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Annual Report 2017 Engineering opportunities

A year of opportunity

Download Chairman's Statement

“The events of 2017 demonstrate that we are not content to let external circumstances dictate Group performance and outcomes, but are actively engaged in engineering opportunities for sustainable growth.”

Bill Whiteley, Chairman

Our performance by segment

Download Group Chief Executive’s Review of Operations

“The Group delivered record revenue and operating profits, achieved through a combination of good organic growth, accretive acquisitions and favourable currency movements.”

Nicholas Anderson, Group Chief Executive

Spirax-Sarco Engineering plc

 
Spirax-Sarco Engineering plc is a multi-national industrial engineering Group with expertise in steam, electrical thermal energy solutions, fluid path technologies and peristaltic pumping.
Group revenue
£998.7m
Group adjusted operating profit
£235.5m

Click on a segment of the pie chart for more information.

Implementing our strategy for growth

Download Group Chief Executive's Statement

“Notable progress was made in the implementation of our strategic priorities, which was a significant contributing factor to the good financial results and strong organic growth achieved during the year.”

Nicholas Anderson, Group Chief Executive

Our strategy Engineering opportunities

As we implement our strategy we increase the effectiveness of our direct sales organisation, leverage our strength in key sectors, identify and take advantage of attractive opportunities, expand our addressable markets and align and direct our resources more effectively to improve business performance.

Our strategic objective: To deliver self-generated growth that outperforms our markets

Our strategic focus: Doing better what we already do well

Our six strategic themes:

1

Increase direct sales effectiveness through sector focus

As we sectorise our sales force around key industries, and align our products and services in support of this, we increase our ability to self-generate growth and provide value to customers.

During 2016 and 2017, Spirax Sarco Korea undertook a programme to increase the sectorisation of its direct sales force. Until recently, the company’s sales force was divided into two teams: Project Sales and End-User Sales, with some sector specialists in each team. Four new sales departments have now been created to align sales engineers with key industries:

Team 1 – Food & Beverage, Healthcare and General Industries;

Team 2 – Electric and Electronics;

Team 3 – Oil & Gas and Chemicals; and

Team 4 – Buildings and OEMs.

By the end of the year, 40% of sales and service engineers were aligned to an industry sector.

Maintaining customer service throughout the period of change was essential and the process required detailed planning prior to implementation. To ensure a smooth transition, industry sales and market size were analysed, industrial distribution was mapped, individual and collective industry knowledge and application expertise were reviewed, as were relationships with key accounts and customers. Extensive training has been delivered to ensure maximum efficacy of the new sales teams.

Spirax Sarco Korea is already seeing the benefits of these changes with increased sales efficiency and revenue generated from key industries.

2

Develop the knowledge and skills of our expert sales and service teams

The knowledge of our sales and service engineers is a key differentiator. We invest extensively in the professional development of our people, building a level of expertise that is unrivalled by our competitors.

Recruiting talented young engineers and developing their knowledge, skills and expertise is essential for the on-going success of the Group. In 2013 we developed an award winning graduate programme in our UK Spirax Sarco Steam Specialties company, which has attracted many highly talented engineers. Building on the success of that programme, in 2017 we launched a Group Global Graduate Development Programme, to increase the number of placements that we can offer, facilitate inter-company movement and widen the range of opportunities and experiences available to programme participants.

We are recruiting high-calibre graduates, primarily with a STEM (Science, Technology, Engineering and Mathematics) background, to join a two year rotational programme. Each graduate will experience four six-month placements, tailored to their individual interests and designed to provide a broad range of business experience across functions such as Product Development, Manufacturing, Sales, Business Development, Marketing, or Health, Safety & the Environment. One of the four placements will be held in an overseas operating company, ensuring first-hand experience of the multi-national nature of the Group. 16 graduates joined the programme in 2017, in the USA, Mexico, Argentina, Italy, Germany, China and the UK.

Through investing in a Global Graduate Programme, we are adopting a co-ordinated approach to replenishing our pipeline of talent.

3

Broaden our global presence

Our strong global infrastructure enables us to rapidly branch into neighbouring markets or leverage our existing infrastructure to pioneer the introduction of our businesses and technologies into new markets.

In January 2017, Watson-Marlow Fluid Technology Group began trading via a newly established sales company in Indonesia, having previously served the country through distributors. The move to direct selling brings a better focus to this growing market, increases the number of customers that can be served and conveys the company’s expertise and advanced technologies into a previously untapped market.

Prior to commencing trading, during 2016 Watson-Marlow intensively trained a local sales force. Training took place within the region, supported by Watson-Marlow’s global training programme. Having sector specialist, expert engineers who understand customers’ applications is central to Watson-Marlow’s customer value proposition and is crucial for the successful transition from distributor to direct sales.

During 2017, the new company primarily focused on two core markets: the Pharmaceutical & Biotechnology and Food & Beverage industries, and sales have exceeded expectations. The new operation is led by General Manager Rahmi Hidayati who, prior to joining Watson-Marlow, had over 14 years of experience working in the Biopharmaceutical industry. Rahmi’s in-depth understanding of the Biopharmaceutical market has had a significant impact on the company’s ability to quickly establish a foothold in this important industry.

4

Leverage our R&D investments

We leverage R&D investments to meet changing customer requirements, improve our offering, respond to market trends, expand our addressable market and maintain our market-leading position in each of our business niches.

Chromalox is a highly innovative company with an active product pipeline and a vitality index of 15%. Amongst several new products launched in 2017 was the CCX Cast Block Heater, which allows Chromalox to be more competitive in the Power Generation and Oil & Gas markets, particularly in Europe and Russia.

The unique construction of the Chromalox CCX heater – which utilises an immersion heater and coiled tubing set in an aluminium casting – allows for the indirect heating of fluids or gases up to pressures of 3,500 psi (241bar), with an option for up to 7,500 psi (517 bar), at a process temperature of 200°C. Chromalox CCX heaters are suited to a variety of industrial process applications, including seal gas heating and condensation prevention for turbines, fuel oil pre-heating, water pre-heating, steam superheating, and air, CO2 and nitrogen heating.

The CCX heater, part of the XtremeDuty™ platform due to its ability to handle high pressures, has ASME (American Society of Mechanical Engineers) and PED (EU Pressure Equipment Directive) pressure certification; marine grade casting, making it suitable for salt-laden environments such as offshore platforms; an explosion-proof terminal enclosure (junction box); and is IECEx (International Trade of Electrical Equipment used in Explosive Atmospheres) and ATEX (EU equipment directive) rated, meaning that it can be safely used in hazardous environments.

5

Optimise supply chain effectiveness

We operate a regional manufacturing strategy and focus on increasing supply chain agility and compressing lead times to enable greater responsiveness, reduce costs and improve customer service.

During 2017, we invested £1.4 million to develop a new 1,500m² distribution centre in Singapore to serve our Steam Specialties division’s sales companies throughout the Asia Pacific region and an accompanying 1,800m² office space to house our Singapore sales company, South East Asia headquarters, Asia Pacific divisional headquarters and training facilities.

Historically, sales companies across Asia Pacific have sourced core stock directly from our regional manufacturing centre in China and supplementary stock from our manufacturing sites in Europe or the Americas, leading to a complex supply chain and limited visibility of regional product availability.

The new facility in Singapore, which opened in September 2017, will significantly increase supply chain efficiency. The consolidation of demand will increase the range of products offered in the region, without the need for sales companies to increase stock, and is expected to reduce air freight in the region by around 10%. The installation of a regional inventory management system will improve regional stock visibility, shorten lead times and reduce stock replenishment time by an average of 13 days. Cumulatively, these benefits will significantly improve customer service throughout the region.

6

Operate sustainably and help improve our customers’ sustainability

In a resource constrained and competitive world, sustainability makes good business sense. As we focus on improving our own operational sustainability and deliver innovative solutions that improve the sustainability of our customers’ operations, we create value and drive growth.

As part of our goal to improve the sustainability of our operations and reduce our environmental impacts, in June 2017 we were pleased to attain “zero waste to landfill” at our Cheltenham-based manufacturing site and Group headquarters, which we intend to maintain from this point forward.

To achieve this milestone we worked with our waste management providers to ensure that they proactively segregate, re-use and recycle waste. For example, all food waste is sent to an anaerobic digestion facility and is used to generate electricity, while a wide range of plastics, metals, papers and cardboard are recycled. Any general waste that cannot be recycled, which would historically have been sent to landfill, is now used to generate energy.

In addition, we have worked to improve waste management internally, increasing on-site segregation of waste streams to facilitate ease of off-site processing. We have developed an internal educational campaign for 2018 to raise awareness amongst our employees of the importance of waste segregation, describe what happens to the waste we produce, and highlight the business and environmental benefits of good waste management.

As a result of the actions undertaken in 2017, we will prevent approximately 35 tonnes of waste being sent to landfill annually.

Acquisitions in 2017 The perfect fit

What do these acquisitions bring to the Group?

During 2017, a very rare opportunity arose to acquire two outstanding businesses: Gestra and Chromalox.

Gestra is highly complementary to the Spirax Sarco Steam Specialties division and will enhance the implementation of Spirax Sarco’s strategy for growth, as a result of its well-developed capabilities in a wide range of industries and applications. Gestra brings market-leading boiler controls to our product portfolio.

Chromalox is closely related to the Spirax Sarco Steam Specialties division in delivering thermal energy management solutions to customers, with the decision between using steam or electricity as a heating medium being driven by application needs or customer circumstances. Chromalox expands our total addressable market by over £2 billion.

Steam system specialist and technology leader in advanced industrial boiler controls

Headquartered in Bremen, Germany

€186 million acquisition, May 2017

Increases the Steam Specialties division’s market share

Specialist provider of electrical products, systems and solutions for industrial process heating and temperature management

Headquartered in Pittsburgh, USA

US$415 million acquisition, July 2017

Expands our addressable market by £2.4bn

Engineering a sustainable future

Excellence Engineering for excellence
Responsible Engineering the responsible way
Planet Engineering for our planet
Sustainable Engineering sustainable solutions
Futures Engineering better futures

The markets we serve

We serve a very wide range of industries and have a great diversity of end markets and customers.

Steam is used for blanching, cooking, baking, packaging, cleaning and sterilising. Electric heating elements are used in commercial food equipment. Pumps are used to meter ingredients, deliver food to process lines and handle process waste. Food
Steam is essential for brewing and distilling processes. It is used to protect product quality and flavour, and ensure compliance with industry standards. Pumps are used to transfer fruit, juice, concentrates, yeast and other additives. Beverage
Electrical heating products increase fluid viscosity, deliver freeze protection and help separate natural gas, crude oil and water during extraction. Our steam products enable optimum steam system performance and reduce energy use during oil and gas production. Oil
Steam and electricity are widely used as an energy source in chemical production and product processing, while our pumps are used to safely and accurately transfer and dose critical chemical components. Chemical
Clean steam reduces the risk of product and process contamination; electrical heating is used in a wide range of process heating applications; our peristaltic pumps, valves and single-use components enable precise flow control and fluid isolation. Pharmaceutical
Original Equipment Manufacturers (OEMs) are companies that build and supply machines for use in industry. Our activities with OEMs vary from simple product supply to advising on machine performance improvements and process plant design. Machinery
Steam is used in hospitals and clinics for space heating, hot water production, humidification and sterilisation. Pumps and associated equipment are used in the manufacture of products for the Healthcare industry. Healthcare
Steam is used to provide space heating, humidification and hot water in public and private buildings, while our electrical products are used for hot water and heat generation, snow melting, gutter and roof de-icing, and frost-heave prevention. Buildings
Peristaltic pumps are used to dose chemicals during water treatment processes and to transfer viscous and abrasive slurries. Electrical heating solutions provide freeze protection, temperature maintenance and space heating in water treatment plants. Water
Our steam, electric and pump products facilitate the accurate control of critical processes, such as washing, bleaching, dyeing, drying and finishing, in the manufacture of paper and a wide range of domestic and industrial tissues. Paper
Metal Processing Peristaltic pumps reduce water, energy and chemical use and increase productivity while moving and processing abrasive ores and slurries. Electrical heating is used for temperature maintenance and space heating for workers. Mining
Electrical heat technologies are widely used to optimise power generation. Steam turbines transfer chemical energy in fuel into electrical energy and steam is used to distribute and re-use waste heat formed during the power generation process. Power-generation

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