Spirax-Sarco Regulatory News (SPX)

Tuesday 23rd August 2011

2011 Half Year Results

Six months ended 30th June

*All profit measures exclude the amortisation of acquisition-related intangible assets of £2.2 million (2010: £1.6 million), of which £0.2 million (2010: £0.2 million) relates to Associates. 2010 excludes the profit on revaluation of investment of £8.2m arising from the acquisition of a company previously treated as an Associate and professional costs of £0.2 million in relation to acquisitions.

·; Record sales up 11% (10% organic) - growth in all segments

·; Operating profit margin improved to 19.9%

·; Pre-tax profit up 15%

·; Completed equipment relocations for Cheltenham manufacturing site consolidation

·; High first-half capital investment (£20 million)

·; Strong balance sheet

Commenting on the results, Mark Vernon, Group Chief Executive, said:

We are pleased to report another set of record results for the first six months of 2011, with good sales growth and improvement in the operating profit margin to 19.9%. Our continued investments in geographic market penetration and new product development have contributed to the good organic sales growth of 10% in the first half of the year and to market share gains and expansion of our addressable markets. Rates of industrial production growth returned to more normal levels in the first half of the year, with the pace of economic growth slowing from the rapid expansion of 2010.

The widespread use of steam means that our markets tend to reflect general economic conditions and industrial production, and we are increasingly alert to the impact on these from uncertainty relating to the financial markets and the parlous state of government finances in many countries. If the growth rate of the world economy slows, we expect to be resilient but not immune. Given no overall deterioration in our markets or significant adverse currency movements, the Board remains confident in the prospects for the Group this year and the progress we expect to achieve.

For further information, please contact:

Mark Vernon, Chief Executive

David Meredith, Finance Director

Tel: 020 6638 9571 at Citigate Dewe Rogerson

There will be a live audio webcast of the Analysts presentation today at 10.00am hosted on the Company website at http://www.media-server.com/m/p/prgn9a9y. Please note that this will be a listen only facility. An archive of the webcast and presentation will be available via the same link later today.

Unless otherwise stated, the figures quoted in the text below are based on the Adjusted Group results.

REVIEW OF OPERATIONS

We are pleased to report another set of record results for the first six months of 2011, with good sales growth and improvement in the operating profit margin to 19.9%.

Sales at £307.7 million were ahead 11%, including 1% from acquisitions, with further progress in all segments. Overall currency movements were immaterial and the organic sales growth of 10% was again led by emerging markets and Watson-Marlow.

Adjusted operating profit for the first half of the year grew by 14% from £53.5 million to £61.2 million and the margin rose from 19.3% to 19.9%. We benefited from operational leverage on the higher sales and the inclusion of Mexico in this year's half-year results, partially offset by increased investments in sales development and R&D, higher material prices and one-off costs from the manufacturing site consolidation in Cheltenham. The adjusted operating margin for the steam specialties business segment advanced to 19.3% from last year's 18.6% and the adjusted operating margin for the Watson-Marlow pumps segment was unchanged at 28.8% due to the negative impact of currency transaction effects.

Net finance income was £0.6 million compared with net expense of £0.4 million in the first half of 2010 due to an improvement relating to the defined benefit pension funds. The Group's share of the after-tax profit of Associates was lower at £1.3 million (2010: £1.8 million) largely due to our Mexican operation becoming a wholly-owned subsidiary in May 2010.

Adjusted pre-tax profit rose 15% from £54.9 million to £63.0 million. The pre-tax profit for the first half of the year, on a statutory basis, was little changed at £60.8 million. The overall tax rate, based on the adjusted profit before tax excluding the Associate profit, was marginally lower at 31.1% (2010: 31.4%). Adjusted basic earnings per share increased by 14% from 49.8p to 56.6p.

Trading

During the first half of the year, market conditions improved and the rates of industrial output growth returned to more normal levels. Our robust business model and good execution have enabled the Group to continue to deliver growth ahead of our markets as we focus on energy saving, emissions reduction and process improvements for our diverse range of industrial and commercial customers. Our continued investments in geographic market penetration and new product developments have contributed to the good organic sales growth of 10% in the first half of the year and to market share gains and expansion of our addressable market. Effectively managing the high cost of energy and meeting stringent environmental regulation are of increasing importance to our customers, who value the highly skilled direct sales and service resources we can bring to bear in providing them with tailored engineering recommendations and solutions.

In our steam specialties business, we achieved good sales growth across all product ranges and geographic markets driven by increased customer spending on maintenance and small capital improvement projects. Combined sales growth of prefabricated heat exchange packages, controls, services and flow meters considerably outpaced the growth of the traditional steam specialties products, in line with our emphasis on new products, engineered packages and services opportunities that have higher inherent growth potential.

Market conditions for Watson-Marlow pumps generally reflect those of the steam specialties business and we achieved good sales growth. Our comparatively small pumps presence in emerging markets provides the opportunity for improved prospects in these important growth markets.

We continue to aggressively progress the implementation of our global manufacturing strategy. Our new, significantly larger, plant in China completed its first full year of operation and output is steadily rising with the addition of new equipment and localisation of more production. In June, we completed the extensive physical moves in the Cheltenham manufacturing site consolidation and the reorganisation of our French factory, and expect to see the progressive cost savings as the new manufacturing processes are bedded down. As expected, material costs have been higher than in the first half of 2010, although these have been mostly offset by price increases and other actions.

Steam Specialties Business

EMEA

Sales in Europe, Middle East and Africa (EMEA) increased by 9% from £112.8 million to £122.7 million, including a 1% benefit from exchange movements. We continue to see a two-speed recovery in our EMEA steam specialties segment, with good growth in Germany, Scandinavia, Eastern Europe, the Middle East and Africa and slower growth and relatively low project activity throughout most of our other core European markets. Sales growth resulted mostly from higher sales of instrumentation products, prefabricated packages and steam system services. Emerging European markets did well and sales in Russia and Poland were strongly ahead, as were sales in the Middle East and Northern Africa. Our South African business also did well benefiting from increased sales, good cost control and favourable currency movements. M&M, our small specialist valve business, continued its recovery with excellent results in the first half year. There was good growth in Germany with higher demand from both domestic and export oriented customers. However, trading conditions remained more difficult in our other core continental European markets in France, Italy and Spain, where combined sales and profit were only marginally ahead. Market conditions also remain difficult in the UK, but sales and profit increased as order backlog was reduced. Our manufacturing operations in the UK and France saw lower profits due to increased material costs and additional costs relating to the site consolidation in Cheltenham and the reorganisation of manufacturing operations in both units. Overall operating profit in EMEA increased by 10% from £18.6 million to £20.5 million and at constant currency the profit increase was 8%. The operating profit margin edged up to 16.7% (2010: 16.5%).

Asia Pacific

Sales in Asia Pacific increased by 15% from £56.7 million to £65.2 million. We benefited from sterling being weaker against virtually all currencies in the region and, at constant currency, sales were up 12%. We saw good sales growth across virtually all product lines, including higher sales of traditional steam specialties products and controls. China, our largest operation in the region, continued to make strong progress in all product areas as we invested to expand our network of sales offices and added sales resource. The new manufacturing plant in Shanghai is performing well with output accelerating. Korean sales and profits were ahead and we saw good results from several of our smaller operations throughout the region. Our Asia Pacific segment results are driven to a great extent by the performance of our businesses in China and Korea. Our Chinese business is focused on serving domestic industries geared more towards local consumption and therefore we remain confident in the future growth prospects but in Korea we expect lower domestic oil and petrochemicals project activity. Notably, our small Japanese business performed remarkably well in moderately improving its profit performance against the background of the devastating earthquake and tsunami in March. Overall, the Asia Pacific operating profit increased 19%, or 14% at constant currency, and the margin improved further to 23.9% (2010: 23.0%).

Americas

Sales in the Americas increased by 8% from £59.0 million to £63.9 million. At constant currency, sales were up 11%, half of which was attributable to the inclusion of our Mexico operation, which became a full subsidiary in May 2010. The US dollar was weaker against sterling and the Argentinian peso continues to depreciate as inflation worries persist but these impacts were mitigated by the continued strength of the Brazilian real. Market conditions in North America have normalised with a return of project activity in Western Canada and cautious spending patterns for replacement equipment and capital improvement projects in the US. Sales growth in the Americas was buoyed by higher sales of flow meters in the US and increased sales of traditional steam specialties products throughout the region. In North America, we saw particularly strong sales growth in Canada, continuing the rebound in the second half of last year from the return of some project work. Sales and profit growth continued in our Latin American operations but at a less frenetic pace than in 2010, with good profit gains and strong operating margins in Brazil and Mexico, but with lower profit in Argentina. Overall operating profit in the Americas grew well, rising by 15% from £10.9 million to £12.6 million, with a further improvement in the operating profit margin from 18.5% to 19.7% as we benefited from higher sales, good cost controls, the inclusion of Mexico and the good performance in Brazil.

Watson-Marlow Pumps 

Sales increased by 15% from £48.5 million to £55.9 million with a negative impact on translation from the weaker US dollar, offset by the benefit from the small acquisition of our Australasian distributorships in June 2010. Watson-Marlow pumps achieved widespread sales growth as we continued to expand our geographic coverage with more direct sales people in both developed and emerging markets, accelerated our industry sector-focused sales approach and capitalised on the further integration and development of acquisitions made in recent years. Sales growth was strong in industrial and mining markets but with some weakness in water & wastewater due to pressures on government finances, particularly in the USA. There was a good performance across EMEA with strong growth in tubing and Bredel products, although Germany did not repeat the large OEM demand in the first half of last year. Sales grew nicely in the Americas with a good contribution from Flexicon products and our new direct selling operations in Mexico and Argentina. Asia Pacific continued its rapid growth, including the benefit from the integration of recent acquisitions and the introduction of a broader range of the pump product portfolio into the region. Segment operating profit increased by 15% from £14.0 million to £16.1 million, or 19% at constant currency, and the operating profit margin was unchanged at 28.8% despite the negative impact of currency transaction effects.

Balance Sheet and Cash Flow

Capital employed of £343 million at 30th June 2011 increased by 13% at constant currency compared with 31st December 2010. Investment in fixed assets, at over £20 million, continued at a high level as we completed the significant elements of the manufacturing site consolidation in Cheltenham. Capital investments will continue at a lower level for the on-going implementation of the regional manufacturing strategy, with additional equipment in China and the Americas. Working capital rose by 20% at constant currency reflecting the good sales growth and due to seasonal patterns, higher levels of raw materials and an increase in buffer stocks related to the manufacturing reorganisation in Cheltenham.

Net cash balances reduced by £22.2 million in the first half year reflecting the usual seasonal pattern, high capital expenditure and 18% increase in dividend payments. We operate with a strong balance sheet that enables us to reinvest in the business and the net cash balance at 30th June 2011 was £12.2 million (31st December 2010 £34.4 million).

Principal Risks and Uncertainties

The Group has an established risk management process which operates within the corporate governance framework, details of which are set out in note 10 which is followed by a Directors' Responsibility Statement.

Dividend

The Board has declared an interim dividend of 14.8p (2010: 13.0p) per ordinary share, an increase of 14%. The dividend will be paid on 11th November 2011 to shareholders on the register at the close of business on 14th October 2011. The final dividend of 30.0p per share in respect of 2010 was paid on 18th May 2011 at a cash cost of £23.2 million. In addition, the 25.0p per share special dividend for 2010 was paid to shareholders on 8th July 2011 at a cash cost of £19.3 million.

Director Retirement

Tony Scrivin retired from the Board on 31st July 2011. The Board extends its deep gratitude to Tony for his valuable contributions to the Group over 48 years of distinguished service, most recently as director for the Group's Europe, Middle East and Africa segment.

Outlook

Rates of industrial production growth returned to more normal levels in the first half of the year, with the pace of economic growth slowing from the rapid expansion of 2010. The widespread use of steam means that our markets tend to reflect general economic conditions and industrial production, and we are increasingly alert to the impact on these from uncertainty relating to the financial markets and the parlous state of government finances in many countries. If the growth rate of the global economy slows, we expect to be resilient but not immune. However, our historic organic sales growth has generally been well ahead of market growth as we have invested for sales growth and market penetration, particularly in emerging markets, and have further increased expenditure in new product development. Additionally, the high cost of energy, increasing environmental pressures to reduce emissions and water consumption, and on-going trends towards increased outsourcing by customers, are all positives for our business. We have a robust business model built on providing tailored customer solutions to a wide range of industry sectors through our highly trained direct sales force, with a very good exposure to emerging markets.

We achieved good results in the first half of the year. In July, demand grew at mid-single digits and sales growth continued at a slightly reduced pace than in the first half of the year. Given no overall deterioration in our markets or significant adverse currency movements, the Board remains confident in the prospects for the Group this year and the progress we expect to achieve.

Spirax-Sarco Engineering plc

GROUP BALANCE SHEET

Spirax-Sarco Engineering plc

GROUP INCOME STATEMENT

* Adjustments relate to amortisation and impairment of acquisition-related intangibles, acquisition costs and in 2010 profit on revaluation of investment arising from the acquisition of a company previously treated as an Associate (see note 1).

GROUP STATEMENT OF COMPREHENSIVE INCOME

GROUP STATEMENT OF CHANGES IN EQUITY

Six months to 30th June 2011

Six months to 30th June 2010

For the year ended 31st December 2010

GROUP CASH FLOW

NOTES TO THE ACCOUNTS

1. SEGMENTAL REPORTING

Analysis by location of operation

Six months to 30th June 2011

Six months to 30th June 2010

Year ended 31st December 2010

The total operating profit for each period is after crediting or charging the adjustments analysed below:

Capital additions include property, plant and equipment at 30th June 2011 of £20,142K, at 30th June 2010 of £10,243K and at 31st December 2010 of £34,892K, and other intangible assets at 30th June 2011 of £1,867K, at 30th June 2010 of £12,767K and at 31st December 2010 of £14,593K. Depreciation and amortisation includes amortisation of acquisition-related intangible assets.

3. TAXATION

Taxation has been estimated at the rate expected to be incurred in the full year

4. EARNINGS PER SHARE

The dilution is in respect of unexercised share options and the performance share plan.

5. DIVIDENDS

No scrip alternative to the cash dividend is being offered in respect of the 2011 interim dividend.

6. EMPLOYEE BENEFITS

Pension plans

The Group is accounting for pension costs in accordance with International Accounting Standard 19.

The disclosures shown here are in respect of the Group's Defined Benefit Obligations. Other plans operated by the Group were either Defined Contribution plans or were deemed immaterial for the purposes of IAS 19 reporting. Full IAS 19 disclosure for the year ended 31st December 2010 is included in the Group's Annual Report.

The defined benefit plan expense is recognised in the income statement as follows:-

The expense is recognised in the following line items in the income statement:

The amounts recognised in the balance sheet are determined as follows:

Share based payments

The charge to the income statement in respect of share-based payments is made up as follows:-

7. ANALYSIS OF CHANGES IN NET CASH

8. CAPITAL EMPLOYED

An analysis of the components of capital employed is as follows: