Spirax Sarco Engineering 2011 Annual Report Results

Spirax-Sarco Engineering plc

2011 Results
31st December 2011

Bill Whiteley - Chairman
Mark Vernon – Chief Executive
David Meredith – Finance Director


Overview of 2011 results

Constant
2011 2010 Change
currency
Revenue £650.0m £589.7m +10% +10%
Operating profit* £134.0m £119.1m +12% +12%
Margin* 20.6% 20.2% +40 bps +50 bps
Pre-tax profit* £137.2m £121.6m +13% +13%
EPS* 124.8p 109.5p +14% +14%
DPS 49.0p 43.0p +14% +14%

• Sales up 10% - widespread growth
• Operating profit margin of 20.6% - tenth consecutive year of improvement
• Good operational gearing
• Emerging markets 47% of operating profit
• Watson-Marlow sales up 15%
• Total dividend up 14%

* See Appendix IV for definition of profit measures
2011 Results 8th March 2012 2


Segment revenue changes

Asia Watson-
EMEA Pacific Americas Marlow FX
Sales +7% +9% +10% +15% +1%
2011 £m 20.0
EMEA 250.1
£17.2m
£15.8m
Asia Pac 147.1 15.0
Americas 134.4 £m £12.0m £12.0m
WM 118.4 Mexico
10.0
Total 650.0

Organic sales
increase over 5.0
£3.2m
2010
Steam
0.0
Specialties
% Change v 2010 H1 H2 Year
+8%
Organic Sales +10% +9% +9.5%
Watson-Marlow Acquisitions/Disposals +1% -1% +0.1%
+15% FX +0% +1% +0.6%
Based on sales at constant currency TOTAL +11% +9% +10.2%


Segment operating profit changes

Asia Watson-
EMEA Pacific Americas Marlow FX
6.0
Profit +13% +7% +17% +15% +0%
2011 £m
5.0 £4.8m
EMEA 42.5 £4.5m
£4.1m
Asia Pac 37.8 4.0
Americas 27.4 £m
Mexico

WM 34.4 3.0
£2.4m
Corp Exp -8.1
Total 134.0 2.0

1.0
£0.2m
0.0
% Change v 2010 H1 H2 Year
Operating profit +14% +11% +12%
Op. margin 2011 19.9% 21.3% 20.6%
Op. margin 2010 19.3% 21.0% 20.2%
Based on adjusted profit at constant
currency - see Appendix IV


Profit bridge
2010 to 2011



Financial aspects

Constant
2011 2010 Change
currency
Revenue £650.0m £589.7m +10% +10%
Operating profit* £134.0m £119.1m +12% +12%
Margin* 20.6% 20.2% +40 bps +50 bps
Net finance income £1.1m (£0.6m) - -
Associate £2.1m £3.1m -31% -27%
Pre-tax profit* £137.2m £121.6m +13% +13%
Tax rate (excluding Associate) 29.8% 31.5% -170 bps
EPS* 124.8p 109.5p +14% +14%
DPS 49.0p 43.0p +14% +14%

• Record operating profit margin • Reduced tax rate
• Improved finance income – DB pensions • FX immaterial


Operating profit margin
Exceeding 20% in last two years

Operating Margin*
25.0%
20.2% 20.6%
20.0%
17.1% 17.3%
15.9% 16.2% 16.5%
15.2%
15.0% 14.0% 14.4% 14.6%

10.0%

5.0%

0.0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011



Cash flow

(£’millions) 2011 2010
Adjusted operating profit* 134.0 119.1
• Working capital
outflow – sales Depreciation and share schemes 18.5 18.9
growth and Working capital (32.9) (13.4)
higher stocks
Adjusted cash from operations 119.6 124.6
• Exceptionally
Capital expenditure (net including R&D) (43.4) (32.9)
high capex –
over £43m Interest paid (0.3) (0.3)

• £25m increase Tax paid (33.5) (30.4)
in dividend Free cash flow 42.4 61.0
payments to
Dividends paid (net) (52.7) (28.0)
£53m –
including Special pension payments/provisions (10.9) (11.4)
special dividend Shares issues/purchased (net) 4.4 6.2
• Closing net Acquisitions (3.4) (3.5)
cash £12m
Cash flow for the period (20.2) 24.3
Net cash balance 12.3 34.4


Long history of dividend growth
10% pa growth in most recent decade

70.0
• 44 year dividend
record with 11% Legend
CAGR 60.0 Dividend increase %
Special dividend
DPS Final +14%
50.0
DPS Interim +19%
Pence per share

40.0 +8%
+11%
+13%
30.0 +11%
+11%
+5% +6%
20.0 +3% +4%

10.0

0.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011



Key performance indicators

2011 2010
Organic sales growth +10% +9%
App I ROCE
Operating profit margin* 20.6% 20.2%
App II Cash
Adjusted cash from operations £119.6m £124.6m
App III FX
Free cash flow £42.4m £61.0m
App IV Adj’d profit
Return on capital employed (average)* 41.1% 42.1%
Capital expenditure to depreciation 253% 194%
Sales per employee +4% +12%
Cash conversion* 57% 77%
Working capital to sales 27.4% 24.3%

• Good organic sales growth
• Record operating profit margin
• Exceptionally high capital investment (£43m)
• Increased stocks impacted balance sheet metrics



Underlying operating margin factors
Effects on underlying margin*
2011 2012

Currency movements

Operating leverage

impacts
Higher
Sales pricing (vs. inflation)

Material prices

Manufacturing strategies

Business & product mix

impacts
Lower
Business development investment

* The arrows as shown are qualitative and indicate direction only


Europe, Middle East & Africa (EMEA)

Constant
2011 2010 Change
currency
Sales £250.1m £230.0m +9% +7%
Op profit* £42.5m £36.8m +15% +13%
Margin* 17.0% 16.0% +100 bps +80 bps

• Trading conditions remain challenging broadly across Europe
• Second half sales benefited from backlog reduction
• Emerging markets generated 60% of profit increase
• Added sales resource in emerging markets – good long term prospects
• 2011 includes net benefit of £1.7m
• Cheltenham manufacturing site consolidation completed
• Lower profits in manufacturing operations

*Based on adjusted Operating profit – see Appendix IV


Asia Pacific

Constant
2011 2010 Change
currency
Sales £147.1m £131.5m +12% +9%
Op profit* £37.8m £34.3m +10% +7%
Margin* 25.7% 26.0% -30 bps -50 bps

• Strong underlying demand broadly across Asia – Thailand hurt by floods
• Healthy quote logs
• Widespread sales growth except Japan and Korea
• Excellent growth in China – 9% of Group sales (including Watson-Marlow)
• Increasing output from Shanghai factory
• Strong sales and profit growth in Southeast Asia
• Continued strong margins at 25.7% (underlying 2010 margin 24.5%)



Americas

Constant
2011 2010 Change
Currency
Sales £134.4m £125.2m +7% +10%
Op profit* £27.4m £24.3m +13% +17%
Margin* 20.4% 19.4% +100 bps +130 bps

• Good sales growth – contribution from Mexico
• Stable market conditions but continued low levels of maintenance spending in US
• Higher metering sales from US government energy management programme
• US sales (including Watson-Marlow) 17% of total Group
• Good prospects in Canada from oil sands development
• Sustained excellent profit performance in Brazil
• Operating profit margin improved to 20.4% – US big contributor



Watson-Marlow Pumps

Constant
2011 2010 Change
currency
Sales £118.4m £103.0m +15% +15%
Op profit* £34.4m £30.8m +12% +15%
Margin* 29.1% 29.9% -80 bps -10 bps

• Strong 15% sales growth – widespread across geographies and products
• Continued expansion of geographic coverage and sector-focused sales resource
• Further integration and development of recent acquisitions
• Exceptional project activity in Q4 in US – some benefit in 2011
• Emerging markets contributing to growth – new sales operation in India
• Significantly higher R&D expenditure – new products to launch in 2012
• FX headwind from weaker US dollar – margins still very healthy at 29.1%



Watson-Marlow opportunities
Unique applications for growth
Point-of-sale paint manufacture Single-use systems
Blending of raw materials to High purity biopharmaceuticals
produce base paint at point-of- manufacturers switching to
sale. Bredel hose pumps supplied disposable single-use tubing and
for modular skid system. systems to reduce validation costs
– opportunities for higher tubing
and tubing assembly sales.

Pumping cheese
Low shear MasoSine
pumps ideal for
manufacture of Mozzarella
cheese in US – application
now replicated in other
countries

Ablation tip cooling
Microflow Alitea pump heads feed
cooling fluid to catheter tip to
minimise tissue damage during
microwave frequency surgery 2011 Results 8th March 2012 16


Group geographic revenues
Emerging markets contributing to growth

EMEA 47%
(2010: 48%)

Emerging markets 9%
Americas 28% (2010: 8%) Asia Pacific 25%
(2010: 24%)
(2010: 28%)
Emerging markets 20%
Emerging markets 9%
(2010: 19%)
(2010: 9%)

CAGR 2006-2011 CAGR 2006-2011 CAGR 2006-2011
19%
20% 20% 20%
15% 13% 15% 15% 12%
10% 10% 10%
5%
5% 5% 3% 5% 1%
0% 0% 0%
Developed Emerging Developed Emerging Developed Emerging

Sales are by geographical location of operations



Emerging markets
Contributing to growth

• Total emerging % of Total Sales Long history in BRIC markets:
markets 100% • Brazil 1959 (53 years)
generated 47% • Russia 1996 (16 years)
of profit in 2011 28%
80% 38% • India 1959 (53 years)
• Long history in • China 1995 (17 years)
BRIC markets
60%
• China 9% of Sales in “newly emerging”
Group sales in markets grew 37% in 2011
2011 40%
including:
• Sales in ‘newly- • Indonesia, Philippines, Vietnam
Emerging • Saudi Arabia, UAE, Kuwait
emerging’ 20%
markets up 37% Developed • Hungary, Ukraine, Romania
in 2011 • Colombia, Chile, Peru, Bolivia
0% • Egypt, Kenya, Nigeria, Uganda
• Direct sales 2006 2011 • Honduras, El Salvador
approach in
most newly-
emerging
markets



Summary

• Sales growth of 10% – well spread across all segments

• Record operating profit and margin (20.6%)

• Continued investment in market penetration, geographic expansion and new
product development

• R&D expenditure up 23%

• Strong balance sheet – net cash £12m

• Total dividend up 14% – £53 million in dividend payments in 2011

• Expect further progress in 2012



2011 Results 31st December

Focused on consistent growth and
creating shareholder value



Appendix I -
Return on capital employed
£’m 2011 2010
Working Capital
Inventories 116.3 96.1
Trade receivables 142.5 137.4
Prepayments, other current assets 19.2 16.9
Trade, other payables & current tax (100.1) (107.2)
Total working capital 177.9 143.2
Property, plant & equipment 174.7 155.5
Total Capital Employed 352.6 298.7
Average Capital Employed 325.6 283.3
Adjusted Operating Profit* 134.0 119.1
ROCE* 41.1% 42.1%
Working Capital/Sales 27.4% 24.3%




Appendix II -
Cash conversion
£’m 2011 2010
Adjusted cash generated from operations 119.6 124.6
Net capital expenditure** (43.4) (32.9)
Net cash flow (before interest, tax, dividends etc) 76.2 91.7
Adjusted Operating Profit* 134.0 119.1
Cash conversion 57% 77%

• See Appendix IV for definition of profit measures
** Property, plant, equipment, software and development


Appendix III -
Currencies

change
2011 2010 %
FX movements
overall Average exchange rates
immaterial to Bank of England sterling index 79.9 80.2 0%
profit in 2011 –
weaker dollar US$ 1.61 1.55 -4%
matched by
Euro 1.15 1.17 +2%
gains elsewhere
RMB 10.34 10.48 +1%
Won 1,779 1,798 +1%
Period end exchange rates
Bank of England sterling index 80.9 79.8 -1%
US$ 1.55 1.57 +1%
Euro 1.20 1.17 -3%
RMB 9.78 10.32 +6%
Won 1,790 1,777 -1%



Appendix IV -
2011 Note on profit measures
All profit measures exclude the amortisation of acquisition-related
intangible assets of £4.4m (2010: £4.0m) of which £0.4m (2010:
£0.4m) relates to Associates, and acquisition and disposal costs of
£0.4m (2010: £0.2m). 2010 excludes the impairment of acquisition-
related intangible assets of £2.1m and the gain of £8.2m on revaluation
of investment of a company previously treated as an Associate.


Spirax Sarco Engineering 2011 Annual Report Results

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