Good morning, everyone, welcome to our 2022 results announcement call. I'm Nicholas Anderson, Group Chief Executive, and I'm joined here by our CFO, Nimesh Patel. Consistent with the format that we followed in the past years, I will start by sharing the 2022 highlights, and then Nimesh will take you through our financial performance. I will come back later to cover the operations in 2022 and our outlook for 2023. To finalize, we will be happy to take questions from the analysts joining us here today. A war in Europe, global supply chain disruptions, COVID-related economic slowdown in China, rising energy prices and heightened inflationary pressures turned 2022 into a very challenging year.
Global industrial production growth, or IP, weakened significantly from a very strong 7.7% expansion in 2021 to 2.7% growth in 2022, which is materially lower than forecasted one year ago. Against this very challenging backdrop, we achieved 14% organic sales growth, driven by volume growth well above IP and price increases that offset significantly higher cost inflation and protected the margins. All three businesses outperformed their markets. The group exited the year with record high order books, which demonstrates good business momentum as we enter 2023. Organic sales were up 12% in Steam Specialties and 14% in ETS. Both businesses also completed strategic acquisitions in 2022 that will enhance our long-term growth prospects, especially by Vulcanic and Durex Industries. I will expand on these acquisitions later in this presentation. Watson-Marlow organic sales grew 16%.
Process Industries grew a very strong 19%, driven by volume growth above IP, as well as price increases that offset inflation. Biopharm sales grew close to 15%, despite the extraordinary COVID vaccine-related demand for Biopharm customers beginning to normalize in the second quarter of this year, of 2022. Our adjusted operating profit margin of 23.6% in 2022 is comparable to the highest margins achieved in our history, excluding the exceptional 25.3% margin achieved in 2021. Consistent with our guidance last year, the margin difference between those two years is due to the full year impact of the 2021 revenue investments, plus additional revenue investments in 2022 to support sustainable future growth. As anticipated, our cash flow conversion of 57% was lower than our historical levels of above 80%.
This was driven by record capital expenditures to expand manufacturing capacity as well as some inventory rebuilding in support of that strong sales growth. On slide 4, new business from the sale of self-generated solutions once again grew at higher rates than maintenance and repair sales, accounting for now close to 40% of sales in 2022. Self-generated solutions through our direct sales model remain attractive even during challenging economic times, as they are typically paid for by the customer's OpEx budgets with shorter payback periods. In 2022, we continued strengthening our direct sales business model by investing in the expansion and training of our direct sales teams, new product introductions, and digital technology solutions.
We also stepped up investments in equipment modernization, process automation, and the expansion of our manufacturing capacity, which included the opening of a state-of-the-art sustainable multi-brand manufacturing facility for Watson-Marlow in the USA and a new facility for Watson-Marlow's BioPure brand in the U.K. We continue investing significantly in the development and introduction of new products, especially sustainable products and solutions that help customers meet their own sustainability goals. In 2022, we launched the New to World TargetZero Decarbonization solutions, created through an internal collaboration between Steam Specialties and ETS, which will underpin incremental organic sales growth for at least the next 30 years. We invested close to GBP 540 million in three important acquisitions that expand and enhance our ETS business, as well as accelerate implementation of our digital strategy.
The integration of Vulcanic and Durex Industries mirrors the successful integration processes deployed on previous acquisitions and builds upon the lessons learned. These integrations kicked off immediately after completions, and we are very encouraged by the positive engagement of the new colleagues, as well as the constructive collaborations already unfolding. These acquisitions will materially contribute to revenue growth in 2023. We remain focused on the implementation of our strategic agenda across all three of our businesses as well as implementing our One Planet sustainability strategy and our inclusion plan, Everyone is Included, in order to create value for all of our stakeholders. On slide 5, we set out some examples of the significant progress achieved in 2022 through the implementation of our strategic agenda. By living our values every day, we are creating value for all our stakeholders in line with our purpose.
With our colleagues' well-being in mind, we established 10 minimum inclusion commitments and refreshed our diversity goals to drive greater inclusivity, equity excuse me, and diversity, as well as continuing our drive for higher health and safety standards across our workplaces. A select range of product categories sold in 2022 saved our customers 17.7 million tons of CO₂, 235 million gigajoules of energy, and over 88 million cubic meters of water. Big numbers, to put these into annual savings into some context, that is the equivalent of 804 million mature trees absorbing CO₂, 3 million people's annual average energy consumption, and 35,000 Olympic-size swimming pools of water. Our environment also benefited from a 30% reduction in our Scope 1 and 2's greenhouse gas emissions in 2022, taking us 41% below our 2019 baseline.
We now contract 57% of our global electricity needs from green or renewable sources and invested in self-generation of renewable energy at four of our manufacturing plants with a combined capacity of 2.4 GW, which is equivalent to about a quarter of the energy demands of those four facilities. Through our community engagement programs, our colleagues doubled to 22,000 the number of volunteering hours dedicated to making our difference in our local communities. Our group education fund supported 51 community projects in its maiden year with combined donations of over GBP 1 million aimed at providing equitable access to education, helping women and girls achieve their potential, and encouraging pathways to careers in science and engineering through a variety of grassroots initiatives.
I am delighted with the progress made on all fronts during 2022 as we worked hard and in challenging circumstances to engineer our difference for all our stakeholders. With that, I'll now hand you over to Nimesh to take you through the financial performance.
Thanks, Nick, good morning, everyone. As Nick has already highlighted, 2022 has been an eventful year for the group as we delivered a strong financial performance against the backdrop of a weakening macroeconomic environment, while also investing in our future growth with record CapEx and through acquisitions. I'll now explain the main drivers of our financial performance. As always, the numbers we will be discussing are the adjusted results. Adjusting items included GBP 15.5 million of costs relating to the restructuring of ETS in Europe, including the closure of Soissons, our Chromalox manufacturing facility in France, and GBP 16.2 million of costs related to the acquisitions of Cotopaxi, Vulcanic, and Durex Industries, in addition to the disposal of our Russian operations. Further details are in the appendix.
Group sales were 20% higher at over GBP 1.6 billion, reflecting an organic increase of 14%. Group operating profit was 12% higher or 7% on an organic basis at GBP 380 million. The difference between our reported and organic growth rates reflects the effects of currency movements on sales and profit and the contributions of our acquisitions net of disposals. These impacts are reflected in our reported numbers and excluded from our organic growth rates. Our operating profit margin of 23.6% is in line with previous guidance, although below the exceptional level of 2021, driven by the full year impact of revenue investments made in 2021 and continued revenue investments in 2022, partially offset by the benefits of operational gearing.
During the fourth quarter of 2022, the group raised GBP 509 million of new euro and dollar-denominated debt to fund the acquisitions of Vulcanic and Durex Industries, resulting in an increase in net finance expense to GBP 9.6 million. Our effective tax rate was broadly flat at 25%. In both 2021 and 2022, we identified benefits such as innovation tax reliefs and consolidating filings, which delivered one-off reductions in respect of prior year claims and a lower ongoing underlying tax rate. We anticipate the tax rate in 2023 will be marginally higher than the 2022 rate. Adjusted EPS of 377.2 pence was 11% higher, slightly below the rate of growth in operating profit due to the higher finance expense.
Return on capital employed was 55%, a decrease of 470 basis points excluding the impact of acquisitions. This reduction was driven by our record capital investment and rebuilding of our inventory as global supply chain constraints eased. Moving to the sales bridge. Currency movements had a positive impact of GBP 53 million on sales or 4%, driven by a weakening of sterling, particularly against the US dollar. If February month end rates were maintained for the rest of 2023, we would expect to see a modest tailwind of between 1% and 2% for the full year. However, exchange rate movements are volatile and unpredictable, and the actual impact could be significantly different. Therefore, our guidance excludes any impact from currency movements. Acquisitions and disposals had a positive effect on sales of GBP 22 million or 2%.
This includes the part year contributions from Cotopaxi, Vulcanic and Durex Industries, which were acquired at the end of January, September and November respectively, net of the disposal of our Russian operations. Including the impact of acquisitions and disposals on a 12-month pro forma basis, group sales would have been almost 8% higher at over GBP 1.7 billion. The group's organic growth of 14%, with double-digit growth in all three of our businesses, was driven by higher volumes as we successfully navigated global supply chain disruptions and a weakening macro environment. Organic growth in Steam Specialties sales was 12%, with demand growth even higher, leading to an expansion in our order book. Growth was strong across all regions, supported by a higher proportion of larger orders compared to 2021 as customers' capital investments continued to recover from pandemic-driven reductions.
ETS organic sales growth was 14%, led by increasing demand for decarbonization solutions in Chromalox and by the semiconductor and aerospace and defense sectors in Thermocoax. Organic sales growth in Vulcanic and Durex Industries was driven by the same trends. ETS's order book expanded, and we are continuing to work to increase capacity in our manufacturing plants to meet this strong customer demand. Organic growth in Watson-Marlow sales of 16% in 2022 followed the very strong performance of 32% in 2021 and 9% in 2020. Sales to the pharmaceutical and biotechnology customers grew close to 15%, and sales to process industries customers grew at a higher rate of 19%.
As expected, in the second half of the year, COVID-related demand began to normalize, leaving some customers with excess pump and consumables inventory, which they are working through, resulting in the rescheduling of deliveries into 2023. As a result, we saw a reduction in demand in 2022, although the order book remains above historical levels. The next bridge highlights the movements in adjusted operating profit for the full year. Currency movements had a positive impact of GBP 13 million or 4% as a result of both translational and transactional impacts. If February month end rates were maintained for the rest of 2023, we would expect to see a modest tailwind again of between 1% and 2% for the full year.
Acquisitions and disposals had a positive effect on sales of GBP 3 million or 1%, as the part year contributions from acquisitions were largely offset by the disposal of our high-margin Russian operations. The organic increase in group operating profit was 7%. Steam Specialties profit grew 8% organically below the growth in sales, reflecting our increased investments to support future growth, such as in sales-related headcount, new product development, and in our sustainability and digital initiatives. ETS profit increased 23% organically, driven by the strong performance of Chromalox, with operational gearing benefits from the growth in volumes and improved pricing on new orders. During the year, the closure of Soissons also delivered a small benefit from overhead reductions in the fourth quarter.
During 2022, both Chromalox and Thermocoax shipped a high proportion of orders, which were booked in 2021 or earlier, and therefore did not benefit from price increases to offset high inflation in material and freight costs. Thermocoax, in particular, was adversely impacted by its higher proportion of sales on medium-term contracts and costs associated with the ramp-up of its manufacturing facility in France. Watson-Marlow's organic profit growth of 3% also reflects the full year impact of revenue investments made in 2021, as well as the costs of expanding manufacturing capacity during 2022, with our BioPure brand moving into a new facility in the U.K. and the ramp-up of our new facility in the U.S. As COVID-related demand slowed in the second half of the year, lower volumes resulted in adverse operational gearing effects.
Steps were taken to appropriately right-size capacity and overhead support costs in the fourth quarter of 2022, with these actions continuing in early 2023, thereby protecting profitability. Nick will cover this further in his section. Central expenses, which remained at a broadly similar percentage of group sales, also reflected our increased revenue and sustainability investments. Moving to slide 10. As in previous years, we have set out our adjusted operating profit margin, excluding the acquisitions of Gestra and Chromalox made in 2017, both of which had mid-teen margins. The two things to note from the chart on this slide are, one, our group margin, excluding these acquisitions, has remained consistently above 25% since 2018.
Two, the gap between the acquisition margins and the group margin has narrowed in the last 2 years, consistent with our target to achieve greater than 20% margins in both acquisitions. In fact, in 2022, Gestra achieved the highest margin in its 120-year history, exceeding the 20% threshold achieved in 2021. Consistent with our guidance, our overall group adjusted operating profit margin in 2022 was 23.6%, which is similar to the highest margins in our history, excluding the exceptional level in 2021. Compared to 2021, the group margin contracted by 160 basis points organically, reflecting the full year impact of revenue investments made in 2021 and continued revenue investments in 2022, partially offset by the benefits of operational gearing from higher sales.
When presenting our 2021 results, we estimated the full year impact of the investments made during that year would have reduced the group's 2021 margin of 25.3% by approximately 200 basis points. During 2022, across all three businesses, we experienced high inflation in raw material, energy, and freight costs. We continued to mitigate these impacts on our margins through our well-established proactive approach to price management, and have already implemented further price increases in 2023. Finally, our acquisitions during 2022 delivered a 12-month pro forma operating profit margin similar to that of the overall group. Nick will talk more about the margin performance in each of our three businesses shortly. Turning now to cash flow.
As planned, our operating profit to cash from operations ratio was 57%, below historical levels, due to increased capital expenditure and investment in working capital. 2022 was a year of record capital investment relating to the expansion of Watson-Marlow's manufacturing capacity, particularly the construction of a new facility in the U.S., the largest project in our group's history, and the completion of the BioPure facility in the U.K. We also invested to advance the delivery of our sustainability and digital ambitions. Capital expenditure equated to 7% of sales in 2022, above our typical range of between 4% and 6%. Excluding our new construction projects, capital expenditure as a percentage of sales would have been at the low end of our typical range.
As we complete our large construction projects and in line with our plans for an extension to Chromalox's facility in Ogden, U.S.A., we anticipate that CapEx in 2023 will be similar as a % of sales to 2022. We also anticipate that CapEx in 2024 will remain above our typical range as we complete these projects. Adjusting for the full year effect of acquisitions and disposals, our ratio of working capital to sales was 22.8% compared to 21.3% in 2021 at constant currency. The increase in working capital was driven by a planned rebuilding of stock as global supply chain constraints eased, as well as growth in the business. Going forward, we anticipate maintaining a similar ratio of working capital to sales.
Excluding our investment in the new construction projects and the increase in our inventory, cash conversion in 2022 would have been above the prior year level of 82% and in line with historical levels. In 2023, we anticipate that cash conversion will improve to over 70% despite the ongoing high level of capital investment. We ended the year with net debt of GBP 690 million, up from GBP 131 million at the end of last year as a result of our acquisitions. Our net debt equated to 1.5x EBITDA, including the contribution from acquisitions on a 12-month pro forma basis. Slide 12 details our history of resilient compounding growth in both our earnings and dividend.
Over the past 10 years, we have delivered a compound annual growth rate of 12% in earnings and 11% in our ordinary dividend, excluding special returns, while maintaining prudent levels of dividend cover of between 2 x and 2.5 x. In total, we have a record of 55 years of dividend growth, during which time, the compound annual growth has also been 11%, and which is testament to the resilience of our business model through multiple economic cycles. In respect to 2022, we are proposing a final dividend of GBP 109.5 pence, reflecting our strong growth in the year. This brings the total dividend for the year to GBP 152 pence, an increase of 12%, and equates to prudent dividend cover of 2.5 x. Thank you.
I will now hand you back to Nick to run through our view of industrial production and our business performance.
Thank you, Nimesh. On slide 14, we once again share a graph of the annual growth rate by quarter of global industrial production, which we refer to as IP. The table in the graph shows the annual IP growth rates for the last three years. As you all know, IP is the best predictor of our markets. The blue line on this graph represents Oxford Economics forecast in July 2022, which we shared with you at the time of our interim results announcements last year. The red line represents their forecast in November of last year at the time of our trading update. While the green line is their latest forecast, published on the 23rd of February of this year. There are three observations I wanted to highlight here for you today.
First, expectations for global IP have weakened consistently over the past eight months, with the latest forecast now indicating 2.7% IP growth in 2022, falling to 0.7% growth in 2023. Second, global IP weakness accelerated in the fourth quarter of 2022 and is expected to continue softening in this first quarter of 2023 as global monetary policies aimed at containing strong inflationary pressures adversely impact demand of industrial goods and services. Third, the latest forecast indicates global IP recovery starting in the second quarter and accelerating as of the fourth quarter of 2023, which suggests improved demand levels in 2024. Now, it's far too early to start making firm predictions about IP for 2023 or for 2024, as these forecasts could still change considerably.
Nevertheless, our resilient business model, ability to self-generate sales, and significant proportion of demand from customers' OpEx budgets underpin our confidence in continued self-generated sales volume growth above global IP. On slide 15, we start the review of our operations with the Steam Specialties business. Organic sales increased 12% in 2022, driving 8% organic operating profit growth. This very strong performance combined strong volume growth ahead of IP with proactive price management practices that offset significant cost inflation and protected margins. Demand growth exceeded sales growth across all divisions and expanded order books with a higher proportion of larger CapEx-driven orders compared to 2021, as customer capital expenditure continued recovering from the pandemic-driven slowdowns. We achieved strong sales growth across the key end market sectors prioritized in our Customer First² strategy.
Sales to the food and beverage and hospital sectors grew close to 11%, while sales to oil and gas and chemical sectors grew over 14%, and OEM sales grew 10%. In January 2022, Steam Specialties completed acquisition of Cotopaxi. Cotopaxi's proprietary software platform, Strata, generates critical insights that are used to better understand industrial customers' management and use of water, air, gas, energy, and steam. Cotopaxi's experience with digital solutions for steam installations enhances our ability to connect to the customer systems and analyze their data, generating further opportunities and solutions that support steam system uptime, reduce waste, and increase efficiency for our customers.
Steam Specialties adjusted operating profit margin contracted by 90 basis points organically compared to the exceptionally high level of 2021, which reflects the full-year impact of prior year revenue investments and further investments during 2022, partially offset by the benefits of operational gearing from higher sales. Excluding any impact from currency movements, we anticipate mid-to-high single-digit growth over 2022 pro forma sales driven by volume growth above IP and proactive price management practice that will continue to offset inflation and protect margins. We also anticipate a more typical drop-through from increased sales suggested operating profit of close to 35%, leading to further improvement in our adjusted operating profit margin for this business.
Moving now to the Electric Thermal Solutions business, or ETS, as we call it for short. ETS has experienced strong growth in 2022, with sales up 14% on an organic basis and operating profit, organic operating profit up 23%. Overall demand was even stronger, leading to a record order book for the second consecutive year. Thermocoax sales expanded 17% driven by growth of the semiconductor and aerospace and defense sectors. Thermocoax's operating margin declined in 2022 due to its high proportion of sales with longer delivery times that faced higher material cost inflation than anticipated at the time that those orders were secured, as well as the impact of one-off costs associated with the ramp-up of our new manufacturing facility in Normandy, France. Chromalox revenues grew 13%, driven by volume growth well above IP and price increases that offset cost inflation and protected margins.
Chromalox experienced increasing demand from decarbonization solutions, which are mostly manufactured at our Ogden facility in Utah, U.S.A., and are helping drive order book growth. Chromalox operating profit margin increased strongly in 2022, driven by operational gearing from sales growth above IP, as well as underlying performance improvements. Significant milestones of 2022 include the acquisition of Vulcanic and Durex Industries that significantly expand and enhance the ETS business, as well as the managed closure of the Chromalox loss-making manufacturing facility in Soissons, France, that will improve operating margins from 2023 onwards. I'll return to the strategic benefits of the ETS acquisitions on my next slide.
During 2022, we stepped up our investments to improve our sustainability performance and the development and launch of innovative new products, including the TargetZero solutions that help customers decarbonize their industrial processes and was co-developed with Steam Specialties. We also invested in further operation improvements to improve manufacturing capacity in Ogden, where we're planning a major facility expansion to support long-term growth of Chromalox's patented medium-voltage technologies that enable many of these decarbonization solutions. ETS' adjusted operating profit margin was up 240 basis points to 15.6%.
On an organic basis, the operating margin improved 100 basis points driven by operational gearing from sales volume above IP, the price management practices that are set inflation on the new orders that were shipped last year, and the small benefit from the overhead reduction in the fourth quarter resulting from the closure of Soissons facility. The balance of the operating margin growth came from the fourth quarter contribution of the Vulcanic and Durex Industries acquisitions that combined have a margin similar to the overall group margin. Actually, excluding any impacts from currency movements for 2023, we anticipate mid to high single-digit growth over ETS 2022 pro forma sales, with an adjusted operating profit margin slightly below 18%.
On slide 17, we highlight the important strategic fit that Vulcanic and Durex Industries bring to the ETS business and to our group. These two strategic acquisitions expand ETS's 2022 pro forma sales by over 70%, growing group revenues by 10% and adding 11 manufacturing facilities and over 1,100 new colleagues, including many direct sales and design engineering resources. The ETS business now accounts for 22% of group revenues on a pro forma basis. Vulcanic and Durex Industries also increased the 2022 ETS addressable market by over 5% to GBP 3.9 billion through the new products, technologies, and capabilities that these companies bring to our group.
More importantly, ETS's 2022 pro forma market share expands from 6% to 10% and enhances the opportunities for new revenue synergies by leveraging products and customer contacts across complementary brands and geographies. Another strategic benefit, though, is the improved geographic balance. With the regional split of 56% Americas, 32% EMEIA, 12% Asia Pacific, better aligned with the Steam Specialties, Watson-Marlow, and group geographic balance. This improved platform for continued growth also strengthens ETS presence in faster-growing end markets, such as food and beverage, equipment manufacturers, and semiconductor wafer fabrication sectors. While broadening support for the strong drive towards decarbonization of industrial processes. ETS is implementing a dual brand strategy. Modeled on the highly successful approach of Steam Specialties that aligns the Spirax Sarco , and the Gestra brands with specific growth sectors.
I'll expand further on the ETS strategic approach to the markets on the next slide. Here on slide 18, we share today some key tenets of the ETS strategy, which internally is branded Engineering Premium Solutions or EPS for short. As you already know, all three group businesses operate a common strategic framework based on direct sales of engineered solutions for mission-critical applications with priority focus on faster-growing end market sectors that we refer to as sectorization. Other than the traditional geographic segmentation, we view ETS as 3.9 billion addressable market along three key dimensions: end markets, product categories, customer applications. This slide focuses on the intersection between end market sectors and the customer application views. The EPS strategy prioritizes focus on four fast-growing end market sectors: energy transition, materials, advanced technologies, and health and nutrition, as well as the 10 subsectors within them.
Against that backdrop, Chromalox and Vulcanic operate in the same market space of electric heating solutions for critical applications of industrial processes, including the decarbonization of those processes. With Chromalox being the lead brand for those markets in the Americas, and Vulcanic, the lead brand in EMEA. The Chromalox and Vulcanic priority subsectors include renewable power generation sectors such as solar, food and beverage, and engineered chemicals. You'll note that inside of that addressable market, there's also some what we call the other non-priority market sectors, right? Which actually today account for close to 30% of ETS's pro forma sales. Will continue to be serviced by Chromalox and Vulcanic, although with a slightly lower level of priority than the faster-growing priority sectors. Durex Industries and Thermocoax operate in the same space of electric heating solutions for ultra-critical applications of industrial process equipment.
With Durex Industries the lead brand for those markets in the Americas and Thermocoax the lead brand in EMEA. Durex Industries and Thermocoax priority subsectors include nuclear power generation, semiconductor wafer fabrication, and the pharmaceutical and biotechnology sectors. Okay, now moving to Watson-Marlow. Watson-Marlow achieved a strong 16% organic sales growth in 2022, an excellent performance given its exceptionally strong 32% organic sales growth in 2021. Operating profit grew 7% in 2022. Pharmaceutical and biotechnology sector sales grew close to 15% in 2022. Typically, over 50% of sales occurred in the first half, as COVID vaccine-related extraordinary demand began normalizing during the second half, with customers postponing new orders and rescheduling delivery dates of orders already placed.
The process and industry sector grew 19%, reflecting strong volume growth above IP, plus price increases that are set inflation and protect the margins. This volume growth was supported by programs to accelerate demand in those specific market sectors, such as food and beverage and water wastewater, and was also supported by new product introductions. In order to support strong sales growth, we deployed record capital investments to significantly expand our global manufacturing capacity. We opened new state-of-the-art facilities for BioPure in Portsmouth and for Watson-Marlow pumps and tubing in Devens, U.S.A.
The adjusted operating profit margin declined 390 basis points to 32.8% as a result of the full-year impact of the 2021 revenue investments, costs associated with the transition to BioPure's new facility, and the ramp-up of costs at our new facility in Devens, Massachusetts. All of these had a combined adverse impact of over 350 basis points. We anticipate biopharm demand normalization to continue in the first half of this year as customers reduce their existing stocks of some of our products. However, continued strong underlying demand for cell and gene therapy applications, combined with our customers' ability to repurpose our products to the production of other drugs, underpin our confidence that biopharm demand will return to growth in the second half of this year.
Although, of course, the precise timing and scale of the recovery remains difficult to call. Definitely in the second half we should see that recovery. During the fourth quarter of 2022 and the first months of this year, Watson-Marlow took some steps to appropriately right-size manufacturing capacity and reduce overhead support costs in order to offset the adverse impact of those lower sales volumes on the adjusted operating profit margins. Therefore, excluding any impact from currency movements, we anticipate overall Watson-Marlow sales in 2023 to be slightly below 2022, with over 55% of the full year sales occurring in the latter half of the year. We also anticipate the full year adjusted operating profit margin in 2023 to remain at a similar level to 2022, with close to 65% of full year operating profit occurring in the latter half of the year.
Moving now to slide 20. We have again added three customer case studies that help illustrate how our three businesses support our customers to improve their performance, help with them achieve their sustainability targets by reducing energy expenditure and waste, as well as contributing to a more efficient, safer and sustainable world. We're also adding, for the first time, two wider stakeholder slides to share greater insights of our engagement with colleagues, communities, and the environment. These stakeholder case studies are in appendix one of this presentation, I would strongly encourage you to read more about them at a later moment. With that, we now move to the summary and outlook on slide 21. We have delivered a strong performance across the group, despite the weakening geopolitical and macroeconomic backdrop, with 14% organic sales growth and 7% adjusted operating profit growth on an organic basis.
Continued volume growth ahead of IP, plus price increases that offset inflationary impacts on our cost and protected our margins, are a testament to the strength of our business model and of our strategic execution. We remain committed to maintain strong capital and revenue investments in order to continue strengthening our group, improve our sustainability performance, increase inclusivity, and underpin long-term sustainable growth. In 2022, we also completed three strategic acquisitions that strengthen and enhance our ETS business as well as the digital agenda. Assuming no material deterioration in global IP forecasts and excluding any impact from currency movements, for 2023, we currently anticipate mid-single digit sales growth over our 22 group performance sales.
We therefore look forward to another year of overall double-digit sales growth with a small progression of the adjusted operating profit margin and cash conversion above 70% as we maintain higher capital investments levels to continue supporting long-term profitable growth. That concludes today's presentation. We will now be pleased to take questions from the analysts in this call in the room, and for those of you that are joining us remotely, those analysts joining remotely. I would request, however, that before asking your question, you please state your name and that of your organization for the benefit of all other listeners. Okay. Okay. Aurelio, you went up first.
Hi, good morning. It's Aurelio Calderon from Morgan Stanley. I've got three questions. I'll try to be quick. The first one is on Watson-Marlow. It will be in the process industry side. Very strong growth and you're expecting a strong year also in 2023. Can you talk about the drivers of that? Is that market share gains, that expanding your addressable market? What's driving that?
You wanna I ask them and you ask, come back for the second set? That's fine. Look, good question, Aurelio. Thanks for giving us a question on another fantastic side of Watson-Marlow, which is the process industry, 'cause sometimes it doesn't get the attention it deserves. Look, the underlying drivers of the process industry growth are the traditional drivers that we've always talked about of the whole of Watson-Marlow, and that is A, Watson-Marlow's ability through new product development, and sometimes through the acquisitions that we've made, to expand our addressable market by displacing other types of pumping technologies. Process industries also correlate to IP.
That's the one part of Watson-Marlow, you know, about 40% of Watson-Marlow sales that do correlate to IP, but at a higher proportion than steam or ETS because they also have that ability to take share from other types of pumping technology and expand their addressable market by. We've got multiple examples like the Qdos pumps where we developed specifically to displace another type of progressive cavity pumping technologies. Okay. Silicon, getting my tongue twisted here. Solenoid, you know what I'm talking about.
Yeah.
Yeah. Sorry, just lost my train of thought. Actually, that is the other thing that continues to drive mostly on the process industry side is the continued globalization of the Watson-Marlow brand around the world, right? 'Cause we leverage the footprint that we already have globally to accelerate the expansion of Watson-Marlow around the world to service those process industries. The third thing is also that, you know, those process industries that we refer to, that includes food and beverage, you know, water, wastewater. Some of those are very resilient but also faster-growing end markets. The combination of all of those factors is what allows us to continue to outperform by a lot more the IP growth in the process industry.
Thank you very much. Good question.
I'll try to combine the next two in one question. It's probably more for Nimesh this. It's, if you look at the guidance-
Sorry, solenoid diaphragm pumps. Is that okay? Sorry.
If we look at the kind of implied margin guidance for Watson-Marlow in the second half of the year, it implies a very strong exit rate into, you know, 2024. Is that because of the cost cut that you're taking in this early part of the year and kind of the impact of the revenue investments kicking in the second half? The second question would be perhaps to this. On the, you're talking about a shift probably from COVID to gene and cell therapy. Is there a margin or a mixed difference there? Are the products exactly the same and you can just repurpose them?
Okay. Let me, let me just take those, actually, the two questions, because I can combine. First, the stronger exit rate. Absolutely correct read, Aurelio. Not only stronger exit rate on sales growth, okay, but also on the margin. The driver of that... Look, we're doing some right-sizing in different parts of the organization. Basically, because when we were flooded with that great exceptional demand, well, we were responding to as best as we could. And in some plants, places we were out of capacity, we had to expand capacity, put extra shifts, put extra people, all sorts of these things, right? As the... And don't forget, nobody could tell us what the actual demand for biopharm products was gonna be, right?
Not even our customers, because, of course, nobody really had an idea how much demand was gonna be necessary for COVID vaccines. If you go back just a couple of years, actually, it looks like a long time ago. It was a couple of years ago. We're all thinking, "Oh, gosh, we're gonna well, fantastic news, we developed these new vaccines, but now we've got to inoculate the world. 8 billion people, at least two, maybe three doses. How are we gonna..." All the industry was ramping up to try to satisfy that level of demand, which the governments were encouraging, right? Yeah, even as recently, you couldn't really get a size of the demand from our customers because they didn't know, okay?
As that demand has started to become clearer and situation, you can all see this, you know, vaccination rates were never gonna get closer to what they were expected to be and all of these other things. You can see now customers are beginning to get a better sense of what the underlying demand for the COVID vaccine is and are adjusting that demand on us, of our products. We did incur some extra costs, right, because we were satisfying the extra demand. That's what we're trying to now right size, but we're right sizing it with a view to that higher, and I would say my normalized level of demand going forward from half to onwards of this year and into 2024.
You know, that normalized level of demand that we see for the whole of Watson-Marlow, not only biopharm, but also process industry. The right sizing is to adjust to that. Inevitably, when you come out of a low volume as, lower volume as we would expect in this first half, to the stronger volume that we expect to exit this year, that we will definitely be exiting this year, then you start getting big operational gearing kicking in, okay? Once we see that, and we get a better sense of where that demand is beginning to hit, then you can start making point adjustments to capacity or, or resources where you see it pop up as the mix of the products come through more clearly in the second half of this year.
We're definitely very, very confident that we're adjusting only to the necessary levels to support the strong growth that we do anticipate coming back from 2020, second half of this year and onwards, and therefore keep those margins always at the levels that they are or above on an annual basis going forward. I just wanted to give that context for you all, so you don't misread the, you know, some right sizing or anything like that.
The shift to cell and gene therapy is another very important point, which I'm glad you asked about, because I think we've all been so distracted with the whole COVID vaccine thing, that we've lost sight that the underlying demand of biopharmaceutical drugs, which before the whole COVID thing, you know, in the before COVID, in the BC years, was already double-digit growth of the biopharm industry for the last 30 years, right? 12%-14% growth of the industry as a whole. Watson-Marlow's very good positioning of our products and our technologies in order to support the processing of biopharmaceutical drugs, and the way that we've been expanding our footprint globally and our product range to support that industry, we've been getting actually higher growth, more like 17%-20% before COVID kicked in, okay?
Fast-forward three years, forget the whole thing about COVID. That underneath, underlying strong demand for what we call gene and cell therapy drugs, right? Fancy names, but what we're talking about is all that product development that our customers are doing to protect the world from many diseases-Through biotechnology drugs. That strong underlying demand was there before COVID, has continued throughout COVID. If anything, I think is not only gonna continue going forward, but that might even accelerate, because now the world has discovered the virtues of biotechnology, of how quickly you can develop these new drugs, how effective those new drugs can be using biotechnology. There's nothing that would suggest to us that, A, that underlying demand, excluding the COVID vaccine thing, that underlying demand hasn't continued to be, and we see it very strongly.
Also going forward, it's gonna remain strong, if not even higher. Okay? Let's just leave it as remain at the same level of strength that it was before. If I can just add one last point, 'cause I think this is really, really important for all of you not to forget. The same products that Watson-Marlow provides our customers for the processing of the COVID vaccines are exactly the same pumps, tubes, connectors, and et cetera, that our customers use for any other processing of cell or gene therapy drugs. It's not like suddenly we've developed, you know. To use the example, it's not like the ventilator episode that we had a couple of years ago, where suddenly people had massive orders of, for necessary.
As soon as that was over, all of that went away. Actually, the products that we're making are the same products that we were making before, and they're the same products that are used for the gel, cell and gene therapy drugs. Therefore, our customers, if they ordered a bit too much of it because they were expecting higher demand of the COVID vaccines, what they're doing now is they're just using those same products to support the underlying growth of that biopharm sector. You can reprocess, repurpose the stocks that they have. It's not sunken stocks that are gonna sit there, okay? That's what gives us this very strong confidence.
Also in the big first few months of this year, we've had better insight from our customers of how they're gearing up to their demand going forward, how much they have of stocks and of our products and that kind of stuff. Now with this additional new information, we're able to plan our activities better, and that's the guidance that we're providing.
Great. Thank you very much.
It was a bit of a long question, but I know everybody's got that question on their mind, so I thought I'd get it all out. Sorry, Jonathan was next, yeah. Then we'll come over here.
Good morning. Hi, it's Jonathan from Barclays. Just two questions, please. Maybe the first one to Nimesh. Maybe if you could just talk about the profit bridge in 2023 and sort of the moving parts within that. You know, are we still gonna see an impact from revenue investments? Is that still gonna be a negative or is that gonna fall out? Or is that gonna be replaced essentially via integration costs? If you can just give us the main moving parts of that, firstly, that'd be great.
Okay. As we think ahead to 2023, I think the first thing to note is at a group level, we're expecting a small progression in the margin. We're not expecting the effect that we had from 2021 into 2022 with the normalization of the revenue investments that we had made. In 2021, it was exceptional because we had been holding off on reintroducing some of those revenue investments back into our business until we had real confidence in the post-pandemic recovery, which meant that they ended up being more weighted towards the second half and the fourth quarter. It was a little bit out of kilter with previous years, the full year impact of that really hit in 2022. We're not seeing that same dynamic again from 2022 into 2023.
Small progression at a group level. If you look business by business in Steam, I'm expecting margin improvement, as Nick highlighted, as a result of volume growth and the operational gearing effects of that. We've talked about the drop-through on increased sales being at about 35% for Steam. In Watson-Marlow, with the actions we're taking in light of the lower demand that we expect in Watson-Marlow, we expect the margin to be broadly similar on 2022. In ETS, the pro forma margin, including the acquisitions, is just over 18%. We're expecting that to moderate slightly, so it'll be slightly below 18%.
The reason for that is because in those acquisitions, we are gonna have integration costs coming through, hiring more people, health and safety, finance, investing behind the business that we've bought so we can drive that stronger growth, so we can improve the margins longer term. That margin will come down slightly.
In terms of those integration costs in ETS, roughly, what would you think they would be for 2023?
We're not quantifying the integration costs separately. It's reflected in our margin guidance. Our integration costs won't all be in 2023. They'll be spread over a number of years in the same way as we've done with Chromalox and Thermocoax. We'll be measured.
Gestra.
How we implement... Gestra. We'll be measured about how we implement that integration over time, focusing on the most critical things first.
Jonathan, we've always said that all of these companies, we will invest in them to bring them up to our standards, our standards of performance, our standards of growth, of profitability, of health and safety, all of these things. These companies have always been in private ownership, either private equity or private private, and therefore they are not operating at our standards. We've always said, these are great businesses, but we will invest and therefore to bring them to our standards. In the first couple of two, three years, those margins will decline a bit because we're putting that extra cost. Then you see the bounce back. You've heard Nimesh talk about the Gestra success story. You've seen the margins coming back strongly now in Chromalox after all the things we've done.
Thermocoax, again, was already a higher margin business, and we've done some investments there and all the rest. This is just deploying the same standards. As Nimesh correctly said, it gets over, not just 2023. It's 2023, 2024. All of this is wrapped into the guidance we're giving you. You don't have to worry about trying to deconstruct how much comes from here or from there. We're giving you the guidance overall because there's so many different moving parts that you can feel confident that this is nothing different to what we've been deploying over the old, acquisitions we've done so far.
Great. The second question, just moving on to ETS and the outlook for that. Maybe just on the semiconductor side. Obviously, you've got quite big exposure to that through Coax. I think it's Durex as well has it, and obviously big North American exposure. What are you seeing there in terms of sort of the order intake and sort of the inquiries? Are we starting to see a ramp-up in inquiries for that? Do you think that would start to come through for those businesses?
There's different dynamics, of course, in that industry. We are quite positive on that industry through the cycles, but inevitably every cycle has a little ups and downs. Demand was very strong last year. It did weaken a bit in the back end of last year, but it was, you know, the whole of last year was very, very robust over the previous years. We, by the way, factored that into the acquisition case when we bought Durex Industries, okay. We obviously didn't take what the sellers were suggesting was a straight line of demand, because we know that never happens.
We did factor into our acquisition case and in the price and multiple that we paid, that we expected that cycle to kind of flatten out, you know, around now-ish, end of 2022 and 2023, before it returns back to its normal kind of growth. That's what we are actually already seeing. Nothing different to what we had predicted and built into our models. Now, the other thing I wanted just to remind you about the semiconductor industry is that the products that we sell, you know, I talk about ultra-critical applications in industrial equipment. This is going mostly into the wafer fabrication equipment. These are million-pound equipment, big, massive equipment that make the chips. Right? You all know about the CHIPS Act in the US and the reshoring of that industry.
The main market leaders of that industry in the U.S. are the top customers of Durex, so they will be beneficiaries of that reshoring. Okay? When it impacts depends on the investment cycles of the customers and et cetera, but they will be ordering more equipment to onshore production in the U.S., and that will come through. You better look at the big picture through the cycles and not be too concerned about the short-term fluctuations. The other thing is the products that we sell into those equipments, A, are a very small part of the value of the equipment, but they're absolutely mission-critical.
The patterns, for example, that we design and supply for atomically positions, for example, you know, those cost, I won't say the exact number, of course, but you know, in the tens of thousands of GBP as to compared to the millions of GBP of the equipment itself. The yield of the equipment, the quality of the chip is those aspects are the scrap rates and the production, all of those are intimately linked to the technology of the product, the quality, the performance of our products into that process. Ultra-critical for the waste of fabrication equipment. We have in Thermocoax, for example, we've been gaining market share.
We've been displacing not only for the new build, but also in the aftermarket of the existing plants in Thermocoax, for example, as we entered that market more recently. Durex has been very well positioned in this market for quite a few years now, for long years now, and therefore, you know, continue to benefit from these aspects. Overall, we remain very bullish on the industry. We understand the cycles and the guidance we have provided is reflective of all of that. Over here.
Thank you.
Thanks. Sorry. Mark Davies Jones from Stifel, loudly. Two for me, please. Firstly, can I get back to the margin message on steam and how that relates to the mix? You talked about more orders for larger CapEx projects, which typically in the past have held back margins a little bit. What's the offset there? Is it just volume or is it, for instance, the Asian business coming back? That's typically been higher margin for you in the past. That was my first. The second also related to growth. Where are you currently capacity constrained? For which divisions does it really matter that new capacity comes on stream to meet your top-line guidance?
The capacity question is not specific to steam, it's about all of the... Okay. All right. The large orders that we've called out over the years, we continue to be transparent in that. You are right that, at a high level, the margins of those large CapEx-driven projects, which account for about 15% of our revenues, just to remind people, it's a smaller part of the whole business. The margins there are slightly... They're positive, always have been, 'cause we don't sell at a loss to be able to capture the aftermarket. They are positive when we sell, but they are not as robust margins as we would get in the aftermarket, the OpEx. 85% of the business is driven by the customer's OpEx demand.
We obviously see that demand for orders for CapEx-driven softens when the economics slow down and it comes back later. A good chunk of it is in Asia, Korea, China. Some of it Particularly the Korea part, is actually for projects that are going into the Middle East, but are designed by contractors in Korea, for example, or in Japan. Right? Again, because it's such a smaller part, 15% of the general sales, and the margin difference isn't that material, the actual impact of that shift in the mix of OpEx and CapEx sales is not such a big swing as you would fear could happen or you see happening in other types within other industrial companies. Right? Again, it's captured inside of all the guidance we're providing.
That mix affects, Nick, can I add one point to that? Sorry. Yes, please. I think it's a great question, Mark, because when you look at our results, you'll see that in Asia Pacific, we grew really strongly last year, despite, for example, in China, the lockdowns that earlier in the year impeded our customers and our own ability to meet our customers' demands. 10% growth in APAC is fantastic. APAC has a higher proportion of orders of larger orders that sometimes come from those customers' CapEx budgets, but it's also a higher margin business for us. You've got those two things playing off against each other.
Yes, as Nick describes, those larger orders sometimes have sort of slightly lower margins than the base business. APAC in general is a higher margin business for us. The two things sort of offset each other. Just if I could just finish the second part, I'll come back to you, Andy. On the capacity constraint across the group, today, given all the investments that we've done already, the only area that I would say that we have still some capacity constraint is the Ogden plant of ETS. It's one plant in ETS. In general, you might have some constraints on this production line or for that type of product in other plants, but given that in steam we have been investing consistently over the years to expand capacity, we don't.
Even last year through the boom of 2021, 2022, we've continued to do that. Therefore, we do not see in 2022, or for 2023, any constraints on our ability to sell because we haven't got capacity to make it. Other than in the Ogden plant, which is, has been and continues to be, at the moment, a constraint, 'cause we've got a much larger order book. We could be... Now, the demand that we're getting, especially for decarbonization solutions, especially around that patented medium-voltage technology that we have, the demand is just strongly outstripping the capacity that we've got in that plant.
Although we've made improvements inside of that plant, we're still not able to cope with that demand because it's just coming at us faster than we can actually expand the capacity. Hence, we've mentioned today in the results announcement that we are in the process of approving an investment, a significant invest to expand that plant by about 70%, I think is the expansion of the footprint. Actually that expansion would be dedicated exclusively. It would be a state-of-the-art plant for medium-voltage reservoir products. As you only make the medium-voltage there, that will then allow us to declutter and re-lay out the current 110,000 sq ft building that we have focused more around the low-voltage technology products.
That is the only one that is still constraining us in 2023 and in 2024 until we get that expansion of Ogden done. In Watson-Marlow, look, we've made all these investments that you've seen. You know, Aflex up in Yorkshire plant, the BioPure down in Portsmouth, the new facility out in the U.S., which is already shipping products. All of these have been designed because ultimately, Watson-Marlow has been on such a strong growth journey, and we anticipate will continue to be on that strong growth journey that at some point, you just run out of physical capacity, and then you've got to do those step change investments, which is what we're seeing now, which is why our CapEx have gone up.
As Nimesh said, the step-up in CapEx spend is coming primarily from those building of new plants because the inside of the plants, we've really expanded as much as we could do. Okay? Andy.
Good morning. It's Andy from Jefferies. Three quick questions, please. Can you give us, please, the price volume split in 2022? I'm working on the assumption that you've put prices up again in 2023, you got annualization of the prices you put through in 2022, and you said that Chromalox, some of their orders were kind of in the order book. Now for you're gonna get the price catch up from there. We should be thinking of that mid-single digit organic growth, what, 3%-4% price and small volume? Is that kind of roughly the right place to-
You looking at Nimesh or me?
I'm looking straight forward, so whoever wants to answer it.
Who do you think is gonna tell you the same answer? You get the same answer from either of us. Who do you wanna hear it from?
I trust you both implicitly.
Okay. If you're looking at me now.
I, I-
Nimesh, you wanna begin? No, let me take it. I think it's, so, as you know, Andy, we don't break out volume versus price. I think if we talk about 2022, got 14% organic growth. That's a very significant chunk of volume.
Yeah.
As I said, we've offset inflationary pressures through price to protect our margin. I think you can make your own assumption about where inflation is in 2022, and you can back out what the volume's likely to be, and you're gonna find that it's pretty attractive number. In 2023, it's sort of the same, except inflation is gonna be lower. We're looking at mid-single digit growth. We're looking at a lower inflation number. That means there is volume growth. Bear in mind that volume growth is benchmarked against an IP of 0.7%. It's still gonna be attractive growth.
It's gonna be lower than it was in 2022.
Okay.
You're focusing on the mid-single digit for the whole of the group.
Correct
growth, organic. Let me remind you, two parts of the group, you know, Steam and ETS, we are guiding to mid-to-high single-digit growth.
Yeah. Yeah.
Therefore, if you follow Nimesh's explanation, you'll get to definitely positive volume growth.
Mm-hmm.
Right? In those two businesses.
Yeah.
Watson-Marlow, we've already talked about.
Talked about. Yep.
Okay? I think that's what you don't wanna forget.
Yeah. Okay. This is for you, Nick. on the Watson-Marlow, kind of first half, second half, you know, down first half, improved second half. I fully get the long-term strategic, you know, growth opportunities in Watson-Marlow, they're massive. in terms of the first half destock and then, you're expecting the kind of recovery in the second half, what is the risk that customers kind of have enough product in the second half and just kinda delay their new orders into next year? What is the risk that the COVID, I guess, destocking continues beyond that first half? Is that a risk or am I kinda missing the point?
let me as you know me well, Andy, for ten years now.
Mm-hmm.
Therefore you know that I'm transparent and I speak openly and I share what information I have. Look, I don't have a crystal ball.
Sure.
Yeah. Unfortunately, I've not managed to find one that works. We inevitably have to operate based on the information that we get from our customers.
Yeah.
Right? If our customer doesn't know, they tell us, "I can't tell you because I don't know myself." Right? That has been part of the issue last year.
Yeah, yeah.
... in trying to figure out the cycle, the shape of the curve as you go through the cycle, right? All the guidance we've given before and that we're giving now is based on the best information that we can get from our customers. Just remind you of that. The other thing is that in any cycle, be it the peak or the trough, it's always impossible to call precisely.
Yeah.
Right? Is it gonna be this month or this quarter, or is it gonna be next quarter, okay? Our best estimation, given the latest conversations and the quality of the information we're getting from our customers now, in the beginning of this year, that wasn't readily available by those same customers at the end of last year, in fourth quarter, for example, okay? Does suggest that we have kind of bottomed out. I'll give you one other indicator that I think is helpful to set the context, to take it in context. We don't disclose our order intake, you know that, but we do talk about demand levels and how the order books are moving, all right? Obviously, that's a key lead indicator. Because we're in short cycles, it's a key lead indicator for us.
The order intake is a key lead indicator for what we're gonna be shipping because we, you know, we operate with short order books and et cetera. We track the order entry levels very closely. If you exclude any effects of price in the new year now, because we've put our price up again, of course, to offset inflation and protect our margins, the level of orders intake in the last quarter and in the first two months of this year have been at relatively the same level. We have seen, you know, boom of orders in the first quarter of last year, for example, and then it's come down.
If I look at October, November, December, January, February, and the forecast that we're getting from the field for March, we are looking at numbers that have stabilized at a certain level of order entry. That gives us confidence to say that we think the best assessment that we can make is that we've kind of bottomed out. What is impossible to call is at what point does that start going upwards. We are confident that it's not gonna continue to go down.
Yeah.
That will depend also, you know, customers' stocks are not always. Nobody's stocks are balanced perfectly. You always got too much of one thing and not enough of the other. The orders that we're getting now are what they haven't got enough of, and they, as they work down, again, because they're not making COVID vaccines, but they're making all the other drugs, it's the same products.
Yeah.
Okay? We see that level of demand having stabilized for five and probably six months in a row. Therefore, we're confident that sometime Q2, latest Q3, you'll see that pick up. When it picks up, we've all seen what happens.
Yeah, sure.
Right? Because the underlying demand is so strong. That underlying demand, if anything, as I said, is probably above the mid-teens or more. Therefore, you know, it, when it comes back, it's gonna come back with vengeance, as we've always seen in Watson-Marlow. Of course, the other 40% of Watson-Marlow, the process industry, continues to grow. I mean, it was 19% organic last year. So, you know, we are seeing very strong demand all across Watson-Marlow. So for us, it's just a matter of when, not if, this demand is gonna come back to more typical levels of growth going forward. We're very confident second half, and the exit rate out of this year is gonna be robust going into next year.
Yeah. That's really helpful. Thank you.
Yes.
Hi, it's. Excuse me. Hi, it's Rory Smith from UBS. Thanks for taking my questions. I've got three. I'll try and keep them brief. Can we ask the ETS margin question a different way? Your guidance implies 230 basis points or thereabouts of expansion this year. How should we think about that falling into the kind of key buckets of annualization of high margin acquisitions last year, Chromalox restructuring benefits annualizing this year as well, and maybe if there's a mixed piece in there, if some of those Chromalox orders are coming through now with higher prices? I'll pause there. Yeah. There's a large number of drivers that impact the ETS margin, some of which move in different directions. That's why we've sought to help you understand the business as a whole.
In any business, there are gonna be different moving factors, and it's very difficult, if not impossible, to unpack all of that in the way that we sort of help you understand what's happening. The biggest buckets.
First of all, if we look at all the businesses in ETS, we are looking at volume growth, so we're gonna have operational gearing benefits. We've got particularly in Chromalox, we've got the closure of Soissons. We've got the benefit coming through from the overhead that we've taken out in that part of the business. The third part we've got, exactly as you mentioned, Rory, is in 2022, we were shipping a large number of orders, a larger proportion of orders that were taken in 2021 or earlier. As you know, we have longer shipment time frames in that part of the business 'cause these are bigger, more bespoke solutions that we deliver for our customers.
Some of those orders that were taken earlier didn't reflect pricing that newer orders reflected in order to compensate for the high levels of inflation. Now that we've shipped a number of those orders, which are still good margin, but not as high as they otherwise would have been, we'll now be shipping more orders that were taken in 2022 and will be taken in 2023. That will also help with the margin. On the other side, we've added in the acquisitions. The acquisitions in ETS in aggregate, have margins that are comparable to the group level. They are attractive margin businesses. We do need to invest in the integration, as I talked about earlier.
As we do that, you'll see the margins of those businesses come down, and we'll do that in a sensible way, and we'll spread it over a number of years, and we'll do the critical things first. The net effect of all of that is our pro forma margin in 2022 would have been a little over 18%. Now we expect it to be just slightly under 18% for 2023.
Great. Thank you.
The legacy business' margin progression continuing in Chromalox and Thermocoax and those two divisions of ETS.
Yeah.
The new ones just going back, for the investments that we're saying. Overall, still good progression.
Absolutely. Thank you. Then on your TargetZero solution, can you just add a bit of color there? How's the sort of customer acceptance journey going on? When might we be able to see those coming through in numbers?
TargetZero.
Two medium-term questions.
Oh, you've touched on my... Have we got two hours for me to answer? No, no, of course not. We're very excited by TargetZero solutions. The level of adoption that customer, or sorry, the level of interest that customers are demonstrating for these decarbonization solutions. I will add, led by Europe, okay? The Americas lags in that sense, and Asia also lag, but especially European countries, U.K. and Continental Europe are leading the charge in decarbonization of industry globally. Of course, that's one of our areas of strength for ETS and for steam. There's a huge amount of interest, really very good. We've already sold some, other than all the field trials that we sold and et cetera, we've already been taking orders.
In fact, in the end of last year and beginning of this year, we've already commissioned. Looking very, very exciting. Little teething problems as you would expect here and there with anything that's new to world, but very strong interest. The only detractor, I would say, as I've mentioned before, is that when you decarbonize, so for example, the raising of steam is just a medium to transfer the heat into the industrial process, right? To generate the steam, you're typically burning a fossil fuel, gas, oil, mostly gas, and emitting carbon emissions. That it's also less efficient, thermally less efficient, but it's much cheaper. You know, the cost differential of a gigawatt of energy from burning fossil fuel is about a quarter of that same kilowatt of energy from electricity.
Therefore, if you were to make the switch purely on economic reasons, you wouldn't do it. Okay? Because it's more expensive. Because electricity is more expensive than gas, 95% of heat transfers in industry today are not done through electricity, because it's always been cheaper to burn gas or oil or coal or whatever it was in the centuries and decades behind us. However, the shift now that we're seeing led by Europe is not one only exclusively, and apologies if this is a heresy for financial people in the room, it's not exclusively driven by finance, by financial numbers, by economics.
Because there's a new factor in society today, which is about reducing greenhouse gas emissions to contain the heat warming and the climate change effects derived from that. That new driver, so it's a new factor in the decision-making. We've already talked about that, we are decarbonizing our largest plant in the UK, the one in Cheltenham. We've already started that process. But we're investing money to increase our operating costs. Okay? If you were just gonna look at an NPV, it's negative, you're not gonna do it. We're doing it because we want to... We're committed to get to net zero in greenhouse gas emissions. We're doing it for that reason.
Over time, I think that cost differential will change, but, and therefore the financial attractiveness will improve over time. It's impossible to predict the rate of adoption because of that. In anticipation of it, we're expanding the plant in Ogden, and we're getting ready to be able to cope with that demand that we're already seeing and is already outstripping our current capacity. Again, as I said earlier, impossible to call precisely when any of these changes occur, but it's coming, it's happening, and we'll see over the coming years, the rate of adoption based on what I described.
I look forward to the two-hour version of the answer, but I'll leave it there for now. Thank you.
Yes. Bruno.
Thanks for taking the question. It's Bruno Gjani from BNP Paribas Exane. Thank you for the color around all the trends in Q4 and the first two months of the year. I was wondering if you could provide some additional color around what book-to-bill looked like in Q4 and the first two months of this year.
We don't disclose that information. We don't disclose book-to-bill because we don't disclose the order intake. I would politely decline to give you more precision on that base. I've given you some indications, specifically for the whole of the group, and in particular, to the Watson-Marlow intake that it has, you know, kind of stabilized at a certain level and going up. Book-to-bill is not something that we provide guidance of, so I will refrain from that. Happy to take another one.
Great. In terms of another one, I'm still struggling a little bit with the restructuring actions in Watson-Marlow, if I'm honest. On one hand, the outlook seems very positive, the weakness or softness rather, seems confined to H1, so why the need for a capacity reduction? Typically, you operate all of your businesses on a longer term view. Does this perhaps reflect a degree of caution on your side, around the outlook for H2 2023, around 2024, or am I just reading too much into this?
Good question. Thank you for asking, because I think you're not the only person that might have that concern. It's nothing to do with caution or concern whether the comeback of demand is gonna happen or whether it's gonna take too long to happen. None of that. We are very confident that that change, for the reasons I gave just recently, is gonna happen this year, and that we will see a second half already much stronger than the second half of last year, and that we'll have a strong exit rate into 2024. It's nothing to do with our confidence related to the outlook for Watson-Marlow.
It has everything to do with the over-investment in resources that we put in when the peak of demand was, A, very big, and B, didn't quite understand how much we actually needed to swell. If you look at how the order book ballooned, and if you look at the level of order intake that we had in the first quarter of last year, all the way up until the first quarter of this year, it was just massive, and it looked like there was no tomorrow. We were putting in resources to be able to capture that level of high demand in response to the orders the customers were placing.
As that balloon of demand has now normalized, customers are giving a better outlook, now we can tailor to not the demand that we're expecting in the first half of this year, but the demand that we're expecting as we exit this year into next year. If it was to tailor it for this first half, it would be a much bigger cut, and we're not gonna do that, because we don't want to compromise on our ability to bounce back strongly when that demand starts happening. Okay? It's all about doing that and protecting the margins of the company while you're waiting for the bounce back of demand. Okay? If I just set nothing, and I say, "Okay, you know what? We'll just carry all of this cost," because we know it's gonna the demand is gonna come back.
A, I've probably got more cost than I'm gonna need, and B, during all the time I'm waiting for it to come back, the margins of Watson-Marlow would be reduced unnecessarily. It is about right sizing. It's not restructuring, it's about right sizing to the new levels of strong demand that we continue to see going forward, but coming off extraordinary levels of demand until just recently. Does that?
No, that's very, very helpful. Thank you very much. Just lastly, on Vulcanic and Durex, I understand the margin stepped down for FY 2023. It also sounds as if this is a multi-period investment cycle. What is the shape beyond FY 2023? What is in your planning assumptions? Is it another step down in FY 2024 before those businesses return to group average margins or not?
Okay. With a caution before we go any further, we are not giving any guidance for 2024. Okay? Let's not get carried away. Yeah, thanks for telling me. Again, let me take you back to what we've already said, maybe with a different angle to help it become clearer. You know that graph that Nimesh showed you, how the spread between the legacy Spirax and Watson-Marlow margins are at 25% for the last, or above that, for the last five years. Then we saw the actually reported margins dropping a bit as we brought in Gestra and Chromalox at sub-20% margins. We said then that in the first two or three years, that margin might go down because we're investing to bring them up to our standards.
You saw that shaded area get a bit, in terms of bits, got bigger, and now it's getting smaller. That's all in line with what we've been saying for the last six years. That same model applies for these acquisitions. Okay? Whilst they're not dilutive to the group, because combined they're the same level as the group, they are enhancing the ETS margins. Okay? Even if we take a bit of intentional and by design, reduction to the margins of those two divisions of ETS, the continuous margin progressions that we are seeing already and we will continue to see in the two, Chromalox and Thermocoax, the two legacy divisions of ETS, that margin progression will continue in line with all the guidance we've been giving you.
The alignment of the structure of the newly acquired divisions of Vulcanic and Durex is typically a 2-year to 3-year cycle. Sometimes it might be 1, might be 3, but that's kind of the timeframe. Those investments are superseded by the continuous improvement of the legacy business. That will continue because of the strong growth of volume above IP, the operational gearing that you get to that, the continuous improvement in the underlying processes. All of those things will continue to drive the legacy businesses up in their margins, and therefore the total ETS margin, our projection, is that it will continue getting stronger as we go forward. We, you know, we don't anticipate today that you would have a further reduction of the, you know, below the margin of this year.
That's. Without giving any specific guidance, but just directional. Do you wanna add anything to that, Nimesh?
No, I think you've covered it. We've gone past 10:30 A.M., so we probably need to release people at some point.
Any other last questions? Okay. On that basis, I thank you all very much for coming here and for your patience to listen to us speakin', over the last hour and a half. It's very nice to see you all again and hope to see you again soon.
Thank you very much.