Welcome to our 2021 results call. I'm Nicholas Anderson, Group Chief Executive, and I'm joined here today by our CFO, Nimesh Patel. Regarding today's presentation, I will start by sharing the 2021 highlights, and then Nimesh will take you through the financial performance. Later, I will return to cover the operations in 2021 and our outlook for 2022. To finalize, we'll be happy to take questions from the analysts who have joined us today.
Now, before we get started into today's presentation, I'd like to update you on our position regarding the tragic events unfolding in Ukraine over the past two weeks. We're all shocked and appalled by these tragic events and strongly condemn the Russian authorities for their actions.
Our concerns and priorities are for the safety and wellbeing of all our employees across the region. We remain in constant contact with all our Ukrainian colleagues and continue supporting them and their families, including those that chose to seek safety outside their country.
In response to the further escalation of the conflict, as well as the tragic consequences for the people and the economy of Ukraine, we have suspended all trading with Russia. This means all group companies will no longer trade with or within Russia. We will continue to support our 70 Russian colleagues by paying their salaries for a period of time. Our business, just for context, our business in the region represented close to 1% of group revenues in 2021.
Okay, now moving to slide three and getting started on the presentation. The outstanding efforts and contributions of all our employees worldwide were of pivotal importance to deliver outstanding outcomes in 2021 to all our stakeholders in support of our purpose. I am very proud of our colleagues and very grateful for their engagement and commitment. The health, safety, and well-being of all our colleagues remained our highest priority in 2021.
As we continuously work to strengthen the Group's health and safety culture and performance, we reduced the number of lost time accidents by 55% to the lowest level on record, and achieved no lost time accidents in 5 of the 12 months of last year. Across our three businesses, we have been implementing sector-specific growth programs to generate demand, including the launch of new solutions.
We also expanded our direct sales organization, recruiting almost 200 new sales and service engineers to support our global growth. In June, Steam Specialties launched its refreshed business strategy, internally branded Customer First Squared, completing a trio of business strategy refreshes commenced in 2020. During the year, we also refreshed our sustainability strategy and launched our groupwide inclusion plan. We also made good progress on our digital strategy, including the acquisition of Cotopaxi.
Our colleagues successfully managed the increasing disruption of the global supply chain through strategic sourcing and working closely with our supply chain partners, while at the same time mitigating the rising cost inflation through our proactive price management processes. We accelerated revenue investments in product development, our direct sales force, digital, and sustainability initiatives.
In addition to these revenue investments, we also made record capital investments, including accelerating the expansion of Watson-Marlow's BioPure facility, adding a third extrusion line in pharma, and continuing to modernize our manufacturing equipment as part of our Future Factory initiatives.
Moving now to slide four. We achieved record revenues in 2021 with organic growth 13% above pre-pandemic levels. Growth was driven by our focused strategy execution, a strong recovery of global industrial production, and exceptional demand from our pharmaceutical and biotechnology customers. We also achieved an exceptional 25.3% profit margin, mostly driven by strong sales growth, with the benefit of operational gearing partly offset by the ramp-up of revenue investments, which mostly impacted the second half of the year.
All three businesses ended the year with record order books as a result of strong demand growth, combined with some global supply chain disruptions. The Steam Specialties business experienced strong sales growth ahead of IP, with growth in demand outstripping sales and leading to an expansion of the order book carried into 2022.
Demand growth in Electric Thermal Solutions business was very strong, even higher than Steam Specialties. As demand growth was significantly ahead of sales, the business ended the year with a record order book. Watson-Marlow delivered record sales supported by exceptional demand from the biotechnology and pharmaceutical sector, as well as strong demand from Watson-Marlow's process industries.
This exceptional demand outstripped our capacity in some plants, leading to the largest order book expansion of any of our businesses. A key strength of our business remains our ability to generate cash. We reduced our net debt to 0.35 times EBITDA, despite our record capital investment of GBP 64 million.
On slide five, we have set out some of our achievements during a year of significant progress in ESG, a key priority for our company. Central to this progress was the launch in June of our refreshed sustainability strategy, internally branded One Planet: Engineering with Purpose, which sets out both our commitments to sustainability and our roadmap to a more sustainable future.
Within the strategy, we have set ourselves some stretching targets to deliver climate and environmental action, customer sustainability, resilient supply chains, and stronger community engagements. Importantly, we brought forward to 2030 our target of achieving net zero in Scope 1 and 2 greenhouse gas emissions, and established a target of reaching net zero in Scope 3 emissions by 2050. We also signed up to two important initiatives, Race to Zero and Business Ambition for 1.5°C, to guide our activities in line with climate science.
To help meet our 2025 biodiversity offset target, we partnered with the World Land Trust to offset 1 times our global footprint in 2021 by contributing to a new nature reserve in Argentina. Beyond sustainability, we remain committed to attracting, developing, and retaining the best talent in our group.
I am very pleased to report that in 2021, we made further progress advancing our gender balance, with women now accounting for 1 in 3 of our senior leadership roles. We also achieved a record 91% response rate in our third biannual employee engagement survey, with engagement scores up on previous years and above global benchmarks.
I am very proud to announce that we launched our group inclusion plan, internally branded Everyone is Included, with a set of 10 inclusion commitments established as minimum standards for all our employees globally. On that note, I'll now hand you over to Nimesh.
Thanks, Nick, and good morning to all of you joining us. I'm pleased to be presenting a strong set of financial results for 2021, and in particular, to be doing so with so many of you here in person today. Moving to slide seven. As always, the numbers we'll be discussing today are the adjusted results. Details of the adjusting items are given in the appendix.
Sales were 13% higher, reflecting an organic increase of 17%, partly offset by a currency headwind of 3%. Operating profit was 26% higher or 31% on an organic basis, reflecting a currency headwind of 4%. Our operating profit margin improved by 260 basis points to a record 25.3%, and on an organic basis, the margin increased by 280 basis points. This margin performance reflects the impact of our strong sales growth and the benefits of operational gearing, partially offset by the impact of revenue investments which we made during 2021.
Net finance expense decreased due to lower average net debt, and our effective tax rate decreased to 25%, a drop of 240 basis points, as we benefited from innovation tax reliefs. These included retrospective first-time claims for prior years, which delivered a one-off benefit in 2021. We therefore expect the tax rate in 2022 to be higher at 26%.
Adjusted EPS of 338.9 pence was 32% higher above the increase in operating profit due to the reduced tax rate. Return on capital employed improved to 59% and return on invested capital to 23%, both excluding the impact of IFRS 16 as a result of our increased operating profit and despite our record capital investment.
Moving to the sales bridge on slide eight. Currency had an adverse impact of GBP 41 million on sales, which is over 3%. Since the end of last year, sterling has strengthened, particularly against the euro. If February month-end rates were maintained for the rest of the year, we would expect to see a headwind of less than 1% for the full year.
During 2021, our colleagues across all three businesses rose to the challenges of significantly ramping up capacity while managing COVID-19 related absences and the reduced availability of components. Thanks to their determination and focus on high quality execution, we were able to deliver a 17% organic increase in group sales. The organic increase in Steam Specialties sales was 12.3% with strong growth across all regions, supported by a recovery in global industrial production.
Sales are now well above pre-pandemic levels, with Steam Specialties sales having declined only 5.5% in 2020. ETS sales grew 6.6% organically, although demand growth was even higher. Shipments were impacted by disruptions in the global supply chain and delays in the delivery of operational improvements in two of Chromalox's manufacturing facilities. Nick will expand on this further.
An organic increase in Watson-Marlow sales of 32% was driven by exceptional COVID-19 related demand from our pharmaceutical and biotechnology customers, as well as sales to process industry sectors growing at a rate which was well ahead of industrial production. Sales would have been higher were it not for global supply chain disruptions. Instead, with demand exceeding sales, we saw a significant expansion in our order book. With strong sales growth in both 2020 and 2021, Watson-Marlow now accounts for 30% of group sales.
The next bridge on slide nine highlights the movement in adjusted operating profit for the full year. Exchange movements reduced profits by GBP 11 million as a result of both translational and transactional impacts. If February's month-end rates were maintained for the rest of the year, we would expect to see a headwind of less than 1% for the full year.
During 2021, Steam Specialties profit grew 27% organically above the growth in sales, reflecting the benefits of operational gearing and despite the increased investments in sales-related headcount, new product development, and in our sustainability and digital initiatives, all of which support our future growth.
ETS profit increased 3% organically, which was lower than expected due to our lower sales growth and continued investment supporting our operational improvements and new product development initiatives. Watson-Marlow's strong sales performance supported organic profit growth of 46%.
Similarly to Steam Specialties, revenue investments increased during 2021, which also supported an increase in manufacturing capacity. The increase in central expenses also includes the impact of increased revenue investments, as well as the establishment of an educational fund to remove barriers to education and improve diversity in engineering with an initial donation of GBP 1 million. The total organic increase in group operating profit was 31%.
On slide 10. As we've done previously, we have set out our adjusted operating profit margin, excluding the two large company acquisitions of Gestra and Chromalox, which were made in 2017, and both of which had mid-teen margins. Our margin, excluding these acquisitions, has increased to over 27%, having been close to 25% in each of the previous three years.
The group margin increased to a record 25.3%, consistent with our guidance that the second half margin would be similar to the first half, despite higher sales as revenue investments made during 2021 were more heavily weighted to the second half of the year. The phasing of these revenue investments is reflected in the drop-through of the increase in organic sales to profit, which reduced from a very high 51% in the first half to a more typical 34% in the second half.
If we had incurred the full year costs of our revenue investments, we estimate that the group's 2021 adjusted operating profit margin would have been lower by less than 200 basis points. During 2021, we also saw material cost inflation across various input commodities and components. We were able to mitigate these impacts on our margins through our well-established and proactive approach to price management in all three of our businesses.
In Steam Specialties business, the adjusted operating profit margin increased by 290 basis points on an organic basis to 25.0%. In ETS, the margin was down 60 basis points organically to 13.2%. In Watson-Marlow, the margin increased by 340 basis points on an organic basis to 36.7%.
Turning now to cash flow on slide 11. Cash generation remained strong with operating profit to operating cash conversion of 82%. While down on last year's 102%, this was principally driven by an increase in capital expenditure and working capital to support our sales growth. Due to our strong cash generation, we ended the year with net debt of GBP 131 million. Net debt equated to 0.35x EBITDA, down from 0.7x last year.
Our ratio of working capital to sales reduced during 2021 to under 21%, reflecting our enhanced stock management practices and maintaining the improvements in our receivables collection practices built up during 2020.
Capital expenditure increased to over GBP 64 million, a record level as we continue to invest in strategically important programs, such as expanding Watson-Marlow's manufacturing capacity at multiple sites, including BioPure in the U.K. and commencing construction of our new facility in the U.S., which will continue into 2022.
In Steam Specialties, we're continuing to invest in a new ERP system, as well as our factory modernization initiative. In ETS, we completed construction of our new facility for Thermocoax in France. We are targeting higher capital expenditure in 2022 to be between 6% and 7% of sales, with the increase driven mostly by the ongoing investment to support Watson-Marlow's future growth.
With this step up in capital expenditure and working capital continuing to increase in line with revenue, we anticipate that cash conversion in 2022 will be lower than our historical levels of around 90%.
Slide 12 details our 10-year dividend history, showing compound annual growth rate of 11% over the period. We have a record of 54 years of dividend progress, during which time the compound annual growth has also been 11%, while maintaining prudent levels of dividend cover of between 2 and 2.5 times.
In respect to 2021, we are proposing a final dividend of GBP 0.975, reflecting our strong growth, high level of cash generation, and confidence in the outlook for our group. This brings the total dividend for the year to GBP 1.36, an increase of 15%, and equates to dividend cover of 2.5 times, up from 2.2 times last year. I'll now hand you over to Nick to take you through the operations and outlook.
Thank you, Nimesh. On slide 14, we have once again shared the sequential evolution by quarter of global industrial production output, which we refer to as IP. As you all know, IP is the best predictor of our markets. The blue line on this graph represents Oxford Economics forecast in July 2021, which we shared with you at our interim results announcements last August.
The red line represents their forecast six months later in January of this year. The green line is their latest forecast published on February 23, the day before Russia invaded Ukraine. The first point to note is the almost 1% lower level of IP output that occurred in the third quarter of 2021 compared to the more than 1% growth originally forecasted for Q3. This was caused by the onset of global supply chain disruptions, which reduced global industrial production forecast for the full years of 2021 and 2022.
Consequently, during the six-month period during July 2021 and January 2022, IP forecasts for 2022 were systematically downgraded from 5.0%- 4.1%. Now, over the last three months, IP forecasts for 2022 have ranged between 4.0% and 4.4%, reflecting the ongoing global supply chain disruptions, but not yet the unfolding geopolitical tensions. It is clearly therefore premature to make a firm IP predictions for 2022.
Nevertheless, our robust business model and disciplined execution of our strategies have underpinned the resilience of our performance throughout economic cycles. We remain confident in our ability to navigate the growing uncertainties ahead.
Moving on to slide 15, we start the review of operations with the Steam Specialties business. Organic sales increased 12.3% in 2021, driving 27% operating profit growth. Demand was higher than sales, resulting in an expansion of the order book carried forward into 2022. The Steam Specialties business accounted for 56% of group revenues in 2021 and experienced strong growth in all regions.
Supported by a recovery of IP and customers as customers resumed maintenance activity and capital expansion projects that were postponed in 2020. China delivered an excellent 28% organic sales growth, while Latin America was the fastest growing region globally. North America and EMEA also delivered double-digit growth. Following its acquisition in May 2017, Gestra is now fully integrated into Steam Specialties.
Since 2019, Gestra's sales growth performance has remained in line with the Spirax Sarco brand. With adjusted operating profit margins reaching the 20% threshold. In June 2021, Steam Specialties launched its refresh strategy, internally branded Customer First Squared. This refresh strategy builds on the Customer First strategy that has been in place since 2014 and expands on key areas such as sustainability, inclusion, and digital.
In January 2022, Steam Specialties completed the acquisition of Cotopaxi Limited, a digitally enabled global energy consulting and optimization specialist that will accelerate the implementation of our digital strategy by enhancing our ability to connect to customer systems and analyze their data. Steam Specialties adjusted operating profit margin expanded 290 basis points organically. This reflects strong sales growth and the benefit of operational gearing.
Revenue investments were ramped up during 2021 and more heavily weighted to the second half of the year. As a result, the 2021 adjusted operating profit does not reflect the full year impact of these investments, which we estimated would reduce the 2021 operating profit margin by around 200 basis points. We currently anticipate that Steam Specialties organic sales will continue to grow ahead of global IP forecasts in 2022, with the adjusted operating profit margin remaining slightly above pre-pandemic levels.
Moving to Electric Thermal Solutions business or ETS as we call it on slide 16. ETS experienced strong overall demand growth in 2022, ahead of Steam Specialties. After we adjust for the record $14 million order we received from the US Navy in late 2020. ETS sales grew 7% on an organic basis, while their organic operating profit grew 3%.
This strong demand growth, driven in part by our customers' focus on decarbonization of their industrial processes, as well as constraints driven by external and internal supply chain issues, resulted in a record order book carried forward into 2022. We also accelerated the synergy and cross-selling opportunities between our Steam Specialties and ETS businesses, which is exposing new and exciting opportunities for both businesses.
Chromalox Americas, which represented over 75% of Chromalox sales, experienced strong demand and sales growth and reached an adjusted operating profit margin of 20%, reflecting the scale and qualities of the business in that region. Thermocoax sales, which grew in 2020 despite the effects of the pandemic, continued to benefit from strong demand growth in the semiconductor sector and delivered further margin growth in 2021.
We again increased our revenue investments in ETS, particularly in sustainability, new product development and capacity expansions. These investments combined with delayed delivery of operational performance improvements in two of Chromalox's manufacturing facilities, resulted in operating margin reducing 60 basis points to 13.2%.
We anticipate this record order book will drive strong sales growth in 2022 at an organic growth rate above Steam Specialties, while the resulting operational gearing will increase the operating profit margin.
Now, moving to slide 17. Watson-Marlow delivered outstanding results in 2021, with 32% organic sales growth and 46% organic profit growth. Exceptional demand from the pharmaceutical and biotechnology sector resulted in the largest order book expansion of any of our three businesses. Sales to the biopharm sector grew 43%, with the sector now accounting for almost 60% of Watson-Marlow's total sales.
Sales to the process industry sector also grew strongly above IP. During 2021, we ramped up our activities to meet this record demand, despite disruptions, global supply chains and shortages of some raw materials and key components. We successfully increased shipments from our BioPure and pharma facilities in the U.K. by over 50% and 35% respectively.
We accelerated capital investments to expand our global manufacturing capacity, increasing the output at BioPure and pharma facilities, and commenced the build of our state-of-the-art greenfield facility in the U.S.A. We significantly increased our revenue investments to support future revenue growth with an expansion of our sales-related headcount, new product development and sustainability initiatives.
Watson-Marlow achieved a 36.7% record margin, up 340 basis points on an organic basis, reflecting the operational gearing from exceptional sales growth, but not yet the full year impact of revenue investments. For 2022, we currently anticipate strong sales growth well above global IP, with the adjusted operating profit margin remaining above 2020 levels.
Now on slide 18, I would like to return briefly to the subjects of sustainability and inclusion and diversity, which remain two of our key strategic opportunity priorities, as well as very close to my own heart. I talked in my introduction about the strategic targets and the roadmap that we've established to drive the implementation of our sustainability and our inclusion strategies, such as 16% reduction of our greenhouse gas emissions compared to the 2019 baseline.
Under our inclusion plan, Everyone is Included. We have committed to provide support to all new parents and caregivers, anyone suffering from pregnancy loss or domestic abuse, as well as for the LGBTQ+ communities and many other more initiatives. In the interest of time, however, I will not expand on these matters now, but I encourage you to read more about them at a later moment, and please feel free to come back to us with any of your questions.
On slide 19, we have again added three new customer case studies that illustrate how our three businesses improve the performance of our customers, help them achieve their sustainability targets by reducing energy expenditure and waste, and contribute to more efficient, safer, and sustainable world. These case studies are in the appendix 1 of this presentation, and I would again encourage you to please read more about them at a later moment.
Moving now on to our final slide of summary and outlook, which is number 20 in the pack. Group sales were up 13%, which represents 17% organic growth. Organic sales growth in 2021 more than offset the small decline experienced in 2020, and has driven group sales 13% above pre-pandemic levels, demonstrating the resilience of our business model and strategies, as well as the quality execution of our teams.
Adjusted operating profit grew 26% to GBP 340 million. After accounting for a currency headwind marginally above 4%, adjusted operating profit grew 31% on an organic basis. The adjusted operating profit margin was up 260 basis points to a record 25.3%. Margin expansion was driven by strong growth in sales, with the benefit of operational gearing partially offset by the ramp-up of revenue investments, which mostly impacted the second half of the year.
We invested a record GBP 64 million of capital investments, as well as record revenue investments to support future organic growth, sustainability initiatives, and capacity expansion. All of these investments continue to strengthen the implementation of our strategy, which underpins our future growth and our resilience through the economic cycles.
We currently anticipate that our record order books will underpin strong sales growth in 2022 well above global industrial production growth. While the full year impact of our revenue investments will reduce the 2022 operating profit growth rate, we currently anticipate the adjusted operating profit margin in 2022 will remain comfortably above pre-pandemic levels.
That concludes today's presentation. We will now be pleased to take questions from the analysts in the room and those who have joined us remotely. I would request, however, that before asking your question, you please state your name and that of your organization for the benefit of other listeners on this call. Andy.
Hi, it's Andy Wilson from JPMorgan. I've got three, if I maybe take them one by one. I'm interested in energy prices. Clearly, it would seem fairly obvious that that would be a beneficiary for you from the perspective of customers demanding your products. I guess what I'm actually interested in is how quickly do you see that come through in terms of higher demand. If you look at previous times where we've had high energy prices, how much of a lag to that. How much difference does it genuinely make, I guess. Broad question.
Coming through what? In our costs or
Sorry, no, in terms of high demand from customers because I presume the payback shortens, the reward for doing it increases, and therefore are expected to step up. I'm interested actually whether you see that and if there is a lag to that coming through.
We'll take these. We'll answer the questions one by one then. Yes, energy prices do have an impact on our business. I asked for clarification because as you know, we've got very robust internal price management processes, aligned with you know, strict management and monitoring of our internal cost inflation. Therefore, we are comfortable that we can mitigate the impact on margins or we can neutralize that effect and as we have done so for so many years.
The magnitude of inflation may be higher, but I take the opportunity to reassure you all that we are confident that we can continue to manage that and not have any substantial impact on our margins going forward. In terms of stimulation of demand or generation of further demand, it is a good point. It is a very good point because as we have seen, we're not inelastic to movements in energy prices, okay?
We've been helping our customers save energy forever, more than 130 years, really. Inevitably, as energy prices do go up, the incentive for customers to reduce their energy consumption to optimize or improve their energy efficiency increases. That is inevitably a driver of the business, a vector for growth for us. Yeah, how quickly does it come through?
Yeah, these efficiency improvement projects are really identified by our sales engineers walking the plants and, you know, looking for those bespoke opportunities plant by plant, application by application. It does take a few months, I would say, for those to be identified, et cetera. We've got a long track record of doing this anyway.
It will be one of the many strings in our bow, one of the many vectors of growth that we foresee going forward. Difficult to quantify how much individually, but it definitely will just strengthen that process and hopefully and surely will be one of the mitigating factors of any decline in global IP that we might see from current circumstances.
Perfect. Second one, I wanted to ask just around the investments. Obviously, there's been a huge step up and going through the release, it's obviously in a lot of different areas. I guess I'm interested mainly on the CapEx side. Are you sort of where you feel you need to be now, or you'll be where you need to be in the next sort of 12-18 months when the Watson-Marlow facility in the U.S., for example, completes?
Or do we expect this sort of higher level of CapEx to be a consistent number going forward? I appreciate it's a little bit of a kind of forecast on demand there, but from what you can see, at least at the moment, because obviously it has been a fairly meaningful step up.
Yeah. Thank you, Andy. Very good question. Look, I don't think you're ever where you need to be when you have a high level of organic growth and you anticipate sustaining that level. The challenge for all of us is always to stay ahead of that curve and be prepared to respond fast to additional growth in demand over and above what we are projecting. Actually, that's what helped us in 2021 and starting in 2020 when Watson-Marlow suddenly was hit with.
They always had a strong organic growth rate, as you all recall, averaging pre-pandemic a CAGR of about 10% per annum. When we suddenly got hit by this step up in demand, I mentioned here, for example, the BioPure facility was able to expand their output by 50%. Actually, they did that in 2020 also and in 2019. You've got to stay ahead. You've got to be investing always ahead of when you think so that you can respond to that wave of demand when it comes.
That's what's driving us. It's driving us also to distribute our manufacturing capabilities globally. Now that this global distribution to be closer to the customers and to be able to respond faster to win customers' requirements is well established in the case of the more mature steam business, but less so in Watson-Marlow.
That's why we're also expanding this site, which we decided to do before, and with approval, even before the pandemic and this exceptional demand started. That's why we, you know, we're ahead. I think you also want to keep modernizing your facilities. It's not just expanding, but you wanna make sure that the existing ones that you have are getting safer, more efficient and expanding capacity. It is a multi-pronged approach that will continue.
Nimesh has guided you to levels of investment, and we said that we will continue this year, for example, to see above average level of investment relative to sales, for example. We do anticipate doing that. Fortunately, we're a very cash generative business and low capital intensity business also. That allows us to do these investments. We don't hold back on making whatever is necessary investment to ensure that we'll continue to respond to any increased demand from our customers globally.
Final one, just on Watson-Marlow, and I guess it's, I sort of feel like we've had this conversation the last couple of results when we've seen the exceptional growth as you described it. You know, just kind of update and maybe reassure a little bit on there isn't gonna be a sort of falling off the cliff moment in Watson-Marlow given where we've got to.
Yeah, Andy, thank you very much. I know it's in some ways the question that everybody has on their mind, "This is great, but are we gonna fall off a cliff at some point?" Obviously, we, you know, our crystal ball is about as hazy as all of yours is. The best data that we have suggests that there isn't a cliff edge coming ahead of us. We've said this now, I must admit, it was, you know, bravely some said in the past.
The reason for that is our confidence, and I want to remind you of what we said in the past. The biopharm sector is a huge important sector for Watson-Marlow and has been for the last 20 years. That industry has been growing globally as an industry in double digits, somewhere in the range of, you know, 10, 12, 14% per annum consistently over the 20 years as the technology in the biotechnology really takes a bigger grasp of the whole pharmaceutical industry.
The Watson-Marlow products are absolutely ideally suited for those kind of processes. That's why we have all of this strong demand, and so we're very well positioned in there. That means that although the industry has been growing as a whole globally, say 12, 14% per annum, our sales to that industry had been growing before the pandemic anywhere between 17%-20%. Let's call it 20% underlying organic sales growth into the biopharm sector. That underlying growth rate is not going away.
There's nothing to suggest that the progressive development of new gene therapy drugs is gonna be reduced. If anything, the COVID situation actually demonstrated with the development of the fast and absolute record-breaking development of mRNA vaccines, for example, demonstrates how this technology, this biopharmaceutical technology, is ideally suited to respond to this situation.
The COVID demand became a wave over and above that underlying organic growth rate to the biopharm sector. As we keep pointing out, all the other process industries that Watson-Marlow supports have also continued to grow above, you know, strongly above inflation on a continuous basis. We don't see that going away either.
When you take that underlying growth that is still there, when you see that this biopharm wave actually is not gonna be so much of a wave, because if you go back now we're seeing not only the vaccines, but the boosters have become a norm and there's talk of that becoming a recurring event, that kind of thing.
We think that the fall off of the demand, specifically relative to biopharm, it will occur, but it's not gonna be a cliff edge. Underneath that, you've got that consistent growth of the underlying biopharm technology and the process industries. All of that gives us the confidence that, you know, while order intake year-over-year may diminish a bit because obviously you're off a very high point.
The underlying sales rate, you know, because of the order book, the way that translates into sales growth, we see that continuing at, you know, the levels we've talked about already. Okay. We'll come back to you. Andy, we'll do an alphabetical order.
Thank you, guys. It's Andrew Douglas from Jefferies. Three nice quick questions, please. Just follow up for Andy's question on energy prices. Am I right in thinking that your customers typically have more exposure to kind of gas price inflation than electricity? I.e., when gas prices go, then that's when you get your big kick in demand, I think. If you look historically, there's been a slightly bigger correlation there between U.S. growth.
Yes, the answer is correct. The main energy source for raising steam continues to be gas for now.
Okay.
Right? That is true. Yeah.
Secondly, just two questions on ETS. The margin in North America, very strong, 20%. Kind of by definition, it's not still great in Europe and elsewhere. Just wondering kind of what the update there is, please, and kind of what you're hopefully going to do about it over the next kind of couple of years. Feels like Europe's been a bit of a challenge for you for quite a while now.
Then last on ETS, from memory, 20% of the business was oil and gas when you bought it. I was just wondering, is that part of the order book growth that you've seen recently? Or has that kind of started to come through yet? Or is that still pent-up demand?
Thank you, Andy. Very good questions. Look, we knew when we acquired Chromalox, and we were very open and transparent about it, that Chromalox Europe was loss-making. It was something that was also subscale. We knew that was gonna be a challenge. We predicted the need to make some significant investments to get it to profitability. As we have been openly reporting to all of you, that's what we've been doing, and that's what we've been working strongly and we are making progress towards.
Now, inevitably, sometimes, despite all our efforts, progress isn't as quick as you would like. That's basically what we're reporting here again, that we're making progress. You know, in some areas. As you make progress in some areas, it exposes other areas that might not have been so visible or so apparent, and therefore you start addressing all of that. What I want to reassure you all is that, number one, the issues around the profitability of Chromalox in Europe is essentially driven by operational matters.
Therefore we know how to fix this, and we are working to fix all of those root causes. We are making progress. Okay? While it's not evident yet in the margins, because it inevitably is still loss-making, and as we said in the RNS, when you get a time to be able to read through it all, and you'll see that we've been open there also to say that, for example, the success and the actions that we've taken to expand capacity in the Europe, in the European really came through.
We ended 2020 with a limitation of shipments in the European operations. This year, we've unlocked those, and in 2021, actually, the shipments from that plant in France went up by almost 50%. We did manage to unlock the throughput. In fact, it has exposed other issues and therefore, actually the losses went up instead of going down.
Okay, it's still not profitable, and I emphasize the word still, and I emphasize that these are operational issues which we are addressing. It's nothing to detract from actually the qualities and the opportunities of the business going forward. Now, on the oil and gas element of your question, oil and gas has a larger weighting in ETS than it has for the other businesses. It's well, it's insignificant, nonexistent for Watson-Marlow, and it's less than that number.
I think from memory, you know, I might be wrong here, but from memory, I think it was less than 20% in ETS also in this 2022 year, okay. I think it's fair to say that the weighting of the oil and gas sector has diminished inside of Chromalox since when we bought it. Now don't quote me on that too soon. I'll have to go back and check my data. But I think it's not become a more important part for sure, okay?
That's because we are seeing really strong demand for the products, for the technologies from all other sectors. Specifically now, the most exciting part and really the biggest opportunity that I see for this business, for this group going forward is this strong demand for decarbonization of industrial processes.
As you said earlier, gas is still the main source of energy for raising steam, and every industrial process that you can mention uses steam in their industrial process to transfer energy into that industrial process to transform raw materials into products. Steam is still the most efficient way to transfer energy into an industrial process, transformation process, followed by electricity.
What we are seeing is not, you know, a pressure to de-steam. What we're seeing is the need to drive a replacement of the energy source. To go back a hundred years, it was coal, then it moved to oil. Today, it's primarily gas, all of which are obviously carbon-emitting sources of energy. The trend is to electrification.
That positions our group in an absolutely unique position of having the relationships, the commercial direct contact to a direct sales force with all the users of steam and all the manufacturers of industrial boilers to the steam specialist business. On the other hand, we've got the technology through Chromalox and ETS, particularly the Medium Voltage, patented Medium Voltage technology, which was one of the attractions that we saw when we acquired Chromalox five years ago.
We have the technology on the other side and the commercial relationships here, and I don't know of any other company in the world that is so ideally well-positioned to be able to capitalize on this strong, decarbonization trend. That really excites us, and we've got lots of exciting stuff that we've been testing and developing, and we think is gonna be another strong spring in our bow, for many years to come.
The recent oil price jump hasn't really driven increase in demand from the oil and gas sector yet. That's still to come. Is that fair or not?
This is a different thing, right? Demand from oil and gas sector would be driven by two factors irrespective of the business. Capital expansions of capacity, right? Obviously maintenance and that. It's less elastic at that point to changes in energy prices. I guess when you get higher energy prices, what it does is that they need to sweat their assets.
The customers need to sweat their assets even further because they're gonna get more for whatever output they can get, and that stimulates them to put a bit more money into small improvements to the processes. These are major industrial processes. It's not used to flex capacity, but it is easy to improve a bit of efficiencies and that kind of stuff and, you know, keep maintenance on that so they don't lose production. It does generate some extra demand, but it's not as elastic as you would say to the change of the price.
Could you pass on to Robert? Yeah.
Well, just while we're handing the microphone over, just two things. One, as a proportion of sales, significantly lower in oil and gas, than it was historically. The second thing is looking at the growth, more of it coming from decarbonization. Supporting the point.
Robert.
Yeah, morning. It's Robert Davies from Morgan Stanley. The first one was just following up on the Watson-Marlow comments, but the process part of the business. Just be interested, is it sort of your identified pool of customers that are adding those pumps into new applications? Are they kind of is it more that you're pushing to customers that had never bought that product before? I'd just be kind of interested what's driving the growth in the process part of the business and where is it strongest? Thank you.
Very good question. Thank you very much, Robert. Look, and I'm glad that we can talk a bit about process industries in Watson-Marlow because biopharm is so important and kind of overshadowed anything else. It's a real shame because Watson-Marlow is just a fantastic business all around. We do need to give their process industries a bit more visibility. Look, what has been driving the faster growth rates, organic growth rates of Watson-Marlow in these process industries have been one, geographic expansion.
As we take our products and technologies from Watson-Marlow, you know, leverage the global footprint that we have already through the steam business and continue to open up more and more direct sales offices of Watson-Marlow around the group. That's inevitably. Going further into other geographic expansions has been for the last 20 years or 30 years one of the drivers of faster growth of Watson-Marlow.
The most important one for the process industries is really the displacement of other types of pumping technologies by our peristaltic pumps, right? Through our own internal research and development, we have for the last 20 years continued to expand the envelope of pressure, flow rates, chemical compatibility so that you or stuff that you can be pumping. That has allowed us to displace other types of positive displacement pumps.
Our favorite example is the Qdos pump, which we developed specifically to displace the solenoid diaphragm pumps. Solenoid diaphragm pumps. You know, pump for pump, actually, our Qdos pump is more expensive. I... We're talking, just to put it into perspective, something that's, you know, a pump that costs less than GBP 2,000 or around GBP 2,000, okay? Obviously you've got a range of sizes, but we're not talking about massive capital investments.
That's what I'm trying to say. These pumps, you know, are a lot more efficient, a lot more energy-saving for the customers, higher precision, multiple benefits, and therefore, we're displacing other pumping technologies and really gaining share from other pumping technologies. That trend continues. That's, you know, a lot of the research and development funds in Watson-Marlow are going into that kind of the finding new applications and displacing other people. That's really an important one to call out. Thank you.
A partial follow-up on that, I guess, you obviously mentioned adding the extra line in pharma plus the new facility in Massachusetts. I'd just be interested, given the growth in that business over the last 10 years, has it changed the regional footprint? Do you need to add additional manufacturing capacity or sales offices in new locations now? Are you kind of getting to critical mass in any new regions?
Well, yes. I mean, the priority is the U.S. because the Americas today account for, just rounding it, around 40% of sales for Watson-Marlow across all of the Americas. Asia Pacific is around 20 or a bit less than 20. Just, you know, rough numbers. We can get you the precise numbers later. On that basis, the priority, I think it was 96% of our manufacturing footprint for Watson-Marlow is in Europe, U.K. and half a dozen European countries. That's why the priority is in the U.S. to rebalance that demand and supply equation within our footprint.
Of course, the next step, which we already got a project lined up, but we're holding back from starting because the priority is in the USA. Shortly afterwards, we'll be launching manufacturing capacity in China, right? That's gonna be coming. Again, we're looking at where our footprint of sales is, where we see the demand rates, and we're looking to accelerate the matching of those, of that, so that we can, as I said earlier, continue to support the growing demand of our customers.
Thank you. The final one's maybe a little bit unfair, but just in terms of the, I know you've put quite a lot in your last few slide decks around ESG. It was one of the things that you mentioned in terms of the incremental step up in 2021. Is there any way of giving us a breakdown in that 200 basis points of incremental investment?
How much is from new capacity or expanding the lines versus, I guess I'm trying to get a sense of have you costed the additional expenditure to meet all these new ESG targets? Do you have any idea of a five-year or a ten-year view of what the total cumulative cost to Spirax is gonna be?
Yes, of course, we have an idea, but I'm not gonna reveal it here. Okay? Good try anyway, right? Now, jokes aside, yes, of course, we have costed the more obvious ones. That is factored into our projections of margin progression, okay? Without getting into the specifics of how much for this or for how much for that. I think the important thing for you guys is that we haven't just made a grandiose statement and haven't thought through what the impact of that is to our business.
In fact, I would say not only from a capital investment point of view, but also from an operating cost point of view. Because as all of you will know, decarbonizing and this approach, so replacing a fossil fuel with electricity, for example, comes with a higher price tag. It varies around the world, but the cost of a kilowatt of energy coming from electricity is about five times the cost of that same kilowatt coming from gas.
Us and everybody else in the world, as we speak about decarbonizing, we have to realize that at the moment, it means your operating costs are gonna go up. Now, we've got a very clear picture of that. As I've said earlier, we've got very good internal, well-embedded and robustly managed cost management processes. We keep making sure that we protect our margins. But I'll be open and say, we know where we're gonna get to.
Can I tell you how much it's gonna cost us by the end of the day? No. I don't think anybody does. Because there's elements of technology that are still gonna be required. You know, there's so many variables. What we have done is we've made a very clear commitment, and we're very energized, and we are. Let me just remind you all, we've been working on environmental sustainability long before it became fashionable, okay?
This is embedded in our culture, this is embedded in our purpose, and we are absolutely resolute to want to be a leader in industrial ESG matters. We are clear on the path. We're setting ourselves very challenging targets and milestones, and we will be making the required investments and adjusting ourselves as we go ahead. It's difficult to quantify the full impact of this because there's a lot of unknowns in there.
Sure. No, of course. Thank you. Thank you very much.
Thank you very much. Sorry, we have Jonathan second, he's following. You've been putting your hand up.
Hi, everyone. It's Will Turner from Goldman Sachs. So I just wanna go back to kinda like Andrew's questions on ETS. Mainly because, you know, when you're comparing it to, you know, Steam Specialties and Watson-Marlow, which are all performing great, as they have been for many years, and it's still relatively new to the portfolio of businesses, what do you think it's really gonna take to improve the European operations?
'Cause it feels like just backing out the numbers or the commentary you've given for Thermocoax and the Americas business, they're performing okay, not maybe outstanding like the other two divisions, and that Europe's being the drag. So like where are we in terms of that kind of restructuring? Does it require something a little bit more kind of significant, like maybe a new facility?
Just like looking at the map that you show of its operations, it's only really operational in France and Germany and Spain from the looks of things. Does it need a lot more capacity in order to get rid of these kind of operational issues?
Okay. Well, Will, thank you very much for your question, and sorry, I forgot to pass the microphone back to you earlier. You'd been putting your hands up earlier. We'll come back to you, Jonathan, after. Look, there was a part of your question which I wasn't quite sure. If you reverse engineer the numbers and concluded that Thermocoax is doing okay, is that what you said?
If you like reverse engineer the numbers, it feels like still the significant amount of weakness in the division is coming from the Chromalox Europe operations.
Yes, that is absolutely correct. In fact, I said already it's loss-making. Has been since before we bought it five years ago, and is still loss-making. Okay? We've always been open about that. The Chromalox Americas and Thermocoax in particular, which is also based in Europe, mostly, are doing fantastic. Thermocoax, in fact, is the highest margin part of the group and, you know, in the mid-20s% of profitability. Okay? Growing and all the rest of it. The problem is essentially the Chromalox Europe operations which are loss-making.
Now, you will appreciate that I'm not gonna stand here and tell you what exactly are the actions that we will be taking, but I am reassuring you all that we are taking them and that we have made progress on many of those actions already, but we're not there yet. We're absolutely resolute in our measure, and you will see those improvements come through. We only like to talk about things that we have already done and not what we will be doing, especially on sensitive matters of this nature. Is that fair?
Nick, can I just add a bit of context for those people who may not have run the numbers yet. If you look at ETS, about a quarter of ETS is Thermocoax where Nick's already said we have attractive margins well into the 20s%. Three-quarters is from Chromalox. But within Chromalox, three-quarters of that business as Nick and I both said comes from Chromalox Americas, where we also have margins in excess of 20%. The bit of the business we're talking about is a relatively small bit of the business, just to help provide some context.
The Asia Pacific part of Chromalox, which is even smaller, is profitable. Obviously not as profitable as Americas because of scale and that kind of stuff. It is really down to operational issues. This is what we do, okay? 'Cause I don't, I can't really get into specifics. You'll appreciate that. Good try anyway. The point is, these are operational issues. This is what we do. We improve operational performance of our businesses everywhere.
I think you can look at the history of this company, and you'll see that track record there. We're not applying anything different to what we've already applied to ourselves over decades, and we know exactly what we need to do. It's just that sometimes it doesn't happen as quickly as we would all like to have. We're on the track, and it, we don't lose sleep about it, 'cause we know we're gonna get there.
I can be frustrated at times by the pace of improvement, but that's a different story. Not to be distracted from the big picture, which is this is a great business. There's a part of it that needs to be fixed, and we're fixing it.
Great. Thank you. A handful of other questions. First one is obviously finishing the year on a record order book. There's a lot of industrial companies who are also finishing 2021 on a record order book. Do you think any of this has something to do with maybe pre-buying amongst more generally due to supply chain disruptions or potentially in anticipation of future price increases?
As I can imagine, you've probably done a number of price increases throughout the year and have intentions to do so in 2022. Do you think that's an element of demand that might reverse? I know this is a more general question rather than specific to you.
Good question, Will. Thank you very much. Well, look, pre-buying, customers sometimes do that. Okay? Sometimes they do that, and I think in some specific sectors, particularly biopharm, we saw even in the fourth quarter of 2020 when it really started, you know, taking off, as a result of the vaccine development.
You could see customers just, you know, ordering 'cause they could see, you know, a lot of demand and they were worried of not having enough to be able to produce. In some specific areas, you can see that demand driven anticipation and trying to buy. But other than that, I can't really identify materially any other part.
In terms of price increases, obviously, everybody knows that inflation is on the rise, and so it'd be natural that we put prices up every year to match the inflation of our cost. Therefore, you know, customers can sometimes try to pre-buy. We were obviously open to that, and we had some cases which I won't state, but customers trying to place orders at the end of last year ahead of the price increases, which obviously we didn't let them do.
We say, "Well, we'll take your order, but not at this year's price. You know what? If you're ordering now for next year, you're gonna get it at next year's prices," and that kind of thing. We're on top of those kind of things. Other than in the biopharm sector, I wouldn't really say it's about pre-buying materially. Yeah. There is nervousness about supply chains. You've got points where sometimes people say, "Well, let me just order."
It's not gonna be material. I think the record order books are coming from a reversal of trend in terms of demand. You know, it went through 2020 with declining demand. The world I'm talking about now, not only ourselves. You know, declining demand, lots of uncertainty, and suddenly you go into 2021 with, "Oh, the worst is behind us," and actually demand starts coming back strongly, end demand.
Therefore, then there's that kind of change gears, and we've gotta step ahead and that acceleration to try to get ahead, especially for those companies, which wasn't our case, that stopped investments, that stopped all sorts of things because they were worried of how bad it was gonna get during the pandemic. Then suddenly they've got a lot more to respond to and that kind of stuff. Some change in consumer patterns, which we've all had during the pandemic. I think that's what's really driving the record demands.
Yeah, that makes sense. Final question. It's kind of a bit of a housekeeping. With regards to Russia and Ukraine, I can imagine they're relatively insignificant direct exposures. Could you just clarify both kind of your direct exposures and any kind of indirect exposures? For example, is there any kind of component or commodity that you source that's in quite significant-
Yeah, no, good question. As I said before, direct in-market sales through our two operating companies, Watson-Marlow and Spirax Sarco sales companies amounted to around 1% or less. Not materially for the business. We have no manufacturing in Russia, so we only our sales companies there will be importing and reselling domestically products manufactured outside of Russia. We have no domestic supplier, no Russian supplier.
In terms of risks, it's a good question to our supply chain by a supplier in a restricted area now. No, we don't have anything that we're relying on somebody. No, it's not come up. We're not worried about that. Okay. Indirect is less than the direct. Yes, you sometimes have, you know, some customers that might be, you know, a contractor building a new plant inside of Russia or an equipment manufacturer that's shipping his equipment into some plant in Russia.
Yeah, but it's a customer of ours outside of Russia, and therefore, you supply to that customer who then puts our products into his product and ships them into the end destination market. Those indirect, which is not always very visible for us, but as best as we can see, is even less than the 1% of our direct presence. I think that answers the question. Thank you.
Great. Thank you.
I think it's time to pass the microphone to Jonathan here. Sorry, Jonathan. Thank you.
Good morning. Hi, it's Jonathan from Barclays. I just have three questions. Firstly, can I just come onto labor, please? Obviously, your specialized sales force is pretty key to obviously the growth strategy now and going forward. What are you seeing in terms of labor right now? Is it quite difficult to hire additional salespeople? That was the first one.
The difficulty for us isn't materially different to what it's always been. We look for a very specific set of skills and values. We want people that will align with our culture and with our values. You know, we always say we recruit engineers that want to be involved in sales and service. We don't recruit a salesperson, then they're gonna train him on the engineering side.
It's a very specific set of skills. That means that we're very selective, and sometimes it takes a bit longer to find the right sets of people everywhere in the world. It hasn't become materially different. Actually, we've been encouraged by, you know, many people looking at our company, and being attracted to come and work for us, and that's been helping us, positively. You know, positively impacting us.
In terms of difficulty for recruitment, not so much. Where we've had some difficulties on the labor front is, for example, people getting pinged in the U.K. because either they've contracted COVID or they've been in touch with somebody, the kid brought it back from home, and then the parents got it, and so then the parent can't come into work, right? 'Cause it's self-isolate.
All companies have had that. When it happens inside of a manufacturing plant, then if you have too many cases in a specific area of that plant s imultaneously, then that can create a bit of a constraint in that point here. The next week it might be in a different part of the plant.
Those are the things that have added to some challenge of our plant managers in managing the you know, the deployment of the workforce in order to you know, keep the lights going at the pace that we need to support this record demand that we're getting from our customers. That is, I think, more of a challenging aspect.
That's very clear. The second question is just come back to Watson-Marlow and its capacity expansion that is gonna come through in the U.S., obviously in the second half of this year. Can you just give us a rough feel for your incremental revenue opportunity that could come from this capacity that you're actually gonna bring online at the end of 2022, please?
Yes, thank you. Look, just be clear. We don't get more demand because of the capacity. The capacity is driven to support that demand that we see coming, right? What we're telling you is that that demand has been exceptionally strong. A little bit, as I said already, maybe some customers that wanted to get, you know, in the queue to make sure that they've got enough supplies coming in 2021 and in 2022, and may have ordered a bit earlier, but a bit of that in biopharma.
Ultimately, we do have, as I said earlier, an absolutely record order book. You know, we operate usually with low levels of order book. On average, the group has always operated with around seven weeks of sales in the order book. Today we're at much higher levels. We don't disclose, but much higher levels than that, especially in Watson-Marlow. We factor into that where we see some capacity constraints and it comes down.
You take that massive demand, break it down by product into the specific plants that need to make that product, and you end up with some places, like I mentioned earlier, BioPure, are having to grow 50% per annum. Now, anybody that's been anywhere close to manufacturing will appreciate that increasing, you know, volume by 50% from one year to the next, and doing that three years in a row, is a lot of work.
We're making sure that we're putting the staff, the capacity, the machines, you know, the supply chain, everything that you need so that we can support that demand. Our sales growth is guided on the basis of us opening up those, where we've had those capacity constraints with the investments that we've done and we continue to do, it's debottlenecking those points in order to support the demand.
Making sure, hopefully, a year from now, I'll be standing here saying, "We didn't have any shipments that didn't go out of the door when the customer wanted them because of supply chain constraints." That's what we're focused on. Which is a long way to say I'm not gonna give you a number.
Yeah. Roughly 50 would be great.
Yeah, no, it would be.
Okay.
Thank you, Jonathan. What's the next one?
Just the last one was just on, obviously, the balance sheet net debt to EBITDA down to 0.35x. How do we think about that going forward? Obviously, you know, you're getting closer to breaking even in terms of the debt position probably at the end of this year. Do we go back to special dividends potentially going forward on the balance sheet? Or do you just reinvest that back maybe into M&A or organically? How do we think of that balance sheet?
I think it follows quite nicely from the conversation you just asked about capacity, because one of the interesting things, just to build on what Nick said, is we thought about all of these investments and approved a large number of these investments before COVID even hit. At that time, our anticipation was that that would help us deliver against demand projections for a decade with expansion capacity.
What's actually happened in the last few years, that time has just been shortened dramatically because of the explosive growth in demand. That's why it's so important for us to be ahead of the demand and the investments we make. I think there is more CapEx that we will continue to put in to support the high growth across all of our businesses, but particularly Watson-Marlow.
To the question that Andy asked before, you know, has our view changed about the long run average CapEx spend in our business, which is typically between 4%-6% of sales? Not really. I think what we might see is that there are some years where we are above and some years where we are below.
To come back to the question you're asking now, absolutely our intention is to continue to invest in our business because the returns on capital are so high when we do that, supported by the growth and demand we see, and that we are confident in that outlook for our business. But our debt is coming down and we are a highly cash generative business. Where do we go from here?
After investing in ourselves, I think we also want to build more flexibility into our balance sheet, not least because we continue to look at M&A opportunities. While we're predominantly an organic growth-focused company, as we always have been, and we're not intending to do material M&A, we're not adding another division to our business. I think we've both been clear about that.
Where we will look actively is whether there are bolt-on acquisitions in each of our different businesses that help accelerate the delivery of our strategy. We're gonna actively look for those. Those things are outside of our control. Often the businesses we're buying are small, they might be privately owned. You know, you can do all the work, but you can't force someone to sell. We'll remain disciplined around value.
If after all of those things, we find that we do have excess balance sheet capacity, and we're not there yet, then of course we would come back to thinking about whether we'd return and how we return that to shareholders. We've done that in the past. We've got a track record of doing it, as you said. It's something we do think about.
Thank you very much.
Any other questions? I think it looks like you're all fed up of listening to us speak. Thank you very much, everybody, for coming all the way here. It's lovely to be able to catch up with you all after two years of looking at each other through a screen. I wish you all well, and stay safe. Thank you very much.