Oxford Instruments plc

Okay, good morning and welcome to Oxford Instruments half year results. In terms of the agenda for today, I'll take you through the highlights for the half year and then update you on our progress with our horizon strategy. I'll then hand over to Gavin who will take you through the financial results before returning for an operational review and then closing with our outlook. Moving straight to the highlights. We've made good progress in the early stages of implementing the Horizon strategy in line with our plans. We have continued our proactive approach to portfolio management, successfully completing the disposal of the industrial analysis business in July. Now, as a more focused nanotechnology group, we have reorganized our structure in line with our chosen customer segments and applications. In addition to our progress with Horizon, we have maintained our focus on the near-term delivery with reported revenue in line with the previous year, adjusted profit before tax is up 24.4%, and adjusted operating margin up 180 basis points, both supported by a currency tailwind. Reported orders for the group were up 6% with increased demand for our own products and related services being partially offset by lower orders in our US healthcare business. The order book representing orders for future delivery increased by 11.8% at constant currency since the year end and is up 3.3% on the prior half year. The sale of industrial analysis has strengthened the balance sheet, significantly reducing net debt. I'd now like to remind you of the key highlights regarding our Horizon strategy that I announced back in June. Horizon is a transformational program focused around two key anchors of repositioning the group for long-term sustainable growth and margin improvement, building on our world-class nanotechnology expertise. A key part of Horizon is our focus on those markets segments where nanotechnology provides long-term growth drivers for our customers and also where we have the opportunity to achieve or retain market leadership. We provide value for our customers by offering products that enable them to be successful, tailoring our solutions and services to help them within fundamental research, applied R&D and commercial end markets. Our customers and their applications are at the center of our focus, and I have previously outlined the key capabilities of market intimacy, innovation and product development, customer support, and operational excellence that we are embedding as our operating model across our organization. While it is still early in our Horizon journey, we've made good progress in a number of areas in support of our strategy. In the past 18 months, we have undertaken significant management of the portfolio. And in July, we successfully completed the sale of industrial analysis, resulting in a more synergistic and focused group. We are building the management, leadership, and core capabilities across the group to enable us to deliver the Horizon strategy. As an indication, of the top 40 leaders across the group, 37% on new appointments since September 2016. We have specifically targeted leaders from a range of different markets and disciplines to build on our existing capabilities. Another core part of Horizon is the transition of the group from a product and technique focus to being customer application and market focused. And in line with this today, we are announcing our new structure for the group. Our new structure aligns our business around our chosen market segments and our customers' applications. It will help us build stronger links to our customers and will drive further synergies across and within our businesses. We have three sectors. The materials and characterization sector uses high technology products that enable the fabrication and characterization of materials and devices down to the atomic scale. and represents 38% of group revenue. Research and discovery provides enhanced solutions that create unique environments and enable measurements down to the molecular and atomic level with 36% of group revenue. Our service and healthcare sector provides customer support related to our own products and the service sale and rental of third party health care imaging systems and represents 26% of our group revenue. Looking at our market segments, our new structure is aligned with serving our core end markets in health care and life science. semiconductor and communications, quantum technology, environment, energy, advanced materials, and research and fundamental science. Now, within each of these segments, we have identified and are actively focusing on a number of niche areas. As a group, 31% of our revenue comes from health care and life science, 30% from semiconductor and communications, with 20% from the advanced materials segments. Research into fundamental and basic science represents 2% of group revenue. Materials and characterization is strongly dominated by customers in semiconductor and communications and advanced materials applications. Whereas our research and discovery sector has an increased focus on healthcare and life science applications with a stronger contribution from quantum technologies. In terms of funding, Materials and Characterisation has a high proportion of commercial customers representing 48% of revenue from the sector. Whereas Research and Discovery has a significantly higher proportion of customers who are academic or government funded representing 72% of revenue from the sector. As a group, and including our service and healthcare sector, 45% of our revenue in the period was from commercial organisations. Now, I remain excited by the potential of the Horizon Strategy and believe that we are making good progress. I'll now hand over to Gavin who will take us through the financial results.

Thanks, Ian. Good morning, everyone. The sale of the industrial analysis business was completed in July. Numbers I'm discussing today are on a continuing basis with IA numbers included in discontinued operations for this financial year and the comparator period. Starting with the income statement, reported revenue was broadly in line against last year at £132.1 million. On a constant currency basis, revenue fell by 4.5%. Adjusted operating profit grew by 14.6% to £18.8 million, with adjusted operating margin rising by 180 basis points to 14.2%, primarily from expected currency benefits. On a constant currency basis, adjusted operating profit fell by 12.2%. Lower debt arising from business disposals and a reduction in pension financing charges led to a fall in net financing costs to £2.5 million. Adjusted profit before tax grew by 24.4% to £16.3 million, with margin rising by 240 basis points to 12.3%. Amortisation of acquired intangibles of £5.6 million is a non-cash charge. Other adjusting items include £600,000 of costs, which half relates to restructuring costs with Arcienta Omicron joint venture. The mark-to-market gain in respect of derivative financial instruments was £2.6 million. This reflects a movement from a net fair value liability to a small net asset position on currency derivatives that are hedging future transactional currency exposures for the group compared to the previous year end. The improvement in profit for tax to twelve point seven million pounds led to a rise of just under 24 percent and adjusted EPS. The board has decided to hold the interim dividend at last year's level of three point seven pence. As Ian has mentioned following the sale of industrial analysis we have reorganized our reporting sectors. Nanoanalysis, asylum research and plasma technology constitute the materials and characterisation sector. And all technology, nanoscience and X-ray technology are included within research and discovery, as well as our share of Sienta Omicron. Our service and healthcare sector remains unchanged, incorporating the results from our healthcare businesses, along with the service revenue and profit from businesses in the other two sectors. The previous nanotechnology tools sector was comprised of the businesses now within materials and characterization and research and discovery with the addition of magnetic resonance and X-ray technology, both of which were previously part of our industrial products sector. For this half year, these two businesses would have accounted for approximately 10% of total sector revenue and 6% of total adjusted operating profit under the old nanotechnology tools sector. Moving towards revenue by sector, reported revenue from materials and characterization grew by 10.6%, 6.6% at constant currency, with particular strong growth driven by demand for semiconductor and advanced materials processing solutions and scanning probe microscopes. A decline in reported revenue of 13.4%, 17.5% at constant currency, for research and discovery was attributable to lower first half microscopy revenue, some of which is expected to unwind in the second half of the year, and an increased proportion of customized magnet and cryogenic systems with longer production lead times. Increased sales of services for our own products drove reported revenue growth of 7.6% and constant currency growth of 2.5%. Moving to revenue by territory in Europe we have seen constant currency revenue growth of four point six percent driven by strong demand for our plasma process products. In addition to increased sales of our micro analysis systems orders in the region about five and a half percent a constant currency. In North America the decline of 10 percent a constant currency is largely due to a weak first half optical microscopy systems, as well as a reduction in revenue for OI Healthcare due to lower equipment sales against last year. In North America, if we exclude our US healthcare business, reported order growth is 11.4% and 5.7% at constant currency. Following several periods of good growth in Asia, constant currency revenue declined by just under 2%. Orders for the region are up 9% against last year at constant currency with first half shipment phasing negatively impacted by a change in process within China, the issuance of duty free certificates. The order book has grown by 3.3% since last year at constant currency to 141.8 million pounds. Constant currency growth was just under 20% for materials and characterization, with strong growth for our scanning probe microscopes and semiconductor and advanced materials processing solutions. All constituent businesses within research and discovery grew their order book, leading to constant currency growth of 10%. A decline in the sale of used imaging equipment within our U.S. healthcare business led to an order book decline of 31.5%, at constant currency within the service and healthcare sector. If we exclude U.S. healthcare, we would have seen a rise in total order book growth from 3.3% to 13.9% against last year. Looking at adjusted operating profit by sector. Constant currency adjusted operating profit in materials and characterization grew by 21.4%. The operating margin increased to 14.4%, assisted by currency benefits. The decline in underlying adjusted operating profit within research and discovery was principally due to two factors. The first was the impact from lower first half microscopy cells, some of which are expected to unwind in the second half. And second, the longer production lead times from our customized magnet and cryogenic systems, combined with their margins being lower than the business average, due to additional production costs. As a result, we saw a corresponding decline in margin to 8.8% for the sector. Strong demand for sales of services of our own products led to a 34.6% rise in constant currency operating profit. Turning to the cash flow, the group made an adjusted EBITDA of £22.8 million with an adjusted operating cash flow of £4.1 million. The half-year working capital cycle resulted in an outflow of £15 million, the most significant movements being an increase in inventories of £6.6 million and a decrease in payables of £9.2 million. The increase in inventories reflects an increase in work in progress and inventory of customised magnets and cryogenic systems. The fall in payables is due to inventory building during the last quarter of last year to support order growth for our semiconductor and material processing solutions, as well as the cash settlement of currency hedging contracts. The pension deficit fell from £25 million last year to £22.5 million due largely to deficit recovery payments. The completion of the sale of Industrial Analysis in July resulted in net proceeds of £73 million. The shareholders of Sienta Omicron agreed to a capital injection to strengthen the balance sheet of the joint venture and ensure future liquidity in support of the business strategy. Our share was £2.1 million and was paid in September. Net debt fell to £45.5 million. This represents a net debt to EBITDA leverage of 0.9 times, well within our covenant of three times. Just looking at currency exposure for the group, the business has a large exposure to foreign currency fluctuations facing translational and transactional currency exposures. Our total currency exposure is detailed on this chart. For the half year and sterling equivalent, we have net exposures of US dollar 19 million, euro 14.9 million and Japanese yen 7.2 million. As many of the manufacturing sites in the UK, we have a short sterling exposure of £18.8 million. The group maintains a hedging programme against its net transactional exposure using internal projections of currency trading transactions expected to rise over a period extending over the next 18 months. So, to finalise the key financial highlights from the first half, We've seen good reported and constant currency orders growth in orders and growth in order book. Adjusted operating margin has risen to 14.2%, primarily through expected currency benefits. Continuing adjusted basic EPS grew by just under 24%. And finally, the proceeds from the sale of industrial analysis has left us with a strong balance sheet with net debt down to £45.5 million. And with that, I'll hand back to Ian.

Thank you Gavin. So moving on to look at our operational performance in the half year. The materials and characterisation sector produces high technology products enabling the fabrication and characterisation of materials and devices down to the atomic scale. Our products are used across a broad range of academic and applied R&D activities and commercial end applications. For example, those undertaking work in semiconductors, photonic devices, metals and polymers to explore fundamental properties through to quality assurance and quality control. We continue to aid the fundamental science in these areas and facilitate the development of new devices as well as the next generation of higher functioning, stronger and lighter materials. The sector has delivered strong growth and improved profitability given by the successful uptake of newly launched products and increased focus on customer applications. Plasma technology had a strong first half, given by increased demand for our semiconductor processing solutions, combined with operational improvements. We have seen growth in academic research and specialised production for a range of applications including plastic electronics, sensors and quantum devices. In particular, we have seen increased demand in optoelectronics, where customers are developing lasers and photonic devices required for the increased device connectivity and usage and the development and ramp up to enable 5G networking. Our expertise in advanced processing of compound semiconductors, which form the active elements of these structures, provides the foundation for further growth within specialized production markets. Asylum Research delivered strong order growth driven by the success of recently launched products that have addressed specific customer challenges in advanced materials and life science applications. The recently launched Cypher VRS is providing new insights to researchers exploring disease mechanisms and drug discovery. It achieves this by enabling the observation of biological interactions in real time. For example, this image of DNA strands, the researcher has added enzymes, which can be seen as the bright spots in the image, to specifically cut the DNA at certain locations. Now, whilst a still image like this can be useful, the Cypher VRS enables you to observe the dynamic interaction taking place at video rates. You can clearly observe the enzyme locate, attach, and then eventually cut the DNA at the desired location on the strand. We've already sold a number of these systems to leading researchers in this and related fields, with increasing interest from a broad range of life science and advanced materials applications, where understanding dynamic processes is of great interest. Nanoanalysis delivered steady growth in both orders and revenue, supported by two major product launches earlier in the year. Both provide enhanced capabilities and significant productivity improvements for customers. For example, Symmetry, our material structure analyzer, is providing major productivity improvements to customers researching and manufacturing semiconductors and advanced materials. Previously, customers had to choose between two distinct instruments, one with higher sensitivity that acquires higher quality data, or one that images at higher speed. Now, symmetry removes the need for the customer to make a choice by providing superior quality data at significantly faster speeds without compromise. This is proving particularly attractive to customers in automotive, aerospace and steel markets. Now moving to research and discovery. This sector provides advanced solutions that create unique environments and enable measurements down to the molecular and atomic level used in fundamental and applied research through to some commercial applications. Revenue and profitability were down in the period due to microscopy systems and longer production lead times, as mentioned previously by Gavin. However, the sector had order growth, driven in part by increased quantum-related research funding. Andor technology delivered a softer performance in the half year due to lower sales of optical microscopy systems. This was due to the transitioning from third party systems to our own in-house portfolio. Increased orders at the back end of the half year and the launch of the complementary and lower priced Dragonfly 200 system provide a positive momentum going into the second half of the year. We saw growth from Imaris, our image analysis software, which is enabling customers in cell biology and neuroscience to visualize and interpret the huge data sets that are now being acquired by modern instrumentation. We sell Imaris for use with our own and also third-party providers of optical microscopy systems. We also saw improved performance from our range of market-leading scientific cameras used in astronomy. And the first ever observation of the violent collision between two neutron stars, identified by gravitational waves, which you may have heard about recently on the news, utilised over 25 of our deep-cooled scientific cameras at various telescope locations around the world. We have merged our nanoscience and magnetic resonance businesses, providing operational efficiencies and broader capabilities to drive future growth. Nanoscience has seen strong order growth, with its cryogenic and magnetic environments being critical for the understanding and exploitation of quantum technology in areas such as quantum information processing and quantum sensors, where there are significant increases in government and corporate funding. Performance in the first half was impacted by an increased volume of longer production lead time and lower margin systems. We are at the early stages of addressing this by moving towards a greater proportion of revenue for more standardised systems. Magnetic resonance has seen strong order growth for both academic and industrial customers, where our improved benchtop performance is providing a practical alternative to wet chemistry and higher cost instruments for food and chemical analysis. X-ray technology had growth in healthcare applications, more than offset by decline from industrial customers. The EnterOmicron has shown continued positive momentum with year-on-year improvement in its operational and financial performance. Moving on to the service and healthcare sector. This sector comprises the service contracts, billable repairs, training and support services related to our own products under the OI service brand and the sales, service and rental of refurbished third party MRI and CT scanners under the OI healthcare brand. Reported revenue increased in the half year, driven predominantly by strong demand for OI service offerings. Increased orders from OI Service were more than offset by reduced orders for refurbished equipment sales within OI Healthcare due to a combination of sales timing and previously reported structural changes in the market. Within OI Service we continue to deliver enhanced support services tailored to meet our customers specific needs. Within OI Healthcare the first half of the year has largely been focused on management restructuring with the recruitment of talent from a range of disciplines and the continuation of our strategy to move the business towards a higher proportion of service contracts relative to the sale of refurbished systems. And moving on to our summary and outlook. I'm excited by the potential of the Horizon strategy, and whilst we're at the start of the business transformation, I'm pleased with our progress. Our new reporting structure enhances our focus on the growth drivers of our markets and the evolving demands of our customers and will more effectively drive cross-business synergies. Our full year expectations remain unchanged, supported by growth in constant currency orders and order book, the timing of introduction of new products, our normal second half seasonal bias and favourable currency effects. I'm encouraged by the progress that we've made in the early stages of implementing the Horizon Strategy, providing confidence in the long-term delivery of sustainable revenue growth and margin improvement. And with that, I thank you for your attention and open the floor to any questions.