Spirax-Sarco Engineering (LON:SPX) reported 5% organic sales growth and 6% organic operating-profit growth in the first half, outperforming industrial production growth of 1.5% despite what Chief Executive Officer Nimesh Patel described as a weak macroeconomic environment.
The group’s adjusted operating margin rose 10 basis points organically to 19.8%, while adjusted earnings per share increased 9% to £1.50. The board declared an interim dividend of 50.4 pence per share, up 3% from the prior year.
Performance varied across the three businesses
Steam Thermal Solutions, or STS, posted 1% organic sales growth, despite demand increasing at more than twice the rate of industrial production. Sales lagged orders because customers scheduled a small number of deliveries for the second half, leaving the business with a stronger order book entering the period.
STS adjusted operating profit declined 6% organically and its margin fell 170 basis points to 22%. Chief Financial Officer Louisa Burdett said the decline primarily reflected shipment timing, along with first-half-weighted investments in sales headcount and digital capabilities. The company expects STS sales and margins to improve in the second half, with full-year margin broadly in line with 2025.
China remained a drag on STS sales, though conditions improved. Sales in China declined 1%, compared with a 6% decline in the prior-year first half, as the drop in large-project demand moderated and maintenance, repair and operations, or MRO, sales continued to grow at a double-digit rate. Patel said China could return to neutral growth toward the earlier end of the company’s previously stated range of the second half of the year or early next year, though he cautioned that further developments were needed.
Electric Thermal Solutions, or ETS, delivered 11% organic sales growth, supported by demand across its three divisions and higher operating throughput. Adjusted operating profit increased 27% organically, while margin rose 220 basis points to 17.2%.
Burdett attributed ETS margin expansion to volume growth, operational efficiencies, the absence of lower-margin legacy orders and a more favorable mix of higher-margin semiconductor and Heat Trace sales. The division achieved a 20% margin in its highest-shipment month during the half, although the company continues to target a 20% margin over the medium term.
Watson-Marlow recorded 7% organic sales growth, with adjusted operating profit up 11% organically and margin rising 80 basis points to 27.5%. Biopharmaceutical orders remained ahead of sales, and second-quarter order intake reached its highest quarterly level since the COVID-related peak, according to Patel. Process Industries continued to outperform industrial production through market-share gains in targeted sectors.
Second-half outlook supported by orders
The company expects higher sales volumes and improved operating leverage in the second half. It forecasts high-single-digit sales growth in ETS and Watson-Marlow, while STS is expected to benefit from the conversion of its existing order book and continued self-generated demand.
Management said it is not relying on a significant recovery in industrial production to deliver full-year guidance. While industrial production forecasts have been revised lower, Patel said Spirax’s planning assumptions had already reflected a cautious outlook.
“Our growth is linked to IP, but it is not reliant on IP,” Patel said, referring to industrial production. He cited the group’s broad market exposure, direct sales-engineer model and focus on process optimization, healthcare, technology and electrification as factors supporting growth.
About 40% of group sales are in sectors management characterized as high growth, while the remaining 60% are in sectors with solid growth potential where the company is seeking to gain market share.
Cash flow, investment and margin ambitions
Adjusted cash from operations totaled £92 million, resulting in cash conversion of 54%. Burdett said first-half cash conversion is typically lower because of seasonality, but was also affected by deliberate inventory builds intended to mitigate potential supply-chain disruption related to the Middle East conflict.
The company continues to expect full-year cash conversion of about 90% and anticipates reducing inventory levels during the second half. Capital expenditure was about 3% of sales in the first half, and management now expects full-year capital expenditure at the lower end of its 4% to 5% of sales guidance range.
Net debt stood at £618 million at the half-year point, equivalent to 1.6 times EBITDA. While that was temporarily above Spirax’s target leverage range of 1 to 1.5 times, Burdett said the company expects to return within the range by year-end.
The company reiterated its medium-term target for group operating margin of 22% to 23%. Management expects much of the remaining progress to come from ETS and Watson-Marlow, while STS is targeted to achieve a 23.5% margin over the medium term.
Patel said bolt-on acquisitions remain part of the company’s capital-allocation approach, though management would remain disciplined on valuations. Burdett added that share repurchases could be considered if leverage reaches the lower end of the target range and attractive organic or acquisition opportunities are unavailable.
About Spirax-Sarco Engineering (LON:SPX)
Spirax Group is positioned to play a critical role in enabling the industrial transition to net zero, aligned to our Purpose to create sustainable value for all our stakeholders as we engineer a more efficient, safer and sustainable world. We put solving customers’ problems at the heart of our total solutions approach. Our global thermal energy and fluid technology solutions improve operating efficiency and safety in our customers’ critical industrial processes. Our new-to-world decarbonisation* solutions will use our proprietary technologies to electrify boilers for the raising of steam, as well as the electrification of other critical industrial process heating applications.
