Business review: John Crane

Paul Cox

President

John Crane is a world-leading provider of products and services for the major process industries, these include the oil and gas, chemical, pharmaceutical, pulp and paper, and mining sectors.

We help to enhance customer productivity by providing advanced technology mechanical products backed by an exceptional global service network.

Employees

6,400

Principal operating regions

John Crane is a global business with a presence in more than 50 countries.

Customers

John Crane serves oil & gas companies, refineries, pump and compressor manufacturers, chemical and other process industries. Its main customers include BP, Chevron, China Petroleum, ConocoPhillips, ExxonMobil, Gazprom, Qatargas, Saudi Aramco, Shell, Total, Dresser, Elliot, Flowserve, GE Nuovo Pignone, ITT, Mitsubishi, Siemens, Solar Turbines, Sulzer, York, BASF, Bayer, Dow, Koch Industries and Lyondell.

Contribution to 2008 Group sales^#

27%

Contribution to 2008 Group headline operating profit^#⁺

25%

Competitors

For rotating technologies in oil & gas, John Crane's main competitors are, Flowserve and EagleBurgmann Industries (mechanical seals), Kingsbury, Osborne Engineering & Waukesha (engineered bearings), Pall, Hydac and Boll (filtration systems), Thomas, Turboflex and Kopflex (couplings). For equipment in upstreamenergy John Crane's principal competitors include Weatherford, Norris, UPCO, Cameron and Quinn.

^#Based on revised operating structure for 2008/09 (see Segment information)

+Percentage relates to headline operating profit before corporate costs

Markets

John Crane sustains the effective operation of customers' rotating equipment and other machinery with products that include mechanical seals, seal support systems, engineered bearings, power transmission couplings and specialist filtration systems. John Crane also helps maintain oil and gas productivity through the provision of down-hole pumping hardware. All this technology is supported by a global sales and service network that provides performance enhancing services. Using expertise developed from decades of experience, service teams in more than 50 countries maintain and support customer assets throughout their economic lifetime.

John Crane is experiencing strong demand for its products and services, particularly in the oil, gas and petrochemical sector, which is its largest market. John Crane’s robust business model stems largely from the aftermarket, which represents two-thirds of revenue. At this stage in the capital investment cycle, the growth is in the sale of original equipment for new production facilities. This will provide aftermarket opportunities in the future, which are expected to generate attractive margins. Global capital spending in the energy sector is projected to continue growing in the long term in response to increasing energy demand.

John Crane already has a global presence, with local service centres in more than 50 countries and hardware installed throughout the supply chain: for example, liquefied natural gas (LNG) produced in Qatar and ultimately drawn from the UK gas grid by consumers will have passed through John Crane seals and other technology at every point in its journey. It is building on this platform in two ways.

First, it is increasing its technological footprint by adding new product lines. These products typically also have a similar customer profile and have strong aftermarkets.

Second, there are approximately 850,000 wells around the world and many of these require oil and gas reserves to be brought to the surface using artificial lift. John Crane is broadening into upstream energy services which address a segment of this £700m per annum market and leverage John Crane’s strong global service and support infrastructure.

Over the past 12 months there have been significant developments in both these areas. The markets for these products are experiencing significant growth resulting from the increasing consumption of oil. This growth is coming in both International and Domestic markets. In addition, we are also experiencing strong growth in the gas markets, as artificial lift systems are being used to de-water gas wells.

Performance

	2008 £m	2007 £m	Reported growth	Underlying growth
Sales	626	532	18%	8%
Headline operating profit	96	75	27%	12%
Headline operating margin	15.3%	14.1%
Statutory operating profit	39	1

John Crane grew reported sales by 18% and headline operating profit by 27%. Sales benefited from currency translation (£20m) and from acquisitions (£30m) giving underlying sales growth of 8%. Similarly, headline operating profit benefited from currency translation (£4m) and from acquisitions (£7m) leaving an underlying growth rate of 12%. Margins increased by 120 basis points to 15.3%. This strong growth has been driven by high levels of investment by the petrochemical industry, reflecting the strong global demand for oil and gas.

The growth in the petrochemical sector has increased original equipment orders to record levels. To help meet these requirements John Crane has invested over £5m worldwide to increase manufacturing capacity by over 20%.

The provision of maintenance and repair services to customers through the aftermarket represents two-thirds of John Crane’s sales. The sale of original equipment for new production facilities creates subsequent aftermarket service opportunities that are delivered via John Crane’s network of service centres, and the business has continued to build its global service base. Local service centres are now sited in 52 countries worldwide. This capability allows us to provide a range of added value services including repair, root cause analysis, alignment and condition monitoring, all designed to improve the performance of our customers’ rotating equipment and reduce downtime. Current developments are focused on key growth markets. For example, in Saudi Arabia, we have a new service centre in Jubail and are building a new service, sales, training and manufacturing facility in Dammam. The Dammam facility features an upgraded gas seals test capability and adds significant service capacity in an area where extensive investment is planned by the petrochemical industry over the next 10 years.

Production capacity has been increased by the creation of a new 5,600 square metre, 60 person manufacturing facility in Mexico. This factory provides machining of seal parts, seal welding and assembly in support of the markets throughout the Americas. The increased capacity takes advantage of the low cost base and availability of skilled machinists in the Mexico City area, and is well positioned for future expansion.

Another growth opportunity is China where we expect to complete a new facility in Tianjin by the end of 2009. This will support further growth and enable the relocation and consolidation of two existing businesses to a single site. This new facility will accommodate sophisticated manufacturing including assembly, testing and enhanced product development, as well as providing a sales and service centre for the vast domestic Chinese market.

Major oil companies are making significant investments to develop the Canadian oil sands in northern Alberta and Saskatchewan, where the oil reserves are thought to equal those of Saudi Arabia. John Crane continues to add manufacturing capacity and support capabilities throughout its Canadian operations, particularly in Edmonton, to service the construction and maintenance of the refineries that bring this oil to market.

Business developments

Our customers are increasingly demanding larger and higher pressure gas seals so we have invested in dry gas seal facilities in Slough, UK and Morton Grove, USA to support our customers' objectives. At the same time one of the world’s most advanced high-pressure test rigs has come onstream.

In pursuit of its policy to increase its technological footprint, John Crane completed a number of bolt-on acquisitions. The acquisition of Sartorius Bearing Technology in November 2007 expands John Crane's offering into the area of rotating bearings for turbo machinery, while the acquisition of Indufil in March 2008 adds specialist filtration systems.

The bearing business is a leading provider of engineered bearings for high performance rotating equipment for the oil and gas industry based in Goettingen, Germany. The acquisition cost of £13m was satisfied in cash. Indufil was acquired for £71m and had sales of £25m in the financial year ending 31 December 2007. It designs and manufactures filtration systems for rotating equipment in the oil and gas, chemical and power sectors. Both businesses serve similar customers to John Crane with a strong aftermarket for their products, a combination which fits well with John Crane's business model.

The acquisition of CDI Energy Services in March 2007 expanded John Crane's upstream energy services capability. This was boosted in December 2007 with the acquisition of FiberComposite Company Inc (Fiberod) for £46m. In calendar year 2007, Fiberod reported sales of £12m. It is the world’s leading manufacturer of fibreglass sucker rods, complementing the CDI service offering.

As a sign of our solid commitment to both the Japanese and the wider Asia Pacific markets, in December 2007 we increased our shareholding in John Crane Japan, a venture with Starlite Co Limited, to become the majority shareholder. The increased shareholding and operational control gives John Crane a greater presence in what is the second largest market after the United States. Our new majority shareholding will help us accelerate the levels of growth and investment in new technologies which we are able to make in Japan.

The implementation of a new ERP system is underway across Europe with 10 markets now successfully online. The project will be rolled out across Europe and then into the Middle East and Asia. Investment to date has been £17m out of a total project cost of £22.5m. The project is due for completion in June 2010 after which it should generate annual cost savings of £9.5m.

During the second half, we began a restructuring programme to create a global John Crane business by merging the two existing regional businesses. Through the creation of a global operations platform, we can provide better capacity and rapid delivery of products and services. We will also improve our service centre support capabilities and provide distributed global account management teams for greater co-ordination around the world. Going forward, the product line will be managed globally which will enhance service delivery to customers. The project is expected to cost £24m and deliver annual savings of £26m once complete. This initiative comes at a time when John Crane is strong and performing well, an ideal time to build for greater success.

Outlook

Looking ahead, sustained growth in demand for oil and gas is likely to continue to drive investment by petrochemical companies and original equipment manufacturers into new technology and facilities. The addition of adjacent technologies to the portfolio will also support growth.

Investment in equipment for new facilities not only provides short term growth, but provides the foundation for long term aftermarket business. With over 60% of our business derived from the aftermarket, and new equipment having an installed life of over 30 years, we are well placed for continued growth in this area.

John Crane invested £2.4m in aworld-leading high pressure seal testing facility at its manufacturing site in Slough, UK. One of the most advanced of its kind in the world, the facility can test high specification mechanical seals under near-field conditions at pressures of up to 800 bar. Using a new remote web-link the facility enables customers to witness their seals being tested in real-time from wherever they are in the world. The facility is also being used by the John Crane R&D team to help develop new technologies, such as high-pressure seals that are increasingly requested by customers.

Next division

Smiths Group divisions:
Smiths Detection, Smiths Medical, John Crane, Smiths Interconnect, Flex-Tek