Business review: John Crane

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

We help to enhance customer productivity by providing advanced technology mechanical products and performance-enhancing services backed by an exceptional global network.

Principal operating regions

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

Customers

John Crane serves oil & gas and power generation 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, Petrom, Total, Dresser, Elliot, Flowserve, GE Nuovo Pignone, GE Energy and Power, Andritz Hydro, Siemens, ITT, Mitsubishi, Solar Turbines, Sulzer, York, BASF, Bayer, Dow, Koch Industries and LyondellBasell.

Competitors

For rotating technologies, John Crane's main competitors are, Flowserve and EagleBurgmann Industries (mechanical seals); Kingsbury and Waukesha (engineered bearings); Pall and Hydac (filtration systems); Rexnord and Emerson (couplings). For equipment in upstream energy John Crane's principal competitors include Weatherford and Norris.

Suppliers

John Crane operates its supply chain globally, using global, regional and local partnerships to meet the required service levels. Its main suppliers are Morgan Group, Coors Tek, Schunk, ESK, Earle M. Jorgensen, Femax, DuPont, Greene Tweed, Scot Industries and Ashland Chemical.

Global service, local support

When a major customer in Chile had to close its gas refinery in June because of damaged compressor seals, prospects for a quick resumption of output looked bleak. Local spares were unavailable and H1N1 flu-related travel restrictions meant specialists could not be sent. However, technicians at John Crane's headquarters in Morton Grove, tapping into global experience and using advanced web-based communications, helped Chilean engineers locate the damage, repair it and rebuild the seals within days. Once installed, they worked perfectly and the plant was able to resume full production.

Markets and trends

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 and enhance oil and gas productivity through the servicing and 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.

Approximately one-third of John Crane sales is the design and supply of products to original equipment manufacturers, while the remaining two-thirds of sales stems from the aftermarket servicing and support of existing installed equipment. The business serves a wide range of process industries including oil and gas, chemical, power and general industrial applications. Demand for John Crane products and services is influenced by a number of factors: the global demand for energy and an increased desire for national energy independence; more stringent regulatory requirements, eg to reduce emissions; the need to replace ageing infrastructure and deliver operational efficiencies; global demographics and long-term economic growth. The long-term drivers, such as the global demand for energy, support growth in original equipment investment in the key end markets that should enable John Crane to deliver average sales growth of around 6% a year over the medium term.

The John Crane addressable market has doubled over the past two years as a result of a targeted acquisition strategy which has added complementary product lines such as engineered bearings, specialist filters and upstream energy services to the existing portfolio of mechanical seals, couplings and seal support systems. These new product areas typically serve similar customers and offer scope for a strong aftermarket business. John Crane is a market leader in its existing product areas with a share of around 28%, while there is significant opportunity to grow its share in the newly acquired product ranges. These new products also allow John Crane to leverage its global network of sales, service and manufacturing centres more effectively. We will continue to seek further opportunities for similar acquisitions which support this growth strategy.

John Crane's global network of over 155 service centres in more than 50 countries is a key asset which allows service closer to customers' operations and provides a swift and effective aftermarket service to them. These facilities provide a range of added value services including repair, root cause analysis, alignment and condition monitoring, all designed to improve the performance of customers' rotating equipment and to reduce downtime. The geographic footprint continued to expand through opening additional manufacturing, sales and service centres in key markets – particularly in growth markets such as the Middle East and Asia Pacific.

Performance

 

2009
£m

2008
£m

Reported
growth

Underlying
growth

Sales

790

626

26%

(1%)

Headline operating profit

143

104

38%

7%

Headline operating margin

18.1%

16.6%

 

 

Statutory operating profit

106

47

 

 

 

John Crane's reported sales rose 26% and headline operating profit increased by 38%. Sales benefited from currency translation (£109m) and from acquisitions (£65m) while underlying sales declined by 1% (£10m) reflecting a lower level of orders for original equipment (OE). Orders began to slow from January 2009, which has caused underlying sales to decline by 7% in the second half compared with a growth of 6% in the first half.

Demand for aftermarket servicing has remained robust and underlying sales remained in line with last year. Within the aftermarket, underlying sales in our largest segment, oil, gas and petrochemical, has continued to grow at 5% as it continues to benefit from the infrastructure investment made by customers over recent years; while the aftermarket for other sectors such as general industrial were down 10% and the chemical and pharmaceutical sector has fallen by 8%. Underlying original equipment sales have declined 3% year on year, reflecting lower sales to the general industrial and chemical sectors offsetting continued growth in our engineered original equipment for bespoke applications, particularly for oil, gas and petrochemical customers.

Headline operating profit benefited from currency translation (£16m) and from acquisitions (£14m), leaving an underlying growth rate of 7%. Margins improved by 150 basis points to 18.1% reflecting the benefits of the restructuring programme which launched at the end of last financial year.

The restructuring programme to create one global John Crane division by integrating the two previous regional organisations is well underway. Corporate functions such as finance, IT, human resources, legal, engineering and product line management are now co-ordinated globally. Sales and service functions have been kept close to customers in regional organisations. Certain manufacturing has been moved to countries in Eastern Europe, Asia and Mexico. These changes are facilitating improved customer focus, quicker decision-making, better delivery, lower cost and more effective communications. In the period, we spent £9m and delivered savings of £6m. Overall, the project is expected to deliver annual savings of £25m.

Implementation of a new ERP system is well underway, with 20 regions across Europe, Middle East and Africa all successfully online. This represents approximately 70% of total project completion. Roll-out is now in progress in India and Asia Pacific regions, with 11 implementations to complete before the end of the project in July 2010. Investment to date has been £22m out of a projected total of £24m. The project is expected to generate annual cost savings of £10m. Since inception the project has realised £4m of savings.

During the year, John Crane has continued to expand its industry-leading, global network of service centres. Current developments are focused on key growth markets. In the Middle East, four new facilities were opened, including a wet seal service centre in Bahrain and a service, sales, manufacturing and training facility in Damman, Saudi Arabia. In Asia Pacific, another four service centres have been opened. This year saw expanded service capability in Rayong, Thailand to serve the petrochemical and oil and gas markets; a new facility in Darwin, Australia to service the oil and gas and minerals mining markets. In China a new service centre opened in Du Shanzi servicing the North West of the country together with a state-of-the-art wet and gas seal service facility in Tianjin, China, part of the recently opened John Crane China facility.

In the past year we continued our acquisition strategy to expand the product portfolio with complementary technologies for similar customers that can leverage the global sales and service network, and build an upstream energy services business. In May 2009 we acquired Orion Corporation, which added a leading US-based designer and manufacturer of hydrodynamic bearings for the oil and gas and industrial power markets. Orion complements and extends John Crane Bearing Technology, a business unit formed following the acquisition of Sartorius Bearing Technology in October 2007. Moreover, it adds complementary products and a manufacturing, sales and service base in North America to supplement existing European operations, and establishes John Crane as one of the leading manufacturers in the hydrodynamic bearings sector. Training and development activity for the John Crane sales force is well underway to promote and sell the product range through John Crane's extensive network. The overall integration process is continuing to progress well and John Crane Bearing Technology was successfully migrated onto the global ERP system in November 2008.

In the upstream energy sector, the John Crane Production Solutions business unit was formed this year to capitalise on the synergies of the CDI Energy Services and Fiberod acquisitions.

Expanding the range of products offered, John Crane Production Solutions launched an Automated Prime Mover (APM) product line which provides auxiliary power to well sites. The product is aimed at geographical areas which are remote from developed power grids, by providing interim power to drilling companies while they wait for power to be run to their wells. APM use will increase oil field production and also meets new carbon emissions standards. John Crane Production Solutions continues to expand international applications, with active opportunities in Indonesia, Romania, India and Mexico.

Sealed for energy saving

John Crane has developed a new and highly reliable gas-lubricated mechanical seal that not only seals high-temperature process fluids on rotating equipment but also saves energy because it is non-contact and friction-free. The Type 2874NE seal ensures no emissions escape into the atmosphere during the pumping of hazardous fluids at temperatures of up to 425° Centigrade while the non-contacting faces maximise seal life. It has already been successfully deployed in many refineries around the world.

Outlook

John Crane's strength and revenue in aftermarket sectors will continue to be enhanced through additional investments in both locations and services offered. The overall order book for the aftermarket and original equipment is below that of the same period last year, primarily because of lower original equipment orders. As a result, we anticipate that overall sales will decline during the first half of the new financial year, particularly against a strong comparator period. In spite of this pressure on sales, there is scope to deliver continued margin expansion as a result of cost controls and the restructuring programme that is underway.



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

 

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