Spirax-Sarco Regulatory News (SPX)

Spirax-Sarco Engineering plc

News Release

Wednesday 5th August 2015

2015 Half Year Results

3% organic sales growth against slowing growth rates in industrial production

Currency headwinds increasing

Six months ended 30th June

*All profit measures exclude certain non-operational items, which total £6.4m for the six months ended 30th June 2015, as defined in note 2.

** At constant exchange rates adjusting for both translation and transaction effects. References to "organic" are at constant currency excluding the effects of acquisitions and disposals.

· Organic sales growth of 3%

· Operating profit up 3% at constant currency excluding India start-up and UK headcount reduction costs

· Underlying operating margin maintained

· Currency headwind reduced sales on translation by 2.6% versus first half 2014

· Strong growth in Watson-Marlow Fluid Technology business

· 98% cash conversion and interim dividend +7%

Commenting on the results, Nicholas Anderson, Group Chief Executive, said:

"We are pleased with the organic sales increase of 3%, against a backdrop of slowing growth rates in the global industrial markets we serve, particularly in Asia and South America. We have seen good growth in Europe, and Watson-Marlow is having another strong year. Currency headwinds reduced sales by 2.6% against the first half 2014. Our underlying operating profit margin was maintained and we have continued to reduce our structural cost base while also stepping up our strategic investments for future growth, particularly in India. These actions in the first half of 2015 will bring benefits in the second half of this year and in future years.

We anticipate that our markets will remain challenging, especially in emerging economies, but continue to expect modest market improvements in Europe and North America during the second half of this year and remain focussed on our strategic priorities to generate our own growth. We have a robust and resilient business model and, assuming no unexpected deterioration in our markets, the Board remains confident that the Group will make progress in 2015."

For further information, please contact:

Nicholas Anderson, Group Chief Executive

David Meredith, Finance Director

Tel: 020 7638 9571 at Citigate Dewe Rogerson

The meeting with analysts will be available as a live audio webcast on the Company's website at www.spiraxsarcoengineering.com or via the following link http://edge.media-server.com/m/p/hmksdyur 

at 9.00 am, and a recording will be posted on the website shortly after the meeting. 

Unless otherwise stated, the figures quoted in the text below are based on the adjusted Group results (see note 2). References to "organic" changes are like-for-like excluding acquisitions and excluding the effects of exchange rate movements.

REVIEW OF OPERATIONS

Organic sales growth was 3% in the first half, partially offset by unfavourable currency movements that reduced sales on translation by 2.6% when compared with first half 2014 average exchange rates. Sales of £320.0 million were therefore marginally ahead of the prior year (2014: £319.2 million) at reported exchange rates.

Global industrial production growth rates, which drive our underlying markets, have progressively slowed over the past year to very low levels of around 1%, in both developed and emerging markets, and this continues to cause a drag on business activity, although we remain focused on our strategic actions to outperform our markets.

Organic sales were flat overall in our steam specialties business following a weak late Spring, although growth resumed in June and has been maintained into the early weeks of the second half year. Europe, Middle East and Africa (EMEA) performed well, achieving organic sales growth of 3% against a background of low, but stable, industrial production growth. In the Americas, organic sales increased by 2% due to growth in Latin America but were lower in North America against a relatively strong first half in 2014. In Asia Pacific, organic sales were 5% lower largely due to a slow first half in Korea. Organic sales again grew strongly in our Watson-Marlow Fluid Technology (WMFTG) business rising by 13%, with expansion in all geographic regions, especially North America and Europe. Asepco, acquired in April 2015 for £7 million, made a good start; sales in the short period since acquisition did not contribute materially to the Group in the first half.

Group adjusted operating profit was flat at constant currency. Watson-Marlow Fluid Technology Group (WMFTG) performed well, increasing profit by 10% at constant currency, reflecting the strong growth in sales. In the steam specialties business, operating profit was 4% lower at constant currency reflecting flat sales, the £0.5 million of net one-off headcount reduction costs in the UK steam specialties manufacturing business and nearly £1 million of start-up costs in India. EMEA performed well, with operating profit ahead 5% at constant currency benefiting from the higher sales, partially offset by the one-off costs. In Asia Pacific, operating profit was down 17% at constant currency reflecting the impact of lower sales and the start-up costs in our new direct sales business in India, which commenced trading last month. Overall in the Americas operating profit was 1% lower against a tough compare, reflecting reduced sales and increased costs in the USA, as resources were added and we continue the process of realigning our market approach, mitigated by good results in some of our smaller Latin American operations. Excluding India start-up costs and the UK headcount reduction costs, Group operating profit was ahead 3% at constant currency. At reported exchange rates, the Group adjusted operating profit of £65.8 million was 2% lower (2014: £67.1 million).

Currency headwinds have continued into 2015 and have increased since our AGM statement in early May, reducing sales on translation by 2.6% compared with first half 2014 average exchange rates. Gains from the stronger dollar have been more than offset by the impact from the weaker euro and some emerging market currencies. If recent exchange rates prevail for the remainder of the year, the translation impact on sales for the full year would increase to 4%. In relation to operating profit, the total impact of unfavourable exchange movements in the first half of 2015, including both translation and transaction effects, was to reduce profit by over 2.3%. Note 14 includes a table of the Group's significant exchange rates.

Net financial expense reduced to £0.6 million from £1.5 million reflecting the improved cash inflow over the prior year and lower interest costs following renegotiation of our debt facilities. Total income from Associate companies declined to £0.2 million from £0.7 million due to the sale in March 2015 of our investment in India ahead of the start-up of our wholly owned direct sales operation in India.

Adjusted pre-tax profit increased by 1% at constant currency to £65.5 million but was reduced by 1% at reported exchange rates (2014: £66.3 million). The pre-tax profit for the first half year on a statutory basis, was £57.3 million (2014: £63.5 million) and includes a one-off charge of £3.8 million in respect of the closure of our metering manufacturing facility in Longmont, Colorado, USA. The statutory pre-tax profit also includes a net charge of £1.7 million in respect of exchange translation losses from prior years, reclassified from equity to the profit and loss account in the current period under IAS 21, net of a small gain on disposal, relating to the sale of the Group's 49.3% interest in our Associate company Spirax Marshall in India that was completed in March 2015. The statutory pre-tax profit includes the amortisation of acquisition-related intangible assets. The overall tax rate, based on the adjusted profit before tax and excluding the Associates profit, was slightly higher at 30.4% (2014: 30.1%).

Adjusted basic earnings per share reduced by 2% to 60.5p (2014: 61.7p) but were flat at constant currency. The number of shares in issue reduced by 3.6% with effect from 15th June 2015, following the share consolidation of 28 existing ordinary shares into 27 new ordinary shares, in conjunction with the recently paid special dividend. This will reduce the number of shares in issue through the second half year and bring down the average shares in issue for the full year. Basic earnings per share on a statutory basis were 52.2p (2014: 58.7p).

The Board has declared an interim dividend of 20.8p (2014: 19.5p) per ordinary share, an increase of 7%. The dividend will be paid on 6th November 2015 to shareholders on the register at the close of business on 9th October 2015. The final dividend of 45.0p per share in respect of 2014 was paid on 29th May 2015 at a cash cost of £34.1 million. The special dividend of 120.0p per share in respect of 2014 was paid on 15th July 2015 at a cash cost of £91.0 million.

Trading

Our businesses serve very diverse markets across a wide range of different industries, geographic regions, customers and products. Because steam is so widely used across so many applications, our markets broadly reflect changes in global economic conditions and, in particular, movements of industrial production growth rates. Our Watson-Marlow fluid path technology business benefits from a similar diversity of markets. The Group's direct sales business model brings to bear our highly trained sales engineers on the solution of customers' energy and water saving, CO2 reduction, productivity, quality and sustainability issues.

Global industrial production growth, which we typically lag by a few quarters, has progressively slowed over the past year to currently very low levels. The slowdown of industrial production growth has been particularly marked in China and other emerging markets where we have long had a strong presence, with recessionary conditions in Latin America and Russia. This slowdown has also been evident in the developed markets of North America and Europe, although industrial production growth rates in the latter look to have stabilised, albeit at close to 1%.

In the first half of 2015, sales in our steam specialties business were flat at constant currency. Overall, large project work has again been at a lower level, offset by growth in our day-to-day business reflecting increased demand from customers' replacement and maintenance spending, from which we derive a large proportion of our revenues. As we have previously noted, the impact on our business from the low oil price is relatively muted but we are not immune, having seen a negative impact in Korea and Canada in particular, as well as Brazil and China for different local reasons. Overall, the weaker oil & petrochemical sector reduced our growth rate by around 1%. The operating profit margin in our steam specialties business was lower at 19.6% compared with 20.7% in the first half of last year, in part due to the one-off headcount reduction costs in the UK, start-up costs in our new operation in India and small exchange transaction losses. However, input costs for materials remained broadly flat.

Sales in our Watson-Marlow Fluid Technology business increased strongly, by 14% at constant currency, with contributions from all geographic regions. Asepco, acquired in April 2015, made a good start, integrating smoothly into the Watson-Marlow business and culture; excluding Asepco, sales were ahead 13% at constant currency. New products from all brands in the business contributed well and the revolutionary Qdos peristaltic metering pump was again a significant part of this, achieving deeper market penetration from an expanded range. Sales increased across almost all industry sectors. The operating profit margin in Watson-Marlow was unchanged at 29.9%, benefiting from favourable exchange transaction gains, particularly on product imported into North America from Europe, but reflecting increased product and market development investment.

The evolution of the Group's business strategy, building on the foundation of our robust, direct sales business model that has proved resilient through the business cycle, was clearly set out in the 2014 Annual Report, with the overarching philosophy of doing better what we already do well, so that we can outperform our markets. We are focusing resources on the implementation of the key elements of that more customer-centric strategy and in particular the sharpening of our direct sales approach to the market through sectorisation, leveraging strength in key industry sectors and key product areas, improved marketing capability, and enhanced training of our sales engineers and support teams. Closer alignment of product development activities to support these key actions and development of the wider supply chain to improve service and reduce costs is also underway. We are also investing in support systems in customer facing areas as well as in product development and manufacturing functions.

Steam Specialties Business

EMEA

Europe, Middle East and Africa (EMEA) did well, growing sales by 3% at constant currency to £111.8 million. Exchange movements were strongly negative, reducing sales on translation by 9%, due to the 10% weaker euro versus the first half of last year. Reported sales were therefore down by 6% (2014: £119.3 million). Operating profit at £21.3 million was also significantly impacted by unfavourable exchange movements and was down 12% at reported currencies but was ahead 5% at constant currency (2014: £24.2 million). The operating profit margin was 19.0% (2014: 20.3%), while at constant exchange rates a further improvement was achieved, following the good gains in recent years. We benefited from continued flat material input costs and EMEA results were ahead despite the £0.5 million of net one-off headcount reduction costs in the steam specialties UK manufacturing operations.

Economic conditions in EMEA have been stable but with industrial production growth rates running at very low levels close to 1%. Industrial production rates modestly improved overall in our larger developed markets but have deteriorated in some developing markets and in Russia in particular. Our business tends to lag movements in industrial production growth rates by a few quarters and we continue to expect to see some pick-up in market activity through the second half while monitoring closely events in Greece, and indeed Russia, for any wider European impacts. Our sales in Russia account for around 1% of Group sales and our direct exposure to Greece is immaterial. Implementation of our strategy in EMEA is progressing well with good co-operation between operating companies in supporting common key actions across the region. Large project activity has remained flat and growth has come from increased customer spend in maintenance and operations, including a higher number of smaller self-generated projects. Sales and operating profit at constant currency were strongly ahead in Italy, with good gains in shipbuilding, and in South Africa where a refocused team is making positive gains. We achieved good progress in Germany and sales and profit were ahead at constant currency in Iberia, following a number of difficult years. The UK sustained the good performance of 2014. Trading results were lower in a number of smaller operations, with profits sharply lower in Russia, where the sales slowdown was compounded by the currency devaluation.

In our main European manufacturing operations in the UK and France, demand levels were again lower reflecting the reduced demand from Asia Pacific and the Americas. Action was taken to reduce costs and the headcount in our UK steam specialties manufacturing operation was reduced by 8% incurring one-off costs of £1.0 million in the first half. Annualised benefits of £2.2 million commenced from April 2015, with £0.5 million of benefit arising in the second quarter and a further £1.1 million in the second half year. The focus remains on efficiency gains, customer service levels and improvements to the wider supply chain.

We announced yesterday the sale of M&M International to Rotork plc for €9.7 million (£6.8 million) in cash, on a cash-free debt-free basis. This company manufactures piston actuated valves and solenoid valves in Bergamo (Italy) and channels close to 15% of its production through our global sales and distribution network. A review concluded that M&M's lower strategic fit with our Group limited our ability to improve their sales growth rates and profitability. 2014 sales of M&M were €8.9 million (£7.2 million at 2014 exchange rates) with an operating profit of €1.5 million (£1.2 million). In April 2015, we completed the acquisition of Valve and Control Engineering Ltd in Scotland, a specialist boiler and valve service and repair business, for a maximum consideration of £0.8 million.

Asia Pacific

Sales in Asia Pacific were down 5% at constant currency to £74.3 million and down by 2% (2014: £75.5 million) at the more favourable reported exchange rates, with the Chinese RMB 8% stronger against sterling and the Korean won 4% stronger. Economic conditions have weakened across the region. Industrial production growth slowed markedly, particularly in China, and Korea is experiencing its third quarter of industrial production decline. Project work has declined further with projects delayed or cancelled, this being mitigated by higher focus on smaller value-added opportunities and customers' maintenance and operations requirements. Operating profit of £15.5 million was down 8% (2014: £16.8 million) and down 17% at constant currency. Excluding pre-operating costs of nearly £1 million in India, profit was down 11% at constant currency, due to a much weaker performance in the first half in Korea and increased market development costs in South East Asia. The operating profit margin was 20.9% (2014: 22.2%).

Our largest sales and profit contributor in the Group is China, accounting for over 10% of Group sales in 2014, where the market is suffering from a well-publicised issue of overcapacity to a greater or lesser extent in most industries. Our sales in China in the first half were marginally lower at constant currency due to further reductions in project work, largely offset by increased day-to-day base business as we refocus our sales resource on customers' smaller energy saving and productivity enhancing opportunities. We expect industrial markets in China to continue to slow and aim to continue mitigating this by leveraging our strength in some of the more resilient sectors such as food & beverages, pharmaceuticals, textiles and healthcare, and maximising the benefits of our powerful direct sales business model.

In Korea, sales and profit were lower reflecting a decline of industrial production and delayed or cancelled projects, including a modest impact from lower activity in the oil & petrochemicals market. We note that order books in Korea and China are higher than the levels reported at this time last year, which should again be supportive of stronger sales in the second half. Elsewhere in Asia Pacific, we achieved improved results in Japan, Taiwan and the Philippines but saw lower results in Australasia and other smaller markets.

As previously announced, in March 2015 we completed the separation from our long-standing business in India via the sale of the Group's 49.3% interest in the Associate company Spirax Marshall for £6.5 million in cash. Our new wholly owned manufacturing and direct sales operation commenced trading in July 2015 following intensive training of our sales and support teams, based in the main industrial centres. Economic activity in India has been growing and we look forward to this providing a favourable background as sales start to build over the coming years. A new facility comprising offices, warehouse, training centre and world class manufacturing plant is under construction, with completion expected early in 2016. The Group's results in the first half include nearly £1 million of pre-operating expenses in India which are somewhat greater than our initial expectations due primarily to high product regulatory approval costs. We now have a strong local team and will continue to add resources as sales build and expect another similar net trading loss in the second half of this year, with improved results from 2016 onwards. Associate profits from India of £0.2 million were recorded in respect of the period to March 2015 compared with £0.8 million for the half year in 2014 (£1.3 million in the full year 2014).

We remain positive on the Asia Pacific region despite the short-term uncertainties. We continue investing to improve our strong position and outperform in existing markets, as well as investing for growth in new ones.

Americas

Organic sales increased by 2% in the Americas to £61.0 million and by 2% at reported exchange rates (2014: £59.8 million). Exchange gains on translation of sales from the stronger dollar, were virtually offset by the impact of much weaker currencies in Latin America, in particular, the Brazilian real down 15%. Sales were lower in North America at constant currency but were ahead in Latin America, driven mostly by growth in Argentina and Mexico. Economic conditions in the Americas slowed, with industrial production growth rates trending to a low level in North America and turning sharply negative in Latin America; Argentina has been mired in an industrial recession for over a year and the Brazilian economy continues to contract strongly this year. Divisional operating profit was broadly unchanged at £11.8 million (2014: £11.9 million) and was 1% lower at constant currency. The operating profit margin was 19.3% (2014: 19.8%).

Sales and operating profit were lower at constant currency in North America following a relatively difficult trading environment in the first half and against a strong profit performance in the comparable period last year. Large project business was lower, including a modest impact from the lack of projects in the Canadian tar sands, although smaller projects showed a modest pick-up. We are continuing the gradual implementation of our more proactive approach to the market in the USA, where additional and redirected sales resources are increasingly working with customers, on a sector basis, to grow the total market by unearthing and developing many hitherto unrecognised customer needs and opportunities for energy and water savings, emissions reductions, productivity improvements, quality improvements and cost reductions. We are also working constructively with distributors to strengthen relationships in appropriate areas of the market but these changes have not been without some limited disruption. In June 2015, we completed the closure of our small meter manufacturing facility in Colorado, USA. Sales of products made at that facility have been declining over recent years and the unit posted an operating loss of £0.6 million in the first half of 2015, which will not repeat in the second half of 2015. Skilled technical resources have been retained to form the core of a new sales support and development team, focused on an expanded metering and energy management offering. One-off, mostly non-cash, closure costs of £3.8 million were incurred that have been excluded from the adjusted operating profit but have been charged against profit in the statutory reported results.

Our performance in Latin America was relatively good against a poor economic environment. Sales and profit were ahead at constant currency in a number of our operations, although we enter the second half with a smaller order book than at this point in 2014. Results were ahead in Brazil, although the second half will reflect lower demand that has been significantly impacted by the paralysis in Petrobras, which is also having a wider economic impact in the country. As expected, profits were lower in Argentina, where strong local inflationary pressures persist and the short term benefits of 2014's currency devaluation are being eroded. We continue to perform well in Mexico and in some of the smaller markets in the region, making a good start in our new direct sales operation in Peru.

We remain positive on the Americas region, where we have been present for many decades, and continue investing to strengthen our well established market position. We expect a second half pick up in the USA, as market conditions improve and we gain traction from our strategic growth initiatives.

Watson-Marlow Fluid Technology

Sales increased by an exceptional 14% at constant currency including a first-time contribution from Asepco acquired in April 2015 (+13% excluding Asepco) that specialises in the design and manufacture of high purity aseptic valves for the biotechnology and pharmaceutical industries. Sales comparisons will become more difficult through the second half of the year due to the strong sales achieved in the second half of last year. Exchange rates reduced sales on translation by a net 1% in the first half, giving a reported sales increase of 13% from £64.5 million to £72.8 million. Reported operating profit also increased by 13% from £19.3 million to £21.8 million, including a small initial contribution from Asepco and a transaction exchange benefit primarily due to lower landed costs in North America from Watson-Marlow manufacturing units in Europe. The operating profit margin was unchanged at 29.9%. At constant currency the operating profit increased by 10%.

Sales were higher in most industry sectors. Our largest sector, biopharmaceutical, was strong with a good flow of project business underpinned by a continued trend towards single-use systems that favour Watson-Marlow products. The acquisition of Asepco, in April, will add to sales in this sector and is a logical extension of product along the fluid path. The new Qdos peristaltic metering pump continued to contribute well in an extended range of sizes displacing other pump types, in particular diaphragm pumps. Food & beverage markets were positive and OEM demand continued at a good level, including projects in clinical diagnostic applications. New products again contributed well, with additions to most product ranges and an active pipeline of future opportunities that extend our capability. An entry level peristaltic pump, manufactured in Asia for local markets, was also recently launched.

All geographic regions contributed to the sales growth at constant currency. Strong growth in the Americas was led by exceptional growth in North America. Good growth was sustained in EMEA with widespread gains, continuing to benefit from the increased sector focus and direct sales expansion over recent years. Sales growth in Asia Pacific was more modest, including in China and Korea, with lower order book levels as we enter the second half. The market in Australia was more difficult where the dominant mining sector was weaker.

In July 2015, we completed the purchase, for £2.8 million, of the MasoSine manufacturing and distribution rights in Japan, providing WMFTG with a direct sales presence in the Japanese market for the first time. This will strengthen the level of service and support available to WMFTG customers in the significant Japanese food and beverage and industrial process markets, and provide a platform for future growth in this important market.

Balance sheet and cash flow

Capital employed of £343 million at 30th June 2015 reduced by 1% at constant currency and excluding acquisitions, versus the equivalent position at 30th June 2014. Improved controls over inventory continue to be implemented to maximise customer service levels. Investment in fixed assets was broadly in line with the level of depreciation in the first half year, although we expect increased investment in the second half in the new plant in India, giving Group capital expenditure of over £30 million for the full year 2015.

Cash generation remains a priority, with a very good 98% cash conversion in the first half, and we continue to operate with a strong balance sheet. There was an outflow of £7 million in respect of the acquisition of Asepco in April 2015, which was broadly matched by the inflow of £6 million in respect of the sale of the Group's 49.3% interest in our Associate company Spirax Marshall in India, completed in March 2015. Currency movements reduced opening net cash balances by £6 million on translation. Net cash at 30th June 2015 was £53.5 million compared with £52.5 million at 31st December 2014 and net debt of £1.5 million at 30th June 2014. The special dividend of 120p per share was approved by shareholders at the AGM on 11th May 2015 and £91.0 million was therefore recognised within current liabilities at 30th June 2015. The dividend was paid after the period end on 15th July 2015.

*Adjustments comprise acquisition and disposal costs of £374k, USA metering manufacturing cash closure costs of £237k and an adjustment in respect of the disposal of Spirax Marshall of £137k

Net assets of £6.7 million in respect of M&M International are shown as an asset held for sale (within current assets and current liabilities) in the balance sheet at 30th June 2015. Subsequent to the balance sheet date, the disposal of this business was completed on 3rd August 2015 for €9.7 million (£6.8 million). A small profit on disposal will be recognised within the statutory profit in the second half year as well as a small loss in respect of prior years' exchange translation differences as required under IAS 21.

Principal risks and uncertainties

The Group has a robust risk management process in place to identify, evaluate and manage the identified risks that could impact the Group's performance. The current risks, together with an explanation of the impact and mitigation actions, are set out in the 2014 Annual Report on pages 28 to 29. The Group has reviewed these risks and concluded that they represent the current position and remain relevant for the second half of the financial year. A summary of the relevant key risks and uncertainties is:

· Economic and political instability

· Significant exchange rate movements

· Loss of manufacturing output at any Group factory

· Breach of legal and regulatory requirements

· Non-compliance with health, safety and environmental legislation

· Defined benefit pension deficits

· Failure to respond to technological developments or customer needs

Our overall geographic diversity limits the impact of instability in any particular region. The Group continues to keep events in Russia (now close to 1% of Group sales) under constant review and is monitoring political and economic events in Greece closely, given the possibility of Europe-wide implications. Currency movements have continued to be relatively volatile, with recent weakness in a number of currencies that are important to the Group, including the Brazilian real and Korean won. Exchange rate movements are monitored closely and we keep mitigating actions under review.

Outlook

Implementation of our strategy for growth is aimed at enhancing our capability to outperform our markets and generate our own growth. Our direct sales business model, with highly skilled sales engineers, creates opportunities to generate engineered solutions to meet customers' needs for energy and water saving, emissions reduction, productivity improvement, quality improvements, regulatory compliance and cost reduction. In difficult economic times our business is resilient, deriving a high proportion of revenues from small projects, replacement demand and customers' maintenance and operating spending.

Because our businesses are so diverse across industrial applications, our markets are strongly influenced by movements in industrial production, which our business tends to lag by a few quarters. Growth rates of global industrial production have progressively slowed for the past year to very low growth rates of around 1%. This slowing of growth rates has been mostly driven by emerging markets, particularly China, Russia and South America. We have, however, achieved good growth in Europe and Watson-Marlow. We anticipate that our markets will remain challenging, especially in emerging economies, but continue to expect modest improvements in European and North American markets during the second half of this year and remain focussed on our strategic priorities to generate our own growth. Currency movements reduced sales on translation by 2.6% in the first half and, if recent exchange rates prevail for the remainder of the year, this will increase to 4% for the full year. We continue to improve the efficiency of our business, having taken actions at our UK and USA manufacturing facilities that bring benefits to trading in the second half and reduce our cost base going forward. We are also continuing to invest for growth, particularly in India, where significant resources have been added to support future expansion. We have a robust and resilient business model and, assuming that there is no unexpected deterioration in our markets, the Board remains confident that the Group will make progress in 2015.

STATEMENT OF FINANCIAL POSITION

CONSOLIDATED INCOME STATEMENT

Adjusted figures exclude certain non-operational items as detailed in note 2. All amounts relate to continuing operations. The notes on pages 15 to 24 form an integral part of the accounts.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Other reserves represent the Group's translation, cash flow hedge and capital redemption reserves. The non-controlling interest is a 2.5% share of Spirax-Sarco (Korea) Ltd held by employee shareholders.

CASH FLOW STATEMENT

NOTES TO THE ACCOUNTS

1. BASIS OF PREPARATION

Spirax-Sarco Engineering plc is a company domiciled in the UK. The half year condensed consolidated financial statements of Spirax-Sarco Engineering plc and its subsidiaries (the Group) have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU. The accounting policies applied are consistent with those set out in the 2014 Spirax-Sarco Engineering plc Annual Report.

These condensed consolidated half year financial statements do not include all the information required for full annual statements and should be read in conjunction with the 2014 Annual Report. The comparative figures for the year ended 31st December 2014 do not constitute the Group's statutory accounts for that financial year as defined in Section 434 of the Companies Act 2006. The consolidated statutory accounts for Spirax-Sarco Engineering plc in respect of the year ended 31st December 2014 have been reported on by the Company's auditors and delivered to the registrar of companies. The report of the auditors 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.

The consolidated financial statements of the Group in respect of the year ended December 2014 are available upon request from Mr A. J. Robson, General Counsel and Company Secretary, Charlton House, Cheltenham, Gloucestershire, GL53 8ER, United Kingdom or on www.spiraxsarcoengineering.com.

The financial statements for the six months ended 30th June 2015, which have not been audited or reviewed by the auditors, were authorised by the Board on 4th August 2015.

The interim report has been prepared solely to provide additional information to shareholders as a body to assess the Group's strategies and the potential for those strategies to succeed. This interim report should not be relied upon by any other party or for any other purpose.

GOING CONCERN

Having made enquiries and reviewed the Group's plans and available financial facilities, the Board has a reasonable expectation that the Group has adequate resources to continue its operational existence for the foreseeable future. For this reason, it continues to adopt the going concern basis in preparing the condensed consolidated financial statements. There are no key sensitivities identified in relation to this conclusion.

NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED

There are a number of new standards, amendments to standards and interpretations that are not yet effective for the period ended 30th June 2015 and have, therefore, not been applied in preparing these condensed consolidated interim financial statements. None of these are anticipated to have a significant impact on the consolidated income statement or consolidated statement of financial position.

SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

The preparation of interim financial statements in conformity with adopted IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amount of assets and liabilities, income and expense. Actual results may differ from these estimates. In preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31st December 2014.

The Directors have considered the facts and circumstances as at 30th June 2015 and concluded that there are no indicators of impairments that require an impairment review to be undertaken on goodwill at the interim statement of financial position date. The annual impairment review will be undertaken later in 2015 consistent with the timing in previous years.

CAUTIONARY STATEMENTS

This interim report contains forward-looking statements. These have been made by the Directors in good faith based on the information available to them up to the time of their approval of this report. The Directors can give no assurance that these expectations will prove to have been correct. Due to the inherent uncertainties, including both economic and business risk factors underlying such forward-looking information, actual results may differ materially from those expressed or implied by these forward-looking statements. The Directors undertake no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

RESPONSIBILITY STATEMENT

The Directors confirm that to the best of their knowledge:

· this financial information has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

· the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year.

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year that have materially affected the financial position or performance of the entity during that period, and any changes in the related party transactions described in the last annual report that could do so.

The Directors of Spirax-Sarco Engineering plc on 4th August 2015 are the same as those listed in the 2014 Annual Report on pages 60 and 61.

N J Anderson

Group Chief Executive

4th August 2015

D J Meredith

Finance Director

4th August 2015

On behalf of the Board

2. 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.

Analysis by location of operation

Non-operational items

The Group uses adjusted figures as key performance measures in addition to those reported under adopted IFRS. The Group's management believes these measures provide valuable additional information for users of the financial statements in understanding the Group's performance. Adjusted operating profit excludes certain non-operational items which are analysed below:

Share of profit of Associates

An analysis of the share of profit of Associates is shown below:

Net assets

The total assets and liabilities of the four segments have not been disclosed as there has been no material change in the amounts disclosed in the 2014 Annual Report and Accounts.

Capital additions include property, plant and equipment at 30th June 2015 of £8,805,000; at 30th June 2014 of £16,144,000; and at 31st December 2014 of £26,876,000; and other intangible assets at 30th June 2015 of £6,080,000; at 30th June 2014 of £6,356,000; and at 31st December 2014 of £12,512,000. Depreciation, amortisation and impairment includes amortisation of acquisition-related intangible assets at 30th June 2015 of £2,240,000; at 30th June 2014 of £2,020,000; and at 31st December 2014 of £4,096,000 and impairment at 30th June 2015 of £1,024,000 of intangible assets and £981,000 of tangible assets in respect of the USA meter manufacturing closure costs (2014: nil).

4. TAXATION

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

5. EARNINGS PER SHARE

The dilution is in respect of unexercised share options and the Performance Share Plan.

6. DIVIDENDS

No scrip alternative to the cash dividend is being offered in respect of the 2015 interim dividend.

7. POST-RETIREMENT BENEFITS

The Group is accounting for pension costs in accordance with IAS 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 2014 is included in the Group's Annual Report.

The amounts recognised in the balance sheet are as follows:

8. ANALYSIS OF CHANGES IN NET CASH