Edited Transcript of SPX.L earnings conference call or presentation 11-Mar-20 9:00am GMT

And with that, I’ll now hand over to Kevin, who will take you through our financial performance.

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Kevin James Boyd, Spirax-Sarco Engineering plc – CFO & Executive Director [3]

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Thanks, Nick, and thank you very much for those kind words. Good morning, everyone. And welcome to what potentially may be my last results presentation after nearly 20 years. As always, the numbers we are discussing today are adjusted results. Details are in the appendix.

Reported sales grew by 8% with organic growth of over 6%. And we saw growth in both reported and organic profit, up 7%. The reported operating profit margin fell by 20 basis points to 22.8%. On an organic basis, the margin grew by 10%. We saw excellent margin expansion in the steam business, which more than compensated for a fall in the Chromalox and Watson-Marlow margins and increased central costs. Net finance expense reduced by GBP 1.9 million, despite inclusion of a GBP 1.3 million of IFRS 16 interest. The reduce in bank interest was due to borrowings in U.S. dollars and interest rates reducing. And we anticipate a similar charge in the current year.

As signaled at the half year, the overall tax rate increased as a result of changes to our internal financing structures and the mix of adjusted profits. In the end, it came in slightly better than anticipated at 28.5%. And we’re looking at a 29% tax rate in the current year. Adjusted EPS of 266p was up 6% on the prior year, slightly less than the increase in operating profit due to the increased tax rate. And we’re recommending a final dividend of 78p, bringing the full year dividend to 110p, an increase of 10%.

Return on capital employed was 54%, an organic increase of 310 bps, while return on invested capital was 19%, an organic increase of 120 bps. Finally, net debt at the end of the year was GBP 295 million, up from GBP 236 million last year due to the acquisition of Thermocoax. And this equates to 0.9x EBITDA.

Looking at the sales bridge on Slide 5. Currency impacts were minimal in the year. While there were some pluses and minuses, they sum to 0. This year, we anticipate a currency headwind. And if February month-end rates were maintained for the rest of the year, we would see a 2% impact on sales.

In December 2018, we disposed of the non-core business, HygroMatik. And in May — this May 2019, we acquired Thermocoax. The net effect of these 2 transactions was an additional GBP 15.2 million sales in the year. Organic growth in steam business was 6% in total with all segments performing well, particularly Asia Pacific and the Americas. Watson-Marlow performed exceptionally with over 12% organic growth in the year. Against a strong compare of 9% growth organically in 2018 and a weakening of their core U.S. market, Chromalox sales were down less than 1% organically.

This next bridge on Slide 6 highlights the movement in adjusted operating profit for the year. Exchange movements decreased profits by GBP 2 million, a decline of 4.6% due to translation, countered by GBP 2.6 million boost from transaction. This year, we anticipate a currency headwind. Again, if February month-end rates were maintained for the rest of the year, we would see a 3% impact on profit.

M&A posted a net gain of GBP 1.6 million. In 2018, HygroMatik had profits of GBP 3.8 million while Thermocoax has added GBP 5.4 million since its acquisition in mid-May. The Steam Specialties business in total delivered GBP 16.4 million organic profit growth while Watson-Marlow continued to perform strongly, delivering GBP 9.2 million organic profit growth. Chromalox saw fall in profits on an organic level of GBP 4.5 million, the vast majority of which occurred in the first half of the year due to operational issues, particularly in Europe. Excluding the effects of currency and M&A, we saw an improvement in operating profit of GBP 18.2 million or 7%.

This next chart on Slide 7 shows operating profit margin progression over the last 10 years. In 2017, ’18 and ’19, we have showed the dilutionary impact of the Gestra and Chromalox acquisitions in 2017. Over time, we expect these margins to grow to group level. Excluding Gestra and Chromalox, the margin was 25.1%. As I’ve said, reported margins fell by 20 bps to 22.8%. But on an organic basis, the margin increased by 10 bps in the year.

In Steam Specialties business, the margin increased by 100 bps organically to 23.6%. In Watson-Marlow, the market fell back 60 bps on an organic basis to 31.8% as we continue to invest in the business to maintain above-market growth. In Electric Thermal Solutions, the margin at 13.3% was down 270 bps on an organic basis due to the underperformance of Chromalox in the first half of the year. In the second half, Chromalox’ margin was 15.1%, above that reported in 2018. Despite the very uncertain macroeconomic backdrop and the twin headwinds of currency and COVID-19, we will strive to maintain the group’s adjusted operating profit margin in 2020 at a similar level to 2019. More information on the relative drivers of margins can be found in Appendix II.

Turning now to cash on Slide 8. Operating profit to operating cash conversion was 84%, down from last year’s 91%, primarily as a result of an increase in capital expenditure as work on Aflex’s new factory progresses. Excluding the Aflex spend, cash conversion was 90%. On a constant currency basis, excluding acquisitions and disposals, underlying working capital as a percentage of sales improved by 30 bps to 21.5% despite the building of GBP 5 million of Brexit buffer stock, which will remain throughout 2020, and increasing Gestra’s inventory to improve customer service levels.

Capital additions increased by GBP 19 million. The most significant addition was the GBP 16 million spend on the construction of the new purpose-built factory in the U.K. for Watson-Marlow’s Aflex Hose business, which will consolidate the existing 4 locations into a single facility. It’s estimated a further GBP 6 million will be spent in 2020 to complete the project, which will bring 2020’s total CapEx spend to approximately GBP 65 million.

In May this year, we announced the completion of the Thermocoax acquisition, which resulted in GBP 138 million outflow of cash in the period. In January 2020, we paid an earn-out of GBP 5 million, which completes the small acquisition that Watson-Marlow made in early 2018. We ended the year with net debt of GBP 295 million, equivalent to 0.9x EBITDA.

This final finance slide on Slide 9 details our 10-year dividend history, showing compound annual growth of 12% over the period. We have a record of 52 years of dividend progress stretching back to 1967. And over the period, the compound annual growth has been 11%. We have a progressive dividend policy, where dividend payments follow underlying EPS growth while maintaining prudent levels of dividend cover. 2019, we’re proposing an increase to the final dividend of 10%. This brings the total dividend for the year to 110p, also an increase of 10% and equates to dividend cover of 2.4x.

Our capital allocation policy remains unchanged. Our first priority is to invest in ourselves for organic growth and performance improvement. Our second priority is to look for suitable bolt-on or related acquisitions. Should net cash balances accumulate with no significant acquisitions in sight, we would seek to return cash to shareholders by way of special dividends, as we did in 2010, 2012 and 2014. However, in the near term, we look to reduce our debt levels prior to any returns of capital.

I’ll now hand you back to Nick to take you through the operations and outlook.

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [4]

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Thank you, Kevin. As mentioned earlier today, I will cover 3 things. First, I will cover our markets and operations in 2019. Later, I will take you through our current assumptions of the impact of COVID-19 in our group. And to end, I will summarize the key points of today’s presentation and our outlook for 2020. Following all of that, I will open for your questions.

So on Slide 11, you are already familiar with this graph that tracks the quarterly evolution of the annual industrial production growth rates, which we refer to as IP. As you all know, IP is the best predictor of our markets.

Today, I would like to highlight 3 observations. The first point to note is that global IP growth in 2019 fell to 1.0%, significantly below the 1.6% anticipated at our interim results presentation in August. This was driven by a much weaker-than-forecasted IP in the second half of the year. My second observation is that the current IP slowdown cycle has already declined more and lasted longer than the other 2 slowdowns of the past 8 years. And there’s no evidence yet that this cycle has bottomed out.

My final observation is that Oxford Economics’ latest forecast in February predicts a 0.8% global IP growth rate for 2020. This is their first estimate of the global impact of COVID-19 following the outbreak in China and therefore precedes the subsequent outbreaks outside China since early March. Needless to say, the constantly changing circumstances surrounding the global spread of COVID-19 as well as the continued levels of IP softness encountered globally bring a heightened degree of downside risk to this latest forecast of Oxford Economics.

Moving to Slide 12. We start the review of our operations with the Steam Specialties business, where organic sales and profit grew a strong 6% and 10%, respectively. While all geographic segments achieved organic sales and profit growth, an exchange headwind and the divestment of HygroMatik in late 2018 reduced the reported sales and profit growth to 3% and 5%, respectively. The operating profit margin increased to 23.6%, which represents an organic improvement of 100 basis points.

Gestra performed very well in its second year — or second full year with the group and improved its operating margin by 110 basis points organically. This was achieved without the benefit of operational gearing as sales were flat in 2019 after growing 10% in 2018. And these flat sales were mostly due to difficult conditions in the core European market of Gestra. The Steam Specialties strong performance of 2019 was driven by the successful implementation of our strategy, which leverages our resilient business model and improves our ability to self generate sales. Therefore, we remain confident in our ability to continue outperforming our markets in 2020 and beyond.

In the Steam Specialties Europe, Middle East and Africa segment, organic sales were up 2% with operating profit up 4% organically. Spirax-Sarco experienced good organic sales growth in the U.K., Germany, Italy, France, the Middle East and across Africa as we strengthened our self-generated sales activity in the priority sectors of our strategy. The EMEA region represents 85% of revenues for Gestra, where the integration continues to be progressing well and overall performance remains in line with our acquisition plans. However, Gestra’s core markets of Germany and Central Europe as well as some of their core market sectors faced very tough conditions in 2019.

The divestment of HygroMatik in November 2018 reduced sales and profit by almost GBP 13 million and GBP 4 million, respectively, a mid-single-digit adverse impact for this segment. Operating profit margins increased 30 basis points organically but declined 10 basis points on a reported basis due to the divestment of the higher-margin HygroMatik business.

Moving to Slide 14, the Asia Pacific segment. Organic sales were up 7% while operating profit was up 13% organically despite weakening industrial production growth rates across the region. China and Korea achieved strong sales growth as good base business and increase of self-generated sales were boosted by a small number of large-scale capital projects. Elsewhere in the region, sales growth was mixed. Our wholly owned operation in India achieved strong domestic sales growth. And the manufacturing unit is now fully established as an intercompany supplier of the Steam Specialties business globally, which helped achieve a break-even position 1 year ahead of our plans.

Gestra continues to invest in this important region, establishing a new sales company in China since April as well as an expanded sales and training facility in Thailand. Gestra in Asia Pacific achieved double-digit sales growth in 2019. Operating profit margins expanded by 150 basis points to 29.0% while on an organic basis, trading margins improved by 140 basis points as we benefited from operational gearing, active price management strategies, increased self-generated projects and a higher proportion of locally manufactured products.

Turning now to the Americas. Overall organic sales were up 11% while operating profit was up 18% organically. Organic sales were up 6% in North America with both Spirax-Sarco and Gestra achieving strong organic sales growth in the U.S.A. as we expanded our direct sales presence. Latin America achieved 20% organic sales growth with good organic progress across all but one of our operations in the region as well as positive benefits from Argentina’s U.S. dollar-denominated pricing. Excluding Argentina, organic sales growth across the region was a strong 8% with our 2 operations in Brazil performing strongly despite the still challenging market conditions.

Gestra, that still has a small presence in this region, continues to perform strongly and achieved double-digit sales growth in the U.S.A., despite the weakening industrial production growth rates during the course of 2019 in that country. Reported operating profit margin was down 100 basis points to 22.6% due mostly to the strong currency headwind. Organically, the margin was up a strong 120 basis points.

And moving to Slide 16. In our recently formed Electric Thermal Solutions business comprised of Chromalox and Thermocoax, organic sales contracted 1% in 2019, following a strong 9% organic growth in 2018. In the 7.5 months since joining the group, Thermocoax added GBP 27.9 million of revenues, taking the reported growth to 20%. Organic sales in Chromalox were up in the MRO and small improvement project category but were offset by a decline of the larger custom-engineered capital projects as markets slowed in their core North American region, particularly in the heat trace product line.

Thermocoax expands our technical offering to customers, enabling access to certain high-tech applications and industries, as well as expanding our addressable market and doubling the business’ presence in Europe and Asia. Reported operating profit was up 8% as contributions from Thermocoax and a currency tailwind offset the poor Chromalox margin performance in the first half of the year. Nevertheless, actions initiated to improve Chromalox’ profitability produced the expected outcome, increasing the operating margin to 15.1% in the second half of the year, which is 40 basis points ahead of the 2018 operating margin.

In early 2020, we initiated a process to reorganize Chromalox France in order to eliminate the losses of the European operations by the end of 2021. We also completed last week the sale of ProTrace, a small non-core heat trace engineering business in Canada that was loss-making in 2019. Going forward, we remain confident that all the actions taken to date will offset the inevitable headwinds resulting from the challenging markets and unfolding COVID-19 situation.

Watson-Marlow organic sales grew an exceptional 12% with strong contributions from all geographic regions. A small exchange tailwind increased reported sales growth to 13%. The biopharma and biotechnology industry continues to grow at double digits globally with the adoption of single-use technologies acting as an additional catalyst of that growth. Watson-Marlow is well positioned to benefit from this industry trend and continues gaining share in that market, which accounted for close to 50% of Watson-Marlow’s global revenues in 2019. New sales companies started operating for Watson-Marlow in Spain, Colombia and the Philippines while the recently opened sales companies in Ireland, Canada and the UAE continued performing strongly.

Operating profit increased by 11% organically while currency tailwinds increased the reported profit growth to 13%. The operating profit margin remains very strong at 31.8%. Organically, the margin actually decreased 60 basis points as operational gearing and efficiency improvements were outpaced by our continued revenue investments for future growth. Despite the slowing global industrial production growth rates, which correlate to the non-biopharma market sectors of Watson-Marlow, our competitive position in the biopharma industry remains strong. And we anticipate that Watson-Marlow will have a lower exposure to the effects of the unfolding COVID-19 situation. We are, therefore, well positioned to deliver above-market organic sales growth in 2020.

I’m moving now to Slide 18 and our current assessment of COVID-19. China is an important country for the group, accounting for 11% of group sales and 8% of employees globally. We have 2 manufacturing facilities in China. And close to 75% of their output is destined to the domestic market. Sourcing from China for other manufacturing units around the world accounts for only GBP 10 million annually. China sales in February were significantly below original expectations due to the full shutdown during week 1 of the month as well as difficulties interacting with customers thereafter. Our manufacturing levels were approaching normality by the end of February, although recovery actions by our local suppliers lags our own progress.

With Chinese infection rates in decline and provided no resurgence occurs, we assume business activity in China will return to normal by the end of the second quarter. Outbreaks beyond China are evolving rapidly, making it very difficult to assess the global impact of COVID-19. However, we assume that the global impact will be contained by the end of the first half; that the global recovery will occur in the second half; and that the overall impact on global IP will be less intense than that experienced in China. Based on all of the assumptions above, we anticipate a global headwind of 2% on sales and 4% on profits with the majority of this effect occurring in the first half of the year.

The health, safety and well-being of our employees is always the top priority for us. Since the initial outbreak of COVID-19, we have taken numerous actions to protect our employees globally. And we continue to monitor and respond accordingly as the situation unfolds. We have also initiated multiple cost containment actions across the globe to mitigate the adverse impact of COVID-19 without compromising on our ability to capitalize on growth opportunities in the balance of the year. Nevertheless, as the situation continues to evolve on a daily basis, the final impact could be significantly different.

So we have again added 3 new customer case studies that help illustrate how our 3 businesses improve the performance of our customers and help them to achieve their sustainability targets by reducing energy expenditure and waste. However, in the interest of time, on this occasion, we have moved these case studies to the Appendix I, Slides 23 to 25 of this presentation. And I would encourage you to read more about them at a later moment.

So moving now to the summary and outlook slide on #20 of our presentation. We are pleased to report strong full year performance with 8% revenue growth on a reported basis and 6% on an organic basis. The group operating profit grew 7% on both an organic and a reported basis with the group’s operating profit margin at 22.8%. Excluding the contributions of the 2017 acquisitions, the group’s underlying operating margin was 25.1%.

The Chromalox operating margin increased to 15.1% in the second half of 2019, which is 40 basis points above the full year 2018 margin. We acquired Thermocoax in May, and together with Chromalox, formed the Electric Thermal Solutions business. This acquisition significantly enhances the technology and product offering of Electric Thermal Solutions, expands its addressable market and doubles its presence in Europe and Asia.

Global industrial production growth rates are expected to slow further in the first half of 2020, when we assume the majority of the adverse impact from COVID-19 will occur. Against a very uncertain and rapidly evolving situation, we assume that the twin headwinds of currency and COVID-19 will offset the underlying organic growth of the group. Nevertheless, we have already initiated cost containment actions to protect our bottom line, and we will strive to maintain the group’s operating margin in 2020 at similar levels to 2019.

We will now be pleased to take questions from the analysts in the room, followed by questions from those joining us remotely. I would request that before asking your questions, please state your name and that of your organization for the benefit of those listening remotely.

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Questions and Answers

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [1]

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Wait for the microphone there.

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Mark Davies Jones, Stifel, Nicolaus & Company, Incorporated, Research Division – Associate [2]

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Thanks, Nick. It’s Mark Davies Jones from Stifel. A couple, if I may. Firstly, in the past, you’ve been very defensive through periods of weaker growth, really driven by the self-generated sales model. Is there any threat to that in a period where people are getting more questionable about letting people into their facilities? Are you finding any issues in actually accessing customer premises? Certainly, in our industry, we are, but…

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [3]

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In terms of COVID-19?

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Mark Davies Jones, Stifel, Nicolaus & Company, Incorporated, Research Division – Associate [4]

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Yes.

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [5]

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Yes. Where there’s been outbreaks, like all companies, our customers are also restricting access of external people and sometimes limiting the access of their own employees. So it’s — we see this as a normal situation derived from COVID-19. We also see it as something that is transitional. And that as soon as the outbreaks are contained, we’ll start going back to normal. And we’ve seen that already in China. The situation in China has evolved quite rapidly. If you look at where it was at the beginning of February and where it is now at beginning of March. So whilst we did see access restrictions in the beginning, we are seeing that also returning to normality. So we don’t think that puts any — the business model of Spirax in jeopardy. It’s just a delay in terms of the activities that we would then otherwise be doing anyway.

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Mark Davies Jones, Stifel, Nicolaus & Company, Incorporated, Research Division – Associate [6]

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And the other question was about the oil price. In looking at the outlook for Chromalox, it’s obviously already looking relatively soft in the U.S. Some of that plays into U.S. oil and gas markets on the heat trace oil and gas. Is that an additional concern as CapEx budgets get cut there?

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [7]

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Look, this is a situation, you remember, we went through back in 2014. And basically, we didn’t have Chromalox at that time. But again, even in Chromalox, the exposure to the oil and gas industry is mid-teens percent of their sales, okay? And for the group as a whole, it’s somewhere in the range of 7% to 8%. So it’s one of the many sectors that we service and have a good response to. And a lot of the work that we do is at an OpEx level. And therefore, maintenance, replacement, overhauls, improvements, small improvements, those things continue, where the capital budgets for expansions or newbuilds can get delayed or postponed.

But it is part — and you’re right. Heat trace — the heat trace part of Chromalox, which is about 1/4 of their sales only, okay, so it’s not a major part. The more important part of Chromalox and of Electric Thermal Solutions, in fact, is — are the industrial heaters and systems that we do. So heat tracing is about 1/4 of Chromalox and maybe 20% of Electric Thermal Solutions as a whole. So yes, there’s always different areas that get impacted by certain industry movements. But it’s nothing that dramatically alters the competitiveness or the outlook for the group.

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Mark Davies Jones, Stifel, Nicolaus & Company, Incorporated, Research Division – Associate [8]

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Can I have just one to Kevin if I’m hoping to agree? Working capital, are you having to leave more leeway, given what’s going on in the supply chain? Should we allow for a bit of outflow?

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Kevin James Boyd, Spirax-Sarco Engineering plc – CFO & Executive Director [9]

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I think that is possible. We — obviously, we have this buffer — Brexit buffer stock that we’ve built and we’re utilizing that through the year, and we’ll replenish it by year-end. I think there’s possibility where you’ve got dual supply lines that we will see inventories increase during the year. But our stock is very durable, and we would see those wind down as the COVID-19 passes on. So I think in the year, probably not a huge impact, in the half year, maybe.

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [10]

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Next question, Jonathan?

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Jonathan Hurn, Barclays Bank PLC, Research Division – Research Analyst [11]

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It’s Jonathan from Barclays. Just two questions. Firstly, can you just talk a little bit about your outperformance you’re seeing in biopharma in Watson-Marlow? Just give us a little bit more color, the rate of outperformance, where you’re seeing it. Going forward, do you think M&A opportunities in that space within Watson-Marlow? So just essentially fleshing it out a bit, that would be very helpful.

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [12]

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Yes. So biopharma, as you all know, and I’m sure we’ve got analysts that are specialized in following that industry, it is an industry that is booming. And growth have been double digits for the last many years. And in particular, the last couple of years, we seem to have seen an acceleration of that double-digit growth, which is what I’m referring to. And you will have noticed that obviously Watson-Marlow’s — the share of biopharma — or sales into the biopharma industry for Watson-Marlow has been growing. And just a few years ago, we were talking of around 40% and then closer to 45%. And now we’re saying it’s actually got close to — not yet at, but close to 50%, which inevitably means we are gaining share in a rapidly growing industry. And we’re gaining that share because, well, the products that we have in the Watson-Marlow portfolio for this industry are very well positioned and at the leading edge of some of their trends, for example, single-use applications. And we’ve got multiple products that we have either developed internally or acquired, like the BioPure connectors or the Flexicon filling machines, which are gaining a lot of traction and helping us gain more share and hence increasing the share of biopharma side of the industry. And we’re very pleased, and we think that all the actions that we’ve taken in the past and we continue to take will continue to reinforce those trends.

Now in terms of M&A space — on M&A opportunities in that space, we’re always on the lookout for them. And we continue to monitor. We have a pipeline of opportunities that we see. The important factor to remember for the group, irrespective of whether it’s in Watson-Marlow, Steam Specialties or ETS or Electric Thermal Solutions, is that an M&A opportunity has to fit our overall strategy. It has to be able to supplement the organic growth, which is and will continue to be the main driver of our business. And therefore, we have to find the right kind of M&A to reinforce the organic growth of the business, and we have to be able to see ways of adding value to that target, not just getting scale from it, okay? We are on the lookout, but we never give any predictions in the M&A space because you don’t know what’s going to become available and when.

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Jonathan Hurn, Barclays Bank PLC, Research Division – Research Analyst [13]

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And just one follow-up maybe on that biopharma. Obviously, when that Aflex Hose gets up and running and the capacity comes online, how much more capacity do you get out of that facility from bringing the 4 sort of lines into 1 relative to where you are now?

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [14]

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So for that plant that we are nearing completion of, pleased to see, but also for all the other plants of Watson-Marlow, we are reviewing our capacity to be able to accommodate continued double-digit growth in the biopharma sector, right? Because — and then some of them were strong. Some of the products, specifically within the biopharma portfolio of products that we have to offer, some of the products actually had very strong double-digit growth. And therefore, we’ve got to be constantly assessing our capacity and expanding it and debottlenecking it so that supply does not become constrained to support this booming industry.

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Jonathan Hurn, Barclays Bank PLC, Research Division – Research Analyst [15]

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And then second question, just coming back to the oil and gas. If we just look at the steam business, I think South Korea is pretty strong for you in terms of oil and gas. How much of that geography is oil and gas? Or how much is South Korea…

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [16]

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So it — we — I don’t recall that we’ve actually disclosed that level of granularity for Korea. But it is an important part of what we do in Korea, okay? And we have a very strong presence. We’ve got a very strong team there for over 40 years, very well positioned with all the engineering, procurement, construction companies, the top ones in the country and top ones around leading companies in the world in that sector. And so we’re constantly working on all the big projects that they’ve gone — that they’ve got ongoing. Yes. And so I think we’re very well positioned in that sense.

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Richard Paul Paige, Numis Securities Limited, Research Division – Analyst [17]

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It’s Richard Paige from Numis. Just one question for me, please. Can we delve a bit more into the performance at Gestra, please? Because obviously, you have to contend with a pretty weak core market. Have you — and obviously, pushed up the margin as well. Have you managed to make market share gains? Or is that expansion to new territories that really driven…

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [18]

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No. Definitely, we believe that we have gained share in all geographies, okay? And if I pull out the comments I’ve made throughout the presentation in 3 regions, what we’re basically saying is that in the core markets of Germany. And just as a reminder, Germany accounts for around 40% of Gestra sales globally, their home market. And then some of the neighboring countries around Central Europe, like Italy and U.K., Poland, et cetera, those markets make up another, just over 40%. So EMEA or Central Europe is an important part. And in those markets, Gestra did not see organic growth. It was a small decline percentage-wise. And that is really driven — I want to remind you and everybody that’s listening remotely that our strategy for Gestra is driven by a dual-brand market sector-driven strategy, okay? So we have the Spirax-Sarco brand and we have the Gestra brand. And each 1 of those 2 brands are focused on those priority sectors where they are stronger and better positioned. They’ve got better products and technologies to service the needs of those industry sectors, okay?

One of the — some of the core markets where Gestra is definitely the world leader, for example, are boiler controls, industrial boiler controls. The best industrial boiler controls in the world are from Gestra, one of the reasons why we were so keen to have them join the family. Now you can all figure out what the situation is for German capital goods manufacturers that are big exporters. And that’s been one industrial sector within Germany that suffered a bit more and the economy as a whole. So that’s why we say some geographies, Germany, Central Europe, and specifically the — some of these sectors where Gestra is focused on have been hard hit with external factors.

Now in the rest of the world, I mentioned in the U.S.A. and in Asia Pacific, Gestra’s growth was 10% — sorry, it was double digits. I don’t know if I gave a figure, but I’m giving now, okay? It was double-digit growth in those other regions where their presence is smaller, admittedly, but you can see strong growth. And that’s coming on the back of, obviously, share gains in those markets. And even in the central economies where Gestra is well positioned, the market fell by more than our sales, organic sales was just slightly off. So that tells you, yes, we’re making share gains across all of Gestra. And we’re very pleased that actually the integration is going very well. The objectives that we set almost 3 years ago now when we acquired the company have all been met. We’re tracking to those, and we’re very pleased with the performance overall. And the margin gains are coming from just better practices in terms of price management, the tools that we brought into Gestra from the group before, efficiency improvements, the host of things that we said that we would be doing and that we’re bringing from our original companies. And it’s all going very well, very pleasing for us. Any more questions from the room? Robert?

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Robert John Davies, Morgan Stanley, Research Division – Equity Analyst [19]

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It’s Robert from Morgan Stanley. Just a couple of questions. One was on the non-biopharma bit of Watson-Marlow. Maybe you could just give us a little color in terms of what else you have kind of predominant exposure to within that business. And kind of, I guess, after biopharma, what’s the kind of next bit of that business that looks most promising in terms of end markets? I’d be quite interested to see that because obviously you mentioned you’ve got quite good progress there, 40% to 50% on biopharma. What’s the next sort of biggest component or the biggest growth driver there?

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [20]

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So the other industrial market sectors that Watson-Marlow has very strong presence, obviously not as broad as the steam business, okay, so more concentrated on, for example, food and beverage, water and wastewater, environmental markets. So Watson-Marlow products for dosing chemicals into water treatment and improving quality of water and et cetera, those kind of markets.

Medical devices, so manufacturers of medical devices, which is another sector that’s moving very rapidly and our products can go into that. OEM equipment, and some of the OEM customers that we have are specific for biopharma sector, but then we have other OEM customers that are sector generic or sometimes for food and beverage for all the other sectors. But equipment manufacturers, OEMs and another sector that Watson-Marlow is also very well positioned. So I think I’ll leave it at those for now.

There’s a smaller exposure in mining and in the — but it’s small and it’s concentrated, focused mostly on platinum refining processes or those kind of stuff. So they are broad, but I think the main ones that you want to note are those that I’ve mentioned. And therefore, we say all of those industrial markets, non-biopharma are the part that — of Watson-Marlow that tracks more closely to IP, global industrial production, whereas the biopharma sector has a dynamic of its own driven by that industry.

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Robert John Davies, Morgan Stanley, Research Division – Equity Analyst [21]

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And then just on the Electric Thermal Solutions business. I guess what have — obviously, you had the challenges in the first half in Chromalox. But what’s really sort of been the sort of bigger surprises or challenges of integrating that new type of business within Spirax? And I guess I’d be interested, you mentioned they’re sort of operating at different units compared to Spirax. Is there any opportunity for cross-selling or plugging in sales guys that you perhaps didn’t do before? And I know you’re sort of targeting slightly different markets, but I’d be interested in…

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [22]

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Well, actually, thank you very much, Robert. That’s a very good question. And I’m glad that you asked this, so we can expand on that point. One of the — if we go back to the rationale — the strategic rationale for the acquisition of Chromalox in the first place, it’s a very similar business to the Spirax-Sarco steam business with very similar dynamics and driven by direct sales in their core market of the U.S.A. So it has many of the characteristics. It services essentially most, almost all of the same markets that Spirax services or the steam business services. However, the weighting of those sectors differs a bit between the electric technology and the steam technologies. But they’re basically the 2 main technologies for providing heat transfer into an industrial process. Steam and electricity are really complementary technologies, not competing technologies. And now we have both of those technologies at our disposal. And the characteristics of the heat energy or the level — the temperatures or the power intensities will vary by applications. And therefore, the exposure to different markets varies whether you’re in steam, but it’s all related to the type of applications that require that heat, okay, so trying to keep it at a high level.

So — but because basically, we’re serving the same purpose, to transfer heat into an industrial process, and we’re doing it through a direct sales model into the same market, there’s always going to be opportunities for us to leverage the presence of one business to the benefit of the other. And we had planned and we are rolling out synergy, so revenue synergy opportunities, okay? We are keeping — and we’ve always said this that we keep the sales organizations of each business focused on their technologies because you can’t be a specialist in everything, right? So the people that are specialists in steam will continue to be focused on steam. And the people that are specialists in electric technologies will stay with electric technologies. But that doesn’t mean that the colleagues can’t speak to each other and they can’t be referring each other to customers. And the other synergy opportunities that we are seeing that are very exciting, for example, Chromalox developed a really, really nice leading technology around medium voltage heaters. And we think this has got a lot of potential. And because those medium-voltage technology allows you to provide that heat in a more efficient electric higher electric efficiency, if you want.

So — and one of the things that Chromalox has developed, for example, is a medium-voltage heater for steam-generating boilers. So as the world moves to decarbonizing, the use of steam is not going to go away. But the energy source used to generate the steam is changing, okay? And electric is one of the ways where that’s going — electric heating to generate steam is one of the ways that this is going. So we’ve got some very exciting internal opportunities that we see that we will unfold over the coming years. It’s always been in our plans, a little bit delayed by the — we were hoping to get started more on that in 2019. And for the reasons that you’ve already alluded in the first half, that was a bit delayed, but we’re back on track. And we think there’s very exciting opportunities.

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Robert John Davies, Morgan Stanley, Research Division – Equity Analyst [23]

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And then maybe just my last one is just around I guess, your kind of medium-term growth strategy. And I know you’d gone through a period where you were buying various distributors, and that was part of your sort of growth model. What — I guess, where do you see sort of regions for further opportunities on that front? And I guess related to that, if we do continue to see an IP slowdown progress longer through the year, where is the biggest risk to not maintaining the margins at a sort of flattish level in 2020 coming from? Maybe if Kevin can give us some insights on that.

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [24]

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Okay. So you’ve got a couple of questions in one there. I think I’ll take them in the order that you raised them, the first one being opportunities for conversion from distributor to direct sales, and that’s an ongoing process. Obviously, the maturity of that process differs across the 3 businesses because the more mature businesses like Spirax-Sarco, we’re a bit more evolved. And therefore, this — we already have a direct sales presence in the steam business across 66 countries. And therefore, you — you’ve got — you’re getting to that point where you’ve got less major industrial economies to expand in your direct sales force.

At the other end of the spectrum, you’ve got ETS, the Electric Thermal Solutions business, we’ve got a much more concentrated in the U.S. and less around the world. So we’ve got a lot more opportunities to grow our business globally and leverage the footprint at other parts of the group, and Watson-Marlow in the middle of all that. So this is a dynamic that cuts across all of our businesses and will continue for the foreseeable future. But given the different maturity levels, the opportunity size also varies across those businesses.

And then the second part of your question was around risk to the margins?

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Robert John Davies, Morgan Stanley, Research Division – Equity Analyst [25]

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Yes. I guess if IP did slow more than expected through the first half of the year, what’s the biggest risk to not maintaining the margins?

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [26]

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And I think you were pointing to Kevin when you asked the question.

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Robert John Davies, Morgan Stanley, Research Division – Equity Analyst [27]

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Yes, because I…

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [28]

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Do you want to get him talking for a while?

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Robert John Davies, Morgan Stanley, Research Division – Equity Analyst [29]

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Because you put — I know that you put that slide in the appendix again, showing all the sort of relative moving parts. So I’d just be interested if you could sort of flesh out which bits are higher or lower risk within the directions of arrows you’ve shown.

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Kevin James Boyd, Spirax-Sarco Engineering plc – CFO & Executive Director [30]

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Yes. So obviously, to counter the effects of COVID-19, we’re already putting cost containment operation in place. Our biggest single cost is labor, 35% of sales. And our people, and everybody says this, are our most important asset. So we wouldn’t look to drastically cut anything, unless we saw a really huge decline in industrial production. But we think that the cost-containment process we put in place now will be able to maintain the margin for what we see at the moment. If that changes, there are other things we can do, but it’s more about not replacing people through churn rather than actually cutting — we wouldn’t expect to do that. And we should be able to maintain margins.

Also, of course, you have to remember that our reaction to IP is less intense than some other companies because of the MRO business we have, because of the recurring business that we have in Watson-Marlow and the self-generated business. Remember, only 85% of our revenue is OpEx revenue, only 15% is CapEx, and it’s the CapEx that tend to be hit most in times of recession.

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [31]

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Any more questions from the room? Thank you very much. Have we got some calls? Okay.

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Operator [32]

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Your first question comes — from the phone comes from Alexander Virgo from Bank of America.

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Alexander Stuart Virgo, BofA Merrill Lynch, Research Division – Director [33]

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I just wondered if you could talk a little bit bigger picture around how customers have responded in the current environment, maybe contrast it with how things were developing into the end of last year, and how you have seen that sort of impact happen over the last quarter or so, and what you sort of see in terms of how people are talking to you in generating business. Because we’re just trying to get a better feel for how companies themselves are responding away from the sort of — obviously, the restrictions and requirements put upon them by governments.

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [34]

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Alex, thank you for your question. So I think it’s all — specifically related to COVID-19 that you want to understand, the reaction from customers?

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Alexander Stuart Virgo, BofA Merrill Lynch, Research Division – Director [35]

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Yes, please.

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [36]

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Okay. Well, look, obviously, this is a very recent development. The outbreak only really started materializing at the end of January in China. And at which point, the country was already in its Lunar New Year migration process, which is huge in China. You’ve got something like 400 million people traveling around to visit their families in what equates to — so for example, Christmas holiday seasons in the Western world. So it’s — there couldn’t have been a worse time for the outbreak to come out in China because of all those people.

So that forced the Chinese government to take very strong actions as soon as they recognized that there was an outbreak that they needed to contain, so the actions were very severe. And you’ve all followed in the press what happened since, which was delaying the return to work, trying to force social distancing so that — to try to contain, within the Wuhan province to start with, but also trying to avoid it spreading across the rest of the group — of the country. And I think that was actually, looking back now 4, 5 weeks later, 6 weeks later, I think it was successfully tackled, albeit in a very necessarily dramatic form by the Chinese government.

Customers, which was the question, for us, have reacted in the ways that you hear about in the press. I mean our relationship with customers is very deep because of this direct sales model and the high exposure to MRO activities and the self-generated initiatives that we drive with our customers. A lot of our work is truly walking the plant of our customers. And it’s difficult to provide that kind of service and solutions for our customers if you can’t access their plant or if the customer himself can’t access his own plant. So that does put a delay into the capture of certain opportunities that were already identified or being worked on for resolution after the Lunar New Year, for example, and on China in that sense. So we don’t see any of that business actually going away. What we are seeing is a delay in capturing of the order. And it’s almost like a little gap in the pipeline of the orders coming through.

And as a reminder, our business has — one of the good things about it, it’s very granular. These are all small-ticket items. Even the self-generated solutions that we provide for our customers are, on average, somewhere around GBP 30,000, GBP 40,000, GBP 50,000. So still funded out of customers’ OpEx budgets. And what we’re seeing is just a natural delay on that, not businesses disappearing, like in some industries, if the airline takes off — the plane takes off with an empty seat, well, that seat is lost. In our case, it can be delayed a few weeks. Some of the larger capital investment projects might be delayed a bit more than that, but that’s basically the situation. And we’re operating very well. Our sales engineers have remained in contact, sometimes calling from home, speaking with our customers, keeping a pulse.

We’ve also — and I think it’s nice to put a little note in that sense that some of our customers, we support hospitals, we support the health care sector, biopharmas, pharmaceutical industries. So both in Steam, Watson-Marlow, ETS. So in those sectors that are — struggle — were prioritizing response to the outbreak, we have had calls from customers saying, look, I know we’re in lockdown. Nobody else can come in. We’re not letting anybody in, but we need — we’ve got a problem in a boiler in hospital X. And could you come and help us see how we fix it because we — and we took exception and the hospital put special conditions for our people to access the plant, our technicians and service engineers to access the plant and help them get up and running faster to support the recovery actions. So it’s been intense period, of course, a lot of uncertainty, but very good support from customers. And we do believe it’s a crisis, but it’s a temporary one. And we believe that the business will get back to normal.

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Alexander Stuart Virgo, BofA Merrill Lynch, Research Division – Director [37]

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That’s very helpful. And if I could follow-up just on Watson-Marlow. Obviously, very, very strong growth there, again, consistently ahead of your sort of more normalized growth guidance, which is totally fair enough. But I’m just wondering how we should think about that for 2020 in the context of your overall group guidance. I know you normally don’t sort of break it out, but I’m just wondering how quickly we should think that might or might not fade off.

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [38]

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In terms of the biopharma sector fading off?

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Alexander Stuart Virgo, BofA Merrill Lynch, Research Division – Director [39]

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Well, I guess, I mean overall. I mean very clearly, your commentary around biopharma is positive and clearly, you’re expanding capacity to meet stronger demand. So I don’t anticipate that fading too much, but I’m guessing the rest of the business, maybe a little, but I’m just trying to piece together the divisional expectations, if you like, just to help build a picture for the group.

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [40]

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Thank you, Alex. Thanks for your question. Well, look, we are, probably for the first time, being a bit more explicit about the fact that you have those 2 dynamics in Watson-Marlow, the biopharma sector and all the other sectors that we support in Watson-Marlow. And it’s — I’m not — I don’t think I’m telling you anything that you didn’t already know. But we’re just reminding you that because at the moment, we expect the biopharma industry to continue to grow at double digits in a strong way and because of our strong positioning in that, we expect to continue to gain share in that industry. And therefore, grow at a faster pace than the industry itself, continue to do that.

The other part of Watson-Marlow is more correlated to global IP, like the rest of the group. And therefore, if global IP is weakening, you’d expect that part of Watson-Marlow to also weaken to some degree, not fade. I wouldn’t say — it’s just the normal cyclicality of that part of — those sectors that we support in Watson-Marlow and around the rest of the group. So it is around that.

And of course, looking to 2020, the exceptionally strong growth rates that we saw in 2019 for Watson-Marlow are a very high bar and a very strong comparison for — to measure yourself off for 2020. So we want to keep that in context, which is why we continue to guide or to expect, I should say, that Watson-Marlow would continue to grow at mid — organically, mid- to high single digits because you’ve got these 2 dynamics, where one part continues to grow strongly. The other part will slow a bit because of the cyclicality of the market. And we’ve got this tough comparison to the former year, the previous year. So that’s really the outlook. Kevin, do you want to add something?

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Kevin James Boyd, Spirax-Sarco Engineering plc – CFO & Executive Director [41]

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Yes. I could just add to that. So certainly, prior to COVID-19, we were looking at sort of mid- to high single-digit growth in Watson-Marlow. I think COVID-19 will have an impact on Watson-Marlow as well. And it’s not as overweight as the steam business is to those territories of China, Korea and Italy, but it will still have some effects. So I think the mid- to high single digit is pre-COVID-19 impact?

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [42]

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Yes, yes, that’s a good reminder. Thank you, Kevin. It’s true. That was our pre-COVID-19. We also state that we think the exposure of Watson-Marlow to COVID-19 is a bit less than the other parts of the group because of the biopharma sector. So not because — not only because — well, one of our assumptions is that the biopharma sector will be less affected by COVID-19 than other industrial sectors. And therefore, that will also attenuate, relative to other 2 businesses, Watson-Marlow’s impact on — of COVID-19.

Thank you. We have 2 more calls.

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Operator [43]

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This comes from Michael Tyndall from HSBC.

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Michael J. Tyndall, HSBC, Research Division – UK MidCap Equity Analyst [44]

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Michael Tyndall from HSBC. Just one for me. Can you talk a little bit maybe about Chromalox Europe? I see that you’ve — you are looking to make some changes in France. I wonder if you can give us a bit more detail in terms of perhaps the scale of that and the timing around that. And then if my math is correct, that probably doesn’t quite get you where you need to be on the margin in line with the rest of the group. So is there more activity? Or are we now looking for more help in terms of top line to bring the margins up to the kind of group level?

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [45]

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Okay. Thanks, Mike. So Chromalox in Europe, we had already indicated last year that the operations — the European operations of Chromalox were loss-making. And last year, for the reasons we explained in the first half, it actually suffered a bit more. And therefore, we had indicated that we were looking at multiple ways to improve the operational performance. And in the case of Europe, we needed to do something a bit stronger. So that’s why we’ve now released and started a process of consultation with our employees in France and the Chromalox employees in France with a way — with a view to modify some of the processes, for example, that we are doing in-house, probably outsourcing those to either other plants of Chromalox or to third parties in some cases and then other internal performance issues that we’re addressing.

But ultimately, it would lead to a reduction in force in that Chromalox European activities. And I can’t disclose further details because the consultation has just started. And therefore, it would not be appropriate or legal of me to give any further indications because we’re still in a consultation process. But what we are making clear is that we have started that consultation process. And the view is that we will be getting the Chromalox European operations back to at least breakeven by the end of next year, okay? That’s what we wanted to indicate. This is just one more of the many actions that we’re doing to recover the profitability of Chromalox to the levels that we expect.

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Kevin James Boyd, Spirax-Sarco Engineering plc – CFO & Executive Director [46]

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And Mike, if I could add to that. We give ourselves 10 years from the acquisition in 2017, and we still are holding to that. We believe we can get both Gestra and Chromalox to the low 20s within that period.

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [47]

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Yes. So those longer-term goals have not changed either, just different activities that we’re taking to get us to that goal, okay? That we report as we unfold them. Okay?

Okay. Thank you very much, Mike. One other call.

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Operator [48]

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And this comes from Andrew Douglas from Jefferies.

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Andrew Douglas, Jefferies LLC, Research Division – Equity Analyst [49]

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Three questions, please, if I may, hopefully, all answered quick. Can I just confirm that the GBP 25 million of sales impacts and GBP 11 million of EBIT impacts from COVID, that is just China? Or does that include any recent activity from — in Italy?

Secondly, I noticed that Watson-Marlow had quite a lot of investment into new products in 2019. Is that a hump for Watson-Marlow? Or does that kind of continue into 2020 and beyond in terms of investment?

And then last one but by no means least. I noticed that you paid out a GBP 5 million earnout on the pre-revenue acquisition that you made in Watson-Marlow. I’m assuming you’re happy with the progress being made there. Why exactly did you — what exactly did you pay out for the earnout? And are you able to give us a bit more information as to kind of what’s going on there? Or is it still too early?

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [50]

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Okay. Andy, thanks for your questions. On the earnout, I’ll start with the third question in Watson-Marlow. We had been indicating that we had made a small — an acquisition of a small pre-revenue company. And this is an exciting development for Watson-Marlow. This is a technology that this company has been developing. And it’s, in essence, expanding the envelope of peristaltic pumping, or taking the peristaltic technology to a new level. And therefore, Watson-Marlow, as the world leader in peristaltic pumping technology, is also leading the way in the development of new technologies. This company had developed some — it’s a small company. It’s literally a handful of — a little bit more than a handful of very good PhDs that were doing research and had filed for some patents.

And we saw this as a technology that we can now plug into the global direct sales organization of Watson-Marlow and create new products that would allow, still peristaltic pumping but in different ways, for higher flow rates, higher pressures and more importantly, higher chemical resistance. So being able to, through this technology, continue to displace other types of pumps with peristaltic technology. And the trials that we were running since the acquisition of these products have all been very successful, which is why — and those were the conditions that the sellers needed to meet. We had to pass very stringent tests to prove the technology. They’ve been passed. We are gearing up to launch some products with that, including that technology, and that’s why we are — we released the payment of the earnout that you picked up in our announcements.

Your first question was on COVID and whether the value impacts included — was only China or included our estimate around the world. The answer is the latter. That overall 2% on sales, and these are round numbers, of course, intentionally. It’s our — again, this is all about assumptions, right? We’ve always said, and if I can expand on your question, I think it’s helpful for everybody that’s listening. We’ve always said that this company, Spirax Sarco, is — has low visibility because we operate with average 7 weeks order books, but high predictability because we’ve got these recurring revenues, MRO, self-generated sales, the strategy that we’ve been unfolding and continue to strengthen. So we have good predictability.

And I think our history and our track record shows that we’ve usually been able to be quite accurate in our predictions of where the business will go. So — and that’s because we’ve got very strong internal models that we continue to deploy. But every model is based on assumptions, right? So we’ve tried to outline, and that’s why I went through this detailed outlining of the assumptions that we’ve made. And based on those assumptions, we estimate in the range of 2% top line and 4% bottom line headwind to the organic growth that we would be otherwise achieving.

Is it right? We don’t know. Our best estimate at this point, we just think it’s better to share with you openly, transparently where we’re going. I like to joke, we’re not trying to get a hole in one here, guys, if that analogy resonates with some of you, golf analogy. This is not about trying to hit the paint in one strike. We’re try — there’s a lot of fog out there in the field. So it’s difficult to know where the hole is at the moment. So we’re trying — we’re assuming it’s somewhere, and we’re trying to get closer to it, and we’ll update you as we go. But we think giving you that guidance is better than saying nothing at this moment and waiting until the fog clears because we might find out that we are further away from the pin than we thought. So it — might have overshot the pin also. So it’s all about trying to get closer to where we think it is based on a list of assumptions, okay, which will vary, but if those assumptions were to hold true, this is the impact that we’re expecting. And we’ll continue updating you as we go, okay?

So we have no more calls. I thank you all. Sorry?

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Kevin James Boyd, Spirax-Sarco Engineering plc – CFO & Executive Director [51]

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Second question on Watson-Marlow products?

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [52]

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Oh, sorry, Andy, thank you. Can you just remind me of the question with Watson-Marlow?

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Unidentified Company Representative, [53]

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He put the phone down.

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Kevin James Boyd, Spirax-Sarco Engineering plc – CFO & Executive Director [54]

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No, he’s gone.

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [55]

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No, he’s gone. Sorry?

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Unidentified Company Representative, [56]

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It was about step-up in our new product investments at Watson-Marlow, whether that was a one-off or…

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Kevin James Boyd, Spirax-Sarco Engineering plc – CFO & Executive Director [57]

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Yes. I can take that, actually.

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [58]

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Okay. Go ahead.

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Kevin James Boyd, Spirax-Sarco Engineering plc – CFO & Executive Director [59]

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The quick answer is no. There’s a continuous pipeline for products in all our businesses, Watson-Marlow probably more so than the other 2, in that they have a more dynamic vitality index and a refresh of products. So no particular bode either last year or this year.

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Nicholas J. Anderson, Spirax-Sarco Engineering plc – Group Chief Executive & Executive Director [60]

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It continues to be an important part of all of our business in terms of new product development. And we try to do as much as the direct sales organization can absorb, right? Because it’s not about how much money you throw at new product development. Anybody can throw money at it. But we’ve got 1,600 men and women around 66 countries in the world that later have to sell any new product that you launch. And you have to train them, and deploy it and stocks to support. So there is what I jokingly call an absorption capacity of a direct sales organization. If you throw too many products simultaneously, yes, your efforts might not be — so that’s how we control. But new product development for Watson-Marlow, for Electric Thermal Solutions and for Steam Specialties continues to be an important part of our business model, and we try to push that envelope as far as the direct sales organization can absorb.

And on that note, thank you all very much, and those on the call also. It’s very nice to see you all, and I have — hope you all have a very good day.