Spirax Group plc (SPX) Earnings Call Transcript & Summary

Hello, and thank you for joining this presentation of Spirax Group's half year results. I'm Nimesh Patel, Group CEO, and I'm joined by Louisa Burdett, Group CFO. Let me begin with summarizing our performance in the first half. We have again delivered a resilient set of results for the first half, and we remain on track to deliver our full year guidance. Across the group, our Together for Growth strategy is strengthening our differentiated business model. We are benefiting from our diversified end market exposure, and, importantly, driving growth ahead of our markets in spite of external conditions is becoming increasingly embedded in how we operate. As a result, we delivered 5% organic sales growth, well ahead of IP of 1.5%. Our organic profit growth was 6% and the operating margin progressing to 19.8%, with EPS up 9%. We achieved this while continuing to invest in future growth. The group adjusted operating margin increased 10 basis points organically with planned investments weighted to the first half. We invested in sales headcount, customer digital connectivity, and digital tools for sales effectiveness. Now looking briefly at the businesses. In STS, sales grew 1%, although demand growth was more than double IP. Sales were below orders as customers specified a small number of deliveries for the second half. So we are carrying both a strong order book and demand momentum into the second half. As expected, the decline in large project demand in China has continued to moderate, partly offset by further growth in MRO and solutions sales. This resulted in China being down 1% compared to the 6% decline we saw in the first half of last year. ETS performed very well, with sales growing 11%, supported by strong demand growth across all 3 divisions and continued operational improvements that are increasing throughput and supporting strong margin progression. And in Watson-Marlow, sales grew 7% with Biopharm new order intake ahead of sales. And in Q2, orders reached the highest quarterly level since the COVID-related peak. In Process Industries, we continue to outperform IP. The lower STS margin of 22% reflects the phasing of shipments, but also investments in future growth that were more weighted to the first half. We expect higher margin in the second half and for the full year to be broadly in line with last year. Margins improved in ETS by 220 basis points to 17.2% through operating leverage, the mix of higher-margin sales from Semicon and Heat Trace and delivery of operational efficiencies. Watson-Marlow margin also improved on operating leverage by 80 basis points to 27.5%. Our cash conversion, which is typically lower in the first half compared to the full year, reflects planned inventory builds to offset potential supply chain disruptions caused by the Middle East conflict. And our return on capital employed has improved by 180 basis points to over 35%. Overall, our Together for Growth strategy is delivering. We continue to grow well ahead of IP. We are carrying strong order books and order momentum into the second half, and we remain confident in delivering on our reiterated guidance for the full year. Let me turn to the broader demand environment. Once again, the macroeconomic backdrop remained weak during the first half. You can see from the chart on the left that IP forecasts continue to be revised downwards for both the first and second half, but this is broadly consistent with the more cautious assumptions we have adopted in our planning. The table on the top right shows that the expected recovery in IP has been pushed out to the second half, and the bottom right illustrates that industrial production has remained weak across key markets, making up around half of group sales. Germany continues to contract, while growth in the USA, France, Italy, and the U.K. remains modest at around 1%. To deliver on the IP forecast for the second half, growth rates would have to improve significantly in key markets. Our approach remains unchanged. We plan prudently and focus on delivering what we can control. IP can be a headwind or it can be supportive, particularly when over a 2% tipping point, above which we start to see a real step-up in customer activity. But what our performance is reinforcing is our ability to self-generate demand to drive organic growth. And what I'm most pleased with is that driving growth against challenging external conditions is becoming embedded in how we operate because of our strategy, because of our execution, and because of our investments. And this highlights an important point. Our growth is linked to IP, but it is not reliant on IP. The resilience of our growth is underpinned by the breadth of markets and customers we serve, which is a key strength of our group. Our growth potential is underpinned by our position in attractive sectors exposed to supportive long-term growth trends, and by our ability to take market share through our focus on solution selling. The long-term growth trends I'm referring to are evident in all 3 businesses: Process optimization, what we do every day across multiple sectors to help our customers with their process reliability, energy costs, higher throughput, lower scrap, safety, essentially their efficiency and effectiveness as they meet increasing consumer demand. Health, where we serve the biotech and pharmaceutical markets as well as medical devices and hospitals, all benefiting from an aging population and innovative advances in health care. Technology, where we're finding new applications in Semicon, data centers, nuclear and aerospace and defense through new product development, benefiting from how technology is changing the way we live and work. And in ETS and STS, we benefit from the trend towards electrification, which is how our customers in all sectors will deliver on their sustainability targets. Around 40% of group sales are in sectors where these trends are driving high growth and around 60% are in sectors with good growth where we are also increasingly taking market share. Importantly, across our 3 businesses and across all our end markets, we leverage the same differentiated business model to deliver on the opportunities we see. Direct sales engineers build deep customer insight through sector focus and local presence. They're experts in customers' mission-critical processes and applied engineering expertise enables us to solve customers' problems and deliver measurable value with 85% of our sales funded by customers' operating budgets. This combination allows us to consistently generate demand growth ahead of IP, and it's why we remain confident in our ability to deliver our medium-term targets and above these in the long term. And speaking of the medium term, let me explain why we remain confident in achieving the organic sales growth targets we set out in 2024. As you know, we have 3 strong engines of growth, starting with STS. Progress in execution of our commercial excellence initiatives is enhancing demand growth relative to IP. I will speak later about how we're investing in direct sales, reshaping partnerships with distributors and driving growth through digital connections. China has been a headwind for growth over the past 2 years, but we are repositioning our business in China. And as expected, we continue to see a moderation in the decline of large projects as well as strong growth in MRO. As a result, we are on track to improve growth within our low to mid-single-digit range. In ETS, sustained strong demand across all our divisions and our focus on operational improvements to deliver into that demand underpins our target of above mid-single-digit growth. We are delivering above that level. And in Watson-Marlow, the underlying market growth in Biopharm, coupled with our success at taking market share in target sectors within process industries supports high single-digit growth. Taken together, these drivers support sustaining and enhancing our mid-single-digit organic sales growth at a group level while continuing to build on our long track record of growth ahead of industrial production. Now I'll hand over to Louisa for a deeper dive into our first half financial performance.

Thanks, Nimesh, and hello, everyone. As usual, the numbers I'm presenting are on an adjusted basis, excluding amortization of acquired intangibles. And the prior year numbers also exclude the costs related to the restructuring program we undertook last year. There were no P&L charges for restructuring in the first half, although you will note GBP 5 million of cash outlay in the cash flow statement, which reflects timing of settlements. And as a reminder, our definition of organic growth excludes both the effect of currency movements on sales and profit and the impact of any M&A, of which there was none in this or the prior year. Group performance in the first half was in line with our expectations and sets us up well to deliver our full year guidance. We delivered mid-single-digit revenue growth, increasing 5% organically, well ahead of IP and with growth in all 3 businesses. Adjusted operating profit increased by 6% organically with adjusted operating margin improving 10 basis points to 19.8%. Margin progression was driven by strong performances in ETS and Watson-Marlow, partly offset by a reduction in STS margin, which I'll come on to shortly. Adjusted earnings per share increased by 9% to 150p per share, reflecting the growth in adjusted operating profit together with stable financing costs and a stable tax rate. The Board has declared an interim dividend of 50.4p per share, representing an increase of 3%. With dividend cover returning to the Board's target range, future dividend growth will more closely reflect underlying earnings growth while maintaining our commitment to sustainable shareholder returns and our capital allocation framework. I'll now take you through the drivers of sales and profit performance, starting with the sales bridge. First half organic sales growth was 5%, well ahead of IP, and there was a negligible impact of GBP 1 million from FX. All 3 businesses delivered organic growth. In STS, mid-single-digit demand growth translated into organic sales growth of 1%, with some shipments specified by customers for delivery in the second half. And as Nimesh has already explained, China is performing as expected. ETS delivered another strong performance against a strong comparative with organic sales growth of 11%. We are driving the demand, which is reflected in strong order books across all 3 divisions, including double-digit growth in Semicon. And our continued operational progress in process heating also had a positive impact on throughput. In Watson-Marlow, sales grew 7% organically. As expected, new orders in Biopharm have remained above sales, benefiting from strong consumables demand, while new capacity demand is still recovering. And Process Industries has continued to significantly outperform IP as we grow our market share in our target sectors. Moving to the operating profit bridge, where group profit increased 6% organically with FX driving a 2% tailwind or GBP 3 million. Looking first at STS, adjusted operating profit declined 6% organically, and the margin was 170 bps lower at 22%. This is largely a function of timing, reflecting the phasing of shipments. And in addition, we also made considered investments in sales headcount and digital capabilities, which were weighted to the first half. In ETS, adjusted operating profit increased by 27% organically, significantly ahead of its strong sales growth. Margin improved by 220 bps to 17.2%. What we are doing here is working with the margin progression in the first half anchored in each of our ongoing operational actions. As a reminder, these are strong volume growth, improved operational efficiencies, the absence of lower-margin legacy orders and a favorable mix from higher-margin Semicon and Heat Trace sales. These drivers were partially offset by ramp-up costs associated with our new medium-voltage facility and, consistent with the other 2 divisions, continued investment in sales headcount and capabilities. Encouragingly, ETS delivered a 20% margin in the month with the highest shipments, demonstrating the strong profit characteristics of this business. And finally, looking at Watson-Marlow, adjusted operating profit increased 11% organically with margin improving 80 bps to 27.5%. The margin improvement was driven by operating leverage on higher volumes as well as ongoing implementation of manufacturing and supply chain efficiencies, offset by some focused investment in sales capabilities, digital solutions and new product development. I'll now turn to cash flow, where adjusted cash from operations was GBP 92 million, resulting in a cash conversion of 54%. A lower level of cash flow in the first half does reflect the normal seasonality of our business, and we continue to expect full year cash conversion of around 90%. However, our absolute cash from operations and conversion were lower than the first half of 2025, and this reflects actions we took to build inventory to mitigate supply chain disruption that we anticipated in response to the conflict in the Middle East. Our capital expenditure was around 3% of sales, reflecting continued discipline in allocation as we prioritize investments in projects that support future growth whilst maximizing the use of our existing manufacturing capacity. We now expect full year CapEx to be at the lower end of our guidance range of 4% to 5% of sales. We ended the half with net debt of GBP 618 million and a net debt-to-EBITDA ratio of 1.6x. Whilst this is temporarily outside our target range of 1 to 1.5x, it is not unusual for the normal cycle through the year, particularly with the recent payment of the interim dividend, and we fully expect to be back within this range by the end of the year as we continue our focus on deleveraging. So let me now turn to the outlook for the second half and the full year. As we have outlined, we ended the first half with strong demand momentum and healthy order books across all 3 businesses, providing good visibility and confidence in our second half delivery. Our initiatives being sponsored through our operational excellence growth driver continue to underpin sales conversion. In STS, we expect higher sales growth in the second half, driven by shipments from the strong order book at the end of the first half, which is unwinding as anticipated as well as further progress in driving self-generated demand. We anticipate second half margin to be higher than the first half, consistent with our typical 45%, 55% weighting of adjusted operating profit. And this margin reflects operating leverage from second half -- from higher second half sales shipments, driving a full year margin broadly in line with that of 2025. In ETS, we expect high single-digit sales growth in the second half, even against the strong double-digit comparator from last year. This is supported by the strong demand environment and large order books in all 3 divisions. Margin will be slightly ahead of the first half. And finally, in Watson-Marlow, as we have said, Biopharm orders remain ahead of sales, and Process Industries entered the second half with a strong and growing order book. So overall, for Watson-Marlow, we expect high single-digit sales growth in the second half with margin broadly similar to the first half. A word on FX. If FX rates were to remain at today's levels, we would expect a negligible impact on both revenue and profit for the full year. To give a little bit more color, in the first half, there was a negligible impact on revenue and a tailwind of 2% on profit. Therefore, we're expecting the second half revenue impact to be again negligible, but profits to be impacted by a 2% headwind, which gets you to the full year guidance. To summarize then, we anticipate higher sales volumes in the second half, driving improved operating leverage across the group. Combined with the continued benefits from operational efficiency initiatives, this gives us confidence in margin progression through the remainder of the year. We are on track to deliver our full year guidance. And I want to finish by reminding you why we remain confident in the medium-term margin targets that we set out at our Capital Markets Day in 2024. Nimesh has already taken you through this slide and the sales drivers that underpin our medium-term targets. So let me now take you through the margin drivers. The actions we have taken over the last 2 years are increasingly gaining traction as we continue to hold and meet the expectations that we set, supporting our confidence in delivering a group margin of 22% to 23% over the medium term. The remainder of the journey to that 22% to 23% will be largely driven by ETS and Watson-Marlow. So if I start with ETS, we remain on track to deliver our 20% margin target. The backlog of lower-margin legacy orders has cleared, demand remains strong. Operational improvements continue to increase our efficiency, and our mix is benefiting from the growth in higher-margin Semicon and Heat Trace sales. And as our lead times continue to improve, we also see opportunity for further value-based pricing, although we expect this to be more of a factor through 2027 and beyond. In Watson-Marlow, it is simple. As we have said before, this business is well invested and the path to over 30% margin is clear. It will come from operating leverage from a sustained level of higher sales. And finally, in STS, we remain confident in delivering margins of 23.5% over the medium term as we have proven consistently we are capable of. Higher sales volumes, continued operational improvements and the benefits of organizational initiatives will support that progress. So taken together, the strong progress we have evidenced in ETS, the operating leverage in Watson-Marlow, and the proven history of STS underpin our confidence in delivering our group medium-term margin target of 22% to 23% while continuing to drive attractive returns on capital. Nimesh, I'm handing back to you.

Thanks, Louisa. Let's turn now to some of the key drivers of our performance in the first half. First, a brief reminder of our Together for Growth strategy. At the foundation is our differentiated business model. Building on that foundation, we are executing against 3 operational priorities: commercial excellence, operational excellence, and organizational fitness. These priorities are strengthening our sales effectiveness, improving manufacturing efficiency, and helping us leverage the scale of our group. We're also creating the capacity to invest in attractive future growth opportunities, particularly through digital and services and decarbonization, where we see significant long-term potential. Together, these support delivery of our financial ambition. Moving to how we're delivering on our operational priorities. Last year, our restructuring program simplified our organization's focus on customers to accelerate growth, supported by reinvestment into key initiatives. We are seeing the benefits of the changes we made last year. Establishing Heat Trace as a standalone division within ETS, benefiting from dedicated sales engineers, is contributing to strong growth in this high-margin part of ETS. Similarly, in Watson-Marlow, our sectorized sales teams continue to build on the double-digit demand growth we saw at the end of last year in focus sectors such as mining and wastewater. In STS, the reorganization enabled us to reinvest in sales and technical capabilities, increasing headcount by around 3%, helping drive demand growth of more than 2x IP in the first half. We are also seeing the benefits of our focus on other commercial excellence initiatives. Our cogeneration approach with STS U.S. distributors continues to gain momentum with demand from the 22 partners onboarded in 2025 increasing by around 6%. Finally, data centers are a good example of how we're continuing to expand our addressable market across all 3 businesses. In ETS, we see considerable opportunity in liquid cooled load bank solutions with a growing development pipeline. We're also seeing demand in Heat Trace for freeze protection, in STS for air eliminators and in Watson-Marlow for specialist hoses. Together, our initiatives are helping us generate demand, win share, and drive growth. Turning next to operational excellence. First, we're optimizing our manufacturing and supply capabilities. In STS, we continue to localize production by transferring casting and forging activity from EMEA to China and India, while also rationalizing and repricing some of our lower demand products, all of which improves manufacturing efficiency. In Watson-Marlow, we've continued to ramp up production at our Devens facility in the U.S. to support strong demand, improve operating leverage and reduce tariff exposure while also localizing selected production and assembly activities in APAC to shorten lead times and better serve our customers. And in ETS, operational improvements continue to translate directly into growth and margin progression through higher throughput and shorter lead times, shipments of large medium-voltage heaters more than doubled in the first half. We also successfully responded to Semicon demand with a further double-digit increase in shipments. Our operational priorities create the capacity to invest in the opportunities that will support our future growth. In Digital and Services, we continue to strengthen our customer relationships by becoming even more connected with customers' processes, and I'll delve deeper into this on the next slide. But first, turning to decarbonizing thermal energy, we continue to make progress across our 4 go-to-market strategies. In STS, our sustainability center of excellence, established as part of our restructuring, successfully won orders to deliver steam system audits across 80 sites for a number of multinational food and beverage customers to identify energy optimization opportunities. And in ETS, we secured 10 Powering Zero orders during the first half at a total value of around GBP 12 million. We are also further leveraging the combined expertise of STS and ETS through our thermal energy assessment capability. During the first half, we delivered 16 assessments across the USA, Europe and China, helping customers identify meaningful energy savings while creating significant potential pull-through revenue opportunities at an average of over 5x the initial assessment revenues. These investments are strengthening our customer partnerships, expanding our addressable market and supporting sustained long-term organic growth. I want to spend a moment to explain the opportunity we see in digital. Over the last few years, we have invested in developing our connected products and service capabilities to create a differentiated digital offering, supported by small bolt-on acquisitions such as Cotopaxi Energy Management Solutions and Pulse Sensing Technology. Now our capability is helping us become even more integrated in our customers' critical processes, moving us from periodic walk the plant reviews to providing constant insights, data and actionable recommendations. Today, we physically survey around 1 million traps every year, and that isn't even our entire installed base. Our experience and expertise tell us that we need to connect around 1 in 10 steam traps in a steam loop to allow us to build a system-wide view. Of course, our sales engineers' knowledge of our customers' individual systems and their mission-critical processes as well as how they operate in practice every day is key to knowing which steam traps need to be connected. In STS, we now have 19,000 connected steam traps across 2,350 customer sites, all since 2023. Our ambition is to grow beyond the 19,000 traps, firstly, to 100,000, but then also recognizing that this number is only part of our growing installed base and a fraction of the industry's installed base. Through our investments, we are on track to do just that. Beyond the connected product and digital subscription revenue, our connections create significant additional value. By identifying optimization, maintenance, and replacement opportunities, we are generating pull-through revenue while helping our customers improve their reliability, efficiency, and sustainability. One example is a dairy customer operating with highly variable throughput and limited maintenance windows. They moved from physical annual steam trap surveys, which identify failed traps at a point in time to continuous wireless monitoring across their steam and condensate loop. Our solution now identifies failures as they occur, reducing energy losses and saving approximately GBP 100,000 a year for that customer, while also improving maintenance planning and delivering a short payback for them. We're excited about our digital potential and continue to evolve and adapt to ensure we maximize the opportunity. So to summarize before moving to Q&A, we have again delivered on the expectations that we set out. Despite the challenging macroeconomic backdrop, we delivered resilient mid-single-digit organic growth in both sales and profit, well ahead of industrial production. We are confident in our ability to deliver on the second half. Strong order books and continued momentum across our end markets provide good visibility into growth and margin progress. Lastly, a reminder that our relentless focus on execution and controlling the controllables is working, and we are embedding the mindset of driving growth ahead of our markets in how we work. As a result, we remain on track to deliver our medium-term targets and above these in the long term. Thank you. We're now happy to take your questions.

Good morning, everyone. This is Mal. Thank you for submitting your questions online. Just to remind you, you can keep on doing that until the call comes to an end. I will read your questions out verbatim as I see them on the screen. So first question is from Stephan on STS. Can you please explain your comment on larger orders coming back? Will that lead to an acceleration of sales going forward as the demand for these has been absent for a while now?

Thank you, Stephan. Good question. So we talked about this in our last trading update, and we've mentioned it again in our half year results. And you are right, we are seeing what I would describe as a small uptick in large orders across our steam business. Now remember, that's against a weak comparator, but it's a positive sign of our customers' activity and a supporting pillar of the longer-term increase in growth of STS. Perhaps I just take a moment here to talk about the longer-term STS growth potential. And what I want to do is start by reminding you of the recent backdrop. So we've been delivering around 3% to 4% growth, excluding China, which has been a headwind. And we've delivered that against a low IP in the order of around 1.5%. So there are a number of things that we have been focused on. The first is repositioning our business in China, and that's progressing really well as we're updating you on in these results. In the first half, China was down 1% as a result of the moderating decline in large orders, but also the continued strong growth in MRO and solutions. China is likely to return to growth. We've talked about hitting an inflection point in either late this year or the early part of next year. And I can see a path to China growing at least in line with the rest of the global STS business and maybe better. So when that happens, steam is back to a sort of 3% to 4% growth rate. Now on top of that, we've got the investments that are helping us enhance the growth of steam, both digital and decarbonization. And that's why I wanted to spend a little bit of time talking about the digital opportunity today. And I can see that adding 1% between that digital and decarbonization to the steam growth. So that's getting us to 4% to 5%. And the other thing to note here is that all of this is before any improvement in IP. And remember, we grow at 2x IP. So you can see how that could enhance growth further. And finally, just remember the long track record we have in steam, supported by our ability to self-generate growth. And now we have a business that is also well invested in both our sales capability, but also our supply capacity. So thank you for the question.

And Stephan has a follow-up on ETS, which is, can you comment on the 20% margin target? Are we right to assume that this is a full year target? Or is it an exit rate? And to get there, are we right to assume you need the support of pricing initiatives, which you haven't done so far in the past years?

Let me kick that off and then Louisa, I'll hand to you. So we are confident in our ability to hit the 20% target for ETS. And Louisa gave you a really interesting point of evidence on the quality of this business from a margin perspective in the sense that we hit 20% in a month in the first half of the year, and it happened to be the month where we shipped the highest value of product. And that's not a surprise because we've talked about the drivers of getting to 20% and volume and continued demand growth is one of them. But Louisa, do you want to take that question?

Yes. I think I would reiterate what Nimesh just said. The margin progression we have seen in the first half of 220 bps is really pleasing. And it is anchored, as I said, in demand growth, efficiencies, mix and a lack of those legacy orders. We always price for value across each of our business units, and ETS is no exception. So Stephan, we do have elements of that already in our business model. We believe there is more pricing opportunity once we are fully through some of our lead time and efficiency improvements. So we do see more of that after the 2027 period, but it's not like we are waiting because we have a particularly strong competitive position in this market. So it's a continuum. And in terms of the delivery, as Nimesh said, we are confident in delivering that 20% margin, and we hope that we have given you some good proof points today.

Good. Next, we have 3 questions from [ Chip ] at JPMorgan. One, could you provide a bit more color on the greater than 2x IP order momentum you're seeing in STS? And do you now see a likelihood of China being neutral in H2 rather than early 2027? Second question, this is the first time we're hearing you talk about end market exposures. Does that mean you might move away from IP as a significant driver of the business? And if so, how should we think about the longer-term growth algorithm? And finally, on ETS, Semis grew double-digit percentage. How sustainable is that? And what visibility do you have?

You might have to remind me of some questions when we get there. But let me start with the first one, which is about demand growth in STS. So we saw greater than 2x IP demand growth in the first half. IP was 1.5%. So that's greater than 3%. By the way, bear in mind that we saw a small impact on demand in the Middle East as a result of the ongoing conflict. Middle East is 1% of group sales, but much more heavily weighted towards steam than the rest of our businesses. And so if you were to strip out the Middle East impact, that demand growth coming from the rest of the world was even better than what we are talking about here. So I am really quite pleased with the demand growth in the first half in steam. The second thing I would say is -- so what you take away from that is orders obviously well ahead of sales. But as we go into the second half, we have not only a healthy order book. And remember, we're not a business that has significant coverage from our order book when you look several months out. But the order book underpins our confidence going into the second half. But more importantly, the order momentum underpins our confidence going into the second half. And of course, sitting here today, we have the benefit of seeing what's happened in July, and we have the indications through our flash of what's happening in August. And as we've said in our release, we are already seeing the anticipated unwind of those order books driving sales growth and the continuation of that order demand. So it gives us confidence in the second half performance of steam exactly as we've described it. We talked earlier in response to Stephan's question about the large orders coming back, which very early stage against a weak comp, but still a positive sign. And remember, the sales performance in the first half, which in turn has some impact on the margin together with the investments, we're talking about small numbers. 1% of steam in the first half is about GBP 4 million. That is literally the equivalent of a few days' worth of shipments. So it helps probably put a little bit of that into context. The second question was about sector exposure. My memory's not failed...

Sector exposure. Does that mean that you are likely to move away from IP as a driver? And what does this mean for the longer-term growth algorithm?

Yes. So we are a business that operates in multiple sectors in multiple regions of the world. All of our technologies are used by almost all sectors in some way, shape or form. So inevitably, our business growth is going to be driven by industrial production activity. The more activity, the more consumables we will sell, the more maintenance will be required, the more the growth in demand, the greater the core on our solutions to help with effectiveness of processes, eliminating waste, driving higher throughput. These are all things that are pegged in some way to IP. However, I've also said that while we cannot be completely divorced from IP, what we can do is continue to improve the outperformance against IP. And again, in the first half, we've delivered at a group level, organic sales growth of 5% in a world where IP is 1.5%. And we've got genuine volume growth in the first half of this year. And that is because of the changes that we have made through our Together for Growth strategy through our restructuring, we are getting after the opportunities we see. And what I wanted to remind everyone of with the slide on sector exposures was, one, we are diversified. We are present across a number of sectors. Two, a very significant proportion of our sales are in sectors that are very exciting, high-growth sectors; and three, that we are driving good growth and taking market share on top of that in other sectors as a result of our ability to self-generate demand and deliver solutions to our customers. So hopefully, that came across.

Maybe I can pick up Chip's other 2 questions, which I think was about China progression being neutral?

No, Semicon.

Semicon, yes, as a high-growth industry. I mean just picking up Nimesh's comments about us, customer solutions, we are seeing double-digit growth in that industry. We have close connections with our customers and very good visibility on what that pipeline looks like. So it is a good high-growth sector for us and one where we're highly connected with our customers and responsive to that.

I'm sorry, Chip's second question, the second part was on China. Do you now expect it to be neutral in the second half?

Our confidence around China hitting that neutral point has definitely gone up given the performance in the first half and what we can see going into the second half. So we've always given the range of second half of this year or early the following year. I think it's fair to say that, that could well come towards the earlier end of that range rather than the latter. But there's more water to flow under that bridge.

Okay. We have a question from Besik at Lombardi Capital. Could you quantify the headwind to STS' first half organic growth from the client-driven shipment phasings into the second half?

Look, very broadly, we're looking at a headwind that's in the low single-digit millions of pounds. So it comes back to my point of the law of small numbers here. Yes, 1% of growth in the first half for steam is about GBP 4 million. So we can see those orders. We can see them in our order book. We can see that customers have specified shipment in the second half. We can see when they're going to ship in the second half. As I said, in the first couple of months of the second half, we've already seen the unwind of that order book. So frankly, things are progressing exactly as we have laid out in our results.

Okay. Some questions from Rory at [ Oxcap ]. Firstly, can you quantify strong growth in STS MRO activity in China? And can you just remind us of the margin difference between STS MRO and project activity in China?

MRO growth has continued in double digits as it has for the last couple of periods, and obviously is a key driver of the return of China overall in STS to minus 1% versus minus 6% in the prior period. Obviously, that's also been helped by mitigation in the decline in large orders. We have directionally always indicated that MRO margins are slightly higher than large order margins in China, but we haven't provided a specific quantification. But look, basically, the growth of MRO, the continued focus on large orders makes our China business even better. And as we've always said, it represents one of our best opcos reading the market and pivoting and having that balance across MRO and large orders makes it a stronger business overall.

Second question from Rory. What are the supply chain impacts you're seeing coming out of the Middle East? Is this where customers have been delaying shipments into the second half? Or is that a different dynamic?

So in terms of the delays of shipments into the second half, and again, let me remind you, we're talking about relatively small numbers. But we have seen that from customers in the Middle East. I mean, sort of clearly, it is challenging and potentially not safe to access customer sites in parts of the Middle East, and we put the safety of our colleagues above all else. However, there is an opportunity here that when it does become safe, working with our customers to access their sites, there is opportunity for us to support repairs, maintenance, ramp-up and various other activities in our customer sites. So that represents an upside potentially in the second half of the year. In terms of other deferrals, there are customers in other parts of the world who have been watching events in the Middle East, but also more broadly across the globe, and making decisions about how to phase their investment in the year. So some projects that they may have set out to execute in the first half have moved into the second half. We've received the orders. We know when we need to ship the projects. So we have confidence in that demand coming through. And in terms of the first part of your question, which was the disruption to supply chains, we took prudent action early to make sure that we could continue to support our customers with their needs. We see, I think, going forward, limited disruptions to the supply chain and where we expect them to continue. We've already got plans in place. And therefore, we would expect to pull down on our higher-than-normal inventory levels during the second half of the year, and that's what you'll see in our improving cash conversion in the second half.

And finally, from Rory on ETS. It feels like ETS is finally turning a corner. But on headwinds, were the medium-voltage ramp-up costs at Ogden incremental based on the strong demand you're seeing? Or were you always expecting to incur these costs in this period? And as a follow-up, are there any opportunities for you as data center architecture shifts to medium voltage?

So ETS has been performing strongly for the last couple of years. As always, the improvement program can't be delivered overnight as much as I, more so than anyone else, wish it could. I have to say, I think the team there are doing a phenomenal job of getting after the opportunities. And I think that's twofold. One, around growth. So you can see the strong demand growth that we are generating in ETS year in, year out. And secondly, in the ability to deliver against that growth operationally, whether that is addressing some of the historic operational issues that existed around large projects, in particular, coming out of our North American factories. And as a reminder, in the 5 years to our Capital Markets Day in 2024, output from those factories in North America was down around 10% in volume. Since then, it's up over 40% in the last, what now, 2.5 years. So I'm really pleased with that performance. And in turn, as Louisa described earlier, that continued demand growth, that ability to deliver to customers, and the efficiency improvements that we are making are driving margin improvement. And we're not done yet, obviously, because we're going to get the margin to 20%. I have absolute confidence that this business can be a 20% margin business. So really pleased with progress there. Sorry, what was the second part of that question?