Spectris plc

Good morning, everyone, and welcome to Spectris' half-year results for 2022. I'm Andrew Heath, Chief Executive, and I'm joined by our CFO, Derek Harding. I'd like to start this morning by saying a big thank you to all my Spectris colleagues for their hard work again this year. 2022 has presented new challenges, but our teams have worked hard, as hard as ever, to deliver the continued progress we have made so far this year. And I'm always grateful for their commitment and can-do, aim high approach, delivering on our purpose, harnessing the power of precision measurement to equip our customers to make the world cleaner, healthier, and more productive. Thank you. We are delivering on all elements of our strategy for profitable growth, which continues to position us strongly as we navigate the macro backdrop, supply disruptions and further COVID-related lockdowns in China. Our focus on working closely with our customers is underpinning demand and driving growth. We provide premium, differentiated technologies, equipping them to improve the drugs that heal us, the food we eat, the materials we build with, the cars we drive, the semiconductors that power our devices, or the air that we breathe. And this is clearly translating into strong growth in orders and sales. Over the past three years, we have transformed the group into a more focused, more profitable and more resilient business, with the ability to compound growth at a higher rate through the cycle. Today, Spectris is in a position of strength, with a robust balance sheet, well positioned in attractive end markets with strong fundamentals, supported by key sustainability themes to deliver structural growth. and the successful sale of Omega delivered significant shareholder value, demonstrating our continued portfolio discipline as we further improved the quality of the group. We have fabulous, engaged people, all contributing to a purpose-led, high-performance growth culture. While vigilant to the macro environment and alert to signs of changes in demand, we have confidence in our business and have increased our investment for growth in R&D to innovate and enhance our customer offerings. With our current order visibility, we expect to deliver high single-digit organic sales growth and margin expansion for the full year, supported by the pricing already in the order book and SBS, the Spectrus business system. And SBS is central to our strategy for profitable growth, tightening our processes and improving the efficiency and effectiveness of our operations. Launched three years ago, it is now delivering tangible benefits right across the group. And for those who attended our investor day at Malvern Palatical, they saw in person the results of improvements made to the manufacturing line for one of our highest volume products, the Master Sizer, where we doubled throughput in a smaller footprint with fewer people. And more so, the team have almost halved overall lead times, creating a real competitive advantage, supporting the significant order and sales growth we've achieved this year. An Akaisen event run by the HBK Suzhou production team analyzed how they could reduce work in progress by value stream mapping and use of HyJunko flow leveling tools. The team achieved close to 30% lead time improvement, significant labor cost savings, as well as inventory reduction. Following Akaisen at PMS, the service room for the 20 nanometer particle counters was relayed out to provide a faster response time than competitors. Turnaround time was almost half and capacity quadrupled, generating £1.6 million worth of extra revenue. The HBK TorqueSensor design team applied value analysis and value engineering to deliver a 40% reduction in unit cost for one of their key product lines. This also came with a significant reduction in disposed plastic. And at Redline and PMS, we also ran Kaizen to reduce packaging and the use of plastics, saving cost and reducing our environmental impact. These are just a small snapshot of SBS in action and the great engagement of our people, driving continuous improvement to deliver business success, enhancing our productivity, increasing our competitiveness and making our operations more sustainable. We entered 2022 with good momentum and a record order book right across the group. We have continued to see healthy demand for our products and services with orders up 20% on a like-for-like basis, further extending our order book. As expected, this resulted in like-for-like sales increasing 11% in the first six months, reflecting the recent introduction of new products and services as well as market share gains. With our current order visibility, we expect to deliver high, single-digit organic sales growth for the full year, as we previously guided. Adjusted operating profit increased to £72.3 million, with operating margin maintained at 12.7%. This reflects higher sales, partly offset by a lower gross margin and higher planned spend in R&D, as we increase investment for growth. Gross margins are temporarily being impacted by the phasing in recognising increased prices that are already in the order book, while we deal with the elevated input cost inflation and supply chain disruption costs, prioritising delivering for our customers. Pricing in our order book, the application of the Spectris business system and our higher quality, more focused portfolio with continued pricing power gives us confidence that we will see margin expansion for the full year. Our near-term target remains to return the Group to its previously adjusted operating margin highs of 18% and longer term to drive margin expansion beyond this level. We have further simplified the Group with the sale of Omega, which completed in July, with £410 million of proceeds adding to our balance sheet strength. We are deploying the balance sheet in line with our capital allocation policy, investing organically in the business to compound growth at a higher rate through the cycle and to accelerate this growth via M&A. In the first half, we announced a number of high-quality bolt-on acquisitions, further enhancing our customer offering. For our shareholders, we continue to look to drive attractive returns, and reflecting this, we have increased the interim dividend 5% and returned £150 million to shareholders via a share buyback in the first half, with another £150 million to go. Sustainability is at the core of our strategy, and I am pleased and proud that we have joined the UN Global Compact as a demonstration of our commitment. Turning to our strategy scorecard, the message here is one of continued strong execution. Our strategy is working for us and for our stakeholders. Spectrus today is more focused, higher quality, more profitable and more resilient. We're also a less cyclical business, concentrating on attractive growth markets with the ability to compound growth at a higher rate through the cycle. We have demonstrated our ability to improve the quality of the group, drive organic growth and margin, and allocate capital with discipline for attractive returns, including several synergistic acquisitions. This gives us a much stronger business today. As I've said, we maintained our adjusted operating margin and have confidence in delivering margin expansion in the second half. This confidence underpins our planned increase in investment in the business. Our R&D spend is up 18% year on year on a like for like basis at 8.3% of sales to fuel for future growth. We're investing in new ERP systems to further improve operating effectiveness and a new facility for PMS, expanding capacity to meet demand. It also supports the 5% increase in the dividend and the share buyback programme. The strength in our balance sheet still leaves plenty of capacity for M&A, and we've announced around £100 million worth of acquisitions in the first half, and I'll talk more on these later. We're now moving into the next phase of our strategy for profitable growth, which we'll be discussing later in the year in more detail. 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 future opportunities.

Good morning everyone. As with previous presentations, my first slide today is our scorecard for the first half. I will cover the specific details shown here on the following slides, but overall we are very pleased with our performance in the first half of 2022, with continuing demand for our products and services and strong like-for-like growth in both orders and sales. Let me now take you through the specific details. Before I go into the detailed numbers, it is important to note that all the figures presented today exclude Omega, which was classified as a discontinued operation at 30 June and subsequently sold on 1 July. Reported sales increased by 6% to 570.2 million. If you adjust for the impact of disposals and net of acquisitions, which reduced sales by 30.5 million or 6%, and foreign exchange movements, which increased sales by 10.7 million or 2%, you see a growth of 11% on a like-for-like basis compared to 2021. Adjusted operating profit increased by 6% to £72.3 million on both a reported and like-for-like basis. Adjusted operating margins were flat at 12.7% with like for like adjusted operating margin down 60 basis points compared to H1 2021. And this reflected higher sales, partly offset by a lower gross margin and higher investment in like for like R&D being 18% higher year on year as we increase the investment for growth. Adjusted profit before tax was 70.3 million, up 8%, and our tax rate came in at 22%, which is in line with guidance. Adjusted earnings per share were 49.8 pence. The interim dividend per share of 24.1 pence represents a 5% increase over the prior year, consistent with the growth in dividend for 2021, and we remain committed to paying a progressive dividend. Adjusted cash conversion was 39%, lower than we would normally expect due to higher working capital, particularly inventory, to ensure customer orders are met in the second half, and higher capital expenditure as a result of a $20 million investment in a new production facility and headquarters for PMS in Colorado. We expect our cash conversion percentage to recover to more normal levels in the second half. Our net debt at the end of June was 98.3 million, following the completion of 150 million of share buyback. It is worth noting that 410 million of headline proceeds for Omega was received in early July. And finally on this slide, our return on gross capital employed continues to improve, increasing from 12.4% to 13.8%. I should also note that this measure is an average measure and does include omega in both the numerator and the denominator for the full period in question. This slide provides a graphical view of the main P&L movements that I've just discussed and therefore I will not go over them again. I would however like to highlight two points of note. The gross margin is temporarily impacted by the timing lag in recognising increased prices and supply disruption costs in executing the order book to support our customers. We expect this to recover progressively in the second half as price increases implemented earlier in the year start to be reflected in sales. Also, it is worth noting that of the 13.9 million of increased overhead shown in the slide, almost half relates to like-for-like R&D investment, which we have purposely increased in the first half. 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 £18.8 million of depreciation and amortisation charged to the adjusted operating profit brings you to £91.1 million of EBITDA. The Group has utilised its strong balance sheet to ensure continued customary deliveries and where necessary has held additional inventory to adjust supply chain disruptions. This has required a cash outflow of £31.6 million relating to working capital during the period. and we spent 31.6 million on CAPEX, the largest element of which was the new building for PMS previously mentioned. This gives us our adjusted cash from operating activities of 27.9 million, which we divide into the adjusted operating profit to get our cash conversion metric of 39%. Transaction related costs and acquisitions resulted in a 68.8 million cash outflow. And in the first half, we spent 150 million of the 300 million share buyback announced in April and paid 53.3 million final dividend. We spent 2.6 million of cash in relation to previously provided restructuring. Interest and tax had a combined cash impact of 20.8 million, with other movements of 2.3 million, bringing us to the net decrease in cash for H1 of 266.1 million. As I stated previously, the 410 million of cash proceeds for Omega were received just after the balance sheet date. This schedule reconciles our adjusted operating profit measures and our statutory profit measure down to statutory profit before tax. There are no asset impairments to report or restructuring costs in the period. Transaction related costs were £6.8 million and we spent £2.3 million on the new ERP project for Malvern Panalytical and HBK. Amortisation and acquisition-related intangibles of £8.8 million brings us down to the statutory operating profit of £54.3 million. Finance costs, primarily a £10.7 million FX loss on inter-company balances, brings you down to a statutory profit before tax of £41.8 million for the period. During the period, the Group has continued to follow its approach to capital allocation set out in 2019. The balance sheet remains strong with a net debt to EBITDA of 0.6 times at the period end. Within the year, we have used the cash generated from operations and disposals to invest in the business to position it for stronger through the cycle growth via an 18% like-for-like increase in R&D to drive further innovation and through selected acquisitions. We continue to look to drive attractive shareholder returns through a combination of growth and income and reflecting this have increased the interim dividend by 5% and use the excess capital following the sale of Omega to return 150 million to shareholders via a share buyback in the first half. Looking ahead to the second half, this slide updates our view of things to consider when looking at 2022 on a full year basis. starting with the headwinds. We believe that things are starting to improve with respect to the global supply chain. However, we still anticipate that we will experience some disruption, but cannot predict exactly which components or the absolute impact this could have. We will continue to find engineering solutions to these issues and make alternative supply arrangements wherever possible. We expect continued inflation for the remainder of this year. However, our premium products provide us with good pricing power to continue to offset the higher inflation than expected at the time of setting the budget. On the positive side, we have several tailwinds. Our order book remains strong and supports our continued organic growth confidence for the remainder of the year. We expect gross margins to recover progressively in the second half as price increases implemented earlier in the year start to be reflected in sales. And additionally, we are working hard to offset inflationary pressures through the application of the Spectra's business system, SBS, to drive cost efficiencies. In terms of other guidance, I've included our usual table for FX movements. CapEx will be around 50 to 60 million and we anticipate incurring around 20 million of software as a service cost as we roll out the new ERP system at Malvern Panalytical. Primarily as a result of acquisitions, we now believe our additional R&D spend in 2022 will be 15 million pounds compared to the 10 million pounds previously guided. We expect our tax rate to be 22%. 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. So now let's take a quick look at our end markets and then turn to our businesses. We have seen good demand in our end markets with all of them now returned to growth. In pharma, higher sales have been driven by investment in biologics and on-suring of manufacturing capacity. Growth has been further driven by the success of our new products like the Zetazizer and Omnitrust software at Melbourne Planetical, and for our complete sterility assurance solutions at PMS. The on-suring trend is also supporting growth in Semicon, as is the rising demand for chips, driving an increase in investment programmes from major manufacturers. Sales were notably strong into Asia with robust demand for PMS's liquids instruments and Servomex's gas purity range. Sales growth in machine manufacturing continued, albeit against a tough comparator, supported by strong demand for HBK's weighing technologies and OEM sensors. Energy and utilities and automotive really stand out as the strongest performers in the first half, in part reflecting their later cycle nature and the easier comp against last year. Sales to energy and utilities continued an improving trend following the growth we saw in the second half of 2021 as the hydrocarbon sector recovers. Sales to energy customers at Servmex saw strong growth in Asia, especially in China. And automotive is now back into growth territory with robust demand from customers, especially for electric vehicle projects, including simulators and production. And higher sales at Redline reflects recent high demand for its automation products. Turning now to our businesses, there are a number of common themes. All the businesses ended the half with record order books and good light for light sales growth. We have experienced higher than expected input cost inflation and production costs from supply disruption, which has impacted our gross margin in the first half. But pricing power has been maintained and we will see the full impact of increased prices coming through in the second half, helping to underpin margin expansion for the full year. At Malvern Panalytical, we continued to see buoyant customer demand, particularly in pharma and advanced materials, with market share gains supported by the positive impact from new products. Order intake was up 12%, leading to a 14% increase in sales. And there was a 24% increase in adjusted operating profit and 100 basis points rise in operating margin, even after higher R&D investment. This also included investment to accelerate the growth of the recent Creoptics acquisition. Turning to HBK, orders grew 23% like-for-like with organic sales 7% higher, reflecting longer lead times and longer dated orders from a planned increase in OEM business. Automotive saw strong demand with significant order and sales growth, especially for electric vehicle projects and for our range of simulation offerings. Like-for-like sales were also up strongly in aerospace and defence. and demand from machine manufacturers continues to be elevated, driven by demand for our weighing technologies and for our smart OEM sensor solutions in medical and healthcare applications. Adjusted operating profit rose 11%, though it was 8% lower on a life flight basis, with operating margins 160 basis points lower. The higher sales plus positive mix and pricing effects were more than offset by higher input and production costs. Turning now to industrial solutions, like-for-like orders grew 28%, with like-for-like sales increasing 11%, driven by strong demand from semiconductor and pharmaceutical customers, as well as the favorable impact of recent product launches across each of our businesses. On a like-for-like basis, adjusted operating profit increased 1%, while operating margins decreased 160 basis points. Again, the sales increase was more than offset by lower gross margins and higher investment. It also reflected the impact of the disposals, which enhanced the underlying margin, but was offset by a higher burden of central costs. We've decided to continue to run ISD's three businesses on a standalone basis to drive efficiency and effectiveness. To take out additional costs, the three businesses will now report directly to me and the ISD management layer has been removed. We are now more aligned than ever to markets with attractive growth trajectories, positioned in technology-driven end markets with strong fundamentals, increasingly supported by sustainability thematics. Back in February, we highlighted a number of sustainability growth trends, which we see as providing new growth opportunities, as detailed on this slide. We've continued to refine our approach and future strategic direction around these trends, given our strong positions in many of these areas today. We see exciting opportunities to accelerate our growth aligned to these trends over the coming years, both in our organic development and via M&A, compounding growth at a higher rate through the cycle. So let's look at each in more detail. In health, both Morgan Panalytical and PMS have leading positions across the pharma development and production workflow. Sales into the sector now account for 25% of the group's revenue, and the success of our new product launches, such as Zetasizer, Omnitrust, Lays Air Pro, and Iso Air Pro Plus have helped strengthen our customer proposition. The transformation of mobility and energy transition is driving significant investment in new battery materials and new greener technologies and fuels. Both Melbourne Analytical and HBK are very much benefiting from this trend. Sales from HBK's electric powertrain offering have more than doubled in the past three years and Melbourne Analytical has seen £11 million worth of new sales into battery and new energy technologies in the first half. We're also playing a key role in environmental protection. Our gas analysis solutions from Servomex are already helping better monitor and control emissions. And then more generally across our business, our products help customers become more productive in their processes, from saving time and cost in bringing new automotive models to market, to ensuring yield maximisation in semi-con manufacturing. We have seen rapidly growing demand for our products and services at HBK, Servomex and PMS here. These themes are very much aligned with our purpose. We continue to invest more in R&D to better position us to take advantage of these trends and opportunities, accelerating growth as we move into the next phase of our strategy. We said in February we would be increasing our R&D spend this year. In the first half of the year, our R&D spend totalled £47.6 million, up 18% on a like-for-like basis, and £3 million of this increase is due to the acquisition of Cree Optics and CCRT. The increase in organic investment includes product extensions across all our businesses, as detailed on this slide, including Marvel Panalytical expanding its range of X-ray spectrometers and particle analyzers, including robot-driven sample automation for the Master Sizer, as well as next-generation calorimeters and analytic software. HPK are developing its new data acquisition hardware and software platform, Advantage and Fusion. And the release of seven new products at PMS, including several that use novel IP, as well as product refreshes at Redline and Servmex. We've also incurred extra capital expenditure with 31.6 million spent in the first half, up from 18.3 million last year. The key project is a new facility for PMS in Colorado, more than doubling its capacity to support its rapidly expanding order book and long-term growth. We're also investing in new ERP systems at both Melbourne Analytical and HBK over the next three years. This will simplify and automate processes, enabling us to become leaner and more agile, and also more scalable and flexible for growth. They will drive long-term structural improvements to our operating model, supporting both our growth and margin expansion ambitions, whilst also driving efficiency and working capital improvements. M&A remains a key aspect of our strategy, and we've announced around £100 million worth of acquisitions in the first half. We acquired Creoptics in January to further strengthen our position and expand Malvern Panalytical's offering in the affinity area within drug development. Creoptics provide industry-leading instruments and software for measuring real-time biological and molecular interactions. For HBK, we announced the acquisition of Dytran Instruments in May. They're based in California. Dytran is a leading designer and manufacturer of piezoelectric and MEMS-based accelerometers and sensors for measuring dynamic force, pressure, and vibration, with its largest market in North America. The acquisition will enhance HPK's customer offering and solutions to enable accelerated product development in the space, aerospace and automotive industries. We expect the transition to complete in the second half. HPK has also established a joint venture with DuSoft, a leading manufacturer of data acquisition hardware. The JV, to be known as Blueberry, has employees from both companies working together to create a new open industry standard for data acquisition products. The JV will also help accelerate the development of HPK's new Fusion data acquisition platform. And to expand its industrial IoT portfolio, Redline acquired MB Connect Line. It has a full complement of products in industrial cybersecurity and provides customers with a portal for remote monitoring and configuration, providing customers with secure remote access solutions. As is usual, I've selected a customer case study to show how we are bringing our purpose to life. And in this case, equipping our customer to be more productive and competitive. HPK's virtual test division has grown materially over the past three years, with 60 million of incremental revenue over this period. We've been working closely with Ford for a while, who earlier this year installed a turnkey VI-grade DIM250 simulator solution at its facility in Michigan. Automotive OEMs are continually looking at ways to speed up and reduce the cost of their development process. Our simulation offering helps Ford reduce the number of physical prototypes needed in its development program, allowing test scenarios to be run which would be too expensive or too radical to be built. The presence of a driver in the loop also brings the essential human element to the testing, allowing the development team to quickly try out different configurations and fix elements in situ. Ford will be investigating vehicle dynamics as well as ride and comfort on the same simulator, saving time, cost, risk and environmental impact. All real and quantifiable benefits for Ford. So in summary, we have made good progress in the first half with continuous strong demand for our products and services. We have confidence in delivering high single digit organic growth and margin expansion for the full year. By executing our strategy for profitable growth, we have delivered a Spectrus that today is purpose-led, more focused, more profitable, higher quality and more resilient with sustainability at the heart. We are in a position of strength, with a robust balance sheet, well positioned in attractive end markets, with strong fundamentals supported by key sustainability themes, with the ability to compound growth at a higher rate through the cycle. This gives us confidence in our ability to return the Group to its previous margin highs and ultimately exceed them over the longer term. We have a very strong platform to meet our ambition as a leading sustainable business, investing in our businesses to take advantage of new growth opportunities strongly aligned to our purpose and to our focus on sustainability.