Nimesh Patel: So good morning. And thank you for joining us for today's presentation. I'm Nimesh Patel and I think most of you know me, although I'm now in a different role, but I would like to introduce Phil Scott, who's our Interim CFO, and you'll hear more from Phil in just a moment.

But first, I am at the end of my second month as CEO, and this is my first set of results in the new role. So I thought it would be appropriate to probably just share with you a few early reflections. And I want to start by saying what a privilege it is to lead the Spirax group because of our outstanding people. I know this business, having been CFO for over 3 years, and I'm incredibly well supported by our group executive team and our Board, and I'm excited about the opportunity we've got ahead of us building on our strong foundations.:

Since my appointment was announced, I've visited over 20 of our operating companies across 11 countries, listening to my colleagues, to understand what they're proud of, what they enjoy, the challenges they face, and what we can do to better support them and support our growth. Not only have I experienced their genuine passion for what they do, but also their dedication to solving our customers' challenges, because solutions are in the bloodstream of our group. They're in our DNA.:

So while today, we're here principally to review our performance in 2023 and discuss the outlook for 2024, I will also speak briefly at the end of this presentation about our future beyond this year, focusing on what I want to preserve and protect, recognizing what's unique about our group and the foundation for our future success and what I want to build, as we fully capture the opportunities that we see ahead. And speaking of the future, let me mark our recent rebranding, evolving from Spirax-Sarco Engineering to Spirax Group, which is the culmination of a journey that spans decades.:

So why did we take this decision? Because this brand which was developed entirely in house brought together our common purpose, brought together our culture and our business model the 3 things that unite us at one group. What the brand reflects, is that we are now 3 strong, sizable and solution focused businesses. And as part of this rebrand Steam Specialties became Steam Thermal Solutions or STS, better reflecting the focus of our business, and it sits alongside Electric Thermal Solutions, and Watson-Marlow Fluid Technology Solutions.:

Now, let's turn to our performance in 2023. I want to acknowledge that we're coming out of what was a challenging year, we faced a materially weaker macroeconomic environment with low global industrial production growth or IP well below 2022. And we faced additional external headwinds to demand from customers in the biopharm and semicon sectors impacting our highest margin businesses. Against this backdrop, our financial performance was in line with the expectations we set out in our November trading update. So I want to thank all of our stakeholders, particularly my colleagues, for helping us collectively steer through these tougher times.:

While overall, we experienced an organic decline in sales, excluding Biopharm, the group grew at a rate significantly above IP because the underlying strength of our business hasn't changed. But I am pleased to say that our expectation is for 2024 to be a year of growth, supported by an improvement in IP, as well as an anticipated recovery in Biopharm demand.:

During 2023 In light of challenging trading conditions, we took early actions to right size capacity and overhead support costs. Together with our pricing discipline. This partially mitigated the impact of lower volumes and an adverse sales mix on our operating profit margin. And as we return to growth in 2024, we expect an improvement to our margin.:

We also continue to invest in the group's strategic initiatives, building the strong foundations that will deliver our long-term growth.:

So to further explain our 2023 financial performance I'll now hand over to Phil, and then I'll return to speak more about our operational performance in each of the 3 businesses. Phil? :

Phil Scott: Thanks, Nimesh and good morning, everyone. So just a reminder, as always, the numbers we'll be discussing today are the adjusted results. A full reconciliation between the statutory and adjusted operating profit is included as an appendix to today's presentation. Again, just to remind the difference between our reported and organic growth rates reflect the effect of currency movements on sales and profit, as well as the contributions from acquisitions in relation to the differing periods of ownership. These impacts are reflected in our reported numbers, and they're excluded from our organic growth rates.

Whilst reported group sales were 4% higher year-on-year. This increase was driven by the full-year contribution from the acquisitions of Vulcanic and Durex Industries. On an organic basis, sales declined by 1%, reflecting the ongoing destocking in the biopharm sector, which began in the second half of 2022.:

Group operating profit declined 8% or 12% on an organic basis to GBP 349 million, driven by the operating leverage impact of the organic sales decline in our highest-margin business. This decline in operating profit resulted in a lower margin of 20.7%. This is in line with guidance and has been supported by the positive impact of early restructuring actions in Watson-Marlow as well as ongoing cost containment across the wider group.:

Net financing costs increased year-on-year by just over GBP 30 million, reflecting the full-year impact of the debt taken on in quarter 4 2022 to fund the Vulcanic and Durex Industries acquisitions, together with a smaller impact from increased market interest rates when refinancing maturing fixed rate debt.:

The group's effective tax rate increased by 50 basis points. Again, this was in line with expectations and reflects the profit mix impact of the countries in which the group operates, including the first full-year impact of Vulcanic and Durex industries. Adjusted EPS of 312.4p was 17% lower, above the rate of decline in operating profit due to the higher net finance expense and effective tax rate. Despite this decline in earnings per share, we are increasing our full-year dividend by 5%. This reflects our confidence in the resilience of the group whilst also ensuring that our dividend cover ratio remains within our target range of 2 to 2.5x.:

Turning now to the sales bridge on Slide 8. Currency movements had a negative impact of 2% on full-year sales. This full-year headwind reflects sterling strengthening in the second half of the year, which more than offset the positive currency impact we reported on our first half sales. The full-year impact of acquisitions had a positive effect on reported sales of 7%.:

Our Steam Thermal Solutions business delivered strong organic sales growth of over 8%, albeit with a slowdown in the second half as industrial production slowed in a number of our key markets, particularly China, North America and Germany. This slowdown also led to a moderation in the rate of growth in large orders.:

ETS full-year organic sales growth was 2%, reflecting growth in Chromalox, but with lower semiconductor demand impacting, particularly in the second half of the year. The ETS order book expanded to record levels, driven by continuing strong demand for decarbonization solutions in Chromalox and Vulcanic. We're continuing to invest in order to increase capacity in our Chromalox manufacturing plants in order to satisfy this level of customer demand.:

Watson-Marlow sales declined by 19% organically. Biopharm sales remained largely flat throughout the year, with the reduced organic decline in H2, reflecting the lower comparator given that customer destocking began in the second half of 2022. Sales to process industries customers are more directly correlated to IP. These were broadly flat in the first half of the year compared to 2022. And in the second half, demand growth was impacted by weakening macroeconomic conditions, which resulted in sales being broadly flat compared to the first half.:

Now looking forward to 2024. At a group level, we expect mid- to high single-digit organic sales growth. The lower end of this range is underpinned by growth in excess of 2x IP. And the upper end reflects a recovery in biopharma and semiconductor demand during the second half of the year.:

The next bridge on Slide 9 details the movement in adjusted operating profit for the full year. Currency movements had a negative impact of GBP 7 million or 2% as a result of both translational and transactional impacts. The full-year ownership of Vulcanic and Durex Industries had a positive effect of approaching GBP 22 million or 6%.:

Profit in Steam Thermal Solutions grew 15% organically, above the 8% organic growth in sales, reflecting operating leverage together with benefits from temporary cost containment actions. In ETS, profit declined by GBP 1.7 million or by 4% organically, reflecting weaker sales growth in Thermocoax together with the continuing investment to increase manufacturing volumes in Chromalox. On a pro forma basis, the combined profit of Vulcanic and Durex Industries was down year-on-year as a result of lower semiconductor demand in Durex as well as investments in safety, systems and processes to more closely align both businesses to our group operating standards.:

Watson-Marlow's organic profit decline of 43% reflects the operating leverage impact of the reduction in biopharm sales. Against this backdrop, we took early action to appropriately rightsize manufacturing capacity and to reduce overhead costs. Our corporate expenses remained at a similar percentage of group sales with ongoing investments to support key strategic initiatives being partially offset by temporary cost containment measures and reductions in variable compensation.:

Now looking to 2024 profit. To provide some context, prior to 2023, our adjusted operating profit split over the first and second half of the year has been an average of 46% in H1 and 54% in H2. In 2024, we expect the profit split to be slightly more weighted to the second half that has been usual. This weighting reflects an exchange rate headwind and the unwinding of temporary cost containment measures alongside anticipated stronger demand growth in the latter part of the year.:

Moving on to the operating margins by business on Slide 10. Our group adjusted operating profit margin fell by 290 basis points or by 270 basis points on an organic basis, reflecting the impact of lower sales in our higher-margin businesses. The adjusted operating profit margin in Steam Thermal Solutions expanded by 80 basis points or by 140 basis points organically to reach an all-time high of 24.6%. Alongside strong sales growth, the margin benefited from temporary cost containment actions as well as continuing strong pricing discipline.:

The ETS margin was flat year-on-year with the full-year benefit of acquisitions being offset by investment in Chromalox, together with the onboarding costs in Vulcanic and Durex Industries. Excluding these onboarding costs, Vulcanic's margin increased in 2023. And going forward, we expect Durex Industries' margins to increase in line with the recovery in semiconductor demand.:

The combined margin of Chromalox and Thermocoax in the second half of 2023 was above both the first half of the year and the second half of 2022. For the full year, Watson-Marlow's adjusted operating profit margin reduced to 23.8%, driven by the 19% organic fall in sales, together with an increase in operating costs from recent manufacturing facility investments. Although Watson-Marlow sales were broadly flat in the first and second half, the second half margin benefited from the restructuring actions taken earlier in the year albeit these benefits were offset by a one-off charge in respect of excess biopharm inventory.:

Moving to Slide 11, which illustrates the impact of current exchange rates on our 2024 guidance. So if February month-end exchange rates were maintained for the rest of 2024 this would have resulted in a full-year headwind to our 2023 sales of 3% and a headwind to 2023 profit of 5%. The difference between the relative headwinds is caused by the group sales and profit mix. A number of currencies where we generate profit at a higher margin than the overall group margin have seen greater levels of currency depreciation against sterling. As you can see on the slide, the exchange rate headwind would have resulted in a lower adjusted operating profit margin in 2023 of 20.3%. So just to be clear, in 2024, we anticipate modest progression in the group adjusted operating profit margin over the reported 20.7%. This progression reflects the operational gearing benefit of the organic growth in sales, moderated by the FX headwind with a partial reversal of the margin benefits resulting from reduced revenue investments and temporary cost containment, including lower levels of variable compensation.:

Turning now to cash flow. Our operating profit to cash conversion rate was 81%. This was above our guidance, primarily due to the lower-than-anticipated capital expenditure. Capital expenditure amounted to 6% of sales, that's GBP 16 million below the level we anticipated. This shortfall was driven by changes in the phasing of payments on ongoing large capital projects. In 2024 and 2025, we anticipate capital expenditure to be 7% of sales, which is above our long-term historical range of between 4% and 6%. This increased level of capital investment is driven by a number of larger scale new construction projects to expand manufacturing capacity. These include the expansion of the Chromalox facility in Ogden. In 2026, we anticipate capital expenditure trending back towards our historical range.:

Our ratio of working capital to sales remained flat at 23% year-on-year. And going forward, we anticipate maintaining a similar ratio. In 2024, we anticipate that cash conversion will be approximately 75% despite the higher level of capital investments. We ended the year with net debt of GBP 667 million, which equates to 1.7x EBITDA. Return on capital reduced to 38.1%, reflecting both the fall in operating profit, together with the increase in the capital base given the level of investment over the last 2 financial years.:

Our return on invested capital declined to 13.5%, primarily as a result of the full-year impact of the acquisitions of Vulcanic and Durex Industries on our invested capital base. We expect returns to increase as demand growth drives margin expansion and the rate of growth in our capital base slows from 2026 onwards.:

I'll now hand back to Nimesh to take you through the operational performance. :

Nimesh Patel: Thank you, Phil. So let me start with a short recap of the macroeconomic environment in 2023 and our expectations for 2024. The chart on the left shows how IP has evolved with IP in 2023 of 0.3%, materially weaker than the 2.1% in 2022 and forecast to improve strongly to 1.7% in 2024. The top right chart shows that projected IP for 2023 was revised downward from 1.4% at the beginning of the year with the largest impact to the second half outlook. In particular, we saw material downward revisions in important markets such as North America, China and Germany.

The trajectory of IP slowed significantly in Q4, well below expectations and declining against Q3, evidencing a weakening outlook heading into 2024. The bottom right chart shows that while IP is still forecast to improve in 2024 to 1.7%, this is below the 2.6% that was forecast at the time of our November trading update. In light of geopolitical unrest and continuing macroeconomic uncertainty, we remain cautious about the outlook for IP, particularly the forecast improvement in the second half and the fourth quarter.:

That said, we remain confident in the ability of our IP linked businesses to continue to grow well ahead of forecast IP. As Phil said, in 2023, we delivered strong growth in STS, significantly ahead of IP and a record operating margin. This was despite a slower second half impacted by lower IP in key markets, especially China and the phasing of large project orders, which were stronger in the first half before the macroeconomic outlook began to weaken. We also continued investing, albeit at a slower pace in key strategic initiatives such as digital, where we are seeing the benefits of leveraging increased connections into our customers' processes and generating rich data, converting this into insights, which help self-generate solution sales.:

As you know, we installed our first TargetZero solutions in 2023, and the pipeline of customer interest continues to build. Having proven the products, we have begun to focus on how we bring these solutions to market, and we'll speak more about this later in the year.:

Looking ahead to our priorities for 2024, I'm confident that STS will navigate through macroeconomic uncertainties with continuing focused execution of our business model, including growing its addressable market. For example, in lithium battery manufacturing, where the team is building its expertise. Consequently, we anticipate mid-single-digit organic revenue growth once again well ahead of IP. In terms of margin, we are facing an FX headwind, especially in H1. And additionally, we'll see an impact on the margin from reversing some of the temporary cost containment measures we took in 2023. Overall, we anticipate the STS margin will be lower than 2023's record margin.:

To conclude, I do think it's important to note the medium-term fundamentals. STS is the most advanced in executing our business model with self-generated sales from a large installed base, a high proportion of recurring MRO demand and solution selling where our pricing is based on customers' economics, which allows us to earn attractive margins.:

In ETS, this was our first full-year with all 4 divisions. So the operational focus has been very much on capitalizing on the strong demand we're seeing for industrial process heating solutions in Chromalox and Vulcanic and managing costs in the semicon facing Thermocoax and Durex Industries. We remain focused on the need to improve manufacturing throughput from our existing Chromalox plant in Ogden, which delivers our decarbonization solutions. The improvements we will make in 2024 will be critical to delivering sales growth from our record order book. Together with the recovery in semicon demand, this will drive high single-digit organic sales growth in 2024.:

During the year, we'll also make -- we made a small but very exciting investment in Kyoto, expanding our thermal energy storage solutions. We began the expansion of Ogden to establish a dedicated site for the manufacturing of medium voltage heating solutions, and we made progress in onboarding Vulcanic and Durex Industries, which is continuing.:

In terms of ETS margins in 2024, we expect sales growth to lead to an improvement in margin, partially offset by further onboarding costs and preproduction costs, which we will incur for the new Ogden expansion.:

Shifting focus away from the current year, ETS continues to prove the rationale for building this business. In the industrial process heating divisions, we are seeing growing demand for decarbonization solutions. Similarly, in the industrial equipment heating division, the semicon market remains attractive, and we're confident in the long-term growth opportunity.:

And through deploying key components of the Spirax Group business model, such as direct selling and solution selling across ETS and especially in the newer acquisitions, we remain on track to deliver greater than 20% operating profit margins in ETS over the medium term.:

Watson-Marlow had a challenging year, with customers in the biopharm sector continuing their destocking that started in the second half of 2022. This follows the COVID pandemic and subsequent supply chain constraints, both of which led to over ordering. But we took the right decisions early on to resize capacity and implemented additional cost measures throughout the year, which helped mitigate part of the margin impact of lower demand, while leaving us ready to respond to a recovery. The underlying growth in demand in the biopharm sector remains robust at over 10% a year.:

Process Industries sales were broadly flat in the first half compared to the record levels of 2022, remaining similar in the second half. It's important to remember that as with biopharm, Process Industries sales are significantly above where they were prepandemic.:

Despite short-term headwinds, we continue to invest in innovation. In 2023, Watson-Marlow developed machine learning protocols integrated into our pumps that anticipate failures and support preventative maintenance interventions in the fluid path by detecting blockages and leaks. We are piloting this new technology in target sectors during 2024.:

And in Process Industries, we are expanding our addressable market into high-growth sectors such as cell-based meat and the electric vehicle battery markets.:

Looking to 2024, we expect to return to high single-digit organic sales growth in Watson-Marlow. The scale and timing of a recovery in biopharm demand will be a key driver of this growth, and we expect to see this during H2. As you would expect, we're monitoring developments very closely and speaking to our customers regularly. There are still a wide range of views on the timing of a recovery, but it's fair to say that the 2 things that all players in this sector agree upon is that the destocking cycle will turn and underlying growth remains strong.:

As we return to growth, we remain well positioned from a capacity perspective to respond quickly and to deliver a strong margin improvement, even after absorbing the reversal of cost containment measures and the resumption of variable pay awards. Beyond 2024, we see no reason why Watson-Marlow will not deliver high single-digit growth and high margins.:

In addition to our progress in key operational areas, we also continued to deliver against our environmental and social targets. Highlights include being very close to achieving our target of a 50% reduction in greenhouse gas emissions against our 2019 baseline. We're currently at a 45% reduction with the full benefit of the decarbonization investment into our manufacturing site in Cheltenham, still to come. And this delivery has been supported by lower energy consumption, and we've also reduced our consumption of water.:

Our environmental targets also include delivering a biodiversity offset to our global operational footprint, supported by at least one initiative for each operating company. During 2023, we completed a further 135 such biodiversity projects, building on the 78 completed in 2022. In terms of our target around building teams with diverse backgrounds, experiences and expertise, we've continued to make progress with 3 appointments announced in the last 6 months being the Group CFO, Group Head of Digital and our General Counsel. By this summer, we will have moved from an all-male executive team as recently as 18 months ago to 4 out of 9 positions being held by women.:

In summary, in 2023, we posted strong organic growth in STS and ETS, well ahead of IP. Early restructuring and cost containment actions mitigated the impact of lower demand on margin, but we also continue to invest in strategic initiatives, which will drive our longer-term growth. And our dividend increase maintains our 56-year track record of progress.:

Turning to 2024. Typically, we guide to organic sales growth of greater than 2x IP over an economic cycle. But in a lower IP and higher inflationary environment, we expect to outperform IP by a larger factor, supported by our disciplined approach to pricing, slightly ahead of inflation as well as volume growth. This underpins our confidence in at least mid-single-digit organic sales growth in 2024. Together with the recovery during the second half in demand from customers in the biopharm and semicon sectors, we anticipate mid- to high-single-digit group organic sales growth. This sales growth is expected to drive low double-digit profit growth and a modest increase in our margin, and we expect cash conversion of approximately 75%, with capital expenditure at close to 7% of sales.:

Earlier, I said I would share a few reflections with you. Now I know many of you are keen to hear more about the future direction I wish to set for the group, but it's only been 8 weeks since I became CEO. So please be patient. However, I am looking at the business through a different lens. And of course, I've got some emerging high-level thoughts. So I don't need to remind you of this, but I will anyway, we have strong foundations, but that doesn't mean we can't improve. When asked about my leadership of the group, I talk about a focus on evolution, not revolution. Put simply, this means I know the group well, I understand what makes us unique, what defines us and what has delivered our strong growth at attractive margins over decades.:

This is what I will work with my colleagues to protect and enhance. Our purpose, culture and business model are core to what make us Spirax Group and fundamental to our future success, a real commitment to safety and recognition that this journey is never complete, real advocacy and engagement in serving our communities and the environment, a sense of ownership in every operating company around the world with a focus on execution, delivering on our customer proposition. A commitment to solving customer problems focused on mission-critical processes, staying close to them with local expertise and insight, engaging directly, developing a deep understanding of their needs, helping to enhance their economics, which is reflected in our pricing.:

What this has and will continue to deliver for us is strong organic growth at attractive margins. But I'm also keen that we focus on the future and think about what we might need to do differently in support of our progress. Each of our 3 businesses have long-term growth potential underpinned by the same drivers delivered through the same business model. So these are the things we will build over time. Firstly, the decarbonization and sustainability opportunity as our customers look to deliver on their own stated ambitions. Our businesses are focused on supporting sustainable practices across ETS and STS. We can help our customers on their net zero journey, addressing their energy efficiency and how they raise industrial heat. In Watson-Marlow, we're supporting advancements in global health, such as life-saving biologics as well as solutions to optimize the efficient use of precious resources. We need to think about how we bring these solutions to our customers with additional products, services and skills we need to serve them best and how we ramp up our activity in this area.:

Secondly, we will invest in digital to better serve our customers because by enabling greater connectivity with our customers, we enhance one of our most important differentiators, our business model, leveraging data and our expertise to deepen our insights, developing a broader set of solutions and better evidencing the value that we can deliver all at a faster pace, which in turn strengthens our customer reach and our customer funding.:

Thirdly, driving innovation, both in products and solutions with a sector focus and local geographic focus, identifying those new niches where our existing or newly developed products will be essential to our customers' mission-critical processes, all expanding our addressable market.:

And finally, investment in our platforms, our systems and processes that support the scalability of our business, their efficiency and our group's ongoing resilience. These are the important pillars we'll build for the future and all to deliver long-term compounding growth above 2x IP and attractive margins with strong cash generation and consistently strong earnings and dividend growth, extending our track record of 56 years.:

Thank you. And now I'm happy to take your questions. :

Nimesh Patel: Should we start with questions in the room. Yes. And then please just hang on for the microphone, who's taking the microphone around? [ Tara ], there's a question over there, Andy?

Andrew Douglas: It's Andrew Douglas from Jefferies. I've got 3 questions and then just a point of clarification. Can we talk about ETFs, just to start off with. You've given us some thoughts on where you're going to take the business. And onboarding costs, maybe I'm just a bit thick, but can you explain to me what exactly they are and why they're taking so long to flow through? I thought you would have kind of finished about that. And on the ETS growth, the decarbonization and the medium voltage order books, can you just help us out a little bit on how big they are? Because I think one is quite nascent and one is growing quite nicely so I just want to make sure I understand the order of magnitude. And then secondly, on Watson-Marlow, is there any reason why a return to growth, let's call it, 3 years, we don't see the margin go back to prior levels? So I mean any structural change in that Watson-Marlow margin potential or recovery potential?

Nimesh Patel: Okay. So firstly, on boarding costs, what are they? These are the costs we incur, number one, is bringing acquisitions in to be part of a listed group to the reporting requirements, upgrading the health and safety practices, which particularly buying businesses from private equity aren't always as well focused on as perhaps they should be. Then there are the costs of implementing our business model, moving to a direct sales model.

And there were more besides, for example, delivering on our One Planet commitment. So that process of bringing our colleagues from those acquisitions into our group, deploying the value of our business model to those businesses takes time, and it doesn't get done quickly, it typically takes several years. And so these onboarding costs will take some time. But equally, in turn, that investment generates growth because when we buy these businesses, what are we trying to do? We're trying to accelerate their growth, and we're trying to improve their margin, and that's what we do. And the best track record that we can point to in that respect is with Gestra. When we bought it, it was a mid-teen margin business and is now over 20%. We increased pricing of Gestra products, and the top line is growing at the same rate as the legacy Spirax-Sarco division within STS. So that's what we're doing with onboarding costs. By the way, if you took the onboarding costs out of Vulcanic in particular, the margin would have been higher this year than last year. The same can't be said for Durex Industries, but that's principally because of the weakness in the semicon demand. :

Andrew Douglas: And the direct sales, but the thing that takes the longer side of those 3 out of health and safety and reporting should...

Nimesh Patel: I mean changing health and safety culture takes time. All of these things take years, but direct sales will take longer still. You're right. In terms of ETS growth, we've got a record order book in ETS. And last part, that's driven by customers' journeys towards Net 0 and decarbonization, generally. We know that we need to increase the throughput from Chromalox in order to be able to deliver against that demand. That's what we're working on. We've talked a little bit about that in respect to our Ogden facility. That will take time. But what I'm not worried about is demand growth. We've got really strong demand growth through ETS.

Andrew Douglas: And medium voltage?

Nimesh Patel: Including in medium voltage. And we don't break -- as you know, we don't give our numbers around the order book, but I can tell you that it's in a very healthy shape. And that's, by the way, why the expansion of Ogden is so important because remember that expanded facility in Ogden is going to be dedicated to medium voltage manufacturing.

And then in Watson-Marlow, you're right, Andy. There is no structural change in the quality of that business. And we would expect margins to recover strongly. Equally, we want to make sure that we're continuing to invest in supporting the long-term high rates of growth that, that business is able to generate. And we'll get that balance right as we start to see the biopharm market recover. :

Andrew Douglas: And just a point of clarification for Phil. Did you say that '26 CapEx is when -- '26 is when we finish -- we see the end of the CapEx by --

Phil Scott: 2026, we'd expect to be gliding back towards that 4% to 6% range, yes.

Nimesh Patel: If we come down to the front and work our way across. I think, Jonathan.

Jonathan Hurn: It's Jonathan from Barclays. Just a few questions from me, please. Firstly, just coming back to Ogden and investment there. Can you kind of quantify what the drag on the margin has been from that investment in Ogden? And obviously, once it's completed, can you just tell us or give us a little bit of color or feeding for the revenue opportunity for that expanded facility, please? That was the first one.

Nimesh Patel: Yes. So in terms of current investment into the existing footprint in Ogden, you're talking about -- we haven't really quantified it, but you're talking about levels of investment that are probably measured in the hundreds of thousands of pounds. And this is around making sure that we resource the work that's happening there. We get external help where we need it. And sometimes, when you're going through changing processes, there's a degree of inefficiency as well in the way those prices work until they get up to a point of maturity.

In terms of the new facility, at the moment, all of that expenditure is CapEx. So there's no drag in terms of the margin. But there will be once we complete the construction, we start to recruit people and build the capacity in order to be able to deliver from that new facility. So that's what we refer to as pre-production costs. And that will impact us towards the back end of this year and then into next year as well. :

Jonathan Hurn: Second question is just on steam. Obviously, you talked about the margin coming back in '24 versus '23. But obviously, medium term, there's a lot of positive drivers. How do we think about the evolution of that margin within steam? Do you think it can get close to Watson-Marlow in terms of profitability or maybe high 20s over the medium term? Is that a possibility, do you think?

Nimesh Patel: It's a good question. So this year's margin is a record for steam. And there's a reason for that, and you understand why because we are one group. And when you've got challenges, particularly in a business like Watson-Marlow, we think about how we manage all of the businesses in the group to make sure we deliver the right result for all of our stakeholders and investors being absolutely crucial -- one of those stakeholders.

We did take some actions, slowing some of our strategic investments, but continuing the ones that are critical. We took actions in terms of containing costs, not backfilling nonessential roles that became vacant during the year. And of course, there were impacts across all 3 of our businesses in terms of variable compensation, which is lower than it's been in the past. Those things will reverse. That's why the margin in steam will go backwards. It remains a very high margin business. And by historical standards, it remains a high margin relative to where we've been in steam in the past.:

Will the steam margin continue to improve from there? Yes. But the way we think about this improvement is it's about delivering small incremental improvements just so that we keep the discipline in being as effective and efficient as we can in everything we do. But over the longer term, the real thing that we need to get the balance right on to preserve the medium-term and the long-term future of this business is to make sure we invest in those things that drive future growth. That's what we refer to as revenue investment.:

In this particular case, we're talking about things like digital because that will help us grow faster. And we're talking about some of the decarb solutions that we have within steam as well to help them serve their customers better. So we've got to get the balance right, making sure that we're not pushing margin at the cost of top line growth. :

Jonathan Hurn: Just finally -- just very quickly, just coming back to Andy's question on Watson-Marlow from a select different angle. If we look at that recovery in H2, can you just give us a little feel for what you could be or what could be the operational gearing drop-through in that business in the second half into any recovery? Is it going to be --

Nimesh Patel: So the operational gearing in the second -- sorry, the drop-through in the second half for Watson-Marlow will be quite high. But there's a reason for that and partly because we've got the one-off inventory write-down in the second half of 2023. So you've got to reverse out for that. And we haven't quantified that for you. But that's why the drop-through will be quite high in Watson-Marlow in the second half.

Do you want to add anything to that? :

Phil Scott: No. No, you said well, yes.

Mark Jones: Mark Davies Jones from Stifel. If I can just follow up from that. Can you quantify anything on the cost savings side during 2023? How much permanent costs might have been taken out of Watson-Marlow? And how much of this temporary cost containment? What's the scale of that, that might come back in this year?

Nimesh Patel: So we're not quantifying the individual cost savings, as you'll have seen from the press release. But what I can do, to give you a bit of a guide, is the restructuring costs in Watson-Marlow were GBP 7.5 million. You'll see that in our adjusting items. And I think it's fair to assume that we get very quick payback on that level of investment. So if you were to take 1x or circa 1x payback on that over the course of 12 months, that probably wouldn't be too far.

Mark Jones: Brilliant.

Nimesh Patel: Now, some of those costs will come back as demand recovers.

Mark Jones: And then on the Process Industries bit of Watson-Marlow, you said flat second half and first half, so I'm assuming down year-on-year in the second half. Are you assuming that remains down year-on-year through the first half of this year? Any change in direction there?

Nimesh Patel: So with Process Industries, not to the same extent, nowhere near to the same extent as with biopharm, but we have seen small amount of customer destocking. And you can understand why, both during the pandemic and then as a result of the supply chain constraints quickly after the pandemic, a number of customers were worried about their ability to access the product that they needed. So they probably over-order slightly to be cautious.

Because remember, we serve emission reduction processes for our customers, so they can't afford to be caught without our products. So we've seen that unwind in Process Industries as well. But just to reiterate the point, '22 was a record year for Process Industries, and we were flat in the first half of '22 and the first half of this year and then as you said, flat in the second half versus the first half. So a very strong performance.:

Process Industries growth is linked to IP. Again, much like in other parts of our business, we expect to outperform IP. So during the first half of this year and second half of the year, that's exactly what we expect. We expect to grow ahead of IP. Now, IP this year in '24 is more weighted to the second half. So that will also change the phasing of how you see the Process Industries growth come through in the numbers. :

Mark Jones: If I may, one bigger picture question. I know it's only 8 weeks, but in your brief outline, no mention of M&A. Is the message for now that it's about consolidating the deals you've done over the last few years rather than looking for new targets or --

Nimesh Patel: Yes. Look, certainly, within ETS, the team, Armando and his team have their hands for consolidating the 4 parts of that business and completing the on-boarding that we talked about earlier. Within other parts of the business, I think there are opportunities. We don't control the timing of those opportunities. And so as and when M&A opportunities arise, we should and we have to look at them seriously. But there are no immediate plans to do anything significant.

Rory Smith: It's Rory Smith from UBS. And sorry to labor the point, but it's back on Ogden. I think in the past, you talked about the rationale there being around shifting from a commoditized product into a more bespoke product and you've spoken to strengthen the order book there that supports that. And also for 2024, the facility expansion in Ogden being a driver of higher CapEx that looks like it's rushing into 2025 as well. Is that a fair assessment? And how much of the phasing of the lighter CapEx for '23 was Ogden? And how much of it was phasing delays elsewhere and what were those? And that's more or less it.

Nimesh Patel: Okay. Do you want to take that on CapEx?

Phil Scott: I'll take it.

Nimesh Patel: Yes.

Phil Scott: So we guided to GBP 16 million of phasing delays. And when I say phasing delays, when you think about cash flow, it's obviously very binary. You either pay it before the very 1st of December or you pay it into this year. So the bulk of that GBP 16 million shortfall was in relation to Ogden. But we shouldn't get hung up with that it's materially behind schedule or anything. It's just a -- bear in mind, when we set these targets at the start of the year, you're forecasting 12 months out in major construction projects like Ogden. So I wouldn't -- it's just -- but the majority is Ogden. It will catch up next year. We're not worried around the facility, the expansion being materially late as a result or anything like that.

Rory Smith: But there's nothing technologically or from an engineering point of view, that is you're finding harder than you initially thought Ogden process.

Nimesh Patel: No, no.

Rory Smith: And overall, that process is a net positive one on a sort of quality of margin point.

Nimesh Patel: We're not seeing a material variation to what we expect at the facility to cost. We're not seeing a material variation to the timing of delivering that facility and it is just it is just as hard to plan exact cash flows of these projects a long way out. And the other part of your question, Rory, is, yes, some of the CapEx will be in 2025. It doesn't complete in 2024.

So go Aurelio -- sorry, okay, we'll go there and then we'll go to Aurelio. :

Andrew Simms: Andrew Simms from Berenberg. Just a couple of questions. Firstly, on ETS. I think in previous periods, we talked about some pricing challenges there. Has that all rolled off now? Or should we expect a little bit of margin compression this year that comes from that? And then the second question is just on the competitive environment in ETS. Can you just make any comments around the semiconductor space there and maybe also the overlap in Process Industries with steam and what competition there is there?

Nimesh Patel: Okay. So on pricing, the challenge that we had, had is heading into a period of high inflation in 2020 -- starting in 2021 and then moving from there. We had a number of orders in our order book that had been taken previously and not yet delivered and our margins got squeezed on those orders. One of the things that we did is focus on making sure that going forward, our pricing was at the right level for the orders that we were taking. And I'm confident that, that is the case.

And so in our order book today, the orders we have are priced at a much higher level. Now, there are still a few legacy orders that will sit in that order book, but at a much lower proportion than was the case in the past. So I'm not worried about price. I'm not worried about 2 things. I'm not worried about pricing in our order book, particularly, and I'm definitely not worried about our ability to price the orders at the right level now and going forward. :

Andrew Simms: So just -- does that then mean that you have a net benefit on growth and margin year-on-year versus where you have been previously, that's --

Nimesh Patel: Yes. Yes. I mean we talked about hitting our margin goal of greater than 20% in ETS over the medium term. As a reminder, when Chromalox was bought back in 2017, at the time the commitment was that we would get to over 20% in 10 years. And what's going to get us there is really getting volume up, because we've got the demand. So as we deliver that volume, the operational gearing drops through, that will help us deliver that margin. Of course, there will be some contribution from operational efficiencies as well is going to be principally that volume. And alongside that volume, the better pricing that we're achieving in ETS. So that's how we get to the 20%.

In terms of the competitive environment, Andrew, if I didn't understand the question properly, then please tell me. But I think you're thinking more about semicon within ETS and the competitive environment. Is that right? :

Andrew Simms: Yes. So the semicon side of things, but also thinking about any overlap with Process Industries and how steam is generated from the electric side.

Nimesh Patel: So I'll come back to that second bit. So on semicon, remember, what we do is provide ultra critical components largely in that part of the business to OEMs, but we also supply some of those components to end users because they are consumable. And these are highly engineered, highly designed components. And so the competitive strength is our ability, our capability to be able to deliver those solutions that the OEMs need that other people can't deliver. And there's a very small number of people who play in that area and have that skill. And we've been very successful.

So has the competitive landscape changed materially in that space? No. Is demand growing fast, particularly in the higher-end applications that we serve? Yes. Semicon side -- semicon industry remains cyclical, but the underlying trend of growth remains strong. And am I confident that we've got the right skilled set of people and the right facilities around the world to be able to essentially supply into that growth and grow our business at attractive margins? Yes, I am. And the semicon part of our business is very high margin.:

In terms of your second question about ETS and steam, it's a good point. There's a very close collaboration between what we do in ETS and what we do in STS. Now, we're at an early stage. If we think about how we're trying to help our customers achieve their Net 0 objectives, we're trying to do 2 things. One, we're trying to help them be more efficient with the energy they use. So there's no point electrifying energy you don't need and incurring the cost of that. So around the steam system, in particular, no one is better placed to do that than our colleagues in STS.:

The second part is about thinking through how that steam is generated. And that's where our colleagues in steam work together with our colleagues in ETS to develop and implement the technologies that decarbonize the generation of steam. So that's the collaboration. Now, in terms of competition in that space, we've been ahead of everyone else in being able to deliver solutions. Certainly, the ElectroFit solutions, the retrofit of existing steam generating boilers, but also through our medium-voltage technology, more efficient solutions and lower cost solutions even for first-fit steam bulk-type boilers.:

And we need to make the most of being early to that because the one thing I do know is that other people will catch us up. Now, when they do, they're going to encounter some of the same problems that we've had to work our way through because these things are not easy to manufacture, hence, the focus we're putting into Ogden. But as things stand, we're in a strong competitive position.:

I'll come back to that. So are we going to -- Aurelio, right. And then we'll come to you, Lush, and then we'll go online. :

Aurelio Calderon Tejedor: It's Aurelio Calderon from Morgan Stanley. Two quick questions and a clarification. First one is a bit of a follow-up on pricing, not just on ETS but on the group. I know you don't necessarily disclose the level of pricing that you took in '23, but if you could give us an indication of how good that was compared to inflation and what you're seeing in '24 your customer conversations so far.

Nimesh Patel: Okay. So I'm going to tell you something I think you already know, which is our pricing practices and methodology remains a fundamental part of how we run our business, our business model, and it's something that we do very successfully. And remember, we don't just pass through pounds, dollars and euros of cost, we protect our margin. And that hasn't changed, and it hasn't changed throughout this entire period of high inflation. And I think that's really powerful. And so in 2023, much as in previous years, we priced slightly ahead of inflation. And I expect that the same thing will happen in 2024. In fact, we've already pushed through most of our price increases across the 3 businesses.

Aurelio Calderon Tejedor: Second question is on your margin guidance, are you embedding any recovery in the high-margin businesses like semis, biopharma, or China? Because it does feel like if those businesses come back up, then obviously, your margin expansion could be a bit better than what you're talking about. Is that fair? Or are you not assuming any recovery?

Nimesh Patel: No, we -- and I think you -- Aurelio, you hit the nail on the head, which is what's the difficulty about giving guidance for 2024. As I explained it earlier, growing at greater than 2x IP doing better than that in a low IP, high inflationary environment gets you to the mid-single-digit growth rate. Beyond that, it's all about the pace of recovery in biopharma and semicon, in particular. But you're right, also China. And that's why we've given a range. Now, if that recovery is significantly stronger than we're anticipating or that I would say most of the industry is anticipating, then yes, there would be some upside. But I don't think that's what people are anticipating.

Broadly, when you look at the feedback -- look, I've got here, Danaher, Merck, Avantor, ThermoFisher's guidance for 2024. And they're talking about -- in fact, some of them are saying down in the first half, return to growth in the second half saying H2 stronger than H1. Some are being more caveated, encouraged by relative stability. And then the last one, market conditions improved slightly as the year unfolds. So I think we've got the balance right, I hope. It's not without risk, both to the downside and to the upside. I think we've got the balance about right. And again, if you look at IP in China, the outlook is not strong. :

Aurelio Calderon Tejedor: And just a quick clarification on M&A. You talked about some opportunities in the market. Is that a fourth leg of the portfolio? Or is that focused on your 3 businesses?

Nimesh Patel: We have no intention of building at this time a fourth leg to the portfolio. The focus is on delivering the strategies that we have within our 3 businesses. And one of the main reasons for that is we have huge opportunity within our existing 3 businesses. We are not needing to go searching for growth.

Lush? And then maybe we'll check to see if there are any questions online. :

Lushanthan Mahendrarajah: It's Lush Mahendrarajah from JPMorgan. A few questions. One, sort of short-term. And I think, two, longer term. I guess, just in terms of that steam guidance on mid-single-digit growth, what are you embedding in there for China for this year?

Nimesh Patel: So let me talk for just a second about China because I think what the team are doing there is really impressive. So as you'll probably appreciate, the growth in China, particularly in our business, but more generally, has been driven by a long time by expansion of capacity, in particular, manufacturing and production capacity largely with an export-led lens. And so our team there for a long time been focused on winning these larger projects for the installation of components to support new steam systems in our customers' factories. What became clear and it became clear to our team. It wasn't us telling them that this was happening. It was them telling us, probably about 18 months to 2 years ago was that this was going to shift. And I think we knew that. We could see that the Chinese economy would shift perhaps more to domestic consumption.

And so they began the process of thinking through. How do we shift our business and the skill set of our direct sales engineers from supporting capacity expansion to doing 2 things: one, investing further effort in process optimization because that's going to be critically important going forward and then mining our installed base for MRO. And they've done that really well. And as a result of that, they are significantly outperforming IP in China. And that's what we've built in to our forecast. So it's an aggressive forecast, absolutely, in terms of China, but it's one that we have a track record to support in terms of our ability to outperform IP in China.

Lushanthan Mahendrarajah: And the second one and I guess bearing in mind it's only been 8 weeks, but that point around addressable market expansion through innovation R&D as a percentage of sales has been roughly 2% historically. Are you sort of suggesting that, that could move up going forward? Or sort of you [ sort of nuts and caps ] like that with that growth?

Nimesh Patel: It depends how you define R&D. So when we talk about innovation, innovation is lots of things. So the steam trap fundamentally has been around for, I don't know, 100 years. It's not the steam trap, it's how you use the steam trap. And if you think about our digital innovation, we're talking about how do we connect up our products? How do we collect data? How do we use that data to drive insight?

A lot of that's about building platforms, it's about training our direct sales engineers in how to use data to further deepen their insights. That's innovation as well. Thinking about how we tackle new markets with existing products, niche markets that are high margin, high growth, where we can make a difference to our customers' economics, cell-based meat and Watson-Marlow or electrical -- electric vehicle battery manufacturing or lithium mining within steam.:

These are all examples of innovation, but there are innovation around thinking about how we solve our customers' problems with existing products. So it doesn't all get captured in R&D. And I think that's -- so I think the R&D to sales is probably not the right measure to focus on for us. That's why we talk about revenue investments and how much we're spending in general on revenue investments, all in the P&L. That's what's driving our future growth. :

Lushanthan Mahendrarajah: Last one sort of longer term, I guess, TargetZero, probably not short or medium term, but longer term would become a bigger part of the group or hopefully. Does that change the business model a little bit because, I guess, they're bigger ticket sales? Are you talking more to sort of more senior people than the plant manager, I guess, team to build those relationships? Is that different to what you're doing right now, I guess, is the typical OpEx model that we've been used to?

Nimesh Patel: I don't think it changes the business model, but I think it does have an influence on how we engage with our customers for exactly the reasons you talked about. And it does require us to strengthen some of the skills that we have. Now, look, in terms of delivering larger systems, we do that in ETS today. We have design engineering teams in ETS that work with the applied engineers and the direct sales engineers to solve those customer problems, to design the right product for them. So that's not new. Do we need to scale that up? Yes, we will need more of that.

Stephan? :

Stephan Klepp: Yes, Stephan Klepp from HSBC. Sorry for asking that, it's short-term and I'm probably boring you with that. But I mean, in the first half, you have high comps in steam, for example, FX is as well not really playing into your cards. So -- and you caveated that in the presentation already that the split between H1 and H2 is obviously very much H2 related with profit realization. How should we think about that? And then how should we tie that into your risk and opportunities that you mentioned as well with the lower end and the high end of your guidance?

Nimesh Patel: Okay. So you really asked about phasing of our projections in 2024. Do you want to take that?

Phil Scott: In the presentation, we talked about -- if you look at our profit split historically, we've been a 46-54 split, with the 46 being H1, the 54 being H2. I think for 2024, when you're modeling, you should think about us being slightly more weighted than that historical average towards the H2 split, I think, driven by the exact drivers you talked about in your question.

Nimesh Patel: Yes. And just to add to that, in terms of the sales split, that will be closer to the traditional 48-52, maybe a little bit more heavily weighted in the second half as a result of semicon and biopharm. And if you're wondering why is the profit more weighted to H2 than the sales, it's because of what we talked about earlier. It's biopharm recovery, semicon recovery, those are the higher-margin businesses for us.

Yes. Was there a second part -- was that -- did we answer your question? :

Stephan Klepp: Yes, more or less, I mean -- more or less the second part was how does it tie into risk and opportunities because you said as well like, yes? So at the lower end, you had this, whatever, let's call it 5%, yes? At the higher end, you had 7%, 8% growth. How does that tie in? But actually, you implicitly answered it with, obviously, biopharm and Watson-Marlow performing better in the second half, you end up in that. And so that is rather emphasizing as well then the phasing a little bit, right?

Nimesh Patel: Yes, that's right. I think there's a bit of a risk probably in the IP. We see that more likely to go down than up from where it is. We've been prudent in how we thought about IP and giving you our guidance. So I think we've hopefully covered that, but it depends on how big it changes. But then it's all around biopharm and semicon. So I think that's spot on.

Are there any questions online, and then I'll wrap up so that all of you can -- no? No questions online? We've got one more, for one more and then we'll wrap up. :

Andrew Douglas: Yes, Andrew again from Jefferies. Just 2 quick questions, hopefully. Going back to your ETS margin target, I think when you guys bought Chromalox, you said that it would be the same you could get the margin to steam the margin. Is that still fair? I know I say over 20% and I'm being a bit [ under here ] but is ETS capable of 23%, 24% margins?

Nimesh Patel: We said we believed we could get the ETS margin to where the steam margin was at that time.

Andrew Douglas: That's right. And a clever use of the words at this time with regards to M&A, I'll ignore those. Can I ask something slightly different? Do you guys think you'll approach M&A over the next 5 to 10 years differently, maybe [indiscernible] ask 4 or 5 acquisitions a year, the power of compounding? Or is it when your ETS business comes up or Watson-Marlow business comes up, you buy it? Any change in strategy for M&A?

Nimesh Patel: 8 weeks.

Andrew Douglas: 2 years and 8 weeks?

Nimesh Patel: Give it time. I -- as we sit here today, as I said earlier, I think we've got such huge scope for organic growth that's within our control and that we need to get behind and execute to deliver that we're not on a search for growth. And I want to keep our teams focused on where their efforts will generate the highest returns. And I think that is in delivering, for example, against the decarbonization opportunity, the digital opportunity, building on innovation, that's where I think it is.

And so in the -- certainly in the near term, I see acquisitions as being interesting where they support our ability to do that. So that means they will be more bolt-on in nature, not building a fourth leg. Look, like I say, we've got our hands full in ETS. I don't think there is scope to do much more there and you don't control the timing of these things. So we'll have to wait and see what comes. So I don't want to rule anything out because I think that would be foolish. But equally, we will be thoughtful and cautious about how we approach M&A. Cheers. Serves me right for letting you have a second go.:

Thank you. Thank you very much, everyone. Really appreciate your time. Thanks very much. And please feel free to reach out with any additional questions. Thank you.:

Earnings Transcript for SPX.L - Q3 Fiscal Year 2023

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