Spectris plc

I hope that you're all keeping safe and well at this time, and welcome to those on the call, but also to those of you on the webcast, to this Spectras' half-year results for 2020. I'm Andrew Heath, Chief Executive, and I'm joined today by Derek Harding, our CFO. So moving on to the agenda, I'll go through the headlines, then pass over to Derek to run through the numbers in more detail. I'll then come back to talk to you about our operational performance before closing with Outlook, then opening the session for Q&A. Our priority continues to be to protect the health and safety of our employees, and through this period, balance the needs of all stakeholders. The response and commitment of our people has been exceptional, and I would again like to publicly thank and recognize everyone for how they've responded to all that COVID-19 has presented to us. I'd also like to thank our shareholders for their understanding and support over the past months. It is greatly appreciated. In terms of performance, we had a better Q2 than we expected when we entered the quarter. Half-won results decreased by 14% on a like-for-like basis to 599 million pounds. With the commitment of our people, we moved quickly to support our customers at a lower cost. We rapidly implemented a number of short-term temporary cost measures, which, along with the benefits from our profit improvement program, delivered an 11% reduction in like-for-like overheads in the first half. As a result, The profit drop-through impact was limited to 32%, resulting in a 41% like-for-like reduction in operating profit to £44.1 million. Spectrus has performed well in the face of what has been an unprecedented time, demonstrating the resilience and quality of our business model and our cash-generative nature. Our cash conversion was very good, such that we ended the period with an even stronger balance sheet and liquidity position at the end of June. This has enabled us to reinstate payments to stakeholders, paying an additional interim dividend in lieu of the final 2019 dividend, and announcing an interim dividend for the first half of 2020. We are also restoring salaries and bringing people back to full-time working. However, we must remain vigilant, both in terms of our people's wellbeing and our forward planning. The outlook does remain uncertain, but what is clear is that we are facing a global recession with an extended recovery period. Therefore, we must now move to implement sustainable actions in the face of this new economic reality. And consequently, we've announced a restructuring program, which we expect to deliver 20 million pounds of benefits in 2021, which is on top of the 20 million pounds we delivered this year from our profit improvement program previously announced. Nevertheless, our strategic direction is unchanged, whilst the backdrop has fundamentally altered provides new opportunities for us to emerge from this crisis even stronger and more resilient. We will continue to focus on what we can control, investing in our business to deliver growth, implementing cost and improvement initiatives to drive operating margin expansion, and optimizing the portfolio to deliver long-term value to our shareholders. The first half of 2020 has presented many new challenges, but as we've previously said, we have endeavored to take a balanced approach socially responsible approach to managing our business, consistent with our culture and values. While, of course, we're working hard to deliver as strong a financial performance as possible, we're also ensuring we address the needs of all our stakeholders, protecting and supporting our people, working more closely and flexibly with our customers and suppliers, while finding ways to aid the communities within which we operate. And to address the crisis, we've managed it really in three phases, react, respond, and reset. At our training update in May, we described many of the actions we had taken in the first two phases. So I'll just provide a brief summary here. The Spectra team reacted superbly in the early days of the pandemic, protecting and supporting our people and working more closely and flexibly with our customers and suppliers. With the health, safety, and well-being of our people remaining a key priority, we moved quickly to enable working from home arrangements for all roles where possible and to protect employees still deployed at our sites, with heightened safety measures. We also enhanced our mental health support, provided practical guidance, and increased our communication in order that everyone stayed connected. These measures continue today. For our customers, we have innovated how we engage with them, so many continue to work remotely. We increased our use of digital engagements, including virtual training, online demonstrations, and also accelerated self-installation and remote support tools keep our customers operational. We've also been working more closely with our suppliers, maintaining our payment terms, and offering to provide early payment to any small business suffering hardship. In the response phase, we took swift action to protect the company while retaining capabilities and protecting jobs for as long as possible. We prioritized short-term costs and savings to support our financial performance and mitigated the impact on jobs through a range of temporary measures such as reducing discretionary costs, a headcount freeze, and asking our people to take a reduction in pay, or work a shorter week, or indeed be furloughed. With the support of our people, we were able to implement these savings quickly, despite the financial burden it placed on them. Their selflessness and commitment is very, very much appreciated. In conjunction with our profit improvement programme, this resulted in overheads in the first half being 11% lower on a like-for-like basis, and Derek will cover this in more detail shortly. To preserve cash, we also decided to withdraw the special dividend and postpone the final dividend for 2019. We also limited spend on CapEx to key projects, but maintained our investment in research and development. As I've already mentioned, our Q2 performance was better than we initially anticipated. However, it has been a challenging period. As we look forward, it is now evident we are facing an extended recovery, and therefore we must now move to the next stage of our planning, the reset phase. We continue to believe in the long-term growth outlook of our target markets. However, it remains unclear exactly how they will perform in the near term. Having reviewed a number of scenarios, we are planning our business based on recovery that extends through 2021. As a result, this now necessitates moving from temporary to permanent reductions in our cost base and additional restructuring will take place through the rest of the year and into next. Our current profit improvement program remains in place and we fully expect to deliver 20 million pounds of benefits this year for a cost between 20 to 25 million pounds. Additionally, we are now launching a restructuring program to resize our cost base, targeting further sustainable benefits of 20 million pounds in 2021. Detailed plans are in the process of being developed, and further information on these will be provided in October. Let me now give you a flavor of where these will come from. The last few months has led to a completely different way of working, which provides a number of opportunities for us to be a lower-cost organization, such as working remotely is now possible on a much wider scale than previously thought, and our people want to be able to work more flexibly. Consequently, a number of physical facilities will be closed or reduced in size. We will also reduce discretionary costs. We've dramatically increased the use of digitalization, both in terms of how we engage with customers as well as remote working. As such, we will be able to translate much of the savings achieved over the past month into a permanent reduction in discretionary costs, such as travel and marketing and conference-like expenses. With a prolonged recovery period now expected, it is unfortunate but appropriate that we now need to resize our capacity on a sustainable basis. Given the varying outlooks for each of our operating companies, we will be implementing a targeted headcount reduction programme by business. And as ever, we will maintain our focus on asset optimization and portfolio management. Our disposal program will continue, and we will look to cease or sell marginal activities so we can focus on those areas which offer high growth and profit potential. As part of this transition, it is right that we reestablish a sense of normality, implementing sustainable changes that provide incentives for all our stakeholders. For this reason, supported by our strong cash flow generation in the first half, we are restoring salaries and returning as many people as possible to full-time working during August and September. Executive director salaries and board fees will be reinstated in October once this work has been completed for all our employees. And for our shareholders, we will pay an additional interim dividend of 43.2 pence per share in October, which is equal to the amount that would otherwise have been paid if the 2019 final dividend had been put to and approved by shareholders. And in regard to the first half of 2020, an interim dividend of 21.9 pence has been declared, and that will be paid in November. In light of the events of the last few months, we have taken the time to reflect on our strategic direction and have concluded that it is still highly relevant. The core thesis of driving growth and operating leverage, as well as optimizing the portfolio and focusing on those businesses, the growth and margin potential is as critical now as when we first set it. The strategic growth initiatives that we establish within our businesses continue to be implemented, and we will carry on investing in R&D and CapEx for key projects, ensuring we continue to deliver the leading products and services our customers desire. For example, during this period, with facility access constrained, the requirement for remote support, data analytics, and insights has become more prevalent. We are investing in providing more integrated software and services, including predictive and prognostic analytics, in order that our products evolve to meet this increasing trend. Urban Analytical is working on the increased vision of process automation solutions, for instance. HBK has launched new hardware and software products to provide more complete e-powertrain testing and optimization, including energy distribution systems testing. And Omega has launched the first phase of its Layer N product range, which is a smart sensor gateway and cloud services system, to streamline sensing, monitoring, and access to data through wireless connectivity. And we remain intent on improving our operating margin to at least previous highs. The outlook makes this longer dated, so it is even more important that we continue to concentrate on self-help initiatives to drive cost efficiency, and the application of the Spectra's business system will also be key. Our portfolio optimization program continues, both in terms of disposals, where the previously identified divestment candidates have not changed, and also on the acquisition side to increase scale and or expand our capabilities into adjacent markets. Our balance sheet strength has put us in a good position to pursue opportunities that may emerge in this new environment. And supporting this strategy is our newly launched values and revised code of business ethics. Our values underpin our behaviors. They represent what we believe and guide our actions such that our culture reflects what we want to see in Spectrus. That is ambition, accountability, and integrity. We phrase that as being true, owning it, and aiming high in everything that we do. And our code of business ethics helps us perform and do business in the right way, ensuring that we maintain strong corporate governance, especially as we shift to greater remote working. I've been delighted to see the strength of our culture come through over these past months. Our people have really stepped up as a team to support our customers, our businesses, and each other. And I'd now like to thank, sorry, I'd now like to hand over to Derek who'll run through the financials in more detail. Derek, over to you.

Thank you, Andrew. And good morning, everyone. Andrew's covered some of the metrics already, but for completeness, my first slide is a summary of the key performance indicators for the period. Sales decreased by 21.1% to £599 million. 9% of this decline related to disposals primarily the disposal of BTG, leaving 13.7% decrease on a like-for-like basis. Adjusted operating profit decreased by 47.2% to 44.1 million, 41% down on a like-for-like basis. And these movements clearly impacted the adjusted operating margin, which was down 360 basis points to 7.4%, with like-for-like adjusted operating margins down 340 basis points compared to the first half of 2019. Clearly, a challenging set of numbers as we faced into COVID for the first half. However, we are pleased to have limited the like-for-like profit decline to only 32% of the sales decline as a result of solid cost actions through the period. Adjusted profit before tax was 40.4 million, down 47.7%. Our tax rate came in at 22%, which is slightly higher than the guidance given at the start of the year, due to a slight change in our mix of anticipated profit, and adjusted earnings per share decreased by 48.1% to 27.2 pence, reflecting the decrease in adjusted profit before tax, which we note above. Supported by our strong cash flow in the first half, the Board has reflected on the decisions regarding the final dividend, as Andrew mentioned, and we announced this morning that an additional interim dividend of the same amount will be paid in October. And with regard to the first half of 2020, the interim dividend of 21.9 pence is proposed, and this will be paid in November of this year. This is the same amount of interim dividend as paid last year, and you should read nothing specific into the amount chosen. We will determine the final dividend for FY20 in February next year as part of our year-end process, based upon all the information available to us at that time. Notwithstanding, there is no change to our progressive dividend policy, which is based on affordability and sustainability. The adjusted cash conversion was 201% compared to 89% last year, and it demonstrates the cash-generative nature of the group. And at June 30th, the group had a net cash position of £94.3 million. Finally, on this slide, the return on gross capital employed fell from 13.4% to 11.3%, primarily due to the lower profits in the period discussed above. My next slide provides a graphical view of the main P&L movements in the first half. Sales are shown across the top with adjusted operating profits at the bottom. First of all, I've adjusted 2019 to remove the sales and operating profit relating to disposals, primarily BTG, to provide an organic baseline. Favorable foreign exchange movements contributed 5.1 million of sales and 1 million of operating profit. And like-for-like organic sales decreased by 94.3 million, which dropped through to lower gross profit of 63.2 million. And then finally, overheads were down by 32.8 million, with savings generated from the Profit Improvement Programme and temporary measures taken in response to COVID-19, which I'll now expand further with my next slide. I've added a new slide this time to help explain the moving parts within our cost post. On the left, you can see the prior year reported overheads of 335.5 million, And I've then removed the overhead associated with disposals of $28 million. Foreign exchange increased our costs by $1.7 million. At the end of last year, we guided that the 2019 profit improvement actions would contribute a further $10 million of cost reduction in 2020 as they annualized. And you can see that $9.2 million of this came through in the first half. Additional PIP actions underway in 2020 have also contributed 1.8 million of savings in the first half. And if you recall, we anticipated that these actions would contribute 10 million in total during 2020. And then next you can see 21.8 million of other cost saves. This includes several temporary savings, such as a 12 million travel saving in the first half, as well as 6.7 million of income from government support schemes outside of the UK. we have chosen not to benefit from any of the COVID-19 related programmes within the UK. As we look into the second half of 2020, removal of disposed businesses will account for a further 24 million reduction in H2 compared to the prior year. We expect to deliver on the remaining 9 million from the PIT programme plus an additional 10 million of temporary savings. So this would give us around 50 million of savings in 2020 compared to 2019 on a like-for-like basis, of which 30 we consider temporary in nature. And as we said earlier, we are launching a restructuring program to switch 20 million of these temporary savings into sustainable benefits. Detailed plans are being developed. Further information will be provided in October. Our next slide looks at how we've generated cash in the year and illustrates what we have then done with that cash. Starting by adding back the $31 million of depreciation and amortization charged to the adjusted operating profit brings you to the $75.1 million of EBITDA generated in the period. As our activity and revenues declined during the first half, the group released $36.9 million of cash from working capital. This was broadly generated from the collection of accounts receivable from the higher sales in Q4 of last year. We continue to focus on improving our average working capital as a percentage of sales, but with the sales decline that we have experienced during the first half, our average working capital increased to 14.7%, the top end of our desired range of 11 to 15. CapEx of 23.2 million was 16 million lower than the prior year and includes investments at Millbrook of 5.1 million. This is lower than our original guidance as we have delayed certain investments in response to the current environment. And this then gives us our adjusted cash from operating activities of 88.8 million, which we divide into the adjusted operating profit to get our cash conversion metric of 201%. Interest and tax had a combined cash effect of 13.3 million. And as we announced in April, there was no dividend payment in the first half. They will now be paid in October and November, as discussed earlier. and we spent 8.2 million of cash in restructuring activities associated with the PIP program. 13.4 million of transaction-related cash income is the net of 24.4 million of cash received from business disposals, 7.1 million paid in respect of prior acquisitions, and 3.9 million transaction-related costs. IFRS lease payments were 9.8 million And an FX loss of £10 million gets you back to the balance sheet net cash income of £60.8 million for the period. The next slide is included to help you understand the moving parts between our adjusted operating profit measures and our statutory profit measures. I'm not going to go through each one as I think they're fairly self-explanatory. The big movement in H1 relates to the impairment at Millbrook. During the first half of 2020, Millbrook's business has been impacted by a number of factors. There's been reduced demand from automotive customers who have delayed development projects and therefore testing in response to the impact of the COVID-19 situation on their businesses. In March, a large customer decided to in-house all outsourced engine testing services from the period from April 2020 to April 2021. And Millbrook's events business has been largely shut down as a result of the COVID-19 restrictions. As a result of these factors, we have recognised an impairment of the whole of Millbrook's goodwill balance of £58.4 million that you can see on the bottom of this slide. And in addition, included in the £36.5 million of amortisation of acquisition-related assets is a further £17.4 million charge relating to Millbrook. These adjustments take us down to the statutory operating profit. And there are then some further adjustments which need to be considered to get to the profit before tax, which I will now cover on the next slide. You can see on this slide that we have removed the loss associated with our share of the EMS joint venture, as this was sold during the period. This sale generated a loss on disposal of 0.9 million pounds, which is offset by a profit of 6 million relating to the sale of our interest in the rheology product range out of multiple panelists. And this gives us the net 5.1 million of profit on disposal that you can see here. Deduction of finance costs then results in a statutory loss before tax of 65.5 million pounds. The next slide sets out primary movements in our return on gross capital employed. This is a rolling 12-month measure and is therefore the slide looks at H2 2019 and H1 2020 combined. Return on gross capital employed for the 12 months ended the 30th of June was 11.3% compared to 13.4% in the prior year. The reduction in adjusted operating profit has already been covered. And gross capital employed increased by 48 million, primarily due to a provision for the share buyback, which was in place in H1 2018. and is thus included in the opening capital employed, but not the closing capital employed. Before I hand back to Andrew, I thought it would be helpful to share some thoughts on how we see the remainder of 2020. As a reminder, due to market uncertainty, we withdrew our forward financial guidance for 2020 on the 6th of April. Visibility continues to remain low, and we therefore maintain this position. Nevertheless, there are some headwinds and tailwinds that are worth discussing. starting with a headwind. Back in February, I had coronavirus question mark on this slide as a headwind, as then it was unclear what impact COVID-19 would have. In reality, it is still unclear, and we are cautious around the impact of potential further lockdowns in all of our markets. We remain cautious of the impact of the current political and economic environment in which we operate. This includes the continuing US-China trade challenges, Brexit, and of course the outcome of the US presidential election. With respect to our cost base in H1, we benefited from around 20 million of temporary cost measures. And we anticipate that some of these will unwind in the second half. And as a result, we are expecting 10 million of temporary cost saves in the second half of 2020 compared to the second half of 2019. Looking now at the tailwinds, we anticipate a further 9 million benefit from the Profit Improvement Programme of the actions taken this year, and we continue to launch new products which will support revenue growth over time. We continue to anticipate benefits from the deployment of the Spectra's business system to help reduce waste and further build on our self-help activities. As I stated earlier in the presentation, overall, we are targeting around 50 million of cost saved in 2020 compared to 2019 on a life-like basis. In the appendix to the slides, I've also included a slide which shows our sensitivities to FX and confirms our guidance on tax and CapEx, which is around 22% for tax, and planned CapEx of 55 million for the year. We've got another 30 million in the second half, including 15 million relating to Millbrook. And with that, I'll hand back to Andrew.

Thank you, Derek. We'll now turn to our operational performance. Let's first look at sales by destination. And here we saw that all regions had lower life-like sales in the first half. In North America, sales were flat in the first three months, then moved notably lower in the second quarter as lockdowns were imposed, although the rate of decline has eased in June. In Europe, sales started the year lower, and then with lockdowns imposed from March, again saw greater declines. But again, the rate of decline has eased in June. In Asia, China had a weak Q1 before moving into positive territory in April and May, though June saw sales lower once again. Other countries such as Korea and India have improved in the latter part of Q2, but were still notably lower versus last year. Turning now to our end markets, similarly, these were all lower, with pharma and machine building faring better, and metals, minerals, and mining seeing the greatest decline. I'll talk to these in more detail as we discuss each of our businesses, firstly looking at each of the platforms, followed by the industrial solutions division. Starting with Morgan Analytical, sales declined 21% on a like-for-like basis, with all regions down, albeit North America less than Europe and Asia. On a like-for-like basis, adjusted operating profit ended 55% lower, with the margin down 420 basis points. Despite a favorable mix and lower overheads, these were not sufficient to offset the adverse volume impact. Looking at the end markets, pharmaceutical was lower, with only China and the UK of the key countries seeing growth. Decline reflected a shift in focus production from R&D and laboratories and academic research institutes being closed due to COVID-19. Sales into manufacturing and also quality control within pharma were down to a lesser degree. Equally, sales to the food sector were also more resilient within this area. Sales to primary materials customers were notably lower year on year, particularly in Asia, with lower oil prices impacting CapEx, resulting from Petrochem customers having declined revenue expected, and that's expected to carry on to be slow over the coming months. Within mining, some mines have been closed or placed on restricted operations to meet social distancing requirements, with many metal suppliers dependent on customers significantly impacted by COVID-19, such as auto and aerospace, demand was also lower. Sales to building materials customers were down to a lesser degree. Sales to advanced materials industries were also impacted by research institutes being closed, although we expect the weakness in demand here to be more temporary. Really sort of driven by battery technology supported by research and development, and also semiconductors driven by 5G and the Internet of Things. Moving on to HBK. Here, we saw HBK performing strongly in the first half with light-for-light sales down 8%, achieving flat sales in North America while Europe and Asia were both down. As a consequence of lower overheads from the profit improvement program and the temporary cost measures, adjusted operating profit was only 2% down on a light-for-light basis, with adjusted operating margin increasing 60 basis points. In our end market, there was a continued slowdown in the overall automotive sector, And here our light flight sales declined in both Europe and Asia, but rose in North America. The electric vehicle market remains a bright spot in this sector, with manufacturers competing to release newer electric models to capture market share. Equally, government support is expected to stimulate growth in electric vehicles. We are seeing increasing demand to test not only electric drives, batteries and power management, but also noise and vibration compliance. Like-for-like sales to machine manufacturing followed a similar profile, lower in both Europe and Asia, but grew strongly in North America, again reflecting the exposure to the automotive supply chain, which has held up better. The growth also reflected good onward demand for our weighing technologies from the process and medical markets. In aerospace and defense, like-for-like sales declined across all regions, although more modestly in Europe than in North America and Asia. HPK's exposure to commercial aviation is limited, and to date our aerospace and defence customers have kept large investment programmes running. In the defence and satellite markets, we expect spending to be impacted to a lesser degree. In consumer electronics and telecoms, light flight sales were lower, with underlying demand impacted by the weaker macroeconomic conditions and the resulting lower levels of customer spending. At Omega, light flight sales decreased 13%, mainly caused by business disruption from COVID in North America. Similarly, sales were lower in Europe. Asia did see growth, driven by strong performances in South Korea and Japan, due to the high electronics and semiconductor demand there, as well as market share gains. The resumption of growth in North America is not expected until 2021. However, in Asia, the outlook for semiconductor demand looks more positive, so we expect growth to recover here quicker. As a result of the lower sales, a relatively fixed cost base, and higher IT cost and amortization related to the new e-commerce platform, like-for-like adjusted operating profit declined 71%, and like-for-like operating margins fell 950 basis points. Following the launch of the new digital platform last year, the focus for 2020 has been to drive volumes through the website to deliver sales growth. We have seen online sales being more resilient over the past period, and further developments continue to be delivered to enhance the customer experience. Omega has also been concentrating on strengthening its existing product portfolio, launching a series of new products for the highest growth market. It has launched 65 new product lines this year, and a further 133 are planned for the remainder of 2020. Lastly, within industrial solutions, sales here declined 30%, primarily reflecting a light-for-light sales decrease of 13% and a 21% impact from the disposal of BTG. Light-for-light sales were down most markedly in Asia, despite growth in China. Light-for-light sales in Europe and North America were down by a similar amount. However, we did see increased sales in pharmaceutical and within food and beverage. On a light-for-light basis, adjusted operating profit declined 44%, and the margin contracted 440 basis points. reflecting the volume decline, as well as an adverse mix effect, which was partly offset by lower overheads. Turning to the end markets, in energy and utilities, the collapse in the oil price impacted sales at ESG, and also demand for Servimex gas analyzers for the likes of industrial and hydrocarbon processing and petrochem sectors. At BKV Ibro, sales to wind customers were strong, with good demand from major turbine OEMs. Pharmaceutical and life sciences industries saw good life-like sales growth, particularly in North America and in China, although sales declined in Europe. At PMS, there was strong demand in North America and also at Servimex, and we have seen significant increase in orders for the Servimex ParaCube oxygen sensor, as manufacturers have been ramping up the production of ventilators for the treatment of COVID-19. Life-like sales in the semiconductor and electronics industries did decline, although China and North America again posted growth in electronic sales. As you are well aware, the automotive industry has suffered a significantly negative impact from COVID-19 with the widespread closure of manufacturing plants, a collapse in new car sales, and also delays to new development projects, and therefore testing. However, light flight sales into automotive decreased only slightly in our industrial solutions division, reflecting the expansion in testing capacity and capability at Millbrook, That's in both Europe and the USA. In our other end markets, primarily served by NDCT, converting and film extrusion industries saw sales decrease, although plastics and packaging continue to hold up. Like flight sales, the food, drink and tobacco sector remained robust, with strong growth in Europe and Asia. Though demand for restaurant and fast food-related products have been impacted by COVID-related closures, there has been good demand from producers of snacks and frozen food products. So in summary, I'm pleased with how we have reacted and responded to the challenges presented. We have taken a balanced approach to managing our business, and I've seen strong support from our people, our customers, our suppliers, and our shareholders. Though the first half was challenging, we saw a better than expected performance in the second quarter than we originally anticipated. We rapidly implemented a number of short-term temporary cost reductions, which along with the benefits from our profit improvement program, delivered an 11% reduction in like-for-like overheads in the first half. As a result, our profit drop through impact was limited and cash conversion was strong, further strengthening our balance sheet and liquidity position. It does put us in a position where we can now reinstate our dividend, restore salaries, and bring as many people back to full-time work as possible. However, it is now evident that we are facing an extended recovery period, and therefore, must now move to implement sustainable cost actions. We have therefore announced a restructuring program, full details of which we are developing, but we expect to deliver £20 million in benefits in 2021. Whilst the lack of visibility means the near term is uncertain, our long-term end markets are still attractive and our strategic direction remains unchanged. We'll continue to focus on what we can control, investing in our business to deliver growth, implementing cost initiatives to drive operating margin expansion, and optimizing the portfolio to deliver long-term values to our shareholders. And with that, I'll happily open to questions.