Coronavirus Update

Spirax-Sarco Engineering - Trading Update

This content has been sourced from: https://www.investegate.co.uk/spirax-sarco-engng/r...

Spirax-Sarco Engineering

Trading Update

Trading performance holding up, despite unprecedented circumstances

Thermal energy management and niche pumping specialist, Spirax-Sarco Engineering plc, issues the following trading update in respect of the four months ended 30th April 2020. 

Economic environment

The global macro-economic environment has worsened significantly since the announcement of our preliminary results on 11th March when the forecast for global Industrial Production growth for 2020 was an expansion of 0.8%.  Since then the full-year forecast has fallen to a contraction of 6.6% as the impact of the COVID-19 pandemic is felt across the world, with quarterly year-on-year contractions of 3.8%, 10.6%, 7.6% and 4.2% expected throughout the year. 

Trading

Despite the unprecedented economic environment trading has held up well.  A small number of our manufacturing facilities in different countries faced temporary closures to comply with government directives.  However, all our production facilities are now open, albeit operating at varying levels of capacity due to our desire to ensure a safe working environment for employees including the needs of staff who are shielding or self-isolating.  Sales engineers remain in close contact with customers globally to satisfy immediate needs, although physical access to customer's facilities has been significantly curtailed in a number of geographies.  Over 50% of our sales are destined to critical sectors on the front line of this global pandemic, such as Hospitals & Healthcare, Pharmaceutical & Biotechnology, Food & Beverage, Power Generation and Water Treatment, which have retained a higher resiliency of demand during this period. 

Demand from MRO (Maintenance, Repair and Overhaul) and small improvement project activities, which traditionally make up c. 85% of revenues, experienced only a mild decline compared to a very strong comparable period in 2019.  Over 80% of demand weakness arose from the postponement of larger project orders.  Organic* sales for the Group in the first four months of the year declined 5%, with reported sales down 3%, reflecting the inclusion of Thermocoax and a currency headwind.  In the three months to March, the organic decline in sales was 4%, while in April it was 8% as the full effects of the global pandemic were felt.

In the Steam Specialties business, sales in the four months were down 7% organically with the majority of the shortfall coming from Asia Pacific, which was down 13% due in part to a particularly poor February in China which suffered from an enforced extended Lunar break and tight lockdown.  We are pleased to see that the economy in China is now recovering and, absent a resurgence of the COVID-19 virus, we expect to see close to normal business activity levels in the second half of the year.  The majority of EMEA entered lockdown around five to six weeks after China and as a result suffered less in the period with sales down 6% organically.  We believe that the Americas are lagging Europe in terms of exposure to COVID-19 and this is reflected in their organic sales performance which was flat on the prior year. 

In the Electric Thermal Solutions business (ETS) sales were up 16%, at constant currency, due to the inclusion of Thermocoax that performed very well in the four month period, with like-for-like sales growth of nearly 18%.  On an organic basis we saw sales fall 9%, modestly above that of Steam Specialties, due to Chromalox's higher exposure to larger project activity and to more cyclical industries such as Oil & Gas, especially in the USA.  

Watson-Marlow's exposure to the Biopharmaceutical and Medical Device markets make it more resilient to the impact of COVID-19 with many customers working on producing testing kits or on developing a vaccine.  As a result, Watson-Marlow's sales grew 4% organically in the period.

Sterling exchange rates against the basket of currencies we trade in have strengthened compared to the average for the prior year, resulting in a 2% negative impact on sales from foreign exchange in the period.

We continue progressing the reorganisation of the Chromalox operations in France and also have initiated the process to close all Defined Benefit Pension Schemes in the UK to future accruals.  These two initiatives will deliver savings in the second half of the year.  Additional cost containment actions were initiated in late February on a global scale in response to COVID-19, positively impacting performance in the past two months. 

On an organic and reported basis, Group operating profit is behind the comparable four-month period in 2019, although operating margins remained above 21% over that period due to the cost containment actions. 

Response to COVID-19

Our ability to operate in such challenging circumstances is not only a result of the resiliency of our business model and the important role we play in serving critical sectors but it is, crucially, also a reflection of the commitment, hard work and dedication of our employees.  Across the world, our employees have adapted quickly and efficiently to new ways of working, whether at home or on site, and have maintained an unfaltering focus on serving our customers. 

All of our production facilities remain open, with most running split shifts to increase social distancing as well as disinfecting between shifts.  Across the Group, office based workers not involved in manufacturing are working from home.  We are starting to plan for a gradual return of some office-based work as governments ease restrictions.  However, the health, safety and wellbeing of our employees has been, and will remain, our utmost priority and we will continue to take all necessary steps to protect and support them. 

To date we have not furloughed any of our UK personnel, which account for 25% of our global workforce.  In late April we introduced a temporary, voluntary flexible working scheme within the Steam Specialties business to reduce costs and support employees, many of whom are managing child or elder care alongside working.  We will continue to review the situation regularly and should further action be needed, in response to any further downturn in demand, we will act appropriately and as circumstances require.  In order to help contain costs during the more critical months of demand weakness, the Board and over one hundred senior managers across the Group agreed in March to pay reductions ranging from 20% to 7%.  These pay cuts took effect from 1st April for a duration of six months. 

We are proud to support numerous customers around the world in the fight against COVID-19.  For example, in April we responded to an urgent request to supply a critical component part for use in the UCL-Ventura breathing aid, a Continuous Positive Airway Pressure (CPAP) device, which is being used to provide potentially life-saving oxygen to patients in the UK.  Further examples from all three businesses can be found on our website: https://www.spiraxsarcoengineering.com/covid-19 .

Financial position

Our business remains highly cash generative and we maintain a strong balance sheet.  At 30th April 2020 net debt was £288 million.  Total debt facilities are £792 million, giving headroom of c. £500 million.  The average tenor is greater than three years with the earliest material repayment being in March 2022.  In addition to liquidity from our banks and private placement providers, we are eligible for support under the Bank of England's Covid Corporate Financing Facility (CCFF), although we currently do not anticipate the need to access it.  The payment of our 2019 final dividend of £57.5 million will be made on 22nd May 2020.

Outlook

With 85% of our demand coming from customers' operating rather than capital budgets and a high proportion of our revenues from sectors less impacted by COVID-19 such as Food & Beverage, Pharmaceutical and Biopharmaceutical, Healthcare, Medical Devices, Power Generation and Water Treatment, we are confident of our ability to weather these unprecedented circumstances. 

However, the significant changes to trading environments since our preliminary results announcement on 11th March, as well as the huge uncertainties that surround the global economy, substantially increase the challenge of providing a full-year outlook.  While trading in the first four months of the year has held up well, we currently believe the worst of the downturn will occur in the second and third quarters of 2020.  Absent a resurgence of the COVID-19 pandemic in the second half of the year, we currently expect trading conditions to improve in the last quarter of 2020, resulting in a lower contraction of organic sales in the second half of 2020 than in the first half. 

Based on current assumptions, we now anticipate that the global impact of COVID-19 on the Steam Specialties business will be an organic decline broadly consistent with the reduction in Industrial Production.  We expect the organic sales contraction of the Electric Thermal Solutions business to be slightly higher than in Steam Specialties business, which should be modestly offset by the full-year contribution and expected strong performance from Thermocoax.  In the Watson-Marlow business, we anticipate that good organic growth in the Biopharmaceutical and Medical Devices sectors will be offset by a contraction in the balance of the business that is more closely correlated to movements in global industrial production.  If current exchange rates were to prevail for the remainder of the year there would be a 2% headwind on the translation of sales.

As a result of cost containment and efficiency improvement initiatives that have been put in place, we currently anticipate that the full year drop through of total revenue decline to operating profit in 2020 will be contained to around 45%.

Spirax-Sarco Engineering plc expects to publish its half-year results on Wednesday 12th August 2020, when we anticipate providing an updated outlook based on the actual performance achieved during the second quarter of 2020.