Spectris plc

Good morning, everyone. I hope that you are all keeping safe and well at this time. Welcome to Spectris' half year results for 2021. I'm Andrew Heath, Chief Executive, and I'll go through the headlines and then you'll hear from Derek Harding, our CFO, who will run through the numbers in more detail. I'll then come back to talk about some of the operational and strategic developments in our businesses before closing with our outlook and moving to Q&A. Now, I'm conscious you have a busy morning, so I'll provide a quick run-through of the main points of today's results announcement. But before I do, I really want to acknowledge the great work and support of the whole Spectris team once again over the past months. Although many of the challenges of COVID-19 are still with us as a society, we have developed as a business really well to our new operating environment. Our priority remains safeguarding the welfare of our employees and their families, the communities in which we operate, and also to maintain high levels of service to our customers. Our operating companies have embraced new ways of working, as have our customers who continue to be supplied with the products, the services and the expertise they need. And it's been great to see this in person as more recent easing of restrictions has allowed me to visit a number of our facilities. Now you've heard me say before that at Spectrus we believe in being purpose driven and very much true to our values as we execute on our strategy delivering value beyond measure for all of our stakeholders. And I'm really pleased with how we have been executing our strategy for profitable growth alongside the balanced and socially responsible approach we have taken to managing our business. It really is delivering for us. And we're emerging from the pandemic a more focused, leaner and stronger business. The last two years have been characterised by restructuring, cost reduction, but also investment for future growth with less reliance on the macro economy. But with a much brighter macro environment and many of our end markets now recovering strongly, we are benefiting from the high quality of the retained businesses within our portfolio, our profit improvement programme and our lower cost base. Equally, we are seeing growth above the market because of our recent investments and concentration on higher growth segments. And we can see these intangible improvements coming through in our strategy scorecard with ticks across the board versus 2020. We have achieved strong operating leverage off the back of the expansion in our top line with adjusted operating profit and margins ahead of both this time last year and also 2019. The portfolio optimisation programme is well progressed and we fully expect to conclude the disposal programme we identified back in 2019 later on this year. We have maintained our investment in R&D and CapEx last year, and we are increasing investment in new products and services through this year. And we can see this coming through in incremental sales growth. The balance sheet has been further strengthened, providing considerable optionality, including for further M&A. And I'm delighted that we have now completed the acquisition of concurrent real-time, which strengthens HPK's simulation offering. And we continue to work on our pipeline of further acquisition opportunities. And today we've announced an interim dividend of 23 pence per share, maintaining the dividend growth at 5% in line with our policy. We're now starting to move into the next phase of our strategy for profitable growth with an even greater focus on our purpose. Our ambition is to be a leading sustainable business, ensuring we have strong relationships with our employees, our customers, our suppliers and communities, and in turn, delivering attractive returns for our shareholders. So now let's look at our financial performance in the first half. We delivered like-for-like sales growth of 14% above that of the market, which reflects the recovery in many of our end markets, and as I've said, also further supported by our new product and service launches. Encouragingly, like-for-like sales were only 2% lower than in the first half of 2019. Also, orders were 16% higher on a like-for-like basis, providing momentum going into the second half. And there was a 74% increase in adjusted operating profit, resulting in an operating margin of 12.8%, which reflects the growth in sales, but also the cost actions and the higher margin mix of the portfolio following the divestments. And all this compares to an 11% margin in the first half of 2019. Again, a notable improvement. As guided, we delivered strong operating leverage. Our cash conversion also remained strong at 122% and in combination with the disposal proceeds resulted in a net cash position at the end of June of £272.8 million. I have to say I am very pleased with the performance that we are delivering. The new business environment that has emerged provides us with good prospects in many of our end markets. We play an important role in sectors that are transforming rapidly, such as pharmaceutical, energy, automotive and mining, which in turn offers significant opportunities for growth. Our current product offerings and new product development activities are very much aligned with our purpose, and that's to equip our customers to make the world cleaner, healthier and more productive, as well as frankly helping them address many of the sustainability challenges that they face. And by focusing on sustainable solutions, it will not only make a difference to our planet, but also underpin our future growth. We also recognize the importance of improving the sustainability of our own operations. And today we have also announced the publication of our net zero ambition. We are committed to taking a leading role in minimizing the emissions footprint of our own activity and also the activity across our value chain. The net zero pledge we have announced today is appropriately ambitious. being aligned with a one and a half degree centigrade climate warming scenario, and we're using 2020 as the baseline. And I'll come back and talk more about our targets and the other initiatives underway in support of the three UN sustainability development goals that we have selected. And I'd now like to hand over to Derek, who will run through the financials in more detail.

Good morning, everyone. For consistency, I am once again starting with our scorecard slide. Perhaps not surprisingly, we are showing a very positive performance compared to H1-20 with ticks across the board. Given the nature of 2020, we have also included a comparison on this slide to H1-2019 to assess how we are performing compared to the pre-COVID period. I will cover the specific numbers during my presentation, but overall we believe that our performance in H1 is a strong step forward and in many ways better than the pre-COVID performance of 2019. Let me now take you through the specific details. Reported sales increased by 0.5% to 601.8 million. If you adjust for the impact of disposals, net of acquisitions, which reduced sales by 44.8 million, or 8%, and foreign exchange movements reducing sales by 28.3 million, or 5%, you see a growth of 13.7% on a like-for-like basis compared to 2020. On this basis, we are only 2.3% behind 2019. Adjusted operating profit increased by 74.2% to 76.8 million on both a reported and like-for-like basis. Compared to 2019, our like-for-like operating profit is up 14% despite the lower sales. Adjusted operating margins increased by 540 basis points with like-for-like adjusted operating margins up 450 basis points compared to H1 2020 and 190 basis points compared to H1 2019. Improvements in the gross margin due to additional volume and favourable pricing combined with our continued cost control have all contributed to the higher operating margin in the period. Adjusted profit before tax was 73.7 million, up 82.4%. Our tax rate came in at 22%, which is in line with guidance. And adjusted earnings per share were 49.7 pence. The interim dividend per share of 23 pence represents a 5% increase over the prior year, consistent with the growth in dividend for 2020. We remain committed to paying a progressive dividend. While adjusted cash conversion was lower than the 201% achieved in 2020, we were pleased to achieve 122% in the first half. Following receipt of funds from disposals, our net cash at the end of June was £272.8 million. Finally on this slide, the trend of our return on gross capital employed has now switched and increased from 11.3% to 12.2%. This slide provides a graphical view of the main P&L movements that I've just discussed. I've used it in previous presentations and I include it here for your future reference. Moving on to cash, this slide shows how we generated cash in the period and illustrates what we have then done with that cash. Starting by adding back the 20.7 million of depreciation and amortization charged to the adjusted operating profit brings you to 97.5 million of EBITDA. Our continued focus on working capital management released 15 million of cash during the period, and we spent 19.1 million on capex. This gives us our adjusted cash from which operating activities of 93.4 million, which we divide into the adjusted operating profit to get our cash conversion metric of 122%. There was then a significant inflow of cash in H1 of $236.8 million, which is made up of $208.8 million net proceeds from disposals, plus $38.3 million in relation to the US listed company shares, which we were holding at the year end. We received cash in the first half when the takeover of that company was completed, and these inflows are offset by $10.3 million of other transaction costs. In the first half, we spent 79.7 million of the 200 million share buyback announced in March and paid 53.6 million in final dividend. We spent 6.8 million of cash in relation to restructuring. Interest and tax had a combined cash impact of 19.7 million, with other movements of 3.7 million, bringing us to the net increase in cash for H1 of 166.7 million. In terms of our funding position during the period, the group took the opportunity to repay a €116 million EIB loan, which was due to mature in September 2022. And we are also in the process of reviewing the $800 million RCF with a view to agreeing a reduction in size to $500 million during the second half. The reconciliation between our adjusted operating profit measures and our statutory profit measure down to statutory profit before tax is much simpler this year. There are no asset impairments to report and restructuring costs were limited to 3.8 million in the first half as we finished up the final aspects of activities started during 2020. and therefore the statutory operating profit is only £16.2 million lower than the adjusted operating profit at £60.6 million. The largest figure on this schedule for 2021 of £117.7 million primarily relates to the profit on disposal of B&K Vibro, which was completed in the first quarter. Financial income in H1 relates to a 5.7 million interest credit following the positive settlement of an EU dividends tax claim and a 6.7 million FX gain on intercompany balances, which was a £10 million loss in the prior year and included in the finance cost line. This then brings you down to a statutory profit before tax of £187 million for the period. Looking ahead to the second half, this slide updates our view of things to consider when looking at 2021 on a full year basis. Starting with the headwinds. We still anticipate COVID-related interruptions. We expect them to be localised, but clearly cannot predict the scale of any impact they may bring. We maintain our guidance regarding the reversal of £10 million of COVID-related temporary cost savings and a similar amount of cost inflation. If our growth is near the top end of the range, that will require some additional investment, as could responding to some of the supply chain constraints that we are experiencing. However, we will work to mitigate this where possible. At the year end, we provided a pro forma set of numbers, excluding BTG, Millbrook and B&K Vibro. Since then, we have sold ESG, which contributed 11 million of revenue in 2020 and 1 million of profit, which will of course not repeat in 2021. We continue to experience a currency translation headwind compared to 2020. And following some of the disposals, the underlying currency shape of the group has changed slightly. So I have updated the sensitivity guidance that we normally provide to reflect this. On the positive side, we have several tailwinds. We are clearly experiencing an economic recovery, with markets improving as confidence builds in managing the pandemic. We have a strong order book as we enter the second half. Our organic growth continues to benefit from new products and services, and as a result, we anticipate like-for-like sales growth for the full year to be in the range of 10-12%. We are continuing to deploy the Spectris business system to reduce waste and further build on our self-help activities and remain confident of continued margin progression. Finally, the acquisition of concurrent real-time, which completed slightly later than previously anticipated, is expected to contribute around 15 million of revenue and 3 million pounds of profit in 2021. In terms of other guidance, CapEx will be around £50 million and we expect our tax rate to be 22%. We think working capital will remain around the 11% level experienced for the first half, and we do not anticipate any new restructuring programmes, but there are some costs in the second half relating to 2020 programmes, but they will be less than £5 million. And with that, I'll hand you back to Andrew.

Thank you, Derek. Now let's take a quick look at our end markets before turning to our businesses. We have seen a good recovery in many of our end markets. Pharmaceutical, semiconductor and machine manufacturing stand out as the strongest performers. In pharma, we are seeing a significant uplift in support of vaccine and viral vector development and manufacturing, as well as an increase in the onshoring of production. And the onshoring trend is also supporting growth in semiconductors, as is the rising demand for chips, which is driving an increase in global fabricated equipment spending. And in machine manufacturing, the positive outlook for agriculture, food and medical equipment, supported by the strong fit of our sensor applications, is also driving growth. Automotive, energy and utilities do remain weaker than last year, albeit the rate of decline is easing, with growth posted in the second quarter. Academic research, which was notably impacted in 2020 with research institutes being closed, has seen a steady recovery. So now turning to our businesses, I'll start with Malvern Panalytical. Here, sales increased 23% on a like-for-like basis, supported by both a strong market recovery and the impact of new products like the Zetasizer Advance and Omnitrust launched in 2020. They had a strong performance in Asia, especially China, and also in the pharmaceutical market. And this volume growth combined with cost management, pricing movements, and higher service revenues helped drive a 186% like-for-like increase in adjusted operating profit. And that's a 730 basis points rise in adjusted operating margin. Compared to 2019, modern political sales are now only 3% lower on a like-for-like basis, showing that our recent product launches are really helping to drive growth above that of the market. And like-for-like adjusted operating profit is 28% higher, reflecting the strong operating leverage on the back of cost management over the past two years. Morven Panel School's program of launching new and enhanced product offerings with a focus on software, services, and analytics is also being well received by customers. In the first half, Morven Panel School released Smart Manager, and that's a cloud-based control room that connects and monitors its X-ray fluorescence systems. It provides insights into the real-time utilization and also the health of their instruments, continuing analyzing data to help improve both process and also team productivity. and we expect this to be particularly attractive to primary materials customers. They also launched enhanced versions of their Aeris Compact X-ray Defractor and the Epsilon XRF Analyzer, both with superior new capabilities. And these new products are allowing us to tap into key growth trends in our markets. Being late a cycle, HBK saw 8% higher like-for-like sales with a very strong second quarter, especially in Europe and Asia with notable growth in the latter. Machine manufacturing was the strongest end market. Adjusted operating profit increased 44% on a light flight basis, while adjusted operating margin increased 310 basis points. Compared to 2019, HPK's light flight sales are broadly flat, but adjusted operating profit is 40% higher. That reflects the operational improvements and merger benefits that continue to be delivered. I think this clearly demonstrates the enhancement that the HBK team has been driving to improve margins and also operating leverage. Alongside the operational improvements, HBK has also been investing in organic growth projects aligned to the strongest market growth opportunities, such as electrification, simulation and digitisation. These focus on virtual testing and simulation, but also physical testing, including electric powertrain development, smart sensors and software. and new products launched this year include a new NVH simulator and the latest software version of the Tessier repetitive testing system. As mentioned earlier, the acquisition of concurrent real-time significantly strengthens HBK's simulation offering. We were pleased to complete the acquisition of concurrent real-time and I'd like to show a short video with an overview of what it does and what it brings to HBK.