Spectris plc

Hello everyone and thank you very much for joining us this morning. Can I just start by saying what a pleasure it is to be with so many of you in person, particularly after Covid stopped me from seeing you back at our Capital Markets Day in October last year. So it's great to see you, so thank you for coming. You will have already seen the results we post this morning, and Derek will take you through this in more detail shortly. But by way of opening, I just want to start by saying how very pleased I am with our financial performance, with very strong sales growth, good margin expansion, and much enhanced returns on capital employed, driven by continued excellent strategy execution. Since 2019, Spectrus has been transformed into a more focused and high quality business, well positioned in attractive markets with structural growth drivers that are closely aligned to our ambition to be a leading sustainable business and as evidenced by our record order book. We have a strong balance sheet to support our growth ambitions, both organic and in continuing to strengthen and expand our portfolio through M&A. We are investing for growth and attractive returns. We again increased the investment in R&D last year. We completed three acquisitions and we also formed a joint venture. All this gives us conviction in our ability to compound growth and expand margins into the future. And this performance is wholly consistent with our strategy for sustainable growth that we set out at our Capital Markets Day in October. And it provides the confidence in our outlook for 2023. Importantly, we've carried real momentum from last year and we are excited by the significant opportunities that lie ahead for us. Trading at the start of the year has been very strong with double-digit light-for-light sales growth and strong order intake with a book-to-bill ratio greater than one. Consequently, in 2023, we expect to deliver organic growth consistent with our medium-term objectives of 6% to 7%, and that's alongside strong progress on expanding margins and also driving forward our ambitions as a leading sustainable business. At the Capital Markets Day, we looked back to how the work we have been doing in recent years has fundamentally reshaped and refocused the group. We also provided you with a medium-term performance framework, a set of ambitious targets that this strategy will deliver against, as we set out on this slide. And we made a great start on this journey with our 2022 results. Organic sales growth of 14% last year reflects excellent execution from our teams right across the group. And this builds on a 10% growth that we achieved in 2021. Our reported growth last year was also very strong. It was also up 14%. And that's despite disposals removing 66 million pounds of sales during the year. Reported growth is supported by acquisitions that we completed in 2021 and 2022, and I think helps demonstrate how we are compounding growth through M&A. Against the backdrop of high material inflation and constrained supply chains, we delivered good operating margin progression of 50 basis points, but there's more to come as the conditions in the market sees, and we'll talk much more about this later. Cashflow was robust. We invested in a new facility for our PMS business, and we also invested in inventory to support our record order book, which is a third higher than the end of 2021. And for the whole of last year, 2022, the book to bill ratio was 1.1 for the full year. Return on gross capital employed was very strong, improving from 13.2% in 21 to 16%. And we made important progress on our sustainability initiatives. In 2022, we reduced our scope one, two and three emissions ahead of plan. And we also improved our employee engagement scores. So that is why today, as we look forward, we have confidence in our ability to compound growth into the future, delivering six to 7% organic growth while expanding margins to above 20% and generating attractive cashflow and returns. I'm sure you agree that these characteristics are a hallmark of a great business. Before handing to Derek, I want to acknowledge that great progress is delivered by great people. So I want to take a moment to thank all of my Spectra's colleagues around the world. I passionately believe that uniting brilliant people behind a common purpose can change the world for the better. And my confidence in achieving our goals is very much rooted in our people. Right across Spectrus, we have exceptional leaders, deep technical experts, innovative minds, out of the box thinkers, a truly diverse team of people performing at the very top level. They have delivered for our customers. They have improved our business. They've supported each other in what's been a challenging macroeconomic environment, always aiming high and getting excellent results. So my sincere thanks to all of you for your continued hard work and support. I will now hand you over to Derek to take you through our 2022 performance in more detail.

Thank you. So thank you, Andrew, and good morning, everyone. So my first slide summarises the key numbers for the year, and I won't repeat all the points that Andrew's already covered, but instead I'll draw your attention to a couple of the key metrics not already mentioned. But before I do that, I want to remind you that Omega, as an operating segment, was disposed during the year, and that's treated as discontinued. So therefore it's reclassified from the income statement for both 22 and 21, and therefore is no longer in any of these numbers that you see. The adjusted operating profit of 2.22.4 represents a like-for-like increase of 14%, and it's 17% on a reported basis. And adjusted operating margins increased by 50 basis points to 16.8%. Tax rate came in just below 22% in line with our guidance, and our adjusted earnings per share were 159.9 pence, and that's a 26% increase over the prior year. The full year dividend per share of 75.4 pence represents a 5% increase over the prior year and that's consistent with the growth in dividend over recent years and we remain committed to paying a progressive dividend. And our net cash at the end of December was £228 million. So I have a slide now that provides you with a graphical view of the main P&L movements in the year. Sales are shown across the top and operating margin at the bottom. I've adjusted 2021 to remove sales and the profit relating to the disposals from 21 so that you can get an organic baseline. And again, remember, Omega is treated as discontinued, so it doesn't appear anywhere in this analysis. FX translation movements increased sales by 53 million and operating profit by 12.5 million. And we saw excellent like-for-like growth in revenue, up 14%, and that added 67.5 million of additional gross profit. Like-for-like adjusted overheads increased by 41.9 million in the year, but were actually 170 basis points lower as a percentage of sales because we held headcount broadly flat, particularly in the second half of the year. And it's also worth noting that within this increase is an additional 20.3 million of R&D investment. When you actually look in the full year, in total we expensed 103.8 million pounds on R&D. That's almost 8% of sales. Acquisitions added 27.6 million of revenue and £200,000 of operating profit. And that reflects the developmental nature of the Crayoptics acquisition. And that brings us back to the 222.4 of adjusted operating profit. That's a margin of 16.8% compared to 16.3 in the prior year. So looking at how we generated cash and then what we did with that cash... Starting by adding about 39.6 million of depreciation and amortisation charge, you get to EBITDA of 262 million. And then during the year, as Andrew mentioned, we continued to invest in safety stock to support customer deliveries, despite the continuing supply chain challenges. And that resulted in working capital cash utilisation of 54.1 million. At the end of the year, our working capital was 15% as a percentage of sales, which is at the top end of the range that I typically guide to, and we expect this percentage will reduce in 2023. CapEx of 44.1 million was slightly higher than normal due to 15.3 million of expenditure on a new manufacturing facility for PMS in Boulder, Colorado. And that then gives us our adjusted cash from operating activities of 163.8, which we then divide into the operating profit to get our cash conversion metric of 74%. Now that's lower than our targeted range, but that's because of the incremental working capital and the incremental CapEx I just mentioned. We had a net cash inflow of 241 million relating to transactions. And of this, this is 365 million of net cash received from the disposal of Omega, offset by 124 million pounds of cash outflow for acquisitions completed in the year. Spent 191 million, including costs on the share buyback, which we announced in April. And the remaining 110 million of the 300 announced will be completed over the course of this year. We paid 78.6 million in dividends, 7.6 million on restructuring that was previously announced, and interest and tax had a combined cash impact of 46.3 million, with other movements of 21.4 gets you to the net increase in the year of 60.2 million pounds. The technical accountants in the room, this slide is included for completeness, so you can easily bridge from our adjusted operating profit measures right the way down to the statutory measures. I won't go through every line, but I'm going to draw your attention to a couple. As previously guided, there were no new P&L restructuring costs in the year. We made significant progress on our business transformation program, and therefore we spent 21.7 million relating to material SAS projects. And the finance charge of 19.2 million includes 14.6 of net loss on retranslation of short-term intercompany loan balances. And that's because of the volatility of sterling against the dollar and euro, particularly in the second half. As you all know, under IAS 21, that's classified as a finance cost, and there is actually an offsetting gain on the other side going through reserves. Profit on disposal and the operating profit of the final six months of ownership relating to Omega in total 287 is classified as profit from discontinued operations and is reported below the tax line. And that then gives you a statutory profit for the year of 401.5 million. So let's move on now and look a little bit more at the divisions. Spectra Scientific delivered an excellent financial performance in 2022. The division achieved sales growth of 24% to 657.8 million. And after taking into account foreign exchange movements of roughly 5%, and the impact of acquisitions was broadly marginal, that gets you to 18% like-for-like growth for scientific. We saw continued strong customer demand in market share gains in all our sectors, particularly semiconductors, life sciences, and pharmaceuticals, as well as energy technologies like batteries and fuel cell development. there was particularly strong demand for our products in Asia. Order intake increased by 12%, and Andrew will provide more colour on some of the key developments for the division shortly, but I wanted to pause for a moment on the improved operating margin. So the adjusted operating profit increased 25% to 140 million, and the adjusted operating margin improved to 21.3%, which is a year-on-year increase of 20 basis points. But if you actually look at it like for like, it's 90 basis points up. And that reflects the volume increase and the impact of both price rises and the new products, offset by the higher investment in R&D and the acquisition of Crayoptics. Our business transformation program to simplify, standardize, and automate processes and simplify the ways of working is on track, and that includes the enterprise-wide ERP solution, which will provide better access to data, offer scalability to support our growth ambitions, and help deliver on further margin expansion. Spectris Dynamics delivered a solid financial performance in 22. Sales were up 16% to 492.2. And 15.6 million of this delta, 4%, came from acquisitions, demonstrating our desire to compound growth through M&A. FX movements were 5%, and that gives you then a 7% like-for-like sales growth. Orders in Dynamics increased 20%, resulting in a 40% year-on-year increase in the order book. And that gives us real confidence of momentum as we enter 2023. During the year, this division was impacted by higher cost input inflation associated with its disproportionate exposure to low volume, high performance electronics and semiconductors. And that did result in a reduction in the gross margin. So consequently, the adjusted operating profit of 73.6 million is a reported increase of 5%, but it's actually 7% lower on a like for like basis. Overheads, however, did reduce by 140 basis points, but that was not enough to offset the gross margin decline, and therefore you see an adjusted operating margin of 15%. Price increases, though, particularly in the second half, helped reverse some of that margin decline, and further pricing implemented in Q4 and improving material supply and easing inflationary pressures, all of those combined gives us real confidence for improved profitability in this division in 2023. And in addition, the ongoing rollout of the Spectra's business system continues to deliver improvements to the operational effectiveness of the division and provides further confidence in margin expansion. I've included a slide here for your ease of reference, which summarises the segmental performance of the group. And it also gives me the opportunity to speak briefly about the performance of Servomex and Redline. On a like-for-like basis, sales increased by 14% from increased volume and strong price discipline. And the adjusted operating profit for the segment was £27.2 million, an increase of 16% like-for-like. And an adjusted operating margin of 15.3%. And group costs were down slightly in the year at £18.4 million. So finally, to help you with some modelling, I've set out a slide for some broad areas of technical guidance. As we've already said today, we expect sales growth to be in the region of 6% to 7%, and we expect our operating margins to expand. Working capital should reduce over the year and will be back in the middle of our guided range of 11% to 15%. CapEx should be in the region of £40 million. We'll continue to invest in the ERP, so our SAS costs will be around 25 million and the effective tax rate should be 22%. The remaining 110 million of the buyback will be completed over the next 12 months. Finally, our assumed exchange rates for 23 are 1.24 for the dollar and 1.17 for the euro. And if that proves to be incorrect, then for every cent change in the dollar, it's a 3.5 million impact on sales, 600 grand impact on profit. And for every euro cent change, it's 2.8 million on sales and 0.5 million on profit. And with that, I'll hand you back to Andrew.

Thank you. So thank you, Derek. I'm now going to take you through our strategic progress and outlook. But I think, as you know, everything begins with our purpose. And that's what being a purpose-led business means. It's the essential ingredient for galvanising engagement and also excitement for our strategy. At Spectrus, our purpose is to deliver value beyond measure, creating a cleaner, healthier, and more productive world. This informs everything we do from strategy decisions around the board table to day-to-day operational decisions within our businesses. Over the coming slides, I'm going to cover the key elements of our strategy for sustainable growth, our delivery plan, if you like, as a leading sustainable compound growth business. So firstly, great businesses. We have simplified Spectrus into two high-quality divisions. Spectrus Scientific and Spectrus Dynamics are asset-light businesses, both focused on premium precision measurement solutions with industry-leading products and domain expertise. Both are high-growth and high-margin businesses with exciting potential. As Derek highlighted, Scientific is firing on all cylinders. It's delivering an excellent performance, 18% like-for-like revenue growth, adjusted operating margin of 21.3%, and strong order intake up 13%. I mean, these are world-class metrics. Despite the disruption from COVID, Scientific delivered compound growth of over 5% since 2019. and we see significant opportunities to deliver even more value through our customers workflows and to drive greater market share. Spectra Dynamics delivered a solid performance in 2022, sales up 16% on a reported basis, and that reflects the contribution from recent acquisitions in exciting high growth markets. We saw strong order growth of 20%, with the closing order book up 40% on 2021, demonstrating both the high demand and the momentum underpinning the future for that division. Now, while the performance was a disappointment in terms of the margin, this was caused by exceptional material inflation, and we see this as a purely transitory issue. As such, we are confident in delivering much improved profitability for the business in 2023. And to be clear, Dynamics is a great business and can deliver much more. And since 2019, we have compounded growth at almost 5%, and we are confident of improving this in the coming years. And that's alongside having a clear path to achieve 20% plus margins over time. To be clear, margin progression in Dynamics is one of the strongest opportunities for the group, and it's a core focus for all of us. Now onto structural growth markets. We are more aligned than ever to markets with a strong sustainability focus and attractive growth trajectories. We're positioned in technology-driven end segments with really strong fundamentals. Demand for our products and services is really being amplified by these trends, supporting structural end market growth rates of 5% to 6% across the group. Our 2022 growth rates gives me the confidence we are both seizing the market opportunity and also taking share. We are seeing strong growth across all our target markets, and academia is also growing well again. But to pick out some specific areas, life sciences continue to power ahead in 2022, particularly in North America, and also driven by investment in biologics, along with high demand for our facility environmental monitoring products. I'd also highlight automotive. Here we're seeing good order momentum in both physical and virtual test, including some significant large orders for our full-scale simulation solutions from some of the world's leading auto OEMs. And we continue to expect growing demand for automotive testing, supporting the increasing pace of new EV model launches. Sales in advanced materials grew strongly, especially in the energy, battery and hydrogen and semiconductor segments, where we are seeing above market performance. And finally, we continue to see strong growth at our semi-con and electronics customers, notably in Asia, with advanced semiconductor manufacturing playing to our strengths in higher accuracy, metrology and ultra clean environments. Next, customer centricity. Solving our customers' challenges with leading differentiated solutions is absolutely core to our model. Over the last four years, we have been successful in shifting from the largely transactional selling of hardware to concentrating on solutions, adding value throughout our customers' workflows and processes. We continue to equip customers to make the world cleaner, healthier, and more productive, true to our purpose. A few highlights of some significant customer wins over the last year will include the huge success of our end-of-line testing solutions for electric motors, and also our smart analytical laboratory solution, helping the likes of the Geological Survey of Finland to accelerate the green transition to carbon neutral mining. We also designed and installed a measurement system for the Horn C2 project. That's the world's largest operational wind farm to ensure safe and profitable generation. We saw continued strong growth for our particle size analyzers, in particularly for developing battery materials as well as new drugs. But also great demand for our clean room solutions with leading life science and high-tech manufacturing companies, including a monitoring solution for Excelitas, who are a leading photonics manufacturer. And we're also getting strong order intake for our virtual testing solutions, which are being selected to accelerate innovation and deliver huge efficiencies for our automotive customers, such as Ford and Myra. And the Ford CEO Jim Farley recently went on social media, having driven one of our simulators, praising its ability to recreate the feel of different vehicles and different driving scenarios to improve safety and quality for their customers. These are just a few examples from across our business where we are partnering with industry leaders, solving some of their toughest challenges. This brings us nicely to R&D. Customers see us as a long-term partner, serving their needs today and helping them meet the challenges of tomorrow. R&D breeds collaboration. It breeds customer embeddedness and future opportunity. That is what innovating for growth is all about. Our strong sales performance over the past few years have been significantly supported by both new and enhanced products. Product vitality, which we measure as current year revenue from products released over the previous five years, is increasing and it will continue to do so. And this is being driven by our increase in investment, up 20 million last year. So R&D today is close to 8% of revenue and we expect to maintain that level going forward. In 2022, we launched some significant new innovations, really just too many to mention here, unfortunately. But by way of another great example, in Spectrous Dynamics, we completed our largest ever development project, a powerful open source hardware and software data acquisition platform with very broad applications. And this will revolutionize how both automotive, aerospace, and other customers gather and analyze their data, bringing their disparate existing data acquisitions systems together into one place. It is called Fusion and Advantage and we're very excited by it. So we thought it'd be great if we could just show you a short video.