1. Spirax-Sarco Engineering plc
2009 Preliminary Results
2009 Preliminary Results 31st December 2009
Bill Whiteley – Chairman
Mark Vernon – Chief Executive
David Meredith – Finance Director
2. Overview of 2009 results
Constant
2009 2008 Change currency
Revenue £518.7m £502.3m +3% -7%
Operating profit* £89.9m £85.7m +5% -12%
Margin 17.3% 17.1%
Pre-tax profit* £90.2m £90.1m +0% -16%
EPS* 82.2p 83.4p -1% -17%
DPS 36.1p 33.3p +8% +8%
• Sales up 3%
• Operating profit margin of 17.3% - eighth consecutive year of improvement
• Early action to reduce costs benefited second half
• Final dividend up 10% – continuing the Group’s long history of increasing dividends
• Significant underlying cash generation with net cash of £8m at year-end
• Continued investment in capex, R&D and acquisitions
* Operating profit, Pre-tax profit and EPS exclude exceptional headcount reduction costs of £11.4m,
amortisation of acquisition-related intangible assets of £2.4m (2008: £1.9m), and impairment of
goodwill and acquisition-related intangible assets of nil (2008: £3.1m). The tax effects on these items
was £4.1m
3. Revenue changes
Asia Watson-
Change over 2008 EMEA Pacific Americas Marlow Exchange
20.0
EMEA -8%
15.0
Asia Pacific -5%
Americas -9% 10.0
+10%
Watson-Marlow -1%
5.0
Exchange +10% (1%)
Total +3% £m 0.0
(£0.8m) + £53.2m
(5%)
-5.0 (9%)
(£5.9m)
-10.0 (8%)
Sales 2009
£m (£10.8m)
-15.0
EMEA 225.5
Asia Pacific 104.7 -20.0
(£19.3m)
Americas 104.6 % Chg yoy H1 H2 Year
Based on sales by segments
at constant currency Organic Sales -8% -6% -7%
Watson-Marlow 83.8
Acquisitions 0% +1% +1%
Total 518.7
Currency +14% +7% +10%
TOTAL +5% +1% +3%
4. Operating profit changes
Asia Watson- Corp
EMEA Pacific Americas Marlow Exp Exchange
8.0
Change over 2008 6.0
EMEA -18%
4.0
Asia Pacific -14% +19%
Americas -5% 2.0
Watson-Marlow -3% (5%) (3%)
£m 0.0
Exchange +19% +£0.2m +£16.7m
(£0.7m) (£0.6m)
-2.0 (14%)
Total +5%
-4.0 (18%)
(£3.7m)
-6.0
-8.0
(£7.6m)
Based on sales by segments at
% Chg yoy H1 H2 Year
constant currency, excluding Operating profit -7% +16% +5%
exceptional costs and
amortisation of acquisition-related Op margin 2009 15.0% 19.5% 17.3%
intangible assets. Op margin 2008 17.1% 17.0% 17.1%
5. Financial aspects
Constant
2009 2008 Change currency
Revenue £518.7m £502.3m +3% -7%
Operating profit £89.9m £85.7m +5% -12%
Margin 17.3% 17.1%
Net finance expense -£2.5m £1.7m
Associates £2.8m £2.7m
Profit before tax £90.2m £90.1m +0% -16%
Tax rate (excl Associates) 31.4% 30.0%
EPS 82.2p 83.4p -1% -17%
DPS 36.1p 33.3p +8% +8%
• Good exchange gains – all segments
• Operating profit margin increased to 17.3%
• Tax rate increased to 31.4% - China and mix
• Final dividend up 10%
* Operating profit, Pre-tax profit and EPS exclude exceptional headcount reduction costs of £11.4m,
amortisation of acquisition-related intangible assets of £2.4m (2008: £1.9m), and impairment of
goodwill and acquisition-related intangible assets of nil (2008: £3.1m). The tax effects on these items
was £4.1m
6. Cash flow
£ millions 2009 2008
Adjusted operating profit 89.9 85.7
Depreciation and share schemes 18.4 16.8
£m
Net cash 31.12.08 Working capital 9.6 (11.4)
17.4
Adjusted cash from operations 117.9 91.1
Cash flow
(11.8) Interest paid (0.7) (0.2)
Exchange Tax paid (29.9) (22.1)
2.4 £m
Capital expenditure (net incl Development) (34.6) (26.5)
Net cash 31.12.09
31.12.07
15.8
8.0 Dividends paid (24.3) (23.2)
Cash flow
Underlying cash flow 28.4 19.0
(0.9)
Exchange Special pension pay’ts/severance/provisions (15.1) (3.3)
2.5 Treasury shares (net) 2.0 (2.8)
Net cash 31.12.08 Acquisitions (27.1) (13.9)
17.4
Cash flow for the period (11.8) (0.9)
• Working capital inflow – stock reduced by 13%
• Strong underlying cash inflow of £28.4 despite high capex
• Acquisitions, special pension contributions and exceptional costs of £42.2m
• Closing net cash of £8.0m
7. 2010 – Items to note
Capital expenditure
• Expect continued high level of investment including
• Completion of China plant
• Cheltenham site consolidation
• New R&D test centre
Net interest
• IAS 19 Post-retirement finance improvement of approx £1.5m in 2010
• Increased return on assets due to rise in asset values in 2009
• Mitigated by higher interest on liabilities due to rising inflation
Cash flow
• Continued special pension contributions – expect approx £8m in 2010
• Exceptional costs paid in 2010 of £3.5m – charged against 2009 P&L
8. Key financial statistics
2009 2008
App I EPS / DPS Operating profit margin 17.3% 17.1%
App II ROCE
Amortisation of acquisition intangibles £2.4m £1.9m
App III Cash conversion
App IV Currencies
Impairment of goodwill & intangibles Nil £3.1m
Sales per employee (average for year) -6% +4%
Net cash £8.0m £17.4m
Cash from operations* £117.9m £91.1m
Capital expenditure as % of depreciation 197% 164%
Cash conversion* 80% 75%
Pension liability IAS19 basis (after tax) £53.2m £49.2m
Return on capital employed 33.3% 35.5%
• 8th year of Operating profit margin increase
• Good improvement in cash from operations to £117.9m
• Continued investment – capex at 2X depreciation
*Excludes exceptional costs and special pension contributions paid of £15.0m in 2009 (2008: £3.3m)
9. Segmental analysis of revenue
Segmental analysis of revenue
2009 2008
EMEA 43.5% 45.0%
EMEA 44%
Asia Pac 20.2% 19.7%
Americas 20.2% 20.3%
Americas 20%
WM 16.1% 15.0% Asia Pacific 20%
Total 100.0% 100.0%
Watson-Marlow Pumps 16%
• Good geographic spread
• Major manufacturing operations on nearly all continents – expansion in Asia
• Direct sales channel in most markets – close to customers
• Diverse industry and customer base
• Watson-Marlow Pumps segment operates worldwide
Sales are by geographical location of operations
10. Europe, Middle East & Africa (EMEA)
constant
2009 2008 change currency
Sales £225.5m £226.1m 0% -8%
Operating profit* £35.6m £39.2m -9% -18%
Margin* 15.8% 17.3%
• Difficult market conditions
• Favourable exchange benefits from 13% weaker sterling against euro
• Good performance from large operations in France, Germany and Italy
• Improved demand and sales in Russia in H2 after very slow start in H1
• Difficult year in the domestic UK market but good project wins in December
• Reduced volumes at manufacturing plants contributed to profit decline
• Headcount down 8%
*Operating profit excludes exceptional headcount reduction costs and the
amortisation/impairment of acquisition-related intangible assets
11. Asia Pacific
constant
2009 2008 change currency
Sales £104.7m £98.9m +6% -5%
Operating profit* £23.1m £21.1m +9% -14%
Margin* 22.1% 21.4%
• Market conditions mixed but improving
• Favourable exchange benefits from 21% stronger renminbi
• Strong shipments in Q4 from backlog
• Added new sales people in China
• Pre-fabricated heat exchange package sales up 30%
• Significant improvement in Japan trading profit from FX benefit
• Headcount down 3%
*Operating profit excludes exceptional headcount reduction costs and the
amortisation/impairment of acquisition-related intangible assets
12. Americas
constant
2009 2008 change currency
Sales £104.6m £101.9m +3% -9%
Operating profit* £13.9m £12.1m +14% -5%
Margin* 13.2% 11.9%
• End markets stabilised in H2 but continuing weakness in Canada
• Favourable exchange benefits from 19% weaker sterling against the US dollar
• Good trading margin of 13.2% versus 11.9% in 2008
• Profit increase from 2008 closure of UltraPure
• Lower profits in Brazil from strong currency impacting export market customers
• Headcount down 13%
*Operating profit excludes exceptional headcount reduction costs and the
amortisation/impairment of acquisition-related intangible assets
13. Watson-Marlow
constant
2009 2009 change currency
Sales £83.8m £75.4m +11% -1%
Operating profit* £22.3m £18.4m +21% -3%
Margin* 26.6% 24.4%
• End markets stabilised and improving
• Favourable benefits from the strong US dollar
• Good Q1 project orders in the US contributed to H2 shipments
• Strong sales growth in Asia
• Increased demand for Flexicon products
• Sales declined at Bredel from difficult mining and general industrial markets
• MasoSine acquisition integration proceeding well
• Headcount down 2%
*Operating profit excludes exceptional headcount reduction costs and the
amortisation/impairment of acquisition-related intangible assets
14. Key messages to drive long-term value
• Remaining focused on two world-leading businesses–
good organic growth prospects
• Investing to enhance the sales growth and profit
prospects
• Shaping our value proposition to address important
secular drivers
• Creating a more performance-based culture
15. Good exposure to developing markets
• Developing markets % of Group Sales
approaching 40% of total 2004 2009
Group sales in 2009 BRIC 11% 16%
Total Developing 31% 38%
• Increasing sales and profit
contribution – good long-term % of Group Headcount
growth driver 2004 2009
BRIC 16% 19%
• e.g. Middle East gulf coast Total Developing 34% 38%
healthcare industry expected Note: All figures are non-IFRS basis
to grow 3x in next ten years –
25,000 new hospital beds.
16. High energy prices are long-term secular growth driver
High energy prices are long-term secular growth driver
US Gulf Coast Residual Fuel Oil Spot Price
(cents per gallon)
• Comparatively high energy
prices on historic basis. 300
250
200
• Payback period on 150
investments proportional to 100
cost of energy – paybacks 50
typically 6 months to 2 years. 0
Jun-93
Jun-94
Jun-95
Jun-96
Jun-97
Jun-98
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
• Achieved 8% organic revenue World Oil Prices
growth with oil prices closer to 225
(2007 dollars per barrel)
$25/barrel for most years. 200
175
150
• About one-third of steam 125
business revenues sold on 100
75
investment return – but 50
compete against other 25
0
customer priorities for capital
1995
2001
2007
2013
2016
2019
2025
2028
1980
1983
1986
1989
1992
1998
2004
2010
2022
investment. Reference Case High Price Low Price
Source: US Energy Information Administration (EIA)
17. Increasing environmental legislation creates opportunity
• Improved efficiency of steam system saves energy AND reduces
emissions of carbon dioxide in flue gas
• New legislation requires investment to reduce carbon footprint and
emissions
• UK Carbon Reduction Commitment (CRC)
• UK Climate Change Levy
• EU Renewables Directive
• EU Emissions Trading Scheme
• Intergovernmental Panel on Climate Change
• Kyoto Protocol successor agreement?
• United Nations Framework for Climate Change?
18. Shaping our value proposition
• Market opportunity expanding as customers increase outsourcing of
maintenance and seek simpler one-stop purchases
• Adding service engineers and extending scope of work to energy
audits and performance improvement recommendations
• Expanding product range – controls, flow meters, level controls,
pumps, heat transfer solutions
• Developing broader range of pre-fabricated engineered packages
• Instantaneous hot water generation
• Flash steam heat recovery
• Clean steam and pure steam generation
• Bespoke heat transfer applications
• Pre-fabricated engineered packages and services now comprise
more than 10% of steam business sales.
19. Investing to enhance sales and profit prospects
• Implementing four-year £50m capital investment program to
upgrade manufacturing facilities, globalise footprint and reduce
cost.
• Introducing ‘back-office’ productivity tools to improve selling
efficiency
• Restructured product development activities in 2008 to increase
revenues from new products and accelerate time to market.
• Invested £40m in last two years on bolt-on acquisitions that
provide new products, technologies and geographic market
access.
20. Developing a more performance-based culture
• Organisation stepped up to challenges during past year
• New human resource leadership
• Focusing on people development and performance management
• Greater alignment of compensation programs to business
objectives
21. Investments sustain trading margin
• Trading margin between 14% and 18% over past 25 years
• Eight consecutive years of margin improvement
• No ‘magic ceiling’ at 18%
Trading Margin
22%
21%
20%
19%
18%
17%
16%
15%
14%
13% sterling weakens sterling strengthens sterling
weakens
12%
1986
1988
1995
1997
1999
2006
2008
1987
1989
1990
1991
1992
1993
1994
1996
1998
2000
2001
2002
2003
2004
2005
2007
2009
Note: Gray bars represent global recession years of 3.0% or less global GDP growth (IMF definition).
22. Summary
• Benefited from resilient business model and strength of customer
value proposition.
• Trading margin improved for eighth consecutive year to 17.3%
• Net cash position of £8m
• Investing for the future
• Market conditions have stabilised – some signs of improvement
• Economic environment remains fragile
25. Appendix - Investing for long term delivers results
Key: EPS DPS
Pence per share
42 year 80
dividend
70
record 83.4
60 82.2
50 65.5
58.1
40
50.2
30 43.1
38.5
20 36.1 37.4 34.4 35.3
10
17.3 18.0 18.6 19.3 20.1 21.4 23.8 26.5 29.9 33.3 36.1
0
99 00 01 02 03 04 05 06 07 08 09
Figures exclude non-operating and exceptional items
From 2004 figures prepared under IFRS and exclude amortisation and impairment of acquired intangibles
26. Appendix – Return on capital employed
£’m 2009 2008
Capital Employed
Property, plant & equipment 135.4 122.9
Inventories 86.5 102.4
Trade receivables 118.8 124.6
Prepayments, other current assets 14.6 14.9
Trade, other payables & current tax (87.5) (93.0)
267.8 271.8
Average Capital Employed 269.8 241.1
Operating Profit
As reported 76.5 81.0
Except’l costs & Amort. of acq’n intang’s 13.4 4.7
89.9 85.7
ROCE 33.3% 35.5 %
27. Appendix – Cash conversion
£’m 2009 2008
Cash
conversion Cash generated from operation 102.8 87.8
in 2009 held Net capital expenditure (property, plant
back by equipment, software and development) (34.6) (26.5)
higher capex
Adjust for exceptional costs in creditors (3.5) -
Add back special pension payments 7.1 3.2
71.8 64.5
Operating Profit – as reported 76.5 81.0
Exceptional costs & amortisation 13.4 4.7
89.9 85.7
Cash conversion 80% 75%
28. Appendix - Currencies
Year First Half Year
2008 2009 2009
Average exchange rates
Recent overall Bank of England sterling index 90.7 78.6 79.6
exchange US$ 1.85 1.50 1.56
rates are Euro 1.26 1.11 1.12
broadly similar
to average RMB 12.9 10.23 10.65
2009 exchange Won 1,998 1,999 1,976
rates
Period end exchange rates
Bank of England sterling index 73.8 83.8 80.5
US$ 1.44 1.65 1.61
Euro 1.03 1.17 1.13
RMB 9.81 11.25 11.02
Won 1,811 2,098 1,880
29. Spirax Sarco Portugal helps Campil reduce downtime &
maintenance costs
• Campil is a tomato pulp plant, producing tomato pastes
• Cookers and sterilizers worked at a low steam pressure
• Steam quality was difficult to maintain due to peak loads, and boilers tripped out
• We provided a complete control sequencing and supervision system
Benefits included
• Reduced fuel consumption
• Improved steam quality
• Reduction in maintenance costs
• Expected payback period of 2 years
30. Southern Cross Hospital Group improve steam quality
by 7% with the help of Spirax Sarco
• Southern Cross Hospital Group is New Zealand’s largest private hospital network.
• They wanted to improve steam quality to fully comply with Australasian standards (97%
dryness value criteria).
• We designed/ installed a new steam reticulation system to the sterilizers, including
steam generation plant.
Benefits included
• Full compliance to Australasian Standards, with a dryness value of 98%.
• Process improvements, cost savings and improved staff moral due to the elimination of
pressures of system failure.
31. Watson-Marlow Masosine Technology Replaces Gear
Watson-Marlow Masosine Technology Replaces
Pumps at Chocolate Factory
Gear Pumps at Chocolate Factory
• Kinnerton, part of Zetar Plc. are confectionary specialists based in Norfolk, UK.
• They wanted to establish an in-house caramel line.
• This ingredient is very viscous when cool and can cause problems for certain pumps.
• We replaced the existing pump with a MasoSine positive displacement pump which
offers flow rates up to 91,000 litres per hour and pressures up to 10.3 bar.
Benefits included
• Gentle handling of the chocolate and caramel even at high speeds/flows.
• Ease of cleaning and therefore hygiene standards are consistently met.
