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.

Thank you, everyone, for joining us this morning. You will have seen our release that went out this morning, as well as our webcast presentation, which I hope you've had a chance to read. Before we just get into the questions and the Q&A session, maybe I'll just make a few opening remarks. Maybe firstly, I'd like to say that I'm very pleased with the execution of our strategy for profitable growth. It is working strongly for us. 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. So today, Spectra is in a position of strength with a robust balance sheet We're well positioned in attractive end markets with strong fundamentals, and we're also supported by key sustainability themes to deliver structural growth. During the first half, we continue to make good progress, achieving strong growth, really through our focus on premium precision measurements, as well as our focus on growth markets, with all our priority markets growing well for us at the moment. And we're also delivering on a consistent basis, even in the face of continued supply chain challenges, And I have to say I'm very proud of the team for all the work they've done over the last six months in delivering the results we posted this morning. I think our results also demonstrate the value of our customer focus and connectivity, where we're solving customers' challenges, whether that be in pharma, semiconductors, automotive, advanced materials, or in a variety of technology-led industrial markets, particularly in smart manufacturing. We've increased investment in R&D, as you've seen. And the improvements we've made to our internal R&D processes, as well as our focus on driving our strategic initiatives against the key drivers we see in our own markets over the last three years is really coming through in strength and demand and market share gains. We've increased the investments I said this year, and that's very much based on our confidence and the outlook we see for our business through the cycle. And you'll also see we continue to apply self-help, driving operational excellence through the deployment of the Spectrum business system, reducing waste, improving throughput, and improving our competitiveness. And clearly, we look to accelerate and compound that growth through attractive M&A, and we've made or announced £100 million worth of acquisitions year-to-date. We're now moving into the next phase of our strategy, delivering on our ambition to be a leading sustainable business, and I look forward to updating you later in the year on that in more detail. So thank you again for joining. Very happy to take your questions.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure that your phone is unmuted locally. Our first question comes from George Featherstone from Bank of America. George, please go ahead.

Morning, Andrew and Derek, and morning, everyone else. A few questions for me. I'll go one at a time. Firstly, I'd like to start on quite a big step up in R&D year on year. I just want to know if you structurally expect now to be above 8% of revenues in terms of R&D spend going forwards. And if there are any parts of the portfolio where you feel there's been underinvestment, hence the increase, or conversely, are there any particular areas where you see an opportunity to gain further market share through new product launches and innovation?

Okay, so let's assume you're going to ask more questions, George, sorry. So yes, I mean, we've stepped up investment in R&D. As I said, sort of just in my brief opening remarks, I mean, that's really as a consequence of the strategic initiatives that we've been running over the last three years, focusing on sort of core parts of our end markets where we see we have the biggest opportunity for structural growth, you know, whether that be in sort of drug development, life science applications, whether that be in, you know, really helping to... support the capacity build-out in Semicon, all the way through to smart manufacturing using our sensors, high-precision sensors, to enable our customers to make smarter devices. So going forward, to your point, we certainly anticipate increasing our range. Historically, we've been at 6% to 7% guidance in terms of R&D. We've clearly gone through that. But I think that's consistent with what we have been saying, is we've been looking forward to increase progressively our R&D spend. So as we look forward now with the sale of Omega, which had relatively small amounts of R&D in it, the mix there has helped a bit and that's pushed us over the 8% threshold. But we are incrementally investing as well. Your question about is there any underinvestment areas? No. We are spending a bit more of our engineering time on supporting all the supply chain challenges at the moment than we'd have liked to have done. So in part, that's also increased the R&D bill a little bit because inevitably our engineers are having to support operations in terms of finding alternative suppliers or redesigning printed circuit boards, et cetera, to make sure we can deliver for our customers. So we are having to spend a little bit more there, but that's, I would hope, sort of unwinds progressively from sort of here on in. And in terms of market share gains, absolutely we're confident that we are seeing gains in market share as a consequence of the initiatives that we've launched over the past two to three years. You'll have seen in our various press releases that we've made in that period, you know, progressively increasing commentary in terms of new product launches, you know, and the impact they're having in the market and the problems they're solving for customers. And that gives us the confidence to continue to sort of progressively increase our spending and invest in R&D.

Okay, thanks very much, Andrew. Turning to the next question. In the first half, revenues, you've mentioned that there's been some extended lead times in delivering from the order book. So I just wondered what portion of your order book that you delivered in that period had price increases that reflected the new pricing that you'd have liked to have put through given the current cost inflation environment?

Yes. So, you know, if you sort of break down, you know, know orders versus revenue um we certainly you know looking at the visibility we have and we've you know that visibility has increased progressively over the last 12 18 months uh we've now got sort of five and a half to six months of sort of aggregate order cover uh or you know baked into the order book and within that there's sort of four to five percent um sort of price increase it just depends a little bit on mix you know by business and products but But the phasing that we talked about in the press release, we put our prices up in the first quarter of last year, then the middle of last year again, put prices up again in Q1 of this year, and we're just in the process of putting prices up again, given inflation has been running at a much more elevated level and for longer than we anticipated. But effectively, the The prices that were in the order book coming into the beginning of the year was set at the middle of last year. So that's really been there. That's really dictated the price going into the revenue through the first half. There's an incremental uplift on price that's in the order book to say to the tune of 4% to 5%. which will then start, you know, has started to progressively come through from really sort of late May into June, but will build as we go forward now to the second half. So we certainly anticipate, you know, a 45% pricing benefit in the second half.

Thank you. Maybe one for Derek on cash flow. Clearly cash conversion below your normal typical levels, which is understandable given what you said on working capital requirements for some of the investments you've made. Should we expect the cash conversion to return to normal levels by the end of the year?

That's certainly the plan, George. There are a couple of specifics in there in the first half between these statements.

We did buy and rebuild. It pretty much doubles the capacity of our PMS operation. We've $20 million spent in the first half on that. And then the remainder is supporting working capital to to facilitate deliveries. It is our expectation that we'll get it back to our normal range of kind of 80% to 90% of the conversion from Target.

OK. Thank you very much.

Thank you, George.

Our next question comes from Andrew Wilson from JP Morgan. Andrew, please go ahead.

Hi. Good morning, everyone. Thanks for taking my question. It's two, I think. Somewhat clarification, I guess. Just talk about the price-cost dynamics and appreciate the detail you've given, Andrew, in terms of the backlog pricing and how it's obviously set to improve second half. Should we think about price-cost being positive for the full year? I'm just trying to sort of understand how much catching up you need to do in the second half, and if we look on a full-year basis, yeah, quite where that's going to come out.

Well, I mean, as we said before, I mean, we're not looking for prices to get ahead of inflation. You know, we're certainly looking for our pricing to maintain our gross margins. And that's certainly our expectation for the full year. So, you know, if you, you know, if you consider our usual sort of first half, second half weighting in terms of revenue growth, plus the, you know, the four to five percent of pricing that's coming through that's already in the order book and we can see it. The operating leverage, therefore, in the second half will be very strong.

That's helpful. Thank you. And second, and it's slightly, I guess, linked to one of George's questions earlier, just on the market shares, and clearly some of the growth in some of the markets has been super strong, even in supportive markets. I guess I'm just interested if there's any particular markets where you would single out where you think you're sort of definitively taking share?

Yeah, so, I mean, if you just look at sort of our sort of key target markets and start with pharma, I mean, we were up 12% in the first half in pharma and life sciences. And that's been, you know, with a strong performance in both mold and palatable and PMS. And we have seen a sort of reduction clearly in sort of vaccine development work. But that's been replaced by continued investment in both conventional drug development, as well as large molecules, you know, protein-based drugs and RNA treatments, mRNA treatments, sorry, that's driving demand for multiple products. And our sort of aseptic monitoring solution out of PMS is doing particularly well. Also, so, you know, we're seeing strong growth there. In automotive, I mean, we're up 15% in the first half, very strong growth, particularly in North America, but also in Europe. I mean, Asia was a little bit softer. China was softer, really, because of Q2 with the lockdowns, which meant, you know, we weren't able to recover all of our sales within HBK into China in the second quarter. But I think the fact that we are very much helping to drive the electrification trend in automotive, our electrical power train testing, our battery testing solutions are selling particularly well. And if you look at our simulation virtual test offering, I think we put the numbers in the press release and in the webcast, but if you look over the last three years, sales have grown incrementally there by 60 million pounds. We are seeing very strong growth there. It is still a relatively new market, but one that's growing very strongly, and we have a very strong offering. So there's never been a better time, certainly, to help our automotive customers with customers at large to drive their own productivity in the face of all this inflation. So that is certainly helping to accelerate time to market for our auto AOM customers, reducing risk, reducing costs as well. And then within semi, I mean, we have some very strong offerings in semi that are certainly benefiting from the very large capex cycle that's going on at the moment. And whilst there is talk that some production volumes may start to come down or given some of the commentary from some of the larger semi producers in terms of inventory levels, but we certainly see that capex cycle continuing as they need to continue to both build out capacity. The on-shoring trend continues as well as the investment in the next generation nodes. And again, our offerings across Morgan Palace and PMS in particular and ServerMix are doing very well there.

Maybe if I can just squeeze, sorry, just one clarification as well. I meant to ask on the pricing. Apologies if I've missed this, but did you split out the organic growth in the first half in sales between price and volume?

So of the 11% revenue growth in the first half, 4% of that would be down to price, 7% down to volume.

That's very helpful. Thank you.

Our next question comes from Andrew Douglas from Jefferies. Andrew, please go ahead.

Morning, guys. I've got three quick questions, please. Just going back to R&D, I understand the increase to 8%. Are we happy that we're getting bang for buck on that 8%? I think when you joined, Andrew, one of the issues that you faced was actually you weren't getting necessarily full bang for buck from that kind of 6%, 7%. And that was a key bit. So going up to 8%, are we confident that that is now still coming through? Secondly, going back to the kind of cost and price increases, are we still confident or how confident are you that the price rises that you're putting through now will stick? particularly if we get into slightly more challenging macro backdrop. And it seems that most raw material prices are now kind of rolling over a bit. So just understanding the confidence there. And if you can give us, please, an update on the M&A pipeline, size of deals, things you're looking at, and whether you think that pricing is at an appropriate level.

Thanks. Okay. Thank you. Nice to hear from you, Andy. So firstly, just in terms of R&D, I mean, you have to rightly characterize it. When I came into the business three and a half years ago, I was concerned about but the amount of, I would say, what I call sustaining and maintenance engineering effort that was going in at the time, I mean, sort of over half of our R&D spend was going into sort of just maintaining and sustaining all the products. As a consequence of both tidying up the portfolio at a group level and really concentrating on the core businesses we're going to retain and investing in the engineering capability and the processes there, That has certainly helped in terms of giving us better bang for the buck, to use your expression. But also within the retained businesses, we have worked through the portfolio of products and services within each of those businesses as well, and either discontinued or end of life the number of products. We've sold a number of products as well over the last three years, some of those older products that were taking a lot more maintenance burden. So that has all helped to improve the vitality. And as I said, we have timed our processes and we've also replaced the engineering leadership within those businesses as well over that period. So I have a lot more confidence in our capability. Equally, the strategic niches that I've spoken about, market share gains, we are seeing the products we're launching getting good traction with customers and solving problems for them that have been driving greater sales. And in terms of our vitality index, that is now starting to progressively improve. So we're all pleased on that front, and we'll talk more about this when we get to the capital markets day later in the year. In terms of cost versus price, yes, still very confident that we have pricing power. All of the pricing increases that I talked about on the previous question, the sticking, we are getting good realization of those price increases. And in some instances, we've also gone back retrospectively with customers and we've had to increase in prices and that's worked. I mean, I don't think that wouldn't make too much of that, but it just demonstrates that even when we have to go back retrospectively, we've been able to. And we've also, within our contracts, built in terms such that we can charge for surcharges around sort of excess freight costs excess energy costs as well as needed. So, you know, it's the nub of your question, have I got confidence in pricing power? The answer to that is yes. And then in terms of the M&A pipeline, clearly, you know, we've done a number of acquisitions over the last 12, 18 months, I think four acquisitions and one announced. So, you know, we have been executing a number of those bolt-ons In terms of the pipeline, I think it's fair to say we're sort of now in a little bit of a sort of a refresh state as well. And we've got a number of opportunities that we are currently considering, as we always do. But given the sheer number of transactions that we have completed, we are in a slight refresh phase. And then I think it was the other part of the question around pricing or valuation.

Yeah, pricing and valuation of assets and where that fits now, given the slightly more dark clouds on the horizon?

Yeah, I mean, we've not seen, I would say, any sort of evidence of pricing and valuation shifting at the moment, albeit clearly debt markets are a lot tighter, and that's putting some downward pressure on prices. So I think it's a bit too early to say, but you would expect, you know, hopefully that some of that valuation expectation, price expectation is starting to come off.

Okay, thank you.

No, thank you for the question.

Our next question comes from Andre Kukinen from Credit Suisse. Andre, please go ahead.

Good morning, everyone. Thank you very much for taking my questions. I'll go one at a time. And first, I just wanted to look a bit more into the H1, H2 margin cadence and really think kind of of the reasons behind implied margin improvement in the second half and the guidance. So firstly, on the acquisition-related expenses and I think fair value adjustments of 6.8 million, am I right to think that most of that is of one-off nature and in absence of another large deal in the second half, not assuming that then that 6.8 should not reoccur?

Yeah, so on the way, so that is, I mean, it's one-off in the sense that it relates to acquisition activity that we've undertaken in the first half it's also an amount that we exclude from our adjusted operating profit. So in that sense, it's below our typical APM, so it doesn't impact the reported operating profit or adjusted operating profit, so it's more of a stat-free method. Clearly, if we have some O&A activity, it can be big or small. There could be other costs going through that, but you're right, it's one-off in nature.

I've got to thank you, and On the China lockdown's impact, given that you've got 16% of sales there, could you help us quantify the impact in the first half?

So, I mean, our team is actually, as I think I said at the beginning, does an excellent job in terms of recovery in China towards the back end of May and through June. But it hasn't, you know, the backlog hasn't fully unwound. So, in particular, within HPK, as I spoke about, since they're all promoted, So that will give us a little bit of an extra coming into the second half. Should we think about a couple million or so, or is that... Yeah, I mean, it's not... I wouldn't say it's hugely material.

Okay, great. Thank you. I have a couple of broader questions. One is on industrial solutions, given the change in the management structure there and noting some differentiation in terms of level investments across a couple of businesses versus others. Should that signal more openness to maybe further portfolio changes there? And is there a kind of timescale on that?

So in terms of industrial solutions, back in December, we talked about looking at how we could integrate the three businesses, PMS, Redline into a more integrated division. And that was very much the New Year. That's the work we undertook. As we went through that work, the thesis didn't really prove itself out to the extent that we anticipated. And as we look at sort of the frictional costs from the sale of Omega and just looking at management costs overall, we took the decision to effectively not continue to go down that path with industrial solutions and instead keep the three businesses as three sort of independent operating companies. They report to myself and that allows us to effectively take out place over the last two, three years or so to manage ISD when it was a portfolio of businesses going through a disposal program. So that's really the logic, and it also gives us a bit more flexibility going forward.

Great. Thank you. And finally, just the very last one to take this opportunity. If we go back to the Oxford deal and just think about the fundamental attractions that you saw in that deal at the time and kind of set everything aside and think of a kind of hypothetical scenario, have those attractions fundamentally changed for you in the current world with the events that have happened since or not?

I mean, I think, Andre, I'll just say, I'll repeat back what we said at the time, really. I mean, you know, it was a very sensible transaction for us to consider. The combination with Morgan Analytical would have been very powerful and would have created significant value for shareholders, in our opinion. You know, that said, you know, it was the right transaction, but at the wrong time. You know, the world changed just to the point we were looking to try and consummate a deal. with Russia invading Ukraine and all the macro uncertainty. So it was right for us to put our pens down. But in terms of the logic for the transaction, that logic still remains. Clearly, there's a number of things that need to come together to make that sort of financially attractive proposition. So we remain disciplined in our approach to M&A and our focus on how we create shareholder value. And for the avoidance of that, we continue to explore other acquisition opportunities.

Very clear. Thank you very much for your time. I appreciate it.

Our next question comes from Mark Davis-Jones from Stiefel. Mark, please go ahead.

Thank you very much. Hi, Andrew. I was also going to just follow up on the industrial solutions thing, because it looks as though that is quite a big change of mind. It was only back in December that we had Mary Beth setting out the sort of strategy there, and that seems to have gone to reverse. I'm assuming, firstly, that she's left the group. Is that right?

She has, yes. That's correct, yes.

Okay. And in thinking about what happens to those three businesses, I mean, they're three quite attractive but sort of unrelated businesses. Is there any scope for... sort of further group reorganisation, PMS, for instance, seems to have a fair amount of overlap with parts of more than panellistical. Is that something we can think about, or do you think these are to be seen as three standalone units that may in time get built out to platforms? But we'll have to wait and see. What's the outlook now?

If I look, Mark, thanks for your question. I mean, as I said, it sort of provides flexibility going forward. you rightly say there are overlaps within industrial solutions between them, particularly sort of between sort of server makes PMS equally. You know, PMS serves the same end markets as small and analytical. So, you know, as we look forward and we come to the capital markets day, you know, we'll give you more color and insight into our thinking around all of that. But clearly, as I said, part of the rationale for The decision was not just cost but also about providing some sort of flexibility on how we proceed with the group.

Okay, understood. At the risk of flogging a dead horse on the price-cost thing, I just wanted to ask, it sounds as though input costs rose more than you were anticipating or more than you budgeted for in the first half, hence the lack of margin leverage that you delivered. Yes. Is there any particular area where those costs have come through higher? Is it labour costs beginning to rise on you or is it just the same sort of materials and logistics things we've been dealing with for some time?

Well, yeah, I mean, it's the when we put the budget together sort of November last year, we were certainly anticipating inflation to be peaking around sort of six to seven percent through the first half and then declining down to sort of three to four percent in line with, I think, how everyone else saw the situation back in November. Clearly, as I said earlier, inflation has been running much hotter, higher and more prolonged than was anticipated then. So when we put our prices up, certainly sort of in the middle of last year, given our stronger order book and increased visibility, the flip side of that clearly is that it takes longer for pricing changes to come into effect as the order book unwinds itself. So yes, we did see higher input costs than anticipated when we put the budget together. Key areas, electronics, semiconductors, other standout areas, I would say it's not getting any worse. And there are some signs that it may be starting to ease, but I think it's going to take some time still to fully unwind. And then on the labor side, yes, we have had to increase some of our own labor costs. you know, as a consequence of both, you know, inflation-type labour markets in some areas of the world and just, you know, the cost of living squeeze. And we're taking an appropriate and responsible approach to, you know, making sure our employers are suitably remunerated.

Okay.

Thank you.

As a reminder, to ask any further questions, please press star followed by one on your telephone keypads. Our next question comes from Jonathan Hearn from Barclays. Jonathan, please go ahead.

Good morning, guys. Just a few questions for me, please. Can I just come back firstly to the supply chain and obviously looking forward into the second half? I'm wondering if you could just give us a little bit of detail about where the biggest supply chain issues are by division, please. Thank you.

uh morning jonathan so from a supply chain perspective as i said really it comes down primarily to um you know electronics semiconductor availability has been the biggest issue that we've had to face over the last six months um equally as i said i mean we are starting to see maybe some signs that things are easing um chip availability is getting a bit better whereas in, you know, go back two or three months, it ties on to the critical shortages. You know, we were having to scale the market and, you know, it's difficult to get commitments. It is easier to get commitments from the manufacturers now than it was. Now, whether that's the start of a trend, you know, it's maybe too early to say, but I'm hopeful that we are starting to see the signs of things easing up. But I think, you know, the beginning, you know, our teams have done a really good job in terms of being able to deal with the situation, being more flexible in terms of how we schedule, how we prioritize, how we resequence the manufacturing lines, how we build modules, part inventory, waiting for shortages such that when the parts do arrive, we can quickly assemble them and get them shipped to customers. And so we're being much more agile in how we manage all of that. But clearly, that comes, there's a cost associated with it, and that in part has also impacted our gross margins in the first half. But all this unwinds with the pricing that we've got in the Audible Plus. The extra volume, the higher level of production efficiency we'll get from that, but also the supply pressures start to unwind. That should certainly help, and that gives us confidence in terms of our outlook, as we've said. I think you can't rule out the fact that there'll be some surprises. There's the known unknowns. we know that there'll be something that our supply chain isn't aware of that may hit us and put us on a stock shift on certain product lines. But as it stands at the moment, we're managing it reasonably well.

Okay. And what I'm trying to do, just in terms of the risk by divisions, does one division stand out as potentially having more risk in H2 than others, or would it be sort of quite equal among the three?

No, I mean, I think the... the biggest area comes back to the electronics and semi-supply chains. And the two businesses that are most exposed to that are HBK and Red Lion. They have the biggest content, I would say, in terms of electronics going into their products. And equally, that's where we've also seen us putting up the prices most significantly to address that.

Great. Same question just on PMS. Obviously, great business. You've spent £50 million on a new facility. Can you just talk us through sort of the timeline here, when that capacity comes online, how ultimately fast it ramps? And from obviously this extra facility, what do you think is the potential sort of revenue opportunity for PMS, please?

um well i wouldn't you know i'm not going to give a revenue guidance for pms directly but i will say that pms has been growing in double digits for the last three four years um and uh you know clearly you know half its revenue um comes from sending up to manufacturing where we provide class-leading particle counters to measure the impurities in air and liquids that go into the manufacturing process for SEMI. We have the highest accuracy sensors on the market, which makes it very attractive for the SEMI guys who are developing smaller and smaller nodes in terms of the semiconductors. And as such, they need higher and higher levels of quality So that is a major driver to PMS's success on that front. But equally, their aseptic monitoring solution where we provide, again, particle counters for clean rooms to make sure our customers can measure the effectiveness of their clean rooms. But we also provide a full sort of software monitoring suite whereby customers not only can ensure that the quality of the air going into the clean rooms, but equally when the regulator comes in, they have all of the monitoring in place such that they can meet the certification requirements to say they've been operating at the right levels of cleanliness. And that again has been hugely successful.

That's very good. And then just maybe the last one, very quick one, just in terms of order book, obviously good growth in the first half, but have there been any cancellations of orders within the order book? during the period? Any signs of possible cancellations?

No, I mean, in terms of customer behavior, we're not seeing any signs at all, but customers are starting to get anxious about what's in the order book. We've repeatedly said on these calls over the last 18 months, it's something that we track routinely on a month-to-month basis, and we've seen no change in behavior from our customers in relation to cancellations or delays.

That's very clear. Thank you, guys.

Our next question comes from Bruno Garni from BNP Baraba. Bruno, please go ahead.

Hi, morning all. Thank you for taking the question. Just on orders, if I could just follow up, could you provide some colour on how orders trended sequentially if we exclude that pre-buy impact in Q1? And would you expect the current run rate of orders to be sustained if we look out to Q3? or do you expect things to slow? I guess, can you take anything away from July trading so far?

Yes, Bruno, thanks for your question. I wasn't quite sure about the pre-order points, you know.

So just, I remember from the Q1 IMS, you talked of certain divisions benefiting from a pre-buy effect in terms of the strong order growth that you saw in Q1. Some orders have been pulled forward. So if we just strip away that from the Q1 base, sequentially, what did you see on your orders?

Well, okay, so yes, I mean, I wouldn't say it was sort of, I wouldn't characterize it as pre-orders, maybe it's just this language, but I mean, we certainly, if we came at the beginning of the year, we extended lead times or, you know, coming out of last year with supply chain pressures. So we did get some benefits in terms of that in Q1. But if you look at, you know, order growth and you compare it to, you know, last year, I mean, in Q1 last year, orders were up 5% and we did 31% this year. Last year orders were up 28% and we did 11% this year in Q2. So, you know, we are still seeing very strong order intakes despite some real, you know, much tougher comps. And, you know, we've had the flash results for July and we're still seeing strong order flow in July. So, you know, as I said, we have no evidence as yet to suggest that, you know, customers are pulling back on placing orders.

Got it. Got it. And just in terms of the lead times on current orders that you're booking, are the lead times you're offering customers coming down somewhat or is there no change really?

No, it's really, it's stabilized. Okay. With the consequence of the demand that we're seeing, you know, and again, supply chain ability to satisfy, we're keeping our lead times broadly, you know, where they were. Having said that, I mean, we are using the Spectrum's business system extensively to look at how we can reduce not only the throughput inside our own facilities, and those of you who came to the Malvern site earlier in the year when we did the Malvern Panicle Investor Day, and we showcased the master size of the line, Malvern Panicle have done a similar exercise with the Z-Sizer. So if you ask the master size and Z-Size, that's about a quarter of Malvern Panicle's revenue. And there we have, you know, we've doubled the throughput in a smaller footprint with less, you know, we're needing less people. And also, you know, the operations and supply chain, certain things have worked with suppliers, as we put in the press release. I mean, we've actually, you know, almost halved the orderly time there. So in that case, we've actually reduced our orderly time, and that's allowing us to gain incremental demand from customers because we can meet their needs faster than the competition. So we're very much using Spectra's business system as a self-help to reduce cost waste but also make us more competitive as well.

And if I could just touch upon guidance. It's a high single-digit like self-growth. To my mind, it implies 8% growth for the full year, which is what consensus models suggest. Now, given that pricing is expected to be 5%, this implies H2 volume growth is closer to 1%, which in the context of stellar order growth seems a bit cautious in my view. So I guess, would it be fair to characterize the like-for-like sales guide for this year as being a tad cautious, with it reflecting uncertainties in relation to supply chain or, yeah, any color on that?

Well, I'll let Derek get into some of the details. But I think as we look forward, we have confidence in our outlook and maintaining the guidance that we've talked about back at the beginning of the year. I mean, there are still some uncertainties in the supply chain. We've clearly increased work and capital to provide more inventory to protect our delivery to customers, which is exactly the right thing we should be doing. And it's more, I would say, you know, it's more about the sort of known unknowns. The things that we know are going to happen, we don't yet know where they're going to come from. And therefore, you know, we've got to be pragmatic in the face of that. But relative to the visibility that we now have in the order book, you know, that gives us very high degrees of confidence to deal with that by single digit growth.

But I'll let Derek get into some of those details. Yeah, I mean, I would add, if you look at the map, then there is opportunity potentially on the volume side. I mean, as we just talk about guidance, it's just worth looking at. I want to make sure everybody is picked up on page 48 of our statement. This is where we've stepped out of the impact of Omiga. I know there's a little bit of confusion and noise this morning around the first half topic number.

And I don't think that everyone quite captured the announcement we put out at the beginning of July that set out the impact of the disposal of omega. So there's a number of sort of range of ideas to where the profit number should be, but I just want to make sure everyone spots that with omega removed, the prior year profit number was 68 million for the first half, and our growth is 6% on that. I think there was a consensus number out there of 17 and a half percent growth, but I don't think anybody actually would have believed. So the growth in the first half was 6% on 68, and as I point out, for the full year, last year, it was 189 million of profit excluding omega. Just want to make sure as you guys update your numbers, you capture that. But in terms of our broad guidance, We're not expecting the expectations for the full year to change off the back of the statement.

Got it. That's all I had on my side. Thank you, guys.

Thank you. Our next question comes from Mark Henderson. Mark, please go ahead.

Thank you. I'm a private shareholder. not often seen at these meetings, but I'm a little bit concerned about the, not your company, but many companies, of the impact of inflation and to the extent to which we're seeing growth in profits being illusory profit growth rather than real profit growth. And that's manifest in your figures by the amount that's going into increased inventories. I think over half year to half year there, 30% up and the reduction or the lack of cash flow conversion. This is typically what we see in inflationary times. And I wondered to what extent you would envisage a reduction in those inventories, in other words, an unwinding of this inflationary pressure.

Mark, good morning. It's Derek Harding here, finance director at Spectris.

You're absolutely right that were the increase in inventories simply down to price, as opposed to volume, that that risk of inflation coming through would be a sort of warning sign, certainly against the cash flow. I think in our case, the predominant reason for the increase in inventory is to combat the supply chain issues that have been well documented. Throughout the first half of this year, where we have had opportunities to obtain input materials, we have taken those opportunities. And in certain cases, that's involved with buying more inventory than we would normally hold with the purpose of making sure we can hit customer demand. That also results in us as well having a number of parts and products that are part built sitting on the balance sheet at the half year. particularly if they're awaiting a final component in order to get them completely built and then shipped. So there are a couple of sort of specific volume-related issues that mean the industry is higher than we would normally have. Notwithstanding that, our working capital sits within the range that we typically guide towards to 11% to 15% of sales. So we're broadly comfortable with the position, and it's entirely intentional for customer service. To move on to your next question, will that unwind? Our expectation is that it will. We have significant orders coming through in the second half. As Andrew talked about, we expect to see that volume pick up in the second half. And as a result of that factor, and hopefully reductions in supply chain issues over time, we ought to see that inventory unwind. And as I said earlier on the call, we expect our cash conversion for the full year to be back in our normal range of 80% to 90%. There's also a cash impact in our conversion in the first half through the purchase of a building for PMS in Colorado, which again is a one-off in some ways when you look at our typical cash conversion. But the net effect is that we anticipate strong cash generation this year back in line with our normal range.

Thank you very much indeed.

Our final question comes from Michael Tinsall from HSBC. Michael, please go ahead.

Good morning, Deb. Just a quick couple from me. The first one, just in relation to post the immediate disposal, we had reallocation of overheads to the other divisions. To what degree can you bring them down? I mean, effectively, you're a smaller size business now. I wonder to what degree there's a variability in some of those overheads that we can expect you to kind of try and drive that down. And the second one is really a clarification. I'm not sure if I heard you correctly, but was there an element of the R&D uptick that related to redesign because of the supply chain issues? And if so, can you give us some sort of quantification of how much that was? Thanks.

Let me answer the second part of your question first, Mike, and I'll pass it to Derek. I mean, I wouldn't get carried away in terms of the amount of engineering time that we're having to spend on supply chain. I mean, it's an irritant, but it's not that material. So in the scheme of things, the growth to 8.4% of revenue in R&D spend the vast majority of that is a real and meaningful increase in our investments for future growth.

And on the end of the cost, Mike, it's a fair point.

If you actually look at the H1 we spent in the prior year, you'll see there was 2.2 million costs left over if you deleted the end of the profit, and it's 4.8 million for the full year last year. We'll be slightly careful if you categorise that all as kind of head office costs, if you like, because a lot of it relates to shared services and shared capability. If you think about sort of IT, cyber security, some of those sorts of skill sets where we hold a stronger skill set at the centre and then allocate it to the platforms and businesses so that we don't end up duplicating the cost. Nevertheless, there is opportunity to reduce that central cost, and we would aim to do it. But what you need to do is look at the cost base across the entire group, and it's a question of where it sits best. And through the Spectris business system, through some of the investments that we're making in terms of our ERP improvements and some of our sort of process improvements over time, you'll see that come down. But it'll all get captured in the overall margin of the group, which, of course, we still believe we can improve year on year, and that remains the case for the remainder of this year.

Brilliant. Thank you.

We have no further questions, so now I'll hand back over to Andrew Heath for closing remarks.

Right, thank you very much, and again, thank you everyone for joining the call and for your questions. By way of closing, I just meant to make a few points. As I said, I'm very pleased that we did a good financial performance in the first half of this year. We absolutely have confidence in delivering high single-digit organic growth and margin expansion for the full year. I'm looking forward to talking to you at our Capital Markets Day in October and talk about really the next phase of our development. We're a business that has a clear purpose with sustainability at its core. As I said earlier, we're a more focused, higher quality, more profitable, less cyclical, more resilient business as a consequence of all the work we've done through executing our strategy for profitable growth. We're now very much positioned in diverse, attractive markets with structural and sustainable growth drivers. We've got an excellent balance sheet that supports both our ambitions to invest organically, improving our internal efficiency, as well as investing in growth through accelerating our spend in R&D, as well as alongside that being able to compound growth through disciplined M&A. And as such, I think we're in a strong position to drive our ambition to be a leading sustainable business. So with that, thank you very much again for joining and look forward to catching up with you all soon. Thank you very much.