Spectris plc

Good morning everyone. Welcome to Spectris' full year results for 2021. Thank you all for your continued interest in our business. I'm Andrew Heath, I'm the Chief Executive. I'd like to start this morning by saying thank you to all of my Spectris colleagues for their hard work and support again over the past year. Together, we've continued to face the challenges from COVID and the well-publicized global supply chain issues head on. Our teams have worked tirelessly, and I couldn't be more grateful for their commitment and support. Thank you. In many ways, 2021 was a challenging but also a very good year for Spectrus. Not only did our end markets recover strongly, on top of this, we saw equally strong demand for our products and services. there's been yet another year in which we have continued to execute our strategy for profitable growth. We set out this strategy in 2019 and through consistent focus and execution, the spectres we have today has been significantly strengthened as we will come to discuss. One of the reasons execution against the strategy has been so effective has been because my colleagues right across our businesses, they believe in it, they own it, and they aim high, consistent with our core values. And this underscores the importance of being purpose-led. Right across Spectrus, we're aligned behind our purpose to deliver value beyond measure. And this means harnessing the power of precision measurement to equip our customers to make the world cleaner, healthier, and more productive. This is echoed across the group. We know our purpose, why we're here, and where we want to get to. We also know and live our values, which speak to the culture of the business and how we conduct ourselves along the way. And we know our strategy, which is our guidebook and the roadmap to get us where we want to be, bringing our purpose to life. As I've said, last year we saw strong demand for our products and services. We entered 2022 with good momentum and a record order book right across the group. We are creating a Spectrus that is a more focused, higher quality, more profitable and a more resilient business, supported by a very strong balance sheet. We have demonstrated our ability to reduce costs responsibly, drive organic growth, expand margins, allocate capital with discipline for attractive returns, and we've made several synergistic acquisitions to enhance our customer offering. In 2021, on a like-for-like basis, orders were up 19% with sales up 10%. And this means we've outperformed buoyant end markets with market share gains supported by new product and service launches. we delivered good financial performance. Our adjusted operating profit improved 29% on a light for light basis to 209.4 million pounds with an operating margin of 16.2%, reflecting the growth in sales and the operational improvements we've made supported by the Spectrus business system. Having returned the business to an asset-like model, adjusted cash flow conversion was 96% and we further strengthened the balance sheet with net cash of £167.8 million at the year end. We want to retain this position given our pipeline of M&A opportunities, so we've elected not to do a special capital return this time. We've announced a final dividend of 71.8 pence per share, and that's a growth of 5% in line with our policy. In the fourth quarter, supply chain challenges and the onset of Omicron constrained our ability to convert our strong order book to revenue, resulting in some order fulfillment being pushed into 2022. Now, this was clearly frustrating, as we could have delivered an even better performance last year, but this revenue is not lost and will be realized in 2022. And as we look forward, I have many reasons to be optimistic. We are committed to being a leading, sustainable business. We have set ambitious net zero targets and have started to deliver our programmes to achieve them. We're also looking beyond our own operations to support the communities we operate in. The Spectrus Foundation has been established to promote STEM education. We've expanded our broader STEM outreach programme. And we're also aligning our strategy with key sustainability themes that will underpin future growth. Turning to our strategy scorecard, the message here is one of strong execution. I am very pleased with how we have continued to execute strategically. Our strategy is working. We have demonstrated our ability to reduce costs responsibly, drive organic growth, expand margins, allocate capital with discipline for attractive returns, and have made several synergistic acquisitions over the past year to enhance our customer offering. This gives us a much stronger business today than we started with in 2018. We maintained our investment in R&D and CapEx in 2021 and will be progressively increasing expenditure to fuel future growth and efficiency through this and following years. When compared to 2019, revenue has recovered within 2% of pre-pandemic levels with margins ahead and that reflects the enhanced quality of the group. We're making good progress in returning Spectrus back to its previous margin highs of over 18% and ultimately exceed them over the longer term. Also, during the course of 2022, we'll move into the next phase of our strategy for profitable growth, and we'll talk more about this as the year progresses. You should not expect the big themes of our scorecard to change and we will retain our discipline and focus when it comes to driving our organic growth initiatives, growing margins and balancing cost discipline with investment in growth. However, the work of the past two to three years means that we are now well positioned to go after numerous opportunities we see in front of us. We are aligned to win markets with attractive growth trajectories and sustainability trends. providing the opportunity to accelerate our emissions. And I'll talk about this a little more later on. In 2021, we committed to being a leading sustainable business, both in the sustainability of our own operations and our wider contribution to addressing the global environmental challenge. I am very pleased by the progress we've made so far to embed our sustainability strategy. Across the group, there is renewed energy and innovation, all aimed at making the world cleaner, healthier, and more productive. At the time of our first half results, we published our net zero targets, which will see us work to minimize the emissions footprint of our own activity and also the activity across our value chain. These targets, though ambitious, have been subsequently validated by the Science Based Targets Initiative against a one and a half degree centigrade climate warming scenario. This year we also undertook a detailed climate scenario analysis in support of TCFD reporting to gain a clear understanding of the potential risks and opportunities from climate change. We have published a detailed report on this on our website. We recognise that the greatest difference Spectris can make to a net zero world is through our products and solutions. increasing our focus on product efficiency and circularity. We are already playing an important role in many sectors that are transforming rapidly, such as pharmaceuticals, energy, transportation, and where customers want to work with partners that have the capabilities and the capacity for innovation, helping them address these new challenges and accelerating their own journeys to net zero. As we refresh our strategy this year, sustainability will be central to how we will make a difference for our customers and the planet, very much aligned with our purpose. An important part of being a sustainable business is being able to look beyond the day-to-day operations of the group and consider the broader factors that contribute to our longer-term business success. And key to this is safeguarding the physical and mental wellbeing of our employees. And ensuring Spectrus is a great place to work, we remain fully committed to the continued support of our mental health, wellbeing and resilience activities. We also want to ensure that everyone feels they belong here. Our work on building a greater diversity and inclusion continues and we'll be strengthening our approach to this and to talent development through a number of initiatives in 2022. This year, we were proud to launch our global STEM strategy. It is focused on ensuring that the group is both an employer and partner of choice. For example, supporting young professionals, building partnerships with universities and enhancing our apprentice programme to attract young talent into Spectrus. This is consistent with the rationale for establishing the Spectrus Foundation, which we've set up to support education in STEM subjects. The Foundation recently made its first awards for a two-year STEM education project in UK schools in association with STEM Enthused Partnership and also an employee-nominated donation to the Sheffield UTC Academy to fund a project for pupils to design and build an environmentally friendly racing car. These will be the first of many more projects that the Foundation will help to fund in the months and years to come. I'd now like to hand over to Derek who will run through the financials in more detail before I come back to talk to you about the businesses and our future opportunities.

Good morning, everyone. For consistency, I am once again starting with our scorecard slide. As you would have been expected, we are showing a very positive performance compared to 2020 with ticks across the board. As we did at half year, given the nature of 2020, we have also included a comparison on this slide to 2019 to assess how we are performing compared to pre-COVID. I will cover the specific numbers during my presentation, but overall we have demonstrated a strong performance in 2021 and continue to make progress compared to the pre-COVID performance of 2019. Let me now take you through the specific details. Reported sales decreased 3% to 1292 million. Adjusting for the impact of disposals, net of acquisitions, which reduced sales by 107.5 million, or 8%, and foreign exchange movements, reducing sales by 54.6 million, or 5%, you see 10% growth on a like-for-like basis compared to 2020. Adjusted operating profit increased by 21% to 209.4 million on a reported basis and by 29% like for like. Adjusted operating margins increased by 320 basis points with like for like adjusted operating margins up 240 basis points compared to 2020. Adjusted profit before tax was 204.3 million up 23%. our tax rate came in at 22% in line with guidance. Adjusted earnings per share were 140.7 pence, a 26% increase over the prior year. And the final dividend per share of 71.8 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 141% achieved in 2020, which was unusually high, we were pleased to achieve 96% in 2021. Our net cash at the year end was 167.8 million. And finally on this slide, the trend of our return on gross capital employed has now switched and increased by 330 basis points from 9.9% to 13.2%. This slide provides a graphical view of the main P&L movements in the year. Sales are shown across the top with adjusted operating profit at the bottom. First of all, I have adjusted 2020 to remove the sales and operating profit relating to the disposals of Millbrook, B&K Vibro, ESG and NDC Technologies in order to provide an organic baseline. Foreign exchange translation movements reduced sales by 54.6 million and operating profit by 10.9 million. We saw a good like-for-like growth in revenue up 10%, as well as a 50 basis points increase in like-for-like gross margins to 57.1%, reflecting the incremental volume and favourable pricing offsetting inflationary cost pressures. There was an expected increase in like-for-like overheads, up 24.8 million, with the reversal of certain temporary savings, such as 9 million of prior year COVID-19 overseas government subsidies, investments of growth and salary inflation all impacting the cost base. Acquisitions, primarily concurrent real-time, added 18.8 million of revenue and 3.9 million of operating profit. resulting in the £209.4 million of adjusted operating profit, a margin of 16.2% compared to 13% in the prior year. This slide shows how we generated cash in the year and illustrates what we have then done with that cash. Adding back £37.3 million of depreciation and amortisation charged to the adjusted operating profit brings you to the £246.7 million of adjusted EBITDA generated in the year. As trading activities increased in the second half of the year and as we invested in more inventory considering continuing supply chain challenges, our working capital utilised £10.7 million of cash during the year. Despite this, our average working capital as a percentage of sales ended the year at a respectable 11%. Capital expenditure was £35.3 million. And this gives us our adjusted cash from operating activities of £200.7 million, which we divide into our adjusted operating profit to get our cash conversion metric of 96%. There was then a significant inflow of cash relating to disposals, offset by the acquisition of concurrent real-time. Within the £225 million of cash income is £333.7 million of 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. These inflows are offset by £135.5 million of acquisition payments and £11.5 million of other transaction costs. We then spent £201.3 million including costs on the share buyback announced last year. During 2021, we established the Spectris Foundation with a £15 million donation, which was made possible by the £23.2 million gain on equity investments recognised in 2020 and shown on my next slide. We paid £79 million in dividends and £11.9 million of cash has been spent in relation to restructuring. Interest and tax had a combined cash impact of £35.1 million, with other movements of £21.7 million, which included £14.8 million of lease payments and £5.9 million of software as a service payments, bringing us to the net increase in cash for the year of £61.7 million. The reconciliation between our adjusted operating profit measures and our statutory profit measure down to statutory profit before tax is set out on this slide. Restructuring costs were limited to £10.2 million as we completed the final aspects of activities started during 2020. The £19.5 million of transaction-related costs includes the £15 million donation noted on my previous slide, and the remaining £4.5 million relates to costs associated with acquisitions, including concurrent real-time and Crayoptics. In April 2021, a new IFRIC interpretation was issued relating to the capitalisation of costs of configuring or customising application software under Software as a Service arrangements. As a result, we have amended our accounting policy and identified SAS arrangements where we do not have control of the software. For these projects, we have de-recognized the intangible assets previously capitalized and recognized the expense within the consolidated income statement. Material SaaS projects which would have been previously capitalized will now be excluded from adjusted operating profit as a new alternative performance measure line called configuration and customization costs carried out by third parties on material SaaS projects. These projects incurred a net P&L charge of £5.2 million in the year. There were no goodwill impairments in 2021 and the amortisation of acquisition-related intangibles was at a more normal level of £19.4 million. And this reconciles to the £154.9 million of statutory operating profit. Profit on disposed businesses was £226.5 million. Financial income includes a 5.1 million interest credit following the positive settlement of an EU dividends tax claim and a 7.2 million FX gain on intercompany balances. After subtracting 5.6 million of finance costs, this brings you down to a statutory profit before tax of £388.6 million for the year. 2021 was a busy year in terms of completing disposals and we also acquired concurrent real time. I have therefore included a pro forma slide to help you with your models by illustrating how the group would have looked with all of the disposals removed and with a full year of concurrent real time. Starting on the left-hand side is our reported result for 2021. I have then removed the 2021 contribution for each of Millbrook, B&K Vibro, ESG and NDC technologies. Finally, I have annualised for the acquisition of concurrent real-time in order to provide you with a reasonable baseline upon which to build your expectations for 2022. Which brings me on to 2022. As we think about 2022, as always, we have several headwinds and tailwinds to consider, starting with the headwinds. We do not expect the same level of COVID challenges that we have seen over the past two years. However, we continue to experience localised COVID-related interruptions and anticipate that this will remain the case in 2022. We also expect supply chain issues to continue, but cannot predict exactly where or the absolute impact this could have. Nevertheless, we anticipate these issues will start to ease in the second half of the year. We expect to face labour cost, material cost and overhead inflation during 2022 and have seen a wide range of forecasts from many commentators. We will continue to control what we can and are confident of our ability to mitigate this headwind through our pricing strategies. Finally, we should recognise the potential risk associated with increased geopolitical disruption. Our assumed exchange rates for 2022 are a $1.38 and a 1.16 euro. If that proves to be incorrect, then for every cent change on the dollar, it has a 3.1 million impact on sales and a 0.8 million pound impact on profit. And for every euro cent change, it's 2.5 million pounds on sales and half a million pounds on profit. On the positive side, we have several tailwinds. Our order book remains strong and supports our continued organic growth confidence into 2022. Our organic growth will continue to benefit from new products and services. Every year, the Spectris business system becomes more established and we will continue to deploy it to reduce waste and inefficiency and remain confident of continued margin progression. As I mentioned on my previous slide, we will benefit from the full year contribution of concurrent real-time and we will continue to actively look at additional acquisition opportunities. In terms of other guidance, CapEx will be around £50 million. In combination with our CrayOptics acquisition and new projects, we expect to increase our R&D spend by an additional £10 million in 2022. We expect to spend around 20 million pounds of software as a service costs as we develop a new ERP system at Malvern Panalytical and from next year at HBK. In total, we anticipate an investment of around 45 million pounds over the next three years, which will be captured by our new SAS performance measure. We expect our tax rate to be 22% and working capital will stay within our previously guided range of 11 to 15%. And with that, I'll hand you back to Andrew.

Thank you, Derek. Now let's take a quick look at our end markets and then turn to our businesses. We have seen a good recovery in many of our end markets, and apart from energy and utilities, they have all returned to growth. Machine manufacturing, pharmaceutical and semiconductor stand out as the strongest performers. In machine manufacturing, positive outlook and the strong fit of our sensor applications for food production, medical equipment and semiconductor manufacturing continued the buoyant performance. In pharma, we're seeing a significant uplift in support of vaccine and viral vector development and also manufacturing, as well as an increase in the onshoring of production. And this has resulted in a record order intake. The on-shoring trend is also supporting growth in Semicon, as is the rising demand for chips, which is driving an increase in investment programmes from major semiconductor manufacturers. Automotive is now back into growth territory, recovering well in the second half of the year, and although energy and utilities remains weaker than last year, the second half saw growth and orders into this sector demonstrate the market is recovering. Turning now to our businesses, and starting with Melbourne Analytical. We had a strong year, achieving a record order intake following 25% growth in like-for-like orders. Asia was particularly strong, as was continuing demand in pharma and advanced materials. Sales increased 11% on a like-for-like basis, supported by both the strong market recovery and the impact of new products like the Zetasizer Advance and Omnitrust. which have both outperformed sales expectations. Revenue would have been stronger if it wasn't for the challenges experienced in Q4 and some sales being pushed out into 2022. However, this does position the business well for the first quarter and the year overall. The higher volume combined with greater efficiency and positive pricing helped drive a 36% like-for-like increase in adjusted operating profit and a 320 basis points rise in adjusted operating margin. Now this is despite investment being increased to both enhance the performance of existing products and develop new solutions with software, services and analytics being key areas of focus. The Smart Manager service was a key launch during the year, providing customers with insights into the real-time utilization and health of their instruments to help improve both utilization and process productivity. The key strategic focus has been on the pharmaceutical industry. It has been good to see organic sales increasing in this area by 34% over the past three years. To compound this growth, a small but important acquisition has recently been completed to tap into key growth trends in this market. Malvern Panalytical has a leading position in measuring the structure, stability and affinity for drug development. This enables customers to ensure the arrangement of the substances, the long-term quality and the drug binding come together in the product formulation. To further strengthen our position and expand our offering in the affinity area, we acquired Creoptics in January. They provide industry-leading instruments and software for measuring real-time biological and molecular interactions. While it is an early-stage business, the combination provides an exciting opportunity to quickly scale Creoptics' superior technology in terms of both speed and sensitivity by leveraging Malvern Panalytical's extensive customer base. HPK achieved 16% like-for-like order growth and again finished the year with a record order book. Like-for-like sales were 8% higher, reflecting the supply chain constraints and some longer dated orders from an increase in OEM business. But again, this positions us well for 2022. Robust demand continued in machine manufacturing, supported by strong demand for our weighing technologies. It's also been pleasing to see a steadily improving automotive market come through last year. HPK continued to make solid progress on improving their financial performance. On a light flight basis, adjusted operating profit increased 32% and adjusted operating margin increased 280 basis points. This was mainly driven by the higher top line, drop through and ongoing efficiency improvements from the merger. But we're not stopping there. With further initiatives in train, In 2021, HBK moved to a new site near Copenhagen with updated manufacturing processes to better serve customer demands and a new go-to-market model. Also, a new CRM system is being rolled out during 2022 as we work to further simplify the operating model. And this will be complemented by the deployment of one common ERP platform across HBK over the next three years, following on from a similar implementation planned in Malvern Panalytical. Alongside these operational improvements, HPK has also been busy investing in organic growth projects aligned to the strongest market growth opportunities, such as electrification, smart sensing, virtual testing and simulation, and digitization. A number of new products and solutions have been launched this year, including our latest generation of NVH simulation software with significant new features and capabilities to give customers a highly accurate experience of sound and vibration through the product design and development cycle. And the QuantumX data acquisition system to simplify the complex measurement environment in battery electric drive trains, hydrogen fuel applications, and structural health monitoring. HVK also made two synergistic acquisitions during the year, Concurrent Real-Time and Vimana. Now, we've talked about Concurrent previously, so just to say that the integration into HVK's virtual test division is going well and to plan. In August, HPK also completed a license and asset purchase agreement with Vimana, a provider of software and services for smart manufacturing. The transaction brings data platform technology and software to HPK and will form the basis of a new engineering center of excellence focused on data management and connectivity. Its open architecture approach will allow customers to easily integrate test data into their networks. The first product will be launched alongside HPK's new data acquisition system during 2022. Turning now to Omega, I am pleased to say that we saw a much improved performance in the business last year. Omega posted above-market growth with strong demand from its strategic OEM and distributor accounts, new business wins and other share gains. Orders were up 23% and sales up 14% on a like-for-like basis. There was strong growth through our key channel partners in North America and also from semiconductor customers in Asia. Sales through the Newark partnership were up 50% year-on-year and the relationship is currently being extended to Europe and Asia. On a like-for-like basis, adjusted operating profit increased 82% with margins rising 430 basis points. This resulted from good operating leverage on the higher sales volume, price gains and also efficiency improvement. This performance reflects the impact of the revised strategic initiatives to drive above market growth and in turn improve margin. Optimising the customer experience has seen web orders and conversion rates back to 2018 levels, that's pre the new web offering, and record average order values. An investment in new products is better focused, targeting both customer needs as well as emerging technologies. And the HANI, which is the High Accuracy Non-Invasive Temperature Sensor, and the Layer N products for Industrial Internet of Things solutions were key product launches in the year. Alongside this, initiatives to simplify the business and improve operation performance continued. Now there is more to do, but it's good to see progress being made under the new management team. Turning now to industrial solutions, like-for-like sales here increased 8% with strong demand from semiconductor and pharmaceutical customers, reflecting a strong market recovery and the impact of recent product launches. Like-for-like adjusted operating profit increased 10% and margins increased 30 basis points. This primarily resulted from the sales increase and also reflected the impact of the disposals, which enhanced the division's margin. As we detailed in our presentation in December, ISD is now made up of three high quality specialist businesses. The strategic direction is centred around being a leading provider of high precision inline sensing and monitoring solutions based around PMS, Servimex and Red Lion. Each of the businesses will continue their customer oriented strategic initiatives and product development strategies to drive organic growth. Alongside this, ISD will be run as a more integrated division, retaining the business units and brands while looking for opportunities to leverage the existing infrastructure and drive efficiencies. Before concluding, I would like to share with you just a few examples of how we equip our customers to make the world cleaner, healthier and more productive. So starting with Cleaner, we are delighted to be supporting the exciting work at ITER to prove the feasibility of fusion as a large-scale, sustainable and carbon-free source of energy. This engineering challenge involves extreme environments, for example high temperatures and huge electromagnetic fields, with really large instrumentation requirements. Being experimental, everything is first of a kind and requires highly specialized materials and processes, as well as precise measurement instrumentation. HPK has a long collaboration history with ITER and recently won a new 1.4 million euro systems order, reflecting its unique capability and expertise in delivering high performance measurement systems using both optical and electrical technologies. ITA's specific requirements often reach physical limits and with its expertise, its sensors and its software, HPK is able to build the customised solutions that the customer needs, cementing its position as a valued partner. Turning out a healthier, we continue to be actively involved in supporting the fight against COVID. Malvern Panalytical's differential scanning calorimetry technology is a gold standard technique for assessing thermal stability and facilitating the selection of stable vaccine formulations. Using this technology, Malvern Panalytical is collaborating with Leucocare, who specialise in biopharma formulation development, to understand how the stability and the subsequent supply and storage of the vaccine can be improved. bringing together Leucocare's pioneering expertise with Malvern Analytical's analytical know-how is helping to increase the production and simplify the distribution of COVID vaccines. And this technique can be further used to achieve stability improvements for a wide range of vaccines. Lastly, to more productive and Omega's new award-winning product, the HANI. In the food and beverage industry, temperature control is critical to ensure product integrity and quality, for example measuring the temperature of a fluid moving through a pipe during manufacturing. The HANI is easily installed by clamping it externally to the pipe, delivering immediate high-accuracy temperature readings without any costly installation and downtime. Also, by being non-invasive and non-contact, it avoids contamination risk, which can affect product integrity. So it allows for easy connectivity and data collection and the flexibility to easily change the temperature monitoring system around the facility. Using HANI, the Food Innovation Centre at Rutgers University achieved their required temperature of measurement outcome within seconds, rather than days it would have historically taken, all while ensuring product integrity. So I wanted to finish with a few insights into our thinking on the next phase for Spectris, as we look beyond the strategy for profitable growth. In 2019, we set out to simplify and bring more focus to Spectris. At that time, the group comprised 13 operating companies and lacked strategic clarity. By executing our strategy, we have delivered a Spectrus that today is more focused, more profitable and more resilient, with sustainability at the heart. This gives us a very strong platform to accelerate our ambitions. During 2021, we conducted an in-depth review of our operations and assessed our activities across a range of key sustainability trends that offer exposure to high growth, high margin in markets. we are already well positioned to take advantage of these trends, which will support the next phase of our development. To go into a little more detail, we have identified seven growth trends, which include advancements in health, the transformation of mobility, the energy transition, responsibility in sourcing and production, the transition to the circular economy, environmental protection, and the evolution of food production and advanced agriculture. Spectris has strong positions in many of these areas today, and we see exciting opportunities to accelerate our growth aligned to these trends over the coming years, both in our organic development and in targeted M&A. For example, we see opportunities across all these trends at Malvern Panalytical. Health is obviously a key area of exposure, and we see continued strong growth in pharma and life sciences, a key market for PMS2. Alongside this, the transformation of mobility and energy transition is driving significant investment in new battery materials and new greener technologies and fuels, as well as environmental protection. This will play not just to Malvern's strengths, but to HPK, Omega, PMS and Servamex as well. And with material use set to double by 2060, we see an opportunity to improve the circularity of our own products in addition to developing recycling solutions support of transforming waste materials to new product these themes are very much aligned with our purpose and this will feature heavily as we articulate the next chapter for the business a chapter that will take us beyond our existing strategy for profitable growth and i look forward to talking to you more about this later in the year so in summary we delivered a good financial performance in 2021 demand for our products and services has been and continues to be strong And although supply chain and COVID challenges somewhat constrained our ability to maximise sales in the fourth quarter, we enter 2022 with a record order book and have made a strong start to the year. This gives us confidence in our ability to deliver continued good growth and to maintain our progress in returning the Group to its previous margin highs and ultimately exceeding them over the longer term. We have made significant progress in executing our strategy. Spectrus is now a more focused, higher quality, more profitable and a more resilient business, supported by a very strong balance sheet. We have demonstrated our ability to reduce costs responsibly, drive organic growth, expand margins, allocate capital with discipline for attractive returns and have made several successful acquisitions to enhance our customer offering. Looking forward, we will build on this progress, investing in our businesses to take advantage of new growth opportunities strongly aligned to our purpose and to our focus on sustainability. We will continue to aim high and be bold in our pursuit of enhancing value for all our stakeholders. Thank you, and we'll now be happy to take your questions.

Our first question comes from Andrew Wilson at J.P. Morgan. Please go ahead.

Hi, good morning. Thanks for taking my questions. I've got three, if I can take them one by one, if possible. I was just hoping to, you've mentioned a number of times the headwinds that you had in the Q4. And if you could, I guess, help to quantify what you think the lost sales impact might have been. Just trying to think, obviously, how the implications of that for 2022.

Right, morning, Andy. I thought you had three questions. I was waiting for all three questions. But let's take the first one first. So, yes, I mean, clearly, as we progressed through Q4, we found a sort of progressive tightening of supply chain, predominantly as our volume was increasing through Q4 in terms of shipment. We ended up with some particular constraints that effectively constrained our ability to convert the full order book as we are expecting in Q4. In terms of the actual quantum, it's difficult to be completely precise, but it's at least 20 million pounds that we can see that was either, you know, ready for shipping or was shipped but couldn't be received by customers. You know, certainly as Omicron expanded in December, we found, you know, a number of customers closing their sites again or other supply chain constraints meant they weren't ready to receive it. So we ended up with quite a significant amount of inventory that was either ready to ship or actually in transit that we couldn't recognize. You know, that particularly affected Maldon Analytical. But likewise, with Omicron and Omega in New Jersey, in particular, where we have our distribution center, we had a number of operatives who were out. And we just didn't have enough fingers and thumbs there to actually pick, pack, and ship. So it's at least 20 million pounds that has effectively fallen over the boundary between December and January. And the new year, as a consequence, has started very well. Revenue in January was up 7% year over year. February revenue is also growing strongly, from what we can see. And the encouraging thing, the order book continues to grow. The order book at the end of January was bigger than it was at the end of December. So we ended up with orders up higher than our average through 2021 in January. So, you know, demand remains very strong, and I see this just purely as a timing issue.

Great. I just wanted to ask around the orders in the order book, obviously being super, super strong, and I guess probably an obvious question, but just in terms of, I guess, confidence around, I guess, for want of a better word, how real those orders are, whether there's any risk that you've seen double order I'm assuming that you will see some early ordering as lead times extend, but just in terms of, I guess, risk around those orders.

Yeah, so the order book is very strong. We do track cancellations and have been all the way through last year. Because clearly as demand picked up, we were conscious that were we just seeing speculative order intake and people reserving positions. That has proved not to be the case. Cancellations run at very low levels consistent with long run history. So we certainly don't see that sort of speculative element within the order book. However, your other points in terms of is the order book longer dated? Yes, it is. Clearly, we have had to extend lead times given supply chain constraints as have most businesses. So inevitably that is boosting the order book. But if you compare our order book as of the year end, it was up over 50% year over year. And if you look at Spectris as a business, typically we had three to four months cover. Historically, if you go back to 2018, 2019, that's now sitting in the almost five to six month range. So, you know, there's clearly some of that is down to longer dated business, but clearly overall, you know, the gap between, you know, order growth of 19% last year versus, you know, top line revenue of 10%, you know, the majority of that is actually just, you know, new increased demand.

Thank you. And then a final one, I guess it's a longer term one, but The statement, obviously, and I think you made the comment as well around the target to get back to the previous peaks on margins and then ultimately exceed them, I guess, interested in terms of what changes you think you need to see to get to those kind of levels, whether it be the 18 or I don't know whether it's sort of north of 20 that you're kind of thinking about. Is that just, is it a volume thing or is it still changes that you want to make to the portfolio or... I just kind of just want to understand sort of the bridge from where we are today to potentially those much higher numbers.

Yeah, so I would sort of break it down into sort of three fundamental areas. Clearly, as we came out of the pandemic or out of 2020, off the back of 2020's COVID outbreak, we said then that we wanted to make sure we got the cost base into the right sort of size and shape. such that we could grow back into the market recovery. So we did a lot of work, you know, back in 18, 19 on the profit improvement program, accelerated its completion in 20, did some further work in 20, as you're well aware. So, you know, we came out at the end of 2020 with the cost base in the right place. So that gives us the opportunity to get, you know, very strong operating leverage as volumes come back. We saw that, you know, in 2021. And as we go forward, We will retain our discipline in terms of costs. We clearly did add some cost into the overheads last year to support the growth rate and to some extent the fact that the sales miss from Q4 or the fulfilment miss that's fallen over into this year. the 20 million I talked about, you know, we built the cost base to support some of that, and that sort of impacted margins in Q4 as a consequence. But I say that's just a timing issue. So firstly, you know, operating leverage. Secondly, the Spectris business system. We continue to mature and strengthen our deployment, our training, development of our tools, and sort of really embedding the whole lean philosophy in terms of how we run our businesses. And I'm pleased that we are now starting to see real financial benefits coming through to help offset cost inflation. So a big driver again this year and going forward to the deployment of the Spectrum's business system. And then thirdly, we are also investing in better processes and better systems to support the growth, to sort of make sure that we have a scalable operating model We can scale efficiently. As you're aware, we've been deploying a new CRM system into HBK over the last 12 months. That went live in January successfully. And as we've put in the announcements in the press release, we are also in the process of investing in upgrading the ERP system, firstly in Morgan Analytical and then into HBK. to really drive greater efficiency in just the way we operate on a day-to-day basis and take advantage of the next generation of ERP technology.

Very helpful. Thank you.

Our next question comes from Michael Tindall from HSBC. Please go ahead.

Good morning, gentlemen. A couple of questions, if I may. Can we just talk a little bit about Malpan? Because Malpan is still some 10% below where it was in 2019 on revenues. I just wondered to what degree is there still catch-up potential there? And also, if I'm not wrong, Pharma was up 27% at the first half, up 14% for the full year. So I realized there could be some base impacts there, but it feels like it was flattish in the second half. Am I reading that the wrong way? And then the second question is, I don't know if you're willing to share it, Derek, but I wonder if you could give us just some idea in terms of what you've got in the budget for labour and material inflation for 2022. Thanks.

All right, very good. Well, let me take the first question, Mike, on Malvern Panelistical. I mean, clearly, it had a very strong year last year. I mean, its order intake was up significantly. And as I said, if it hadn't been for some of the constraints in Q4, the revenue growth in Melbourne Analytical would have been that much stronger. A good proportion of the 20 million missed from Q4 that I spoke about relates to Melbourne Analytical and just its business model and the way it recognises revenue in terms of some of the complexity of the systems installations going into customers. But we are seeing continued strong growth in pharma. You know, we have a very strong offering, particularly around this whole sort of stability, affinity structure area of drug development discovery and manufacturing quality. And, you know, as per the case study highlighted earlier, you know, we're seeing still strong demand in terms of vaccine development and antivirals. And that's also then supported by, you know, quite a strong onshoring trend, which we see continuing. But it was also good to see the growth in the advanced materials last year, particularly around semiconductors and the fine chemistries associated with that. Our wafer analyzers did very well. But equally, the investment in new battery materials, additive layer manufacturing was strong. And it's also great to see that the academia sector that was heavily down in 2020 recovered quite strongly. It was up almost double digits last year. So, you know, all of that is contributing, you know, well to Malvern Planetical's growth. And certainly, as we look forward, you know, we see, you know, continued strong growth, you know, and recovery beyond 2019 levels.

And then on your question, Mike, on the budget costs, We are anticipating inflation in our cost base and our overheads. In terms of labour inflation, we have a range of assumptions, to be honest, and we're in the process of doing pay reviews at the moment, so I don't think it's appropriate for me to give you a number now because it does differ by territory and grade and all sorts of different dynamics in terms of doing our pay reviews across the piece. And I think, to be honest, given the environment that we're currently operating in, I think I'm going to have to leave it to you guys to make an assessment as to what you think the correct inflationary range is for your guidance. We have a series of planning assumptions, but I suspect my planning assumptions are no better than your market assumptions. So I don't think we're going to get drawn on trying to guide to cost inflation for this year.

Don't blame me for trying. Thank you.

Our next question is from Andrew Douglas at Jefferies. Please go ahead.

Morning, guys. Most of my questions have already been asked, but I've got three smaller ones, please. Can we talk just very quickly about the M&A pipeline? It sounds like you've been building that throughout the year. You made a £34 or £30-odd million acquisition this morning. Can you just talk about the pipeline and how that's looking, big or small ones, and kind of the evolution of the end markets kind of that you're following. Has that changed the businesses that you're looking at, or are you kind of thinking slightly differently about M&A? That would be helpful. Second question is a slight lead-on from Michael's question a minute ago. Can you just give us an update on energy costs in terms of percentage of sales, whether it's gas, electricity, et cetera, just so we can have a better understanding there, please? And then last but not least, Omega looks like it's motoring. I think it was plus 18 organic sales in the fourth quarter. That's good. And your comments about the improvements and the current management team, you're going well. How much more do you think needs to be done there? And is it fair to say that they're kind of doing all they can at the moment and a lot of the heavy lifting has been done, which will then come through to an improved performance? Or is there still more to be done there? Please.

Okay, thanks, Andy. Thanks for your questions. I'll take your first and third questions. I'll pass energy costs on to Derek. So, firstly, just talking about the M&A pipeline. I mean, I'm really pleased with just how all the businesses have been able to strengthen their pipelines over the past sort of 12, 18, 24 months. We have put a lot of focus on it, as you know, and as a consequence of that, were able to complete on concurrent real-time back in the summer last year. Equally, the asset and license agreement with Vermana for HBK to create a sort of data management platform is also an exciting development. And you'll see in the announcement the acquisition of Creoptics by Malvern Panelistica, which completed in January. So we've got a strong pipeline, some good momentum. And as ever, we continue to sort of actively scan the market, but have some attractive targets that we are looking at currently. And that's why we've decided this year not to do any sort of special return by way of a special dividend or a share buyback. And I think your other Parts of the question there was, is the evolution of end markets changing? Are we thinking differently? I mean, clearly, the whole focus on sustainability is important to us. We see opportunities there to be advantaged by a number of the sustainability thematics I touched on in the presentation. So that is certainly uppermost in terms of our thinking, and it's now part of our filtering process. And in part, the acquisition of Creoptics was part of that thinking. But all of the acquisitions we're looking for are very much consistent with what we've said strategically in the past, where we're looking to scale up the businesses, either looking at targets that sit back on the same end markets, the same sort of strategic growth areas we're looking for, that would complement our current offering or indeed are immediately adjacent spaces or offerings that, you know, we see will be highly synergistic to, you know, what we do today. And Creoptics, I think, is a classic case in point where, you know, as I said in the presentation, Malvern Analytical, you know, very strong in the whole sort of drug discovery and development space, particularly around the stability, the structure, the affinity of formulations. And we saw in Creoptics an early stage business that had some really strong new leading technology in the affinity space that we absolutely believe will sit very nicely alongside Mold and Palleticle's current calorimetry offerings. It is an early stage business. It's currently slightly loss making, about 4 million of revenue. But, you know, we see the opportunity to quickly scale that business and deliver very strong returns off the back of flowing CREOptics technology and products through the existing Melbourne Pallet School supply chain, sorry, you know, customer chain and, you know, routes to market. So, you know, it's bang on strategy. I wouldn't say don't get carried away that our M&A approach has shifted towards early-stage businesses. As we said before, we look at everything from technology through early-stage startups through to small bolt-ons to businesses the size of concurrent, which is $160 million-ish size. you know, all the way up to businesses that are equivalent to, you know, the size of our current platforms as we were looking back in 2020, you know, on the potential US acquisition we spoke about at the time. So, you know, we continue to look across the board. And if anything, you know, given the current market volatility, we see opportunities.

Yeah, then energy costs. That's a great question, Andy. I don't have a specific pound note number for energy costs, to be honest, across the group. I mean, I make a couple of observations. Roughly half of our energy usage is electricity. So when you look in the annual report, when it comes out, you'll see a sort of table on our energy consumption. Broadly, half of it is electricity. When you think about our business, though, we don't have significant energy demands. We're not running big, large machinery 24-7. We're not burning anything or building anything using high energy usage in that sense. Most of our production is assembly or bringing things together that have been manufactured elsewhere. So it's an asset light model, and it's also a relatively energy light model. But in terms of giving you a specific number on the energy costs, I'm afraid that's not something that we particularly focus on.

No, that's fine.

I think the message is clear.

That's fine.

And Omega? I mean, just the other part on energy. I mean, we've signed up to the RE100 initiative around renewable energy. 43% of our electricity we purchase now is renewable, and we're working on negotiating contracts to increase that quickly up to towards 100%. Then just on Omega, yes, as you said, as I said in the presentation, it's really pleasing to see the progress that the new management team is making there. The focus that AMIS has brought in terms of really getting Omega to drive just four key strategic growth initiatives around enhancing the digital experience, expanding the sales distribution channels and developing new partnerships there, having much more sort of focused product innovation, and then just, you know, overall continue to simplify and improve the operational performance of the business. You know, they have done a great job last year, you know, despite all the challenges that they've had in terms of, you know, supply chain disruption and also some fairly tight labor markets in the U.S. So, you know, really pleased with the progress they're making. In terms of, I think your question was really around is there more heavy lifting to do? I don't think there is. It's more a matter of continued execution on the strategy and driving the focus there, as I've said. But I think one sort of data point that I'd like to share with you that I think is meaningful is that on the digital experience side, our web orders now are higher than they were back in 2018 before we implemented the new e-commerce web platform. So all the work the team's put into sort of getting that new e-commerce investment, you know, firing all cylinders and driving order intake is now starting to yield, you know, the results that we were hoping for. So, you know, I think from a heavy lifting perspective, you know, the work certainly on the digital side has been done and it's about continued execution. But as I said in the presentation, you know, there's still more to do. You know, the margins are still below, you know, the group average. and the team is very much focused on driving top-line growth, scaling the business, and improving its margin performance.

Understood.

Thank you very much.

The next question comes from Jonathan Hearn at Barclays. Please go ahead.

Good morning, guys. I just have three questions, please. Maybe the first one for Derek. I know this is never really that easy to answer at this point of the year, but Can you just give us some kind of feel for how you see that sort of H1, H2 seasonality coming through in the business, maybe just in terms of sort of revenue and profit? Obviously, it is going to be quite H2 weighted this year, but can you just give us a feel for the split as it stands? That was the first one.

Yeah, so you're absolutely right, Jonathan, it is trickier to answer at this time of the year. I mean, I think I'm not going to give you a percentage split. There's nothing that we can necessarily see that means the business is any different to normal in that sense, other than, I guess, the supply chain challenge. So we're expecting the supply chain challenges to ease in the second half, start to ease in the second half. So, you know, on balance of probabilities, that would suggest that, you know, a stronger period in the second half of those ease and the orders that we're carrying at the moment start to get realized into revenue. But I think at this stage of the year, it's difficult to be able to give you a specific percentage. Normally, we give a bit of guidance on that when we actually get through the first half. But again, I think. with all the uncertainties, that's not something we're necessarily going to look at. I think if you look overall, we are of the view, though, that this year, 2022, on a life-like, when you take out all of the disposals that we've completed in the year, and before you add in the full effect of concurrent RT on those sort of underlying life-to-life bases, we anticipate the year to be similar to 2021. But I'm not going to give an H1-H2 split at this stage.

Okay, that's clear. The same question that was just coming back to the order book. Obviously, if you look at that sort of Q4 order growth, there's quite a marked slowdown relative to Q3 and Q2. Take on board your points that things are sort of picked up in Q1, but obviously the comp there is easy. Why was that Q4 order intake down so much relative to Q3? Was it essentially a comp issue or was there some other things sort of playing out there?

So Jonathan, just to clarify, are you talking about revenue or orders? I'm talking about orders.

So orders were plus 14 in Q4, but they were plus 31 in Q3 and I think plus 20 in Q2. So why was that sudden slowdown?

It's really just against a tougher comp. If you go back to the second half of 2020, we really saw orders start to pick up progressively from June of 2020. And then it was clearly within, you know, certain markets. You know, pharma was the first to kick off. You know, it's taken until this year until sort of, you know, automotive and academia, you know, started to go positive. So, you know, it's been a progressive build from then. But, you know, we did see the order book really starting to pick up from sort of middle of 2020. So it's, again, so much tougher comp, that's all.

Okay. That's clear. And maybe the last question, just coming or following on from Andy, just in terms of Amiga, obviously, performance has improved quite a lot in Q4 relative to Q3. I mean, just in terms, I know it's a bit of an unfair question, but just in terms of its place in the portfolio, are you now a lot more convinced in terms of Amiga on a long-term basis, or are there still some questions and issues that it needs to answer for you to be really happy with its position in Spectra?

Yeah. Well, I mean, for all our businesses, they all have to, you know, earn their right to retain their position in the portfolio. I mean, Omega, you know, clearly we've refreshed the management team and it's brought in, you know, a very clear, focused approach and that is, you know, delivering results, which is really pleasing to see. But as I said, you know, there's clearly more to do. And so, you know, we will continue to review the performance, you know, of Omega as we do with all our businesses to make sure that, you know, they are still tracking a trajectory that we believe, you know, over the longer term delivers good value and good returns.

That's very clear. Thank you.

Our next question is from Mark Davis-Jones at Stifel. Please go ahead.

Thank you very much. Morning, both. Can I start just on that one again, on Omega? For the group as a whole, you're saying that you think you can get back to previous peak margins. Can the same apply at Omega? Because there's great progress, but you're still a long way below the 18 and a bit that that peaked at before it hit choppier waters. So is there any structural reason, particularly having increased the cost base on some of those web investments, why you can't get back to that sort of level at Omega?

Thanks for your question, Mark. I mean, the simple answer is there's absolutely no reason at all why not. I mean, the problem over the last two, three years has been the extra overhead burden from all of the IT investment that went in back in 17 and 18 for the new e-commerce platform. You know, that meant the business had to scale, you know, really quickly. significantly to be able to you know get the returns off that investment um and you know it's been we've been very clear you know with our frustration and our disappointment that we weren't able to scale it you know through uh 19 and 20. but you know we are now starting to get the benefit of that um you know as part of the sort of sat accounting as well we have written off some of that it investment as well just in terms of the way you know that the new Accounting rules apply, so that will help boost its headline margin as well. So absolutely no reason at all why it can't get back to – I mean, it was previously back in 2018, what, 18%, 19% operating margins. No reason it can't get back to there at all.

Okay, great. And then clearly you've simplified the business a lot over the last couple of years, which is great, but there are still an awful lot of moving parts. Are there any of your end markets, I mean, important end markets where you think activity is sort of super normal at the moment? You've mentioned some vaccine support within the pharma business. Obviously, there's been a big spike up in the machine tool end of things. Is there anything that could go against you off those peaks in 2022, do you think?

Well, I mean, I think firstly, I'd say, you know, from the simplification perspective, you know, we are, you know, and have now concentrated the group on the more attractive, higher growth end market segments that we plan to do when we announce the strategy in 2019. So, the fact that we're seeing a strong growth in pharmaceuticals, strong growth in semiconductor electronics, strong growth in the advanced materials, part of our business, the sort of what we call technology-led industrials, the machine manufacturing growth there is testament to the focus that's been brought. Clearly automotive is really the only one of our sort of target end markets that has struggled the most, but that's well publicized as the cause is why. So the simplification has certainly helped focus us on those end markets that are growing strongly, and importantly, really targeting the sub-segments within it where we have and where we can build strong leading positions. That strategy is working for us. Just going forward, your question is, of those markets that have been growing really strongly, are they going to start to slow? Overall, if you talk to any of the economists, as we progress into the second half of this year and into 2023, Clearly, there will be slowing growth. We can't sustain the growth rates that have been achieved through the back half of 20 and 21. Just mathematically, that's not going to be feasible. So we will see slowing growth, but we certainly still see growth, which is important. And as I say, we're targeting those subsegments where we see this greatest growth and our shift and focus around sustainability. I think we'll also make sure that we are focusing on real high growth, high margin opportunities as well. But I think the markets have really outperformed for us has been pharma. And at the moment, that continues to go very strongly. All the developments around viral vector, vaccine development, plus antivirals, the on-shoring trend, and the expansion of biopharma and therapeutics. We're seeing huge investments going in there, so we certainly anticipate that momentum to continue through this year. Semiconductor, without a doubt, is going to remain very strong. I mean, our order intake in semis was up, I think, 50% last year. Whether we'll achieve a 50% growth again this year, I think, you know, I would question whether we'll get there. But, you know, in terms of the, you know, we're still seeing very strong growth in the semi space. And in machine manufacturing, you know, our particular, you know, in HBK, our focus on what we call our OEM sensor business, so providing real high-precision sensors to OEMs to build into machines, everything from machine tools all the way through into agricultural equipment for precision agriculture, and even into healthcare applications where we're providing weight sensors going into high-tech hospital beds who now basically have beds that are automatically measuring movement, weight of patients and optimizing the position for patients. You know, we're selling sensors into that market as well. So, you know, I certainly see strong momentum coming into this year and we'll sustain that in those sectors through 2022. Great.

If I can just squeak in one final one. Are you seeing any shift in the M&A environment in terms of valuation expectations from sellers or willingness to sell as the world gets a bit more complicated? That's a great question.

I think it's a little early to tell. Clearly, valuation expectations have risen over the last two years. And I think, as I say, it's a little bit early days. But certainly, if you look at the listed public companies, then valuations have come off quite a bit, which, as I said earlier, in response to Andy's question, potentially may provide some opportunities.

Okay, perfect. Thanks very much.

Our next question comes from George Featherstone at the Bank of America. Please go ahead.

Hi, morning, everyone, and thanks for taking my questions. Just a follow-up on the margins. Just wanted to know what the specific timeline you have in mind for achieving the 18% operating margin target is. And then... How do the margins in the backlog compare to 2021 margins for the group?

Well, we'll take them in turn, George. Thanks for your question. So in terms of margins, we've never been explicit in terms of achieving the margin target. I mean, that's fraught with all sorts of externalities. But I think, you know, I would just simply say, you know, I'm really pleased with the way we have executed on the strategy and continue to execute on the strategy. You know, the simplification, the focus we brought the group, you know, we've improved the quality, we've improved the end market focus and attractiveness, the operational efficiency of the group is improving, the cost base is in a much better place. So, you know, confidence that we will continue to make good progress in terms of achieving our, you know, targets we put out there. And as we said all along, you know, we don't see sort of, you know, 18% as a ceiling. You know, our long-term objective is to improve margins well beyond that. Yeah, so your second question was about the margins on the order backlog.

That's right, yeah, just how they compare to what you finish the year in.

Yes, I mean, basically, George, I guess what you're taking into account is if orders are placed at certain pricing and if we see cost inflation coming through, could that impact the outturn? Is that the point you're making? That's right. Yeah.

Yeah.

I mean, it depends, in all honesty, because a number of the platforms have short order cycles and therefore, although the order is greater, the new orders reflect new pricing. So that kind of helps. Others a slightly longer cycle, but in the environment that we're in, we're able to talk to our customers and make sure that we have a sensible either discounting or mechanism in place to ensure that pricing on the order book is reflective of the environment that we're in. So the short answer to your question is we don't think having that longer order book will make a material difference to our margins, and we continue to feel that our pricing strategies and our pricing capability gives us the opportunity to offset inflationary costs where necessary. So I would say it has limited impact on the margins.

Yeah. But yeah, I mean, pricing is a live discussion with all of our businesses. Whenever Derek and I sit down with them, we are continuing to review pricing strategy. It's gone are the days where we used to do it once a year. you know, this is a much more dynamic environment. And I think if you look at 2021, the fact that we were able to, you know, actually hold up actually slightly improved gross margins last year is again, you know, evidence that, you know, we have good pricing power and are able to offset, you know, supply input inflation.

Thanks very much. Maybe one more for me and I'll leave it at that. I just wanted to talk a little bit about how much headroom you now have on the balance sheet for M&A, because you ended the year with a very strong financial position with the net cash situation. So just the headroom you have to not just your covenant targets, but maybe the level of leverage that you'd like the group to be at more structurally.

Sure. So we have, you're right, I mean, the leverage targets are way, way covered. So that's not the limiting factor. It really is a question of appetite. We have always said, and nothing's really changed, that the right level over the sort of cycle for our leverage position is between one to two times net debt EBITDA. We are happy to operate at lower than that level. as we have done, obviously, for the last couple of years because the circumstances are such. And if we had a clear path to de-lever, we would equally be happy to go slightly above that level for the right transaction at the right time. So, you know, through the cycle, you want to be looking at kind of one term of EBITDA. So you can do the math, really. If you look at our current EBITDA for this year, And obviously, you'd add in the EBITDA of any acquired entity as well. But if you looked at the current EBITDA of sort of around 250, took that up to two times and added on the cash, you can see there's a reasonable headroom on the balance sheet at the moment. That doesn't mean that it's burning a hole in our pocket. It simply means it's available. And if the right opportunities come along, then we are confident to deploy it.

Great. Thank you very much.

Our next question is from Harry Phillips at Peel Hunt.

Yeah, good morning. I appreciate you being on a very long time. So three very quick ones from me, please. Just the comment around the incremental spend on R&D of an additional 10 million. Is that a sort of, we should be taking 10 million off expectations as a consequence of that, or it's just an increase of 10 million and it's in normal band of circa 7%. The second question is for Derek, particularly around, I'm not an expert on SAAS or whatever it's referred to, accounting, but so just, I know you put a number in there, but just sort of how do we, you know, what do we put in the model, basically, because I don't have a clue. And then in terms of the comments, Derek, you made back to Jono about like-for-like growth sort of being similar to last year, what context, was that revenue growth or, Was I missing the point there? And then very lastly, just obviously the strategy refresh, you've sorted everything out or largely out internally. So clearly it's a sort of external focus. I've just been talking, I've seen free share buybacks announced by various companies across various sectors. You know, what point in time, I know you wouldn't want to answer this, but what point in time will you sort of think that that maybe is the correct alternative route, if you like?

Fine, yeah. Okay, so if I do the, I'll do them in order. So the incremental R&D, it kind of depends on how you build your model. But effectively, we've put that number out there, Harry, so that you can increase your cost base by 10 million relative to what you would have come up with had you not had that piece of information. Okay. Does that make sense? So that's what that's looking to do. In terms of software as a service, right. um how to explain that at the end of a call in a simple sense in very simple terms the the accounting standard says that if you do not own the asset that you have just created then you do not capitalize it and in the old days when you bought software you would buy a system you would build the system on premise you would capitalize all of the work that went into building that system obviously nowadays we see many many more software providers providing software in the cloud and you pay a subscription model and therefore you don't own it. So what we have done is we have interpreted that new guidance that came out in April of this year and where we had software as a service assets on the balance sheet, we have corrected the accounting, if you like, and we've written it off as a prior adjustment. That took about 20 million net. It's 18.9, I think, off our balance sheet. as an opening position in 2019. And then going forward, above the line, you will incur the lease costs, if you like, the rental costs of software as a service assets. And as a rule of thumb, that's going to be broadly similar to the amortization that we would have previously had on those capitalized costs. So to answer your question specifically in the model, what should you do? Ignore it. It's a wash. And that's going to be the case in most businesses in most scenarios. Where it's slightly more complicated for us is we're at a point in our cycle where we are actually going to make, over the next couple of years, some significant investment in new ERP systems, in multi-analytical and HVK. Under the old rules, that would have been capitalized and then amortized over its life. But rather than have very large hits into the P&L, we have identified those specific projects and those specific projects only as an APM, and you'll see that below the line. And in 2021, the cost of all of those adjustments below the line was 5.2 million. In 2022, we expect around about 20 million of what would have historically been CapEx investment, but is actually licensed spend or uncapitalizable spend to come through in the numbers. But in terms of the adjusted OP number that we typically look at, it'll be a wash, Harry. And for anyone who wants to get into more detail on any of that, I'm happy to do it offline. But hopefully that gives you enough of an understanding of what's going on.

That's very kind.

All right, excellent. And then finally, my comment on growth is around sales. So in the slides, we have a pro forma slide that basically takes this year's revenue and profit as reported, takes out the disposals. So it's around about £60 million of revenue in the reported number this year that relates to disposals. Once you get to that baseline, which is 1,226, I'm saying there's a like-for-like growth on top of that that feels, you know, as an idea similar to this year. And then you add on the annualising impact of CCRT. So that's what I was trying to.

Thank you very much.

Harry, your final question, I think, about strategy refresh. I mean, as I said, I've been really pleased with just how well the group has executed on the strategy. What we laid out in 2019, the vast majority of that we have delivered on. We've returned the group to a much more focused, higher quality business. And clearly, we've also returned it to being a an asset light business as well, so we are highly cash generative. So I think your question was really around what's our capital allocation policy going forward, if I interpret it rightly, around share buybacks or other capital choices. But as we now look forward and we look at being purpose-led and true to our purpose and we look at sustainability The strategy we laid out in 2019 and our purpose around equipping our customers to make the world cleaner, healthier, more productive talks to many of the sustainability themes that I went through in the presentation. And one thing that's always struck me since I've been Inspector is that whenever we look at the strategy and look at the optionality in front of us, we are absolutely blessed by choices. And the challenge for us is always to make sure we are filtering those choices and electing to pick the best ones. So our challenge is never one of what are we going to do? There's always plenty of things we can do. The key for us is making sure that we pick the right choices. So as we look forward, I see some real bright opportunities for us, not just in terms of continuing to execute on the strategy that we have for each of the businesses and the markets we focus on, but also certainly around the sustainability thematics driving further growth and accelerating the business further. So the year-end date, we look at the balance sheet, we review, the demand for capital, the investments needed in the business. We also review those opportunities, both organically and from M&A. We have, I certainly hope, we've demonstrated over the last two, three years, our discipline around capital allocation, and we will continue to do so if we feel that there's good opportunities to invest, to acquire businesses that help prosecute our strategy. then we will continue to do so. We've always been clear that M&A is a key part of the strategy. Likewise, if we feel that those opportunities are less realisable over the next 12 months, then we will return further capital to shareholders. So that's how we approach things. So we do retain a very disciplined approach.

Great. Thanks very much indeed.

My pleasure. Our next question is from Robert Davies from Morgan Stanley.

Go ahead. Thanks for taking my questions. My first one was just really on the catch up effect with the disconnect between orders and sales. Are you expecting to post most of that in the first quarter of the year or is there anything that kind of longer lead time? That was my first question. Thank you.

Thanks for the question, Robert. So in terms of the catch-up effect, I mean, our first quarter is very well covered from the order book. But I think in response to Andy Wilson's question, it's also, you know, it's slightly longer dated. We've gone from that sort of, you know, three, four months, two, three, four months cover to, you know, five to six months sort of order cover as the business. So, you know, the Q1 is well covered, H1 is well covered. which gives us confidence, as Derek said, that, you know, growth in the top line this year will be consistent with, you know, where we've achieved last year.

Thank you. And then two other ones I had as sort of follow-ups. One was just, could you sort of give us what the percentage of exposure in terms of sales is to Russia, or whether you have any supply chain or customers that are sort of based there, obviously, given all the news this morning? Just

be interested if there's any kind of further clarity you can provide on that topic thank you yeah it's very small uh robert we don't we don't do really anything there at all we did have a uh an operation there a couple of years ago but we closed that um last year um i think across the whole group sales that went into russia last year was about four million pounds so it's it's tiny i see okay

And then just the final one was just, I know last year, Derek, you provided some color on the sort of operational leverage for the business. Just be curious with all the, I guess, disposals and acquisitions that you've done over the last 12 to 18 months, does that have a material impact on how we should think about operational leverage in 2022, i.e. on whatever volume growth we assume? Is it reasonable to assume a similar operational leverage or has the cost adds that you've had from additional people over the last couple of years going to affect that?

Thank you. Yeah. It's a great question. There are a lot of moving parts still this year with supply chain, I think, and inflation coming through. So those are kind of two new data points that would make our historic operational leverage slightly harder to hit, I'd imagine. But there's nothing fundamental that's changed in the shape of the group. But as you say, I think you kind of need to take into account current events when you think about it rather than just sort of sticking to a specific percentage.

That's great. Thank you very much.

Next question comes from Robert, sorry, Richard Page from Numis. Please go ahead.

Thank you. Morning. Long call. So just the one from me. Just want to dig into industrial solutions a bit more because I guess at the headline level, light for light sales of 8% growth. translating into 30 basis points of like-like margin improvement looks pretty underwhelming i'm assuming that uh servomex is a big delta within that given the ventilator demand in 20 drop away but you also mention overheads just trying to understand what the sort of moving parts of that bit better please

Yeah, thanks, Richard. Good to hear your voice. So, I mean, I think for ISD, I mean, there's been quite a lot of moving parts, clearly, within ISD. So, from a like-for-like perspective, you know, I appreciate I have to sort of peel a number of things back to sort of get to the core numbers. But certainly our, you know, PMS and ServerMix, you know, held up very well through 2020. So from a growth perspective, they are back collectively to just 1% of their 2019 sales. So they saw a much smaller dip. So to some extent, I think that explains the 8% light for light sales growth last year. And the 30 basis point improvement, Again, their margins held up much better during COVID as you saw last year. We have been investing for growth in all the businesses. New product launches across the board. Redline has been coming to the end of a full product refresh for its lineup. PMS has been investing quite heavily in terms of its microbial monitoring. for its liquid products. Likewise, investments in Servamex. And we feel that all three businesses are well positioned for growth. And in particular, in the pharma and the life sciences space where we've certainly seen over 50% order intake growth in Semicom, which helps both PMS and Servamex. And the life sciences business is also doing well, you know, despite the fact that, yes, you know, ventilator supply, you know, for Servimex is down. So, you know, there's a number of moving parts there, but, you know, overall, as I say, you know, pleased with the, you know, with the progress we're making and equally how the business is positioned for future growth.

Okay. So, we should expect probably better operational leverage next year.

Yeah. Yeah. Correct. Yes.

Yeah.

We currently have no further questions on the phone lines, so I will hand over to Siobhan for the webcast questions.

Okay, there's a couple of questions coming through. I think one is probably addressed, but on the strong order book, is that just a function of supply chain issues inedible to deliver in Q4? And then the second one, could you help us understand a bit more about the magnitude of any price increases in this year and whether there will be any net of costs possibly?

Okay. So, well, firstly, on the order book, I mean, the order book is significantly up. I mean, we are up, say, over 50% year over year. So, you know, almost 200 million as a quantum, as the delta between, you know, year end of 21 versus 20. versus a $20 million-ish order fulfillment miss in Q4 that's fallen through into this year. So you can clearly see that the demand overall is significantly up and very strong. Then in terms of pricing, as we've said, pricing is an active discussion that we're having monthly with all of the businesses and just reviewing what we need to do. Clearly, we need to stay ahead of inflation to offset the inflationary pressures. All the work we did last year, and you can see in our results and our gross margin performance last year, we've been successful in doing that. Clearly, we'd always like to be slightly ahead of the input inflation, but given the rate that's running at the moment, I wouldn't wish to make any assertions that we would be ahead this year, but equally, you know, our objective is to be at least neutral, if not slightly ahead. So, you know, that's how we, you know, think about our, you know, pricing, using our pricing power.

Okay, thank you. That's all the webcast questions.

Okay. So, I think we are complete with the questions. I appreciate it's been a long call. You know, thank you for your patience, and also thank you for all the questions. So, let me just conclude and wrap up. So, for me, in conclusion, there is lots to like here. We delivered a very good overall performance in 2021. Clearly, the supply chain and Omicron developments in Q4 did frustrate our order fulfillment, as we've talked about, but I just see that purely as a timing issue. Demand for our products and services has been and continues to be strong, and we've had a strong start to the year, supported by a record order book. I'm very pleased with how we're executing our strategy for profitable growth. We are today a much higher quality, more profitable and stronger business and that gives us real confidence in our ability to deliver continued good growth and also maintain progress on improving margins. And I have to say, you know, despite developments, you know, recently I am optimistic about the future and that optimism is rooted in the commitment and, you know, support and dedication of my colleagues and also how I can see our strategy evolving. We're going to build on our progress. We're going to invest in our businesses to take advantage of those growth opportunities that we see in front of us that are strongly aligned to our purpose and to our focus on sustainability. And I very much look forward to talking to you more about those later on in the year. As I said earlier, we'll continue to aim high and be bold in our pursuit of enhancing value for all shareholders and all stakeholders. So thank you very much for joining and look forward to catching up with you again in April. Thank you very much.