Release Date: August 11, 2022
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Strong demand growth across all three business segments, with record order books.
- Successful implementation of price increases to offset inflation and protect margins.
- Significant sales growth in Watson-Marlow, particularly in the biopharma sector.
- Acquisition of Vulcanic to strengthen ETS business and expand decarbonization solutions.
- Continued progress on ESG initiatives, including health and safety investments and reduction in emissions.
Negative Points
- Global supply chain challenges impacting availability of key manufacturing components.
- Suspension of trading with Russia and disposal of Russian operations.
- Increased capital expenditure leading to lower cash conversion rates.
- Operating profit margin decreased by 150 basis points due to revenue investments.
- Ongoing financial underperformance at the Chromalox facility in Soissons, France.
Q & A Highlights
Q: My first one would be on the order book. I wonder if you could help us understand a bit more about the increase year-on-year here. What contribution do you think there's been from price and how much from volume in that increase? And also, how much visibility do you have now compared to typical levels?
A: George, thanks for your question. Look, the order book is up, and it's up by those 2 reasons, the price and the volume. The visibility is the same as we've always had, right? So you know that we have typically short lead times, and therefore we have limited visibility, although high predictability, and we always remind people of that. So that visibility remains the same. We've historically operated on 7 or 8 weeks, 7 to 8 weeks of order book and those are usually the longer cycle orders that sit for a bit longer in the order book. And we do have across the board, the Group, as you know, yes, close to 40% of our business that actually is booked and shipped within the same month. And therefore, that limits the visibility. Now, if we've said clearly that the order intake of this year and the sales of this year have been impacted favorably by both volume growth and sales growth, you would expect that same mix to be reflected in the order book at the moment because of the short lead times that we've mentioned.
Q: Maybe then turning to the payback period that you typically offer for customers, which is already -- or historically has been very short anyway. But I wondered how much of that has changed maybe in the prevailing energy cost environment for Steam and ETS? And also how much of the demand growth across those 2 businesses would you attribute to growing need to reduce energy costs for your customers as we look forward?
A: So the -- look, the -- are you particularly interested in, if the payback of decarbonization solutions is longer than the payback of the other projects that we've usually been doing. Is that what you're trying to understand?
Q: Well, I'm just trying to understand, if the payback period has changed because when customers are looking at maybe upgrading those systems, it might be against now higher energy costs that they can offset through some of the improvements that you can give. So I just wondered if there's been a change versus history in terms of the payback period that you'd normally be able to offer?
A: Yes. So okay. First, as a reminder, Energy savings is just one of the many ways in which we help our customers improve their performance, right? So it's a more visible one, easier to visualize, but it's not the only reason why customers -- not the only way in which we help our customers improve their performance and reduce their costs. So inevitably, the part that is related to energy savings will benefit from a slightly shorter payback if the energy costs go up or will lengthen a little bit when the energy costs go down. But it doesn't materially change the overall situation that we have been seeing with our customers, because it's not -- energy cost is not the only reason why customers are reflecting that. When it comes to decarbonization solutions, and that's why I was inquiring if that's where you were, right. It does extend a little bit. So when the customer is looking to, for example, decarbonize one of his operations, the driver there is reduction of carbon footprint, not the energy costs. And actually, the cost of electricity are higher than gas, and therefore, that does change a bit of the equation. But really, the driver there tends to be a reduction of carbon footprint as opposed to energy costs.
Q: Okay. And final one for me would be on the large project demand that you've seen an increase in. Just wondered if you could maybe run us through particular customer segments that you've seen this in? And is it more in the Asia Pacific region where you've seen this, because that has historically been, I think, the area where large projects should be mostly found?
A: Okay. Yes. Thanks, George. Good question. Yes, look, yes, APAC is where we see a lot of -- or a higher proportion, if you want, of CapEx-driven sales, customer CapEx in sales, new builds, design of new facilities or expansion -- brownfield expansion of new facilities. And so yes, that is reflected this year as it has been historically. The nature of that is mostly across all sectors. I wouldn't call out any individual sector as having seen more CapEx investments by customers than in other sectors. And really, what this is, is the expected return to normality after the slowdown during 2020 because of COVID. So as you remember, 2019, global IP was already coming down. In fact, it was close to 1% in that year. So many companies were already reviewing their capacity expansions, because when we talk about CapEx, customer CapEx projects, it's essentially customers expanding their capacity. -- either through greenfield or brownfield expansion. So when the demand of the customers' products, the expansion because when we talk about CapEx, customer CapEx projects is it's essentially customers expanding their capacity, either through greenfield or brownfield expansion. So when the demand of the customers products start softening as it was in 2019, the need to expand that capacity eases a bit, and we're already seeing that slowdown in 2019, then come 2020 with the pandemic, everything stopped because it wasn't clear. And then once the situation started becoming clearer in 2021, customers started pulling those projects out and reviewing those projects and you started seeing those orders coming in at the end of last year and the beginning of this year. So it is really a return in that sense and somewhat of a catch-up from the slowdown that goes back to 2019, really.
Q: The first one is around the process part of Watson-Marlow and I think the implied guidance or the implied performance in the first half is quite encouraging, close to 20% growth. So what's driving that growth? Is it again market share gains? Is it that your pumps are displacing other type of pumps? Or what is the driver behind that strong growth and kind of the forward-looking demand comment, which also looks quite encouraging.
A: Okay. Aurelio, thanks for your question. Look, the process industries, as you will recall, is a collection of multiple sectors. The main ones are food and beverage, water and wastewater, and water treatment processes, a little bit of precious metals, mining, et cetera. So there is a variety of sectors. In all of those sectors, as is not typically across all of the businesses of our Group, we do tend to gain market share through the sale of solutions for customers, which is what we call the uncovering the need -- unrealized needs of the customers. So it is the same, we've shared in the past, where our sales engineers walk to plants
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
