2012 Annual Report - Spirax-Sarco Engineering plc

Europe, Middle East and Africa (EMEA)
Our markets remained relatively stable in 2012,
despite the weak euro and deterioration in
economic conditions in the Eurozone.
Nick Anderson
Executive Director
Revenue £m
2008 226.1
2009
2010
2011
2012
Operating profit £m
2008 39.2
2009
2010
2011
2012
225.5
35.6
230.0
232.8
36.8
36.7
250.1
42.5
Sales in EMEA were down 7% to £232.8
million (2011 : £250.1 million) but were
heavily impacted by the weak euro, where
the average exchange rate for the year fell
7% versus sterling, and all other segment
currencies were also lower against sterling.
The impact of the two small business
disposals in mid-2011 reduced sales by a
further 1%, meaning organic sales were
virtually flat for the year. Overall operating
profit was down 14% to £36.7 million from
£42.5 million in the prior year. Our sales
operations in EMEA source their products
from multiple locations and as the euro
weakened, profits in Continental Europe were
impacted by higher landed costs for products
imported from the UK and from suppliers in
Asia, and operating profit was down 4% at
constant exchange rates. Operating profit
margin was lower at 15.8% (2011 : 17.0%)
due mostly to the unfavourable
currency movements.
Economic conditions deteriorated in the
Eurozone throughout the year and industrial
output declined. Our markets remained
weak but stable, with customer maintenance
spending appearing to have bottomed in
the first half of the year. We saw a modest
improvement in underlying demand in the
second half of the year despite deteriorating
economic conditions – core maintenance
expenditure by our customers reflected the
need to keep their steam systems operating
effectively, although increased market
uncertainty led to delays in some local
project work related to energy saving and
operating efficiency.
In our large, mature markets in France,
Germany, Italy, Spain and the UK, sales
were comparatively resilient and were flat in
constant currency overall, as exceptionally
good sales growth in our French business
and mid-single digit growth in our German
operations was offset by lower sales in the
UK and Spain. Total operating profit in these
large markets was higher, particularly in
France, due to good cost controls and some
benefit from the restructuring cost savings.
Southern Europe accounted for 8% of total
Group sales in the year and declined just 1%
at constant currency.
Elsewhere in EMEA, results were mixed with
good performances in our smaller operations
in Belgium and Switzerland. In Scandinavia,
sales overall were lower amidst generally
tough market conditions but profits were
well ahead due to good cost controls and
improved pricing.
Trading conditions in EMEA emerging
markets in Russia and Eastern Europe were
impacted by uncertainty spilling over from the
Eurozone. Combined sales in these markets
were down in the year, principally due to
Russia where we saw a noticeable decline in
refining and petrochemicals project activity
and were therefore unable to repeat the
outstanding sales and profit achieved in 2011.
However, demand in our Eastern European
markets improved sequentially versus the
first half of the year. Our increased emphasis
and investments in the Middle East and Africa
resulted in robust order growth in the fourth
quarter and we remain very encouraged
by our longer term prospects in these
increasingly important markets.
Our main manufacturing operations in the
UK and France were impacted by a doubledigit
volume decline from destocking in our
internal supply chain and reduced demand
in our European sales companies. R&D
spending was marginally higher for the year
and we have now completed our objective of
raising the overall level of investment in new
product development. Construction of the
new finished product distribution centre in
Cheltenham was recently completed and will
be brought fully into use through the second
quarter of 2013, completing the final piece of
investment to consolidate and modernise our
manufacturing and R&D facilities in the UK.
As announced in August at our half year
results, we have taken actions to reduce
our cost base across many of our European
companies in response to the decline in
volumes in those markets since the start of
the recession and to our expectation that the
economic healing process in Europe will be
slow and protracted. Overall the headcount in
our sales operations was reduced by 9%, and
there were additional reductions in our main
manufacturing plants in Europe.
18 Spirax-Sarco Engineering plc Annual Report and Accounts 2012