities
with significant investments made in new manufacturing capacity,
sustainability initiatives and building additional digital
capability. The Group's longstanding track record of increasing
returns to shareholders has continued with a proposed year-on-year
increase of 12% in ordinary dividends.
Our products and solutions support critical industrial processes
across a broad range of industries and geographical markets, which
links our business performance to movements in global IP. As in
previous years, our business model supported our outperformance
against global IP due to our ability to self-generate sales
(accounting for 40% of sales) and a significant base business in
maintenance and repair sales (accounting for 45% of sales). These
sales are funded from our customers' operating budgets. The
remaining 15% of sales are related to large projects, funded from
customers' capital expenditure budgets, which are more heavily
influenced by economic cycles. Over 60% of our sales are to
defensive, less cyclical sectors and no single customer accounts
for more than 1.5% of Group sales.
Resilience over the short, medium and long term
Our business model and the investments we have continued to make
in our business, combined with our strong cash generation, position
us well to adapt to economic cycles. Our Going Concern and
Viability analysis gives us confidence in the robust nature of our
business and our capital structure, even when analysed under a
number of downside scenarios.
We have undertaken scenario-based modelling of our key risks,
the results of which underpin our confidence in our short and
medium-term resilience. The continued implementation of our
strategy supports our longer-term resilience and we continue to
closely monitor and respond to the changing external economic,
environmental and social factors that will impact our Businesses in
the future.
Going Concern statement
The Group's principal objective when managing liquidity is to
safeguard the Group's ability to continue as a going concern for at
least 12 months from the date of signing the 2022 Annual Report.
The Group retains sufficient resources to remain in compliance with
all the required terms and conditions within its borrowing
facilities with material headroom and no material uncertainties
have been identified. The Group continues to conduct ongoing risk
assessments on its business operations and liquidity. Consideration
has also been given to reverse stress tests, which seek to identify
factors that might cause the Group to require additional liquidity
and form a view as to the probability of these occurring.
Our financial position remains robust, with the next maturity of
our committed debt facilities being EUR225 million of Private
Placement notes which mature in September 2023 and which are
included within the cashflow forecast that underpins our scenario
modelling. The Group's debt facilities contain a leverage ratio
(net debt/EBITDA) covenant with a limit of up to 3.5x. Certain debt
facilities also contain an interest cover (EBITDA/net finance
expense) covenant of a minimum of 3.0x. The Group closely monitors
its financial position to ensure that it remains within the terms
of these debt covenants. At 31st December 2022 the Group's reported
leverage ratio was 1.7x (31st December 2021: 0.4x), the
year-on-year increase resulting from the debt-financed acquisitions
of Vulcanic and Durex Industries. It should be noted that including
a full year of EBITDA for acquired businesses results in a
pro-forma leverage ratio of 1.5x. Interest cover on a pro-forma
basis was 62x at 31st December 2022 (31st December 2021: 93x).
Reverse 'stress testing' was also performed to assess what level
of business under-performance would be required for a breach of the
financial covenants to occur, the results of which evidenced that
no reasonably possible change in future forecast cash flows would
cause a breach of the Group's covenants. In addition, the reverse
stress tests undertaken did not require us to take into account any
mitigating actions which the Group would implement in the event of
a severe and extended revenue and profitability decline. Such
actions would serve to further increase covenant headroom.
Having assessed the relevant business risks as discussed in our
Principal Risks on pages 31 and 32 and considered the liquidity and
covenant headroom available under several alternative scenarios as
set out in the viability assessment below, the Directors consider
it appropriate to continue to adopt the going concern basis in
preparing the financial statements.
Assessment of Viability
In accordance with provision 31 of the UK Corporate Governance
Code 2018, the Board has assessed the viability of the Group,
taking into account the Group's current financial position,
business strategy, the Board's risk appetite and the potential
impacts of the Group's Principal Risks. We set out the eight
Principal Risks we have identified on pages 31 and 32.
The Board has adopted a five-year viability assessment, which it
believes to be appropriate as this timeframe is covered by the
Group's forecasts; takes into account the nature of the Group's
Principal Risks, a number of which are external and have the
potential to impact over short time periods; and is aligned with
the maturity of the Group's principal committed bank credit
facility. While the Board has no reason to believe that the Group
will not be viable over a longer period, given the inherent
uncertainty involved, the Board believes that a five-year period
provides an appropriate degree of confidence whilst covering a
sufficiently longer-term perspective.
In making their assessment, the Board completed a robust
assessment, supported by detailed modelling, of the Principal Risks
facing the Group, including those that would threaten its business
model, future performance, solvency, or liquidity. In addition to
completing an impact assessment of the Principal Risks, the Board
considered the probability of the occurrence of the Principal
Risks, the Group's ability to control them and the effectiveness of
mitigating actions available. In every modelled scenario the Group
is able to demonstrate that it continues to remain viable. The
scenarios modelled to support this process were as follows:
Scenarios Modelled Links to Principal
Risks
================================================ ===============================
Scenario 1: Revenue Fall Risk 1: Economic and
We considered a combination of forward-looking political instability
scenarios in which sales were adversely Risk 2: Significant
impacted in all years of the assessment exchange rate movements
period.The reductions reflected the combined Risk 4: Loss of manufacturing
impact of economic political instability output at any Group
on global Industrial Production output, factory
material currency exchange rate fluctuations Risk 6: Loss of critical
and a loss of manufacturing output at supplier
a significant Group manufacturing site. Risk 8: Inability
to identify or respond
We assumed a reduction of 17% in sales to changes in customer
and no mitigating actions were taken needs
by the Group. Despite these impacts the
Group continued to trade profitably and
always remained comfortably within the
financial covenants in the external financing
facilities.
------------------------------------------------ -------------------------------
Scenario 2: Exceptional Charge Risk 7: Breach of
We considered the impact of a potential legal and regulatory
large, one-off expense as could be required requirements (including
in the case of a legal or regulatory ABC laws)
fine or a compensation payment. An expense
equivalent to 10% of the 2022 adjusted
Group operating profit was assumed alongside
a negative impact of 10% on revenue resulting
from the associated reputational damage.
Despite these impacts the Group continued
to trade profitably and always remained
comfortably within the financial covenants
in the external financing facilities.
------------------------------------------------ -------------------------------
Scenario 3: Cyber Attack Risk 3: Cybersecurity
We considered the occurrence of a cyber-attack
that succeeds in severely impacting Group
systems. We assumed an immediate disruption
to trading followed by a fall in sales
in subsequent years resulting from the
associated negative reputational impact,
the combined effect being a loss of 5%
of sales in each year over the period.
A significant initial cost was also included
to rectify the immediate impact of the
attack followed by increased investment
in all subsequent years to strengthen
our cyber-security.
Despite these impacts the Group continued
to trade profitably and always remained
comfortably within the financial covenants
in the external financing facilities.
-------------------------------
Scenario 4: Acquisition Failure Risk 5: Failure to
We considered a scenario whereby a large realise acquisition
acquisition has failed to achieve the objectives
acquisition business case. We assumed
a 20% shortfall in sales in the acquired
business and disposal for a lower cash
consideration than the original consideration.
Despite these impacts the Group continued
to trade profitably and remained comfortably
within the financial covenants contained
within the external financing facilities
at all times.
-------------------------------
A further scenario was modelled to ascertain what level of
revenue or adjusted operating profit margin reduction would be
required to cause a breach of the Group's debt covenants. The
reductions in revenue and adjusted operating profit margin were
significantly higher than those shown in the above scenarios. While
linked to the Group's Principal Risks, the scenarios detailed above
are hypothetical and designed to test the ability of the Group to
withstand such severe outcomes. In practice, the Group has an
established series of risk control measures in place that are
designed to both prevent and mitigate the impact of any such
occurrences from taking place. The results of the stress testing
undertaken showed that the Group would be able to absorb the impact
of the scenarios considered should they occur within the assessment
time period. In all the scenarios considered, the Group was not
required to implement any mitigating actions in relation to
reductions in forecast expenditure in order to remain within its
debt covenants.
Viability statement
Based on the outcomes of the scenarios and considering the
Group's financial position, strategic plans and Principal Risks,
the Directors have a reasonable expectation that the Group will be
able to continue in operation and meet its liabilities as they fall
due over the period of their assessment. The Directors' statement
regarding the adoption of the going concern basis for the
preparation of the financial statements can be found on page
43.
Long-term resilience
The Group has a long track record, over 130 years, of
consistently adapting to changing macroeconomic, environmental and
social factors supported by our business model. While our strategy
and business model lessen any material impact from our Principal
Risk factors, we nevertheless continuously review our markets,
listen to our customers and adapt our solutions, while working
responsibly and in line with our Values to build long-term
sustainability.
We have a highly resilient business and strategy that will
remain relevant across different climate-related scenarios. We
recognise the need to anticipate and mitigate the impact of
climate-related change. In 2021 we launched our 'One Planet:
Engineering with Purpose' Sustainability Strategy covered in more
detail on page 47 of the Annual Report. Although not classed as a
Principal Risk for our Group, the TCFD disclosures on pages 59 to
61 detail the anticipated impact of climate-change on the Group's
longer-term resilience.
The increasing commitments to net zero targets will have a
profound effect on industrial activity over the coming decades and
is an additional source of growth for our Group over at least the
next 30 years. To address the opportunities arising from the
decarbonisation of industrial processes, we have invested
significantly in the development of sustainable products and
solutions that help customers meet their own sustainability goals.
In 2022, we launched new-to-world 'TargetZero' decarbonisation
solutions, created through an internal collaboration between Steam
Specialties and Electric Thermal Solutions (ETS). You can read more
about the benefits of the three 'TargetZero' solutions, branded
'ElectroFit', 'Steam Battery' and 'SteamVolt', on page 21 of the
Operating Review.
Spirax-Sarco Engineering plc
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31ST DECEMBER
2022
8B Note 2022 2021
GBPm GBPm
----------------------------------------- -------- -------- --------
ASSETS
Non-current assets
Property, plant and equipment 384.5 277.4
Right-of-use assets 67.2 62.9
Goodwill 703.3 411.2
Other intangible assets 500.3 255.7
Prepayments 2.0 1.3
Taxation recoverable 5.1 4.9
Deferred tax assets 69.0 46.1
----------------------------------------- -------- -------- --------
1,731.4 1,059.5
----------------------------------------- -------- -------- --------
Current assets
Inventories 290.0 201.3
Trade receivables 341.1 272.3
Other current assets 79.6 44.7
Taxation recoverable 13.9 10.8
Cash and cash equivalents 8 328.9 274.6
----------------------------------------- -------- -------- --------
1,053.5 803.7
----------------------------------------- -------- -------- --------
Total assets 2,784.9 1,863.2
----------------------------------------- -------- -------- --------
EQUITY AND LIABILITIES
Current liabilities
Trade and other payables 283.0 217.0
Provisions 12.0 5.2
Bank overdrafts 8 85.1 55.6
Current portion of long-term borrowings 8 202.9 59.6
Short-term lease liabilities 8 14.1 11.2
Current tax payable 40.4 33.1
----------------------------------------- -------- -------- --------
637.5 381.7
----------------------------------------- -------- -------- --------
Net current assets 416.0 422.0
----------------------------------------- -------- -------- --------
Non-current liabilities
Long-term borrowings 8 731.3 289.9
Long-term lease liabilities 8 51.1 48.9
Deferred tax liabilities 128.1 81.8
Post-retirement benefits 52.1 44.7
Provisions 6.2 1.5
Long-term payables 8.8 4.7
----------------------------------------- -------- -------- --------
977.6 471.5
----------------------------------------- -------- -------- --------
Total liabilities 1,615.1 853.2
----------------------------------------- -------- -------- --------
Net assets 3 1,169.8 1,010.0
----------------------------------------- -------- -------- --------
Equity
Share capital 19.8 19.8
Share premium account 88.1 86.3
Translation reserve 17.5 (40.5)
Other reserves (23.4) (17.7)
Retained earnings 1,067.0 961.1
----------------------------------------- -------- -------- --------
Equity shareholders' funds 1,169.0 1,009.0
Non-controlling interest 0.8 1.0
----------------------------------------- -------- -------- --------
Total equity 1,169.8 1,010.0
----------------------------------------- -------- -------- --------
Total equity and liabilities 2,784.9 1,863.2
----------------------------------------- -------- -------- --------
Spirax-Sarco Engineering plc
CONSOLIDATED INCOME STATEMENT FOR THE YEARED 31ST DECEMBER
2022
Adjusted Adj't* Total Adjusted Adj't* Total
Note 2022 2022 2022 2021 2021 2021
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ------ --------- ------ --------- --------- ------ ---------
2,
Revenue 3 1,610.6 - 1,610.6 1,344.5 - 1,344.5
Operating costs (1,230.4) (61.4) (1,291.8) (1,004.2) (19.4) (1,023.6)
---------------------- ------ --------- ------ --------- --------- ------ ---------
2,
Operating profit 3 380.2 (61.4) 318.8 340.3 (19.4) 320.9
---------------------- ------ --------- ------ --------- --------- ------ ---------
Financial expenses (15.2) (1.1) (16.3) (9.8) - (9.8)
Financial income 5.6 - 5.6 3.4 - 3.4
---------------------- ------ --------- ------ --------- --------- ------ ---------
3,
Net financing expense 4 (9.6) (1.1) (10.7) (6.4) - (6.4)
---------------------- ------ --------- ------ --------- --------- ------ ---------
Share of profit
of Associate - - - - - -
---------------------- ------ --------- ------ --------- --------- ------ ---------
Profit before
taxation 370.6 (62.5) 308.1 333.9 (19.4) 314.5
Taxation 5 (92.5) 9.4 (83.1) (83.9) 4.3 (79.6)
---------------------- ------ --------- ------ --------- --------- ------ ---------
Profit for the
period 278.1 (53.1) 225.0 250.0 (15.1) 234.9
---------------------- ------ --------- ------ --------- --------- ------ ---------
Attributable to:
Equity shareholders 277.8 (53.1) 224.7 249.7 (15.1) 234.6
Non-controlling
interest 0.3 - 0.3 0.3 - 0.3
---------------------- ------ --------- ------ --------- --------- ------ ---------
Profit for the
period 278.1 (53.1) 225.0 250.0 (15.1) 234.9
---------------------- ------ --------- ------ --------- --------- ------ ---------
2,
Earnings per share 6
Basic earnings
per share 377.2p 305.1p 338.9p 318.3p
Diluted earnings
per share 376.3p 304.4p 338.0p 317.5p
---------------------- ------ --------- ------ --------- --------- ------ ---------
Dividends 7
Dividends per share 152.0p 136.0p
Dividends paid
during the year
(per share) 140.0p 123.0p
---------------------- ------ --------- ------ --------- --------- ------ ---------
*Adjusted figures exclude certain items, as set out and
explained in the Financial Review and as detailed in Note 2. All
amounts relate to continuing operations.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE
YEARED
31ST DECEMBER 2022
2022 2021
GBPm GBPm
------------------------------------------------------ --- ------ ------
Profit for the year 225.0 234.9
------------------------------------------------------ --- ------ ------
Items that will not be reclassified to profit
or loss:
Remeasurement (loss)/gain on post-retirement
benefits (8.3) 46.3
Deferred tax on remeasurement loss/(gain) on
post-retirement benefits 1.8 (8.9)
------------------------------------------------------ --- ------ ------
(6.5) 37.4
------------------------------------------------------ --- ------ ------
Items that may be reclassified subsequently
to profit or loss:
Foreign exchange translation differences and
net investment hedges 54.8 (6.8)
Transfer to Income Statement of cumulative
translation differences on disposal of subsidiaries 10 3.2 -
Loss on cash flow hedges net of tax (3.5) (2.8)
------------------------------------------------------ --- ------ ------
54.5 (9.6)
------------------------------------------------------ --- ------ ------
Total comprehensive income for the year 273.0 262.7
------------------------------------------------------ --- ------ ------
Attributable to:
Equity shareholders 272.7 262.4
Non-controlling interest 0.3 0.3
------------------------------------------------------ --- ------ ------
Total comprehensive income for the year 273.0 262.7
------------------------------------------------------ --- ------ ------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEARED 31ST
DECEMBER 2022
Share Equity
Share Premium Translation Other Retained shareholders' Non-controlling Total
Capital Account reserve* reserves Earnings funds interest Equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- -------- -------- ----------- --------- --------- -------------- --------------- -------
Balance at 1(st)
January 2022 19.8 86.3 (40.5) (17.7) 961.1 1,009.0 1.0 1,010.0
--------------------- -------- -------- ----------- --------- --------- -------------- --------------- -------
Profit for the year - - - - 224.7 224.7 0.3 225.0
Other comprehensive
income/(expense):
Foreign exchange
translation
differences and net
investment hedges - - 54.8 - - 54.8 - 54.8
Transfer to Income
Statement of
cumulative
translation
differences
on disposal of
subsidiaries - - 3.2 - - 3.2 - 3.2
Remeasurement loss
on post-retirement
benefits - - - - (8.3) (8.3) - (8.3)
Deferred tax on
remeasurement
loss on
post-retirement
benefits - - - - 1.8 1.8 - 1.8
Cash flow hedges - - - (3.5) - (3.5) - (3.5)
--------------------- -------- -------- ----------- --------- --------- -------------- --------------- -------
Total other
comprehensive
income/(expense) for
the year - - 58.0 (3.5) (6.5) 48.0 - 48.0
--------------------- -------- -------- ----------- --------- --------- -------------- --------------- -------
Total comprehensive
income/(expense) for
the year - - 58.0 (3.5) 218.2 272.7 0.3 273.0
--------------------- -------- -------- ----------- --------- --------- -------------- --------------- -------
Contributions by and
distributions to
owners
of the Company:
Dividends paid - - - - (103.1) (103.1) (0.5) (103.6)
Equity settled share
plans net of tax - - - - (9.2) (9.2) - (9.2)
Issue of share
capital - 1.8 - - - 1.8 - 1.8
Employee Benefit
Trust
shares - - - (2.2) - (2.2) - (2.2)
Balance at 31(st)
December 2022 19.8 88.1 17.5 (23.4) 1,067.0 1,169.0 0.8 1,169.8
--------------------- -------- -------- ----------- --------- --------- -------------- --------------- -------
*In prior years, the translation reserve was included within
other reserves with a breakdown being disclosed separately in the
notes to the Financial Statements. Due to the material value of
this reserve, we have presented it as a separate heading in the
Statement of Changes in Equity for the year ended 31st December
2022. The comparatives have also been amended to reflect this
reclassification to ensure comparability and consistency.
Other reserves represent the Group's cash flow hedges, capital
redemption and Employee Benefit Trust reserves. The non-controlling
interest is a 2.5% share of Spirax Sarco (Korea) Ltd held by
employee shareholders.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEARED 31ST
DECEMBER 2021
Share Equity
Share Premium Translation Other Retained shareholders' Non-controlling Total
Capital Account reserve* Reserves Earnings funds interest Equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ----------- -------- ----------- --------- --------- -------------- --------------- -------
Balance at 1(st)
January 2021 19.8 84.8 (33.7) (2.4) 782.8 851.3 1.0 852.3
------------------------ ----- -------- ----------- --------- --------- -------------- --------------- -------
Profit for the year - - - - 234.6 234.6 0.3 234.9
Other comprehensive
(expense)/income:
Foreign exchange
translation
differences and net
investment hedges - - (6.8) - - (6.8) - (6.8)
Remeasurement loss
on post-retirement
benefits - - - - 46.3 46.3 - 46.3
Deferred tax on
remeasurement
loss on post-retirement
benefits - - - - (8.9) (8.9) - (8.9)
Cash flow hedges - - - (2.8) - (2.8) - (2.8)
------------------------ ----- -------- ----------- --------- --------- -------------- --------------- -------
Total other
comprehensive
(expense)/income for
the year - - (6.8) (2.8) 37.4 27.8 - 27.8
------------------------ ----- -------- ----------- --------- --------- -------------- --------------- -------
Total comprehensive
(expense)/income for
the year - - (6.8) (2.8) 272.0 262.4 0.3 262.7
------------------------ ----- -------- ----------- --------- --------- -------------- --------------- -------
Contributions by and
distributions to owners
of the Company:
Dividends paid - - - - (90.7) (90.7) (0.3) (91.0)
Equity settled share
plans net of tax - - - - (3.0) (3.0) - (3.0)
Issue of share capital - 1.5 - - - 1.5 - 1.5
Employee Benefit Trust
shares - - - (12.5) - (12.5) - (12.5)
Balance at 31(st)
December 2021 19.8 86.3 (40.5) (17.7) 961.1 1,009.0 1.0 1,010.0
------------------------ ----- -------- ----------- --------- --------- -------------- --------------- -------
Spirax-Sarco Engineering plc
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARED 31ST
DECEMBER 2022
Note 2022 2021
GBPm GBPm
---------------------------------------------- ----- --------- --------
Cash flows from operating activities
Profit before taxation 308.1 314.5
Depreciation, amortisation and impairment 81.0 69.0
Profit on disposal of property, plant
and equipment (1.4) (0.5)
Cash payments to the pension schemes greater
than the charge to operating profit (5.3) (7.6)
Loss on disposal of subsidiaries 7.0 -
Acquisition related costs 3.8 -
Restructuring related provisions and current -
asset impairments 10.2
Equity settled share plans 8.9 9.2
Net financing expense 10.7 6.4
---------------------------------------------- ----- --------- --------
Operating cash flow before changes in
working capital and provisions 423.0 391.0
(Increase)/decrease in trade and other
receivables (56.3) (71.3)
(Increase)/decrease in inventories (58.3) (26.7)
(Decrease)/increase in provisions (0.8) (1.0)
Increase/(decrease) in trade and other
payables 23.5 59.5
---------------------------------------------- ----- --------- --------
Cash generated from operations 331.1 351.5
Income taxes paid (90.0) (78.1)
---------------------------------------------- ----- --------- --------
Net cash from operating activities 2 241.1 273.4
---------------------------------------------- ----- --------- --------
Cash flows from investing activities
Purchase of property, plant and equipment (104.3) (52.8)
Proceeds from sale of property, plant
and equipment 4.0 2.0
Purchase of software and other intangibles (8.9) (8.1)
Development expenditure capitalised (4.3) (3.2)
Disposal of subsidiaries 10 (2.8) -
Acquisition of businesses net of cash
acquired 9 (460.3) -
Interest received 4 5.6 3.4
---------------------------------------------- ----- --------- --------
Net cash used in investing activities (571.0) (58.7)
---------------------------------------------- ----- --------- --------
Cash flows from financing activities
Proceeds from issue of share capital 1.8 1.5
Employee Benefit Trust share purchase (20.8) (26.1)
Repaid borrowings 8 (511.1) (77.5)
New borrowings 8 1,008.8 -
Interest paid including interest on lease
liabilities 4 (15.5) (8.5)
Repayment of lease liabilities 8 (12.9) (11.7)
Dividends paid (including minorities) 7 (103.6) (91.0)
---------------------------------------------- ----- --------- --------
Net cash used in financing activities 346.7 (213.3)
---------------------------------------------- ----- --------- --------
Net change in cash and cash equivalents 8 16.8 1.4
Net cash and cash equivalents at beginning
of period 219.0 224.0
Exchange movement 8 8.0 (6.4)
---------------------------------------------- ----- --------- --------
Net cash and cash equivalents at end
of period 8 243.8 219.0
Borrowings 8 (934.2) (349.5)
---------------------------------------------- ----- --------- --------
Net debt at end of period 8 (690.4) (130.5)
---------------------------------------------- ----- --------- --------
Lease liabilities 8 (65.2) (60.1)
---------------------------------------------- ----- --------- --------
Net debt including lease liabilities at
end of period 8 (755.6) (190.6)
---------------------------------------------- ----- --------- --------
NOTES TO THE FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
The Consolidated Financial Statements have been prepared in
accordance with International Financial Reporting Standards (IFRS)
adopted for use in the United Kingdom (UK) and therefore comply
with those parts of the Companies Act 2006 that are applicable to
companies reporting under IFRS. IFRS includes the standards and
interpretations approved by the International Accounting Standards
Board (IASB) including International Accounting Standards (IAS) and
interpretations issued by the IFRS Interpretations Committee
(IFRIC).
The financial information included in this News Release does not
constitute statutory accounts of the Group for the years ended 31st
December 2022 and 2021, although it is derived from those accounts.
Statutory accounts for the year ended 31st December 2021 have been
reported on by the Group's auditor and delivered to the Registrar
of Companies. Statutory accounts for the year ended 31st December
2022 have been audited and will be delivered to the Registrar of
Companies following the Company's Annual General Meeting. The
report of the auditors for both years was (i) unqualified, (ii) did
not include a reference to any matters to which the auditors drew
attention by way of emphasis without qualifying their report, and
(iii) did not contain a statement under Section 498 (2) or (3) of
the Companies Act 2006.
If approved at the Annual General Meeting on 10th May 2023, the
final dividend will be paid on 19th May 2023 to shareholders on the
register at 21st April 2023. No scrip alternative to the cash
dividends is being offered.
Copies of the Annual Report will be sent on 30th March 2023 to
shareholders who have requested a hard copy and can be obtained
from our office at The Grange, Bishops Cleeve, Cheltenham, GL52
8YQ. The Report will also be available on our website at
www.spiraxsarcoengineering.com .
As outlined below, there have been no significant changes in
accounting policies from those set out in the Spirax-Sarco
Engineering plc 2021 Annual Report. The accounting policies have
been applied consistently throughout the years ended 31st December
2021 and 31st December 2022.
NEW STANDARDS AND INTERPRETATIONS ADOPTED IN THE CURRENT
YEAR
During the current year, the Group has applied the following
amendments to IFRS Standards and Interpretations issued by the
International Accounting Standards Board (IASB) effective for
annual periods that begin on or after 1(st) January 2022. Adoption
has not had a material impact on the disclosures or on the amounts
reported in these Financial Statements:
-- Amendments to IFRS 3 Reference to the Conceptual Framework
-- Amendments to IAS 16 Property, Plant and Equipment - Proceeds
before Intended Use
-- Amendments to IAS 37 Onerous Contracts - Cost of Fulfilling
a Contract
-- Annual Improvements to IFRS Accounting Standards 2018-2020
Cycle
The economies in Argentina and Turkey are subject to high
inflation. At 31st December 2022 we have concluded that applying
IAS 29 (Financial Reporting in Hyperinflationary Economies) is not
required as the impact of adoption is not material. We will
continue to assess the position going forward.
NEW STANDARDS AND INTERPRETATIONS NOT YET APPLIED
At the date of authorisation of these Financial Statements, the
Group has not applied the following new and revised IFRS Standards
that have been issued but are not yet effective:
-- IFRS 17 Insurance Contracts
-- IFRS 10 and IAS 28 (amendments): Sale or Contribution of Assets
between an Investor and its Associate or Joint Venture
-- Amendments to IAS 1: Classification of liabilities as Current
or Non-current
-- Amendments to IAS 1 and IFRS Practice Statement 2: Disclosure
of Accounting Polices
-- Amendments to IAS 8: Definition of Accounting Estimates
-- Amendments to IAS 12: Deferred Tax related to Assets and Liabilities
arising from a Single Transaction
The Directors do not expect that the adoption of the Standards
listed above will have a material impact on the Financial
Statements of the Group in future periods.
GOING CONCERN
In determining the basis of preparation for the Consolidated
Financial Statements, the Directors have considered the Group's
available resources, current business activities and factors likely
to impact on its future development and performance, which are
described in the Chair's Statement, Operating Review and Financial
Review.
Following this assessment, the Board of Directors are satisfied
that the Group has sufficient resources to continue in operation
for the foreseeable future, a period of not less than 12 months
from the date of this report. Accordingly, they continue to adopt
the going concern basis in relation to this conclusion and
preparing the Consolidated Financial Statements.
2. ALTERNATIVE PERFORMANCE MEASURES
The Group reports under IFRS and also uses alternative
performance measures where the Board believe that they help to
effectively monitor the performance of the Group and users of the
Financial Statements might find them informative. Certain
alternative performance measures also form a meaningful element of
Executive Directors' variable remuneration. Net debt to EBITDA is
also a covenant assessed for external borrowing purposes. A
definition of the alternative performance measures included in the
Annual Report and a reconciliation to the closest IFRS equivalent
are disclosed below. The term 'adjusted' is not defined under IFRS
and may therefore not be comparable with similarly titled measures
reported by other companies. Adjusted performance measures are not
considered to be a substitute for, or superior to, IFRS
measures.
The term 'sales' is used interchangeably with 'revenue' when
describing the financial performance of the business.
Drop-through is calculated as the organic increase in adjusted
operating profit divided by the organic increased in revenue.
Adjusted operating profit
Adjusted operating profit excludes items that are considered to
be significant in nature and/or quantum at either a Group or an
operating segment level and where treatment as an adjusted item
provides stakeholders with additional useful information to assess
the period-on-period trading performance of the Group. The Group
excludes such items including those defined as follows:
-- amortisation and impairment of acquisition-related intangible
assets
-- costs associated with acquisitions and disposals
-- reversal of acquisition-related fair value adjustments to inventory
-- changes in deferred and contingent consideration payable on
acquisitions
-- gain or loss on disposal of subsidiary and disposal groups
-- costs associated with a significant restructuring programme
-- significant gains or losses on disposal of property
-- significant non-recurring pension costs or credits
-- accelerated depreciation, impairment and other related costs
on one-off significant property redevelopments
-- related tax effect on adjusting items above and other tax items
which do not form part of the underlying tax rate
A reconciliation between operating profit as reported under IFRS
and adjusted operating profit is given below.
2022 2021
GBPm GBPm
------------------------------------------------------- ------ ------
Operating profit as reported under IFRS 318.8 320.9
Amortisation of acquisition-related intangible assets 23.7 21.4
Reversal of acquisition-related fair value adjustments
to inventory 1.8 -
Disposal of subsidiaries in Russia 7.1 -
Restructuring costs 15.5 -
Acquisition-related items 9.1 -
Accelerated depreciation and other related costs
on one-off property redevelopments 4.2 -
Post-retirement benefit plan in Germany being closed
to future accrual - (2.0)
Adjusted operating profit 380.2 340.3
------------------------------------------------------- ------ ------
The related tax effects of the above are included as adjustments
in taxation as disclosed in Note 5.
The impact of adjustments to operating profit as reported under
IFRS of GBP61.4m (2021: GBP19.4m) on net change in cash and cash
equivalents is a total outflow of GBP13.5m (2021: GBPnil). Included
within cash generated from operations is acquisition-related items
of GBP7.1m, related costs on one-off property redevelopments of
GBP0.3m and disposal-related costs GBP0.1m. Included within net
cash used in investing activities is restructuring costs of GBP3.2m
and disposal of subsidiaries in Russia of GBP2.8m.
Adjusted earnings per share
2022 2021
--------------------------------------------- ------ ------
Profit for the period attributable to equity
holders as reported under IFRS (GBPm) 224.7 234.6
Items excluded from adjusted profit (GBPm) 62.5 19.4
Tax effects on adjusted items (GBPm) (9.4) (4.3)
Adjusted profit for the period attributable
to equity holders (GBPm) 277.8 249.7
--------------------------------------------- ------ ------
Weighted average shares (million) 73.6 73.7
--------------------------------------------- ------ ------
Basic adjusted earnings per share 377.2p 338.9p
--------------------------------------------- ------ ------
Diluted weighted average shares (million) 73.8 73.9
--------------------------------------------- ------ ------
Diluted adjusted earnings per share 376.3p 338.0p
--------------------------------------------- ------ ------
Basic adjusted earnings per share is defined as adjusted profit
for the period attributable to equity holders divided by the
weighted average number of shares in issue. Diluted adjusted
earnings per share is defined as adjusted profit for the period
attributable to equity holders divided by the diluted weighted
average number of shares.
Basic and diluted EPS calculated on an IFRS profit basis are
included in Note 6.
Adjusted cash flow
A reconciliation showing the items that bridge between net cash
from operating activities as reported under IFRS to an adjusted
basis is given below. Adjusted cash from operations is used by the
Board to monitor the performance of the Group, with a focus on
elements of cashflow, such as net capital expenditure, which are
subject to day-to-day control by the business.
2022 2021
GBPm GBPm
------------------------------------------------ ------- ------
Net cash from operating activities as reported
under IFRS 241.1 273.4
Restructuring and acquisition-related costs 10.2 -
Net capital expenditure excluding acquired
intangibles from acquisitions (113.5) (62.1)
Income tax paid 90.0 78.1
Repayments of principal under lease liabilities (12.9) (11.7)
Adjusted cash from operations 214.9 277.7
------------------------------------------------ ------- ------
Adjusted cash conversion in 2022 is 57% (2021: 82%). Cash
conversion is calculated as adjusted cash from operations divided
by adjusted operating profit. The adjusted cash flow is included in
the Financial Review on page 16.
Cash generation
Cash generation is one of the Group's key performance indicators
used by the Board to monitor the performance of the Group and
measure the successful implementation of our strategy. It is one of
two financial measures on which Executive Directors' variable
remuneration is based.
Cash generation is adjusted operating profit after adding back
depreciation and amortisation, less cash payments to pension
schemes in excess of the charge to adjusted operating profit,
equity settled share plans, net capital expenditure excluding
acquired intangibles, working capital changes and repayment of
principal under lease liabilities. Cash generation is equivalent to
adjusted cash from operations, a reconciliation between this and
net cash from operating activities as reported under IFRS is shown
above.
Return on invested capital (ROIC) and return on capital employed
(ROCE)
The Group distinguishes between invested capital and capital
employed when calculating return on capital. Invested capital
represents the total capital invested in the business and is equal
to total equity plus net debt and therefore includes the impact of
acquisitions and disposals. Capital employed is invested capital
less certain non-current assets and non-current liabilities and
therefore reflects capital that is more operational in nature. Both
of these return metrics are used to ensure a full assessment of
business performance.
Return on invested capital (ROIC)
ROIC measures the post-tax return on the total capital invested
in the business. It is calculated as adjusted operating profit
after tax divided by average invested capital. Average invested
capital is defined as the average of the closing balance at the
current and prior year end. Taxation is calculated as adjusted
operating profit multiplied by the adjusted effective tax rate.
An analysis of the components is as follows:
2022 2021
GBPm GBPm
-------------------------------------------------- ------- -------
Total equity 1,169.8 1,010.0
Net debt including lease liabilities 755.6 190.6
-------------------------------------------------- ------- -------
Total invested capital 1,925.4 1,200.6
Average invested capital 1,563.0 1,157.9
-------------------------------------------------- ------- -------
Average invested capital (excluding acquisitions,
disposals and leases) 1,263.8 1,108.4
-------------------------------------------------- ------- -------
Operating profit as reported under IFRS 318.8 320.9
Adjustments (see adjusted operating profit) 61.4 19.4
-------------------------------------------------- ------- -------
Adjusted operating profit 380.2 340.3
Taxation (94.9) (85.5)
-------------------------------------------------- ------- -------
Adjusted operating profit after tax 285.3 254.8
-------------------------------------------------- ------- -------
Adjusted operating profit after tax (excluding
acquisitions, disposals and leases) 277.6 254.1
-------------------------------------------------- ------- -------
Return on invested capital 18.3% 22.0%
-------------------------------------------------- ------- -------
Return on invested capital (excluding
acquisitions, disposals and leases) 22.0% 22.9%
-------------------------------------------------- ------- -------
Return on capital employed (ROCE)
ROCE measures effective management of fixed assets and working
capital relative to the profitability of the business. It is
calculated as adjusted operating profit divided by average capital
employed. Average capital employed is defined as the average of the
closing balance at the current and prior year end. More information
on ROCE can be found in the Capital Employed and ROCE sections of
the Financial Review.
An analysis of the components is as follows:
2022 2021
GBPm GBPm
Property, plant and equipment 384.5 277.4
Right-of-use assets 67.2 62.9
Software and development costs 44.5 38.9
Prepayments 2.0 1.3
Inventories 290.0 201.3
Trade receivables 341.1 272.3
Other current assets 79.6 44.7
Tax recoverable 19.0 15.7
Trade, other payables and current
provisions (295.0) (222.2)
Current tax payable (40.4) (33.1)
Capital employed 892.5 659.2
--------------------------------------- -------- --------
Average capital employed 775.9 621.5
--------------------------------------- -------- --------
Average capital employed (excluding
acquisitions, disposals and leases) 677.5 571.9
--------------------------------------- -------- --------
Operating profit 318.8 320.9
Adjustments (see adjusted operating
profit) 61.4 19.4
--------------------------------------- -------- --------
Adjusted operating profit 380.2 340.3
--------------------------------------- -------- --------
Adjusted operating profit (excluding
acquisitions, disposals and leases) 369.9 339.2
--------------------------------------- -------- --------
Return on capital employed 49.0% 54.7%
--------------------------------------- -------- --------
Return on capital employed (excluding
acquisitions, disposals and leases) 54.6% 59.3%
--------------------------------------- -------- --------
A reconciliation of capital employed to net assets as reported
under IFRS and disclosed on the Consolidated Statement of Financial
Position is given below.
2022 2021
GBPm GBPm
Capital employed 892.5 659.2
Goodwill and acquired intangibles 1,159.1 628.0
Post-retirement benefits (52.1) (44.7)
Net deferred tax (59.1) (35.7)
Non-current provisions and
long-term payables (15.0) (6.2)
Lease liabilities (65.2) (60.1)
Net debt (690.4) (130.5)
---------------------------------- ------- -------
Net assets as reported under
IFRS 1,169.8 1,010.0
---------------------------------- ------- -------
Net debt including lease liabilities
A reconciliation between net debt and net debt including lease
liabilities is given below. A breakdown of the balances that are
included within net debt is given within Note 8. Net debt excludes
lease liabilities to be consistent with how net debt is defined for
external debt covenant purposes, as well as to enable comparability
with prior years.
2022 2021
GBPm GBPm
------------------------------------- ------ ------
Net debt 690.4 130.5
Lease liabilities 65.2 60.1
Net debt including lease liabilities 755.6 190.6
------------------------------------- ------ ------
Net debt to earnings before interest, tax, depreciation and
amortisation (EBITDA)
To assess the size of the net debt balance relative to the size
of the earnings for the Group we analyse net debt as a proportion
of EBITDA. EBITDA is calculated by adding back depreciation and
amortisation of owned property, plant and equipment, software and
development and the 12-month pro-forma EBITDA impact of
acquisitions and disposals to adjusted operating profit. Net debt
is calculated as Cash and cash equivalents less Bank overdrafts,
Short-term borrowings and Long-term borrowings (excluding
Short-term and Long-term lease liabilities). The net debt to EBITDA
ratio is calculated as follows:
2022 2021
GBPm GBPm
----------------------------------------------- ------ ------
Adjusted operating profit 380.2 340.3
Depreciation and amortisation of property,
plant and equipment, software and development 37.4 36.2
Acquisitions and disposals pro-forma basis
(EBITDA) 33.7 -
EBITDA 451.3 376.5
----------------------------------------------- ------ ------
Net debt 690.4 130.5
----------------------------------------------- ------ ------
Net debt to EBITDA 1.5x 0.3x
----------------------------------------------- ------ ------
The components of net debt are disclosed in Note 8.
Organic measures
As we are a multi-national Group of companies, who trade in a
large number of foreign currencies and also acquire and sometimes
dispose of companies, we also refer to organic performance measures
throughout the News Release. These strip out the effects of the
movement of foreign currency exchange rates and of acquisitions and
disposals. The Board believe that this allows users of the accounts
to gain a further understanding of how the Group has performed.
Exchange translation movements are assessed by re-translating
prior period reported values to current period exchange rates.
Exchange transaction impacts on operating profit are assessed on
the basis of transactions being at constant currency between
years.
The incremental impact of any acquisitions that occurred in
either the current period or prior period is excluded from the
organic results of the current period at current period exchange
rates. For any disposals that occurred in the current or prior
period, the current period organic results include the difference
between the current and prior period financial results only for the
like-for-like period of ownership.
The organic percentage movement is calculated as the organic
movement divided by the prior period at current period exchange
rates, excluding disposals for the non like-for-like period of
ownership. The organic bps change in adjusted operating margin is
the difference between the current period margin, excluding the
incremental impact of acquisitions, and the prior period margin
excluding disposals for the non like-for-like period of ownership
at current period exchange rates.
A reconciliation of the movement in revenue and adjusted
operating profit compared to the prior period is given below.
Acquisitions
and disposal
2021 Exchange Organic (1) 2022
GBPm GBPm GBPm GBPm GBPm Organic Reported
------------------- ----------- -------- --------- ------------- ----------- -------- --------
Revenue GBP1,344.5m GBP52.5m GBP191.6m GBP22.0m GBP1,610.6m +14% +20%
Adjusted operating
profit GBP340.3m GBP13.0m GBP23.5m GBP3.4m GBP380.2m +7% +12%
Adjusted operating
profit margin 25.3% 23.6% -160 bps -170 bps
------------------- ----------- -------- --------- ------------- ----------- -------- --------
(1) Includes the impact of (i) the acquisition of Cotopaxi,
Durex Industries and Vulcanic and (ii) the treatment of our
disposed Russian operating companies as disposed from the date at
which the Group suspended all trading with and within Russia.
The reconciliation for each segment is included in the Operating
Review on pages 19, 23 and 28.
Pro-forma Revenue
Due to the disposal of our Russian operating companies and the
acquisitions of Cotopaxi, Vulcanic and Durex Industries, our
financial results for 2022 only include the impact of these
operations for the period of ownership by the Group. The table
below reconciles statutory Revenue as reported within the
Consolidated Income Statement, and the 2022 pro-forma Revenue had
all acquisition and disposal transactions occurred on 1st January
2022. This allows users of the accounts to see the split of Revenue
by operating segment on a basis that will be like-for-like against
2023.
Revenue Pro-forma Revenue Proportion
(statutory) adjustments* (pro-forma) of Group
GBPm GBPm GBPm
---------------------------- ------------- -------------- ------------- -----------
Steam Specialties 866.0 (1.2) 864.8 50%
Electric Thermal Solutions 256.1 126.8 382.9 22%
Watson-Marlow 488.5 (1.9) 486.6 28%
Total 1,610.6 123.7 1,734.3
---------------------------- ------------- -------------- ------------- -----------
*includes the 2022 pre-acquisition financial results of
Cotopaxi, Vulcanic and Durex Industries, and the removal of the
2022 statutory results of our Russian operating companies
disposed.
3.SEGMENTAL REPORTING
As required by IFRS 8 (Operating Segments), the following
segmental information is presented in a consistent format with
management information considered by the Board.
No changes to the structure of operating segments have been made
during the current period.
Analysis by operating segment
2022
Revenue Total Adjusted Adjusted
operating operating operating
profit profit margin
GBPm GBPm GBPm %
---------------------------- -------- ----------- ----------- -----------
Steam Specialties 866.0 196.2 206.1 23.8%
Electric Thermal Solutions 256.1 7.3 39.9 15.6%
Watson-Marlow 488.5 154.4 160.0 32.8%
Corporate expenses (39.1) (25.8)
---------------------------- -------- ----------- ----------- -----------
Total 1,610.6 318.8 380.2 23.6%
---------------------------- -------- ----------- ----------- -----------
Net financing expense (10.7) (9.6)
Share of Loss of Associate - -
---------------------------- -------- ----------- ----------- -----------
Profit before tax 308.1 370.6
---------------------------- -------- ----------- ----------- -----------
2021
Revenue Total Adjusted Adjusted
operating operating operating
profit profit margin
GBPm GBPm GBPm %
---------------------------- -------- ----------- ----------- -----------
Steam Specialties 754.9 186.8 188.7 25.0%
Electric Thermal Solutions 181.3 11.1 24.0 13.2%
Watson-Marlow 408.3 145.4 150.0 36.7%
Corporate expenses (22.4) (22.4)
---------------------------- -------- ----------- ----------- -----------
Total 1,344.5 320.9 340.3 25.3%
---------------------------- -------- ----------- ----------- -----------
Net financing expense (6.4) (6.4)
Share of Loss of Associate - -
---------------------------- -------- ----------- ----------- -----------
Profit before tax 314.5 333.9
---------------------------- -------- ----------- ----------- -----------
The following table details the split of revenue by geography
for the combined Group:
2022 2021
GBPm GBPm
------------------------------- ------- -------
Europe, Middle East and Africa 649.6 563.3
Asia Pacific 384.3 334.2
Americas 576.7 447.0
Total revenue 1,610.6 1,344.5
------------------------------- ------- -------
Revenue generated by Group companies based in the USA is
GBP433.0m (2021: GBP342.4m), in China is GBP213.2m (2021:
GBP181.6m), in Germany is GBP134.3m (2021: GBP118.2m), in the UK is
GBP115.7m (2021: GBP99.6m) and the rest of the world is GBP714.4m
(2021: GBP602.7m)
The total operating profit for each period includes certain
items as analysed below:
2022
Accelerated
Reversal depreciation
Amortisation of and other
of acquisition-related Disposal related costs
acquisition-related fair value of on one-off
intangible adjustments subsidiaries Restructuring Acquisition-related property
assets to inventory in Russia costs items redevelopments Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- -------------------- -------------------- ------------- -------------- -------------------- --------------- -------
Steam
Specialties (4.6) - (5.3) - - - (9.9)
Electric
Thermal
Solutions (15.3) (1.8) - (15.5) - - (32.6)
Watson-Marlow (3.8) - (1.8) - - - (5.6)
Corporate
expenses - - - - (9.1) (4.2) (13.3)
Total (23.7) (1.8) (7.1) (15.5) (9.1) (4.2) (61.4)
--------------- -------------------- -------------------- ------------- -------------- -------------------- --------------- -------
2021
Amortisation Germany Total
of acquisition-related pension plan
intangible closed to
assets future accrual
GBPm GBPm GBPm
-------------------- ------------------------ ---------------- -------
Steam Specialties (3.9) 2.0 (1.9)
Electric Thermal
Solutions (12.9) - (12.9)
Watson-Marlow (4.6) - (4.6)
Corporate expenses - - -
Total (21.4) 2.0 (19.4)
-------------------- ------------------------ ---------------- -------
Net financing income and expense
2022 2022 2022 2021 2021 2021
Income Expense Net Income Expense Net
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------- -------- --------- ------- --------- --------- --------
Steam Specialties 3.6 (1.8) 1.8 3.0 (2.3) 0.7
Electric Thermal
Solutions 0.3 (0.5) (0.2) - (0.2) (0.2)
Watson-Marlow 0.3 (0.6) (0.3) 0.1 (0.5) (0.4)
Corporate expenses 1.4 (13.4) (12.0) 0.3 (6.8) (6.5)
-------------------- -------- --------- ------- --------- --------- --------
Total net
financing expense 5.6 (16.3) (10.7) 3.4 (9.8) (6.4)
-------------------- -------- --------- ------- --------- --------- --------
Net assets
2022 2022 2021 2021
Assets Liabilities Assets Liabilities
GBPm GBPm GBPm GBPm
---------------------------- -------- ------------- -------- -------------
Steam Specialties 766.4 (226.8) 658.0 (182.1)
Electric Thermal Solutions 1,174.2 (78.0) 536.9 (33.0)
Watson-Marlow 427.4 (57.3) 331.8 (57.9)
---------------------------- -------- ------------- -------- -------------
2,368.0 (362.1) 1,526.7 (273.0)
Liabilities (362.1) (273.0)
Net deferred tax (59.1) (35.7)
Net tax payable (21.4) (17.4)
Net debt including
lease liabilities (755.6) (190.6)
---------------------------- -------- ------------- -------- -------------
Net assets 1,169.8 1,010.0
---------------------------- -------- ------------- -------- -------------
Non-current assets in the USA were GBP686.8m (2021: GBP345.6m),
in France were GBP403.1m (2021: GBP150.5m), in the UK were
GBP284.1m (2021: GBP231.2m), in Germany were GBP165.6m (2021:
GBP154.6m) and in the rest of the world were GBP191.8m (2021:
GBP177.6m).
Capital additions, depreciation, amortisation and impairment
2022 2022 2021 2021
Depreciation, Depreciation,
Capital amortisation Capital amortisation
additions and impairment additions and impairment
GBPm GBPm GBPm GBPm
---------------------------- ----------- ---------------- ----------- ----------------
Steam Specialties 47.1 37.3 35.6 33.9
Electric Thermal Solutions 285.4 24.7 16.6 18.3
Watson-Marlow 76.4 19.0 51.0 16.8
---------------------------- ----------- ---------------- ----------- ----------------
Total 408.9 81.0 103.2 69.0
---------------------------- ----------- ---------------- ----------- ----------------
Capital additions include property, plant and equipment of
GBP135.0m (2021: GBP52.8m), of which GBP30.7m (2021: GBPnil) was
from acquisitions in the period, and other intangible assets of
GBP258.3m (2021: GBP11.3m) of which GBP245.1m (2021: GBPnil)
relates to acquired intangibles from acquisitions in the period.
Right-of-use asset additions of GBP15.6m (2021: GBP39.1m) occurred
during the 12-month period to 31st December 2022, of which GBP4.1m
(2021: GBPnil) relates to acquired leases from acquisitions in the
period. Capital additions split between the USA GBP186.4m (2021:
GBP4.7m), UK GBP51.8m (2021: GBP54.2m) and rest of world GBP170.7m
(2021: GBP44.4m).
4.NET FINANCING INCOME AND EXPENSE
2022 2021
GBPm GBPm
-------------------------------------------- ------- ------
Financial expenses:
Bank and other borrowing interest
payable (14.0) (7.4)
Interest expense on lease liabilities (1.5) (1.1)
Net interest on pension scheme liabilities (0.7) (1.3)
-------------------------------------------- ------- ------
(16.3) (9.8)
-------------------------------------------- ------- ------
Financial income:
Bank interest receivable 5.6 3.4
-------------------------------------------- ------- ------
Net financing expense (10.7) (6.4)
-------------------------------------------- ------- ------
Net bank interest (8.4) (4.0)
Interest expense on lease liabilities (1.5) (1.1)
Net pension scheme financial expense (0.8) (1.3)
-------------------------------------------- ------- ------
Net financing expense (10.7) (6.4)
-------------------------------------------- ------- ------
5.TAXATION
2022 2021
Analysis of charge in Adjusted Adj't Total Adjusted Adj't Total
period GBPm GBPm GBPm GBPm GBPm GBPm
UK corporation tax:
Current tax on income
for the period 7.3 (0.2) 7.1 8.7 - 8.7
Adjustments in respect
of prior periods (0.7) - (0.7) (1.7) - (1.7)
--------------------------- --------- ------ ------ --------- ------ ------
6.6 (0.2) 6.4 7.0 - 7.0
--------------------------- --------- ------ ------ --------- ------ ------
Foreign tax:
Current tax on income
for the period 89.4 (0.8) 88.6 74.5 - 74.5
Adjustments in respect
of prior periods (1.3) - (1.3) (1.5) - (1.5)
--------------------------- --------- ------ ------ --------- ------ ------
88.1 (0.8) 87.3 73.0 - 73.0
--------------------------- --------- ------ ------ --------- ------ ------
Total current tax charge 94.7 (1.0) 93.7 80.0 - 80.0
Deferred tax - UK (0.4) (0.7) (1.1) 4.0 (0.3) 3.7
Deferred tax - Foreign (1.8) (7.7) (9.5) (0.1) (4.0) (4.1)
--------------------------- --------- ------ ------ --------- ------ ------
Tax on profit on ordinary
activities 92.5 (9.4) 83.1 83.9 (4.3) 79.6
--------------------------- --------- ------ ------ --------- ------ ------
The Group's tax charge in future years is likely to be affected
by the proportion of profits arising from, and the effective tax
rates in, the various territories in which the Group operates. The
rate may also be affected by the impact of any acquisitions. The
Group monitors income tax developments in the territories in which
it operates in line with the requirements of the OECD Base Erosion
and Profit Shifting (BEPS) initiative. This includes the setting of
a new minimum global corporate tax rate of 15%. We will continue to
monitor developments closely and assess whether this will lead to
an increase in tax going forward.
The Group's tax charge includes a credit of GBP9.4 million in
relation to certain items excluded from adjusted operating profit
(as disclosed in Note 2). The tax impacts of these items are:
-- Amortisation of acquisition-related intangible assets (GBP5.6m
credit)
-- Costs associated with the acquisition of Vulcanic (GBP1.8m
credit)
-- Costs associated with the acquisition of Durex Industries (GBP1.2m
credit)
-- Restructuring of the Chromalox manufacturing operations in
Soissons (France) (GBP0.7m credit)
-- Costs associated with the redevelopment of the Group Head Office
building in Cheltenham (UK) (GBP0.1m credit)
Excluding these adjustments, the tax on profit and the effective
tax rate are GBP92.5 million and 25.0% respectively.
The UK deferred tax assets and liabilities at 31st December 2022
that are expected to reverse before 1st April 2023 have been
calculated based upon the rate of 19% whilst the UK deferred tax
assets and liabilities expected to reverse on or after 1st April
2023 have been calculated based upon the rate of 25%.
In October 2017, the European Commission (EC) opened a State Aid
investigation into the UK's Controlled Foreign Company (CFC)
regime. In April 2019, the EC published its final decision that the
UK CFC Finance Company Exemption (FCE) constituted State Aid in
certain circumstances, following which the UK Government appealed
the decision to the EU General Court. In June 2022, the EU General
Court dismissed the UK Government's appeal following which the UK
Government lodged a further appeal to the European Court of
Justice. The UK Government's appeal has not yet been heard. Like
other UK Groups, the Group submitted its own appeal against the
EC's decision. The Group's benefit from the FCE in the period from
1st January 2013 to 31st December 2022 is approximately GBP8.7m,
including compound interest. To date, the Group has received, paid,
and appealed Charging Notices totalling GBP4.9m, assessed for the
period from 1st January 2017 to 31st December 2018. The Group
expects to recover this in the event of a successful appeal and has
recognised a receivable for the full amount at the year-end balance
sheet date. The Group has not received a Charging Notice for the
period prior to 1st January 2017, the benefit for this period being
GBP2.8m. HMRC has enquired into the benefit received during 2019,
which the Group estimates to be GBP1.0m. No provisions have been
recognised at the year-end balance sheet date for either the
Charging Notice amounts or for the estimates for the other
periods.
6.EARNINGS PER SHARE
2022 2021
Profit attributable to equity shareholders
(GBPm) 224.7 234.6
Weighted average shares (million) 73.6 73.7
Dilution (million) 0.2 0.2
-------------------------------------------- ------- -------
Diluted weighted average shares
(million) 73.8 73.9
-------------------------------------------- ------- -------
Basic earnings per share 305.1p 318.3p
-------------------------------------------- ------- -------
Diluted earnings per share 304.4p 317.5p
-------------------------------------------- ------- -------
Basic and diluted earnings per share calculated on an adjusted
profit basis are included in Note 2. The dilution is in respect of
the Performance Share Plan.
7.DIVIDS
2022 2021
GBPm GBPm
---------------------------------------------------------- ------ ------
Amounts paid in the year:
Final dividend for the year ended 31st December 2021 of
97.5p (2020: 84.5p) per share 71.9 62.3
Interim dividend for the year ended 31st December 2022
of 42.5p (2021: 38.5p) per share 31.2 28.4
---------------------------------------------------------- ------ ------
Total dividends paid 103.1 90.7
---------------------------------------------------------- ------ ------
Amounts arising in respect of the year:
Interim dividend for the year ended 31st December 2022
of 42.5p (2021: 38.5p) per share 31.2 28.4
Proposed final dividend for the year ended 31st December
2022 of 109.5p (2021: 97.5p) per share 80.8 71.8
---------------------------------------------------------- ------ ------
Total dividends arising 112.0 100.2
---------------------------------------------------------- ------ ------
8.ANALYSIS OF CHANGES IN NET DEBT, INCLUDING CHANGES IN
LIABILITIES ARISING FROM FINANCING ACTIVITIES
2022
At
1(st) At
Jan Cash Acquired Disposal Exchange 31(st)
2022 flow debt* of subsidiaries movement Dec 2022
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- -------- -------- ----------- ------------------ ----------- ----------
Current portion of long-term
borrowings (59.6) (202.9)
Non-current portion of long-term
borrowings (289.9) (731.3)
Total borrowings (349.5) (934.2)
---------------------------------- -------- -------- ----------- ------------------ ----------- ----------
Comprising:
---------------------------------- -------- -------- ----------- ------------------ ----------- ----------
Borrowings (349.5) (497.7) (67.0) - (20.0) (934.2)
Changes in liabilities arising
from financing (349.5) (497.7) (67.0) - (20.0) (934.2)
Cash at bank 274.6 46.3 - (2.8) 10.8 328.9
Bank overdrafts (55.6) (26.7) - - (2.8) (85.1)
---------------------------------- -------- -------- ----------- ------------------ ----------- ----------
Net cash and cash equivalents 219.0 19.6 - (2.8) 8.0 243.8
Net debt (130.5) (478.1) (67.0) (2.8) (12.0) (690.4)
---------------------------------- -------- -------- ----------- ------------------ ----------- ----------
Lease liabilities (60.1) 12.9 (15.2) - (2.8) (65.2)
---------------------------------- -------- -------- ----------- ------------------ ----------- ----------
Net debt including lease
liabilities (190.6) (465.2) (82.2) (2.8) (14.8) (755.6)
---------------------------------- -------- -------- ----------- ------------------ ----------- ----------
* Debt acquired includes both debt acquired due to acquisition,
and debt recognised on the balance sheet due to entry into new
leases.
The net cashflow from borrowings of GBP497.7m consists of
GBP1,008.8m of new borrowings and GBP511.1m of repaid
borrowings.
New borrowings include acquisition-related short-term bank
facilities of EUR265.0m (GBP232.8m) and US$185.0m (GBP153.5m), a
US$150.0m (GBP124.4m) term loan, revolving credit facility
drawdowns of GBP35.0m and EUR90.0m (GBP76.8m) and new private
placement debt of EUR265.0m (GBP234.6m) and $185.0m (GBP149.8m)
that was issued to repay of the acquisition-related short-term bank
facilities.
Repaid borrowings include EUR70.0m (GBP59.7m) of term loan that
matured during the year, EUR265.0m (GBP234.6m) and US$185.0m
(GBP149.8m) of acquisition-related short-term bank facilities and
EUR76.3m (GBP67.0m) of acquired debt that was repaid on completion
of the Vulcanic acquisition.
At 31st December 2022, total lease liabilities consist of
GBP14.1m (2021: GBP11.2m) short-term and GBP51.1m (2021: GBP48.9m)
long-term.
2021
At
1(st) At
Jan Cash Acquired Disposal Exchange 31(st)
2021 flow debt* of subsidiaries movement Dec 2021
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------------- -------- ------- ----------- ------------------ ----------- ----------
Current portion of long-term
borrowings (0.6) (59.6)
Non-current portion of long-term
borrowings (452.2) (289.9)
Total borrowings (452.8) (349.5)
-------------------------------------- -------- ------- ----------- ------------------ ----------- ----------
Comprising:
Borrowings (452.8) 77.5 - - 25.8 (349.5)
Changes in liabilities arising
from financing (452.8) 77.5 - - 25.8 (349.5)
-------------------------------------- -------- ------- ----------- ------------------ ----------- ----------
Cash at bank 246.2 35.7 - - (7.3) 274.6
Bank overdrafts (22.2) (34.3) - - 0.9 (55.6)
-------------------------------------- -------- ------- ----------- ------------------ ----------- ----------
Net cash and cash equivalents 224.0 1.4 - - (6.4) 219.0
-------------------------------------- -------- ------- ----------- ------------------ ----------- ----------
Net debt (228.8) 78.9 - - 19.4 (130.5)
-------------------------------------- -------- ------- ----------- ------------------ ----------- ----------
Lease liabilities (34.1) 11.7 (39.1) - 1.4 (60.1)
-------------------------------------- -------- ------- ----------- ------------------ ----------- ----------
Net debt including lease liabilities (262.9) 90.6 (39.1) - 20.8 (190.6)
-------------------------------------- -------- ------- ----------- ------------------ ----------- ----------
9.PURCHASE OF BUSINESSES
The provisional fair value accounting is shown below:
Cotopaxi Vulcanic Durex
fair fair fair
value value value Total
GBPm GBPm GBPm GBPm
----------------------------------------- --------- --------- ------- -------
Non-current assets:
Property, plant and equipment - 15.8 14.9 30.7
Right-of-use assets - 4.1 - 4.1
Acquired intangibles 2.8 115.6 126.2 244.6
Software and other intangibles - 0.5 - 0.5
Deferred tax assets - 2.9 0.5 3.4
----------------------------------------- --------- --------- ------- -------
2.8 138.9 141.6 283.3
----------------------------------------- --------- --------- ------- -------
Current assets:
Inventories - 17.4 7.3 24.7
Trade receivables 0.8 24.5 9.5 34.8
Other receivables 0.4 3.5 1.2 5.1
Cash and cash equivalents 0.6 10.3 14.8 25.7
----------------------------------------- --------- --------- ------- -------
1.8 55.7 32.8 90.3
----------------------------------------- --------- --------- ------- -------
Total assets 4.6 194.6 174.4 373.6
----------------------------------------- --------- --------- ------- -------
Current liabilities:
Trade payables 0.1 7.5 1.1 8.7
Other payables, accruals and provisions 0.6 15.9 7.0 23.5
Short-term lease liabilities - 1.1 - 1.1
----------------------------------------- --------- --------- ------- -------
0.7 24.5 8.1 33.3
----------------------------------------- --------- --------- ------- -------
Non-current liabilities:
Long-term borrowings - 67.0 - 67.0
Long-term payables - 3.7 - 3.7
Long-term lease liabilities - 3.0 - 3.0
Deferred tax liabilities 0.6 33.4 0.1 34.1
Non-current provisions - 4.6 0.1 4.7
Post-retirement benefit plans - 1.1 - 1.1
----------------------------------------- --------- --------- ------- -------
0.6 112.8 0.2 113.6
----------------------------------------- --------- --------- ------- -------
Total liabilities 1.3 137.3 8.3 146.9
----------------------------------------- --------- --------- ------- -------
Total net assets 3.3 57.3 166.1 226.7
Goodwill 10.0 119.2 130.1 259.3
----------------------------------------- --------- --------- ------- -------
Total 13.3 176.5 296.2 486.0
----------------------------------------- --------- --------- ------- -------
Satisfied by:
Cash paid 13.3 176.5 296.2 486.0
----------------------------------------- --------- --------- ------- -------
Total consideration 13.3 176.5 296.2 486.0
----------------------------------------- --------- --------- ------- -------
Cash outflow for acquired businesses
in the Statement of Cash Flows
Cash paid for businesses acquired
in the period and debt repaid 13.3 243.5 296.2 553.0
Debt repaid - (67.0) - (67.0)
----------------------------------------- --------- --------- ------- -------
Cash paid for businesses acquired
in the period 13.3 176.5 296.2 486.0
Less cash acquired (0.6) (10.3) (14.8) (25.7)
----------------------------------------- --------- --------- ------- -------
Net cash outflow 12.7 166.2 281.4 460.3
----------------------------------------- --------- --------- ------- -------
On a debt-free cash-free basis the cash outflow for acquisitions
was GBP535.5m consisting of GBP486.0m paid to the vendors, GBP67.0m
of debt acquired and repaid and GBP8.2m of acquisition costs less
cash acquired of GBP25.7m.
The acquisitions of 100% of Vulcanic (completed on 29th
September 2022 for consideration of EUR200.8m or GBP176.5m), 100%
of Durex Industries (completed on 30th November 2022 for
consideration of US$357.1m or GBP296.2m) and 100% of Cotopaxi
(completed on 30th January 2022 for consideration of GBP13.4m) have
all been accounted for under the acquisition method.
The separately identified intangibles of all three acquisitions
are recorded as part of the provisional fair value adjustment. The
acquired intangibles relate to brand names and trademarks,
manufacturing designs and core technology and customer
relationships. The goodwill recognised represents the skilled
workforce acquired and the opportunity to achieve synergies from
being part of a larger Group.
Vulcanic is a European leader in industrial process heating
solutions and is highly complementary to Chromalox within our ETS
Business. As the lead brands within ETS for electric process
heating, Chromalox and Vulcanic will support the effective
deployment of our industry-leading decarbonisation solutions
alongside Steam Specialties.
Goodwill arising on the acquisition of Vulcanic is not expected
to be tax deductible. Following completion of the acquisition,
Vulcanic generated EUR34.8m (GBP29.7m) of revenue and EUR8.3m
(GBP7.1m) of adjusted pre-tax profit. Had the acquisition been made
on 1st January 2022, Vulcanic revenue and adjusted pre-tax profit
would have been approximately EUR111.9m (GBP95.5m) and EUR21.1m
(GBP18.0m) respectively.
Durex Industries, located in Illinois (USA), is a specialist in
custom electric thermal solutions for ultracritical applications of
industrial equipment and is highly complementary to Thermocoax
within our ETS Business. Together, Thermocoax and Durex Industries
are well positioned to capitalise on the growing demand for
increasingly stringent thermal energy requirements in
high-technology equipment within market sectors with high barriers
to entry.
Goodwill arising on the acquisition of Durex Industries is
expected to be tax deductible in the USA. Following completion of
the acquisition, Durex Industries generated US$5.6m (GBP4.5m) of
revenue and US$1.2m (GBP1.0m) of adjusted pre-tax profit. Had the
acquisition been made on 1st January 2022, Durex Industries revenue
and adjusted pre-tax profit would have been approximately US$81.3m
(GBP65.5m) and US$26.4m (GBP21.3m) respectively.
Cotopaxi is a UK based digitally-enabled global energy
consulting and optimisation company, which will enable Steam
Specialties to digitally enhance its customer bonding through the
provision of physical and digital connections to customers'
infrastructure and equipment.
Goodwill arising on the acquisition of Cotopaxi is not expected
to be tax deductible. Following completion of the acquisition,
Cotopaxi generated GBP2.9m of revenue and GBP0.5m of pre-tax
profit. Had the acquisition been made on 1st January 2022, Cotopaxi
revenue and pre-tax profit would not have been materially different
from the figure disclosed.
As at the date of approval of the Financial Statements, the
accounting for all current year acquisitions is provisional
relating to the finalisation of the acquired intangible assets
valuation and certain other provisional balances. Due to their
contractual dates, the fair value of receivables acquired
approximate to the gross contractual amounts receivable. The amount
of gross contractual receivables not expected to be recovered is
immaterial.
10.DISPOSAL OF SUBSIDIARIES
The loss on disposal of subsidiaries wholly relates to the
disposal of 100% of Spirax Sarco Russia and Watson-Marlow Russia on
6th July 2022.
The consideration amounted to GBPnil which resulted in a loss on
disposal for Spirax Sarco Russia of GBP2.2m and GBP1.7m for
Watson-Marlow Russia, including GBP0.1m of legal fees, and
cumulative currency translation losses recycled to the income
statement of GBP3.2m. GBP2.8m of cash and cash equivalents were
disposed as part of the transaction.
These disposals did not meet the definition of a discontinued
operation in IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations, and therefore, no disclosures in relation
to discontinued operations have been made.
11. RESPONSIBILITY statement OF THE DIRECTORS ON THE ANNUAL
REPORT
The Responsibility Statement below has been prepared in
connection with the Company's full Annual Report for the year
ending 31st December 2022. Certain parts thereof are not included
within this announcement.
We confirm to the best of our knowledge:
-- the Financial Statements, prepared in accordance with IFRS as
adopted by the UK, give a true and fair view of the assets, liabilities,
financial position and profit and loss of the Company and the
undertakings included in the consolidation taken as a whole
-- the Strategic Report includes a fair review of the development
and performance of the business and the position of the Company
and the undertakings included in the consolidation taken as a
whole, together with a description of the Principal Risks and
uncertainties they face
-- the Annual Report and Financial Statements, taken as a whole,
are fair, balanced and understandable and provide the information
necessary to assess the Company's performance, business model
and strategy
This Responsibility Statement was approved by the Board of
Directors on 8th March 2023 and is signed on its behalf by:
N.J. Anderson, Group Chief Executive
N.B. Patel, Chief Financial Officer
12. Cautionary statement
All statements other than statements of historical fact included
in this document, including, without limitation, those regarding
the financial condition, results, operations and businesses of
Spirax-Sarco Engineering plc and its strategy, plans and objectives
and the markets and economies in which it operates, are
forward-looking statements. These forward-looking statements which
reflect management's assumptions made on the basis of information
available to it at this time, involve known and unknown risks,
uncertainties and other important factors which could cause the
actual results, performance or achievements of Spirax-Sarco
Engineering plc or the markets and economies in which we operate to
be materially different from future results, performance or
achievements expressed or implied by such forward-looking
statements. Spirax-Sarco Engineering plc and its Directors accept
no liability to third parties in respect of this report save as
would arise under English law. Accordingly, any liability to a
person who has demonstrated reliance on any untrue or misleading
statement or omission shall be determined in accordance with
schedule 10A of the Financial Services and Markets Act 2000. It
should be noted that schedule 10A contains limits on the liability
of the Directors of Spirax-Sarco Engineering plc so that their
liability is solely to Spirax-Sarco Engineering plc.
13. EXCHANGE RATE IMPACTS
Whilst not an IFRS disclosure or part of the audited accounts,
set out below is an additional disclosure that highlights the
movements in a selection of exchange rates between 2022 and
2021.
Exchange rates to sterling have been as follows:
Average Average Change Closing Closing Change%
2022 2021 % 2022 2021
---------------- ---------- ---------- --------- ---------- ---------- ----------
US Dollar 1.24 1.37 +10% 1.21 1.35 +10%
Euro 1.17 1.16 -1% 1.13 1.19 +5%
Renminbi 8.32 8.85 +6% 8.34 8.60 +3%
Won 1,587 1,569 -1% 1,525 1,607 +5%
Real 6.41 7.41 +13% 6.39 7.54 +15%
Argentine Peso 161.50 130.24 -24% 213.80 138.92 -54%
A negative movement indicates a strengthening in sterling versus
that currency. When sterling strengthens against other currencies
in which the Group operates, the Group incurs a loss on translation
of the financial results into sterling.
On a translation basis, sales increased by 3.9% and adjusted
operating profit increased by 3.6%, while transactional currency
impacts also increased profit, giving a total increase to profit
from currency movements of 3.8%.
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END
QRTJLMMTMTIMMLJ
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March 09, 2023 02:00 ET (07:00 GMT)
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