Spirax Sarco Engineering 2010 Annual Report Results
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Spirax-Sarco Engineering reported strong financial results for 2010, with revenue increasing 14% to £589.7 million and operating profit rising 32% to £119.1 million. Operating margins reached a record 20.2%, up from 17.3% in 2009. Free cash flow increased 18% to £62 million. The company also announced a total dividend per share up 19% and a special dividend of 25 pence per share. Overall, 2010 was a year of revenue growth, margin expansion, strong cash flow generation and increased returns to shareholders.
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Spirax Sarco Engineering 2010 Annual Report Results
- 1. Spirax-Sarco Engineering plc 2010 Results 31st December 2010 Bill Whiteley – Chairman Mark Vernon – Chief Executive David Meredith – Finance Director
- 2. Overview of 2010 results Constant 2010 2009 Change currency Revenue £589.7m £518.7m +14% +11% Operating profit* £119.1m £89.9m +32% +26% Margin* 20.2% 17.3% Pre-tax profit* £121.6m £90.2m +35% +29% EPS* 109.5p 82.2p +33% +28% DPS 43.0p 36.1p +19% +19% Special Dividend 25.0p - - - • Sales up 14% – growth led by emerging markets and Watson-Marlow • Record operating profit margin exceeds 20% • Continued reinvestment in sales development and R&D • Good cash flow and strong balance sheet – net cash £34m • Total dividend up 19% – continuing the Group’s long history of increasing dividends • Additional special dividend of £20m * See Appendix VII for definition of profit measures 2010 Results 31st December 2010 2
- 3. Segment revenue changes Asia Watson- EMEA Pacific Americas Marlow FX Increase over 2009 25.0 +3% +16% +15% +22% +2% EMEA +3% Asia Pac +16% 20.0 £18.6m £18.8m Americas +15% WM +22% £15.9m 15.0 MasoSine FX +2% Mexico Total +14% £m £10.4m 10.0 £7.4m Sales 2010 £m 5.0 EMEA 230.0 Asia Pac 131.5 Americas 125.2 0.0 WM 103.0 Based on sales by segment at constant currency % Chg yoy over 2009 Total 589.7 Organic Sales +9% Acquisitions +2% FX +2% TOTAL +14% 2010 Results 31st December 2010 3
- 4. Segment operating profit changes Asia Watson- EMEA Pacific Americas Marlow FX Increase over 2009 14.0 +5% +27% +67% +36% +5% EMEA +5% 12.0 Asia Pac +27% Americas +67% 10.0 £9.8m WM +36% Mexico £8.2m FX +5% 8.0 £7.2m Total +32% £m MasoSine 6.0 £4.4m 4.0 Profit 2010 £m EMEA 36.8 £1.7m 2.0 Asia Pac 34.2 Americas 24.3 0.0 WM 30.8 Based on adjusted profit by segment at constant currency % Chg yoy over 2009 Corp Exp -7.0 Operating profit +32.5% Op margin 2010 20.2% Total 119.1 Op margin 2009 17.3% 2010 Results 31st December 2010 4
- 5. Financial aspects Constant 2010 2009 Change currency Revenue £589.7m £518.7m +14% +11% Operating profit* £119.1m £89.9m +32% +26% Margin* 20.2% 17.3% +290 bps +240 bps Net finance expense (£0.6m) (£2.5m) Associates £3.1m £2.8m +11% +4% Pre-tax profit* £121.6m £90.2m +35% +29% Tax rate (excl Associates)* 31.5% 31.4% EPS* 109.5p 82.2p +33% +28% DPS 43.0p 36.1p +19% +19% Special dividend 25.0p - - - • Record 20.2% operating profit margin • Tax rate virtually unchanged • Lower finance expense – pensions • FX gain 2% on sales and 5% on operating profit * See Appendix VII for definition of profit measures 2010 Results 31st December 2010 5
- 6. Cash flow (£millions) 2010 2009 Adjusted operating profit* 119.1 89.9 • Strong profit increase Depreciation and share schemes 18.9 18.4 • Working capital Working capital (12.4) 9.6 outflow Adjusted cash from operations 125.6 117.9 • Free cash flow Interest paid (0.3) (0.7) +18% to £62m • Closing net cash Tax paid (30.4) (29.9) £34m Capital expenditure (net including Development) (32.9) (34.6) Free cash flow 62.0 52.7 Dividends paid (net) (28.0) (24.3) Special pension payments/severance/provisions (12.4) (15.0) Treasury shares (net) 6.2 2.0 Acquisitions (3.5) (27.2) Cash flow for the period 24.3 (11.8) Net cash balance 34.4 8.0 * See Appendix VII for definition of profit measures 2010 Results 31st December 2010 6
- 7. Key financial statistics 2010 2009 Amortisation & impairment of acquisition intangibles £6.1m £2.4m App I EPS / DPS Sales per employee (average for period at constant FX)) +11% -6% App II ROCE Adjusted cash from operations £125.6m £117.9m App III Cash Free cash flow £62.0m £52.7m App IV FX App V H1,H2 Margins Net cash £34.4m £8.0m App VI Definition Capital expenditure as % of depreciation 197% 210% Cash conversion* 78% 93% Pension liability IAS19 basis (after tax) £45.5m £53.2m Return on capital employed (average)* 42.1% 33.3% • Return on capital employed improved to 42.1% • Good cash conversion • Continued investment – capex at nearly 2X depreciation * See Appendix VII for definition of profit measures 2010 Results 31st December 2010 7
- 8. Underlying operating margin factors (Year-on-year effects on margin) 2010 2011E Currency movements Volume leverage impacts Higher Sales pricing (above inflation) Material prices Manufacturing strategies Product mix impacts Lower Business development investment 2010 Results 31st December 2010 8
- 9. Segmental Revenue Changes EMEA 39% (2009: 44%) Americas 21% (2009: 20%) Asia Pacific 23% (2009: 20%) • Good geographic spread • Diverse industry and customer base • 1,300 direct sales and service engineers in over 50 countries Watson-Marlow Pumps 17% • 42% of 2010 sales into (2009: 16%) emerging markets • >80% Watson-Marlow sales in Europe & North America Sales are by geographical location of operations 2010 Results 31st December 2010 9
- 10. Europe, Middle East & Africa (EMEA) Constant 2010 2009 Change currency Sales £230.0m £225.5m +2% +3% Operating profit* £36.8m £35.6m +3% +5% Margin* 16.0% 15.8% • Mixed market conditions • Good performances from Germany, Russia and M&M Italy • Higher second half sales in UK • Challenging markets in Italy and France • Higher volumes at manufacturing plants contributed to profit increase • Cheltenham manufacturing consolidation largely complete by mid-2011 • Product rationalisation/costs in South Africa *Based on adjusted Operating profit 2010 Results 31st December 2010 10
- 11. Asia Pacific Constant 2010 2009 Change currency Sales £131.5m £104.7m +26% +16% Operating profit* £34.3m £23.1m +48% +27% Margin* 26.0% 22.1% • End markets recovering • Higher levels of project and maintenance spending by customers • Overall sales up strongly across region • Exceptional second half project shipments from backlog • New China plant in production (£2m profit on sale of old premises) • Favourable exchange benefits from stronger won and Australian dollar • Restructured Japan management *Based on adjusted Operating profit 2010 Results 31st December 2010 11
- 12. Americas Constant 2010 2009 Change currency Sales £125.2m £104.6m +20% +15% Operating profit* £24.3m £13.9m +75% +67% Margin* 19.4% 13.2% • Operating profit up 75% • Outstanding operating profit margin of 19.4% • Sales and profit growth from all operations • Improving second half market conditions in Canada • Favourable exchange benefits from stronger Brazilian real • Sales and profit benefits from Mexico shareholding acquisition • Sharply higher profits in Brazil from improved gross margin, cost/pricing management *Based on adjusted Operating profit 2010 Results 31st December 2010 12
- 13. Watson-Marlow Pumps Constant 2010 2009 Change currency Sales £103.0m £83.8m +23% +22% Operating profit* £30.8m £22.3m +38% +36% Margin* 29.9% 26.6% • End markets recovering • Good growth from all geographic regions and product segments • Benefits from full year of MasoSine acquisition • Good demand from OEM customers in EMEA • Bredel shipments recovered from weak 2009 • Strong sales growth in Asia (small base) *Based on adjusted Operating profit 2010 Results 31st December 2010 13
- 14. Operational priorities: invest for future growth Investments £25m higher than 2005 New product development £50.0 • New product development investment increased £45.0 Capex R&D more than 50% since 2007 and doubled since £40.0 2005 £35.0 • Pipeline of new products increasing £30.0 £25.0 £20.0 Market development £15.0 • 250 new sales & service engineers since 2005 £10.0 • Developing markets increased to 42% of Group £5.0 sales in 2010 £0.0 • Direct sales in more than 50 countries 2005 2006 2007 2008 2009 2010 • New sales offices opened in Eastern Europe, Asia and Middle East 7% pa sales growth since 2005 14.0% Acquisitions Organic Selling focus on higher growth products 12.0% 10.0% • Heat transfer/recovery 8.0% packages, services, controls and metering 6.0% product groups grew 2x faster than overall 4.0% growth in last decade 2.0% • Customer outsourcing trends creating 0.0% opportunities to grow pre-fabricated packages -2.0% 2006 2007 2008 2009 2010 and services -4.0% -6.0% Changes at constant currency -8.0% 2010 Results 31st December 2010 14
- 15. Operational priorities: increase operating efficiency Manufacturing strategies Operating margin improved to record high • Four-year £50m investment 20.2% in 2010 nearing end 24.0% • Consolidate and rationalise European footprint 22.0% • Increase manufacturing capacity 20.0% closer to growth markets 18.0% • Improve local product availability 16.0% • Simplify supply chain logistics • £2m additional cost benefits in 14.0% 2011 and further £2m in 2012 12.0% 10.0% Selling efficiency 8.0% • People costs largest single element of cost structure – 43% of total 6.0% costs in 2010 4.0% • Nearly 30% of employees customer 2.0% facing 0.0% • Internet-based technical training 1… 1… 1… 1… 1… 1… 1… 1… 1… 2… 2… 2… 2… 2… 2… 2… 2… 2… 2… 2… tools and assessments to speed development Years shaded in grey represent global recessions (IMF) • Global knowledge sharing software platform 2010 Results 31st December 2010 15
- 16. Operational priorities: improve return on capital employed Working Capital improved to 24% of sales Working Capital 34.0% • Working capital reduced from 29% of sales in 2005 to 24% in 2010 32.0% • Global manufacturing strategies to yield further 30.0% improvements 28.0% 26.0% ROCE • Steady improvements every year since 2005 24.0% except recessionary 2009 22.0% • Higher margins/well managed working capital 20.0% drove improved ROCE in 2010 2005 2006 2007 2008 2009 2010 Cash generation ROCE improved to 42% in 2010 50.0% • Business highly cash generative – £228m free cash flow in last five years 45.0% • £50m invested in acquisitions since 2005 40.0% • £119m dividends since 2005 • Additional special dividend for 2010 (paid 2011) 35.0% 30.0% 25.0% 20.0% 2005 2006 2007 2008 2009 2010 2010 Results 31st December 2010 16
- 17. Summary • Markets recovering but mixed across Europe • Record operating profit margin exceeds 20% – volume and self helps • Total dividend up 19% continuing long history – additional special dividend • Strong balance sheet – net cash of £34m • Return on capital employed 42.1% • Higher investments in product development and market penetration planned • Expect global industrial output to return to more normal levels in 2011 • Board confident in prospects for Group 2010 Results 31st December 2010 17
- 18. Spirax-Sarco Engineering plc 2010 Results 31st December Focused on consistent growth and creating shareholder value 2010 Results 31st December 2010 18
- 19. Appendix I - Investing for long term delivers results 120 43 year Key: EPS dividend Special dividend record 100 DPS Final DPS Interim 80 Pence per share 60 40 20 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 *Based on adjusted Operating Profit. From 2004 figures prepared under IFRS 2010 Results 31st December 2010 19
- 20. Appendix II - Return on capital employed £’m 2010 2009 Capital employed Property, plant & equipment 155.6 135.4 Inventories 96.1 86.5 Trade receivables 137.3 118.8 Prepayments, other current assets 16.9 14.6 Trade, other payables & current tax (107.2) (87.5) Total Capital Employed 298.7 267.8 Average Capital Employed 283.3 269.8 Adjusted Operating Profit* 119.1 89.9 ROCE* 42.1% 33.3% * See Appendix VII for definition of profit measures 2010 Results 31st December 2010 20
- 21. Appendix III - Cash conversion £’m 2010 2009 Adjusted cash generated from operations 125.6 117.9 Good cash conversion Net capital expenditure (32.9) (34.6) (property, plant, equipment, software and development) 92.7 83.3 Adjusted Operating Profit* 119.1 89.9 Cash conversion 78% 93% * See Appendix VII for definition of profit measures 2010 Results 31st December 2010 21
- 22. Appendix IV - Currencies 2010 2009 % Small FX gains Average exchange rates in 2010. Current rates Bank of England sterling index 80.2 79.6 -1% indicate broadly US$ 1.55 1.56 +1% neutral average FX for 2011 Euro 1.17 1.12 -4% RMB 10.48 10.65 +2% Won 1,798 1,976 +10% Period end exchange rates Bank of England sterling index 79.8 80.5 +1% US$ 1.57 1.61 +3% Euro 1.17 1.13 -3% RMB 10.32 11.02 +7% Won 1,777 1,880 +6% 2010 Results 31st December 2010 22
- 23. Appendix V - Improving trend in operating margin H1 vs. H2 Operating profit margin* 22.0% 21.0% 20.0% Key 19.5% 19.3% H1 H2 18.0% 17.1% 17.1% 17.1%17.0% 16.6% 15.9% 15.9% 15.8% 16.0% 15.3% 15.0% 15.0% 15.0% 14.3% 14.4% 13.8% 14.0% 13.7% 13.2% 12.0% 10.0% 8.0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Consecutive yearly margin improvement since 2001 with higher H2 margins from seasonally higher sales volumes *Based on adjusted Operating profit 2010 Results 31st December 2010 23
- 24. Appendix VI - 2010 Note on profit measures All profit measures exclude the exceptional revaluation gain in Mexico of £8.2m (2009: nil) and the amortisation and impairment of acquisition-related intangible assets of £6.1m (2009: £2.4m) of which £0.4m (2009: £0.4m) relates to Associates. 2010 excludes professional costs of £0.2m in relation to acquisitions and 2009 excluded headcount reduction costs of £11.4m. The tax effect on these items was £0.4m (2009: £4.1m) 2010 Results 31st December 2010 24