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.

At Spectris, we believe in innovating for growth, from automotive to aerospace. Customers are striving to shorten development times, bringing products to market more quickly and at lower cost. Today's sophisticated product testing requires multiple sensors, using disparate systems, generating data that is difficult to compare and analyse. HBK's new data acquisition platform, Fusion and Advantage, solves this data chaos challenge by combining Fusion's high-precision data acquisition system with the powerful Advantage analytical software in a single, scalable, integrated solution, delivering the results customers need when they need it. Spectris Dynamics. Empowering the innovators.

And in addition to R&D value enhancing, M&A remains an important part of our compounding growth strategy. And over the last two years, we have acquired five businesses, further building out our leading positions across key end markets. We maintain an active pipeline of potential acquisition targets from early stage technologies, such as the acquisition of Creoptics in Spectra Scientific last year, to bolt-on acquisitions such as Dytran Instruments. The acquisition of Creoptics strengthened our affinity offering for early stage drug development. That's really important to our pharma customers, but also to our workflow strategy. And Dytran strengthened our piezoelectric and MEMS sensor offering, whilst also expanding our sales into North America. And we also formed a joint venture with Jusoft to develop a new industry open standard in data acquisition hardware. Now, we also consider large scale opportunities where we see a compelling strategic and financial logic. But while organic growth will always be our first priority, we continue to see strong and significant opportunities for targeted M&A growth. We also continue to drive operational excellence to improve productivity and also strengthen our competitiveness. The Spectrus business system, or SBS if you like, formed as the basis for our continuous improvement mindset, where everybody in Spectrus is empowered to improve the business every day. In 2022, we reduced our like-for-like adjusted overheads by 170 basis points, as Derek mentioned, and these savings have enabled the group to offset gross margin pressure and deliver an increased operating margin for the year. So SBS really supports our expectation of delivering strong progress on expanding margins in 2023 and into the future. And last year, we also deployed SPS on reducing lead times to support customer order fulfillment, clearly in the face of supply constraints. And for a number of our products, that resulted in us being able to offer much greater availability than our competitors, and also, therefore, enabled us to also gain share. And in addition to SPS, we are also driving forward with a number of business transformation projects, such as the ERP installations that's happening in both divisions. And this will enable our businesses to become leaner, more efficient, and also more scalable for growth. And we expect the benefits to start being delivered from 2024, and that will ultimately deliver 150 basis points of margin improvement at the group level. So the key takeaway here is really our constant focus on driving improvement and making progress towards delivering that 20% plus margin target for the group in the medium term. Now, as you know, sustainability is very much at the heart of our purpose. We have a clear ambition to create a positive and lasting impact for the environment and for our communities. And we break this down into the four areas on this slide, areas where we are building a sustainable future. So just to pick up on a few here. For our planet, we have made excellent progress on our sustainability initiatives. We reduced our scope one and two emissions by over 20% in 2022. And we also made important early progress on our scope three ambitions with over a 30% reduction in our category four emissions. We also extended our EcoVardis supplier assurance to over 30% of our supply chain. And we've also commenced the development of our product sustainability work streams. But also we improved our operational energy efficiency last year by 21%. And that's a 37% improvement since 2020. And clearly that's helping to mitigate against energy cost inflation. So just as a reminder, we have committed to net zero across scope one and two by 2030 and across scope three emissions by 2040. For our society, we are really proud to be engineering brighter futures for students across the world through the Spectrus Foundation. And during 2022, the foundation made grants of almost half a million pounds, reaching more than 21,000 students in over 15 countries to support wider access to a quality STEM education. The foundation also granted 100,000 pounds to community projects that were selected by Spectrus employees. So in summary, we delivered a very strong performance last year. We entered 2023 with momentum and a very healthy order book, and we have started the year strongly. We will continue to deploy our strong balance sheet to support our organic growth initiatives and to compound growth through M&A. We expect to maintain this momentum in 2023, delivering organic growth of six to seven percent and making strong progress on expanding margins and really grasping the margin opportunity that we have in Dynamics. We will always remain true to our purpose, sustainably delivering these results, driven by our values based, healthy, high performance culture, delivering value beyond measure for all of our stakeholders. So thank you very much for coming and thank you very much for listening. And with that, let's move to questions.

Andy. Good morning. It's Andrew Douglas from Jefferies. Nice to see you both. Three questions, please. The 36% order book growth, just working through that, you've got five to six months visibility. I'm sure you're not going to go at 36% organic in the first half. But yeah, if you have a good first half, I'm just trying to figure out how much you're putting in for that second half growth rate. Because it feels to me like you're not assuming a huge amount of growth in the second half within your guidance. I guess that can be taken positively or negatively, depending on your view of the world. But is that a fair assumption in terms of how we get to that 6% to 7% organic?

Yes. So, look, we are absolutely confident in delivering that 6% to 7% growth. I mean, you know, we're only in February. We've still got ten and a half months of the year to go. I think the last two, three years have taught us that events can conspire to happen. But, you know, we clearly finished the year with a record order book, almost six months of order cover. January started well, booked a bill above one for January. Now, you know, against Q4, Q1's an easier comp in that regard. So I would expect maybe a slightly more level year than we have historically seen. But it all depends on how much the order demand continues to hold up through the first half of this year. Because clearly, over the next five, six months, we will be building our order book for the second half.

Sure, but it doesn't feel like you're expecting a massive second half to hit your guidance in terms of how you've positioned the year in terms of first half order book. and what you need to do in the second half. We've seen elsewhere in the sector, life sciences has come under a bit of pressure. Clearly, we've had a massive boost from COVID. Any signs that any of your customers are stopping ordering or pushing ordering out? or double ordered or anything like that in terms of the life sciences stuff?

Yeah, so certainly no sort of double ordering, sort of de-stocking. I mean, into life sciences, really for all our businesses, we don't sell into a stocking model, into distribution networks. So what is purchased from us goes directly to specific projects. So we've never really been worried about that de-stocking sort of phenomena. I think some of our suppliers may be more worried about that as the broader supply chain. So we don't see any destocking. I think it's fair to say that life sciences and pharma has normalized back to that sort of longer 4% to 6% through cycle growth rate and was the first of our sectors to do so. But, you know, we were growing at phenomenal rates through 2021, the first half of 22. So we never anticipated that that could continue anyway. So we have seen the sort of that, you know, life science and pharma sort of, I'd say, you know, normalising to that four to six percent growth rate.

I've got loads of questions, but one more. In terms of the acquisition spend, you spent £125 million on acquisitions. Can you just help us with our modelling in terms of the EBITDA contribution from that 125 last year?

Yeah, so I mean, a good chunk of that is in the cryoptics business, which is still in its development stage. So when you take the six or 7% growth number, that includes all of that in at the top line. And then in terms of contribution, you'll need to know it's not going to be a huge number, you need to take that into account in the margin guidance we've given. It's not not a huge amount of benefit from Africa.

Thank you. Andy.

Thank you. It's Andy Wilson from J.P. Morgan. I've got three as well, actually. I wanted to ask on pricing in terms of pricing carryover that you're, I guess, embedding into that six to seven percent for 23. And also, I guess, expectations on price in 23, I guess, stand alone in terms of going forward.

Yeah, so, I mean, I think as we said at the half year, clearly we've been playing, to some extent, catch-up on pricing versus inflation. I think it's inevitable. As our order book grew, that became progressively more of a challenge. You know, a six-month order cover, any pricing we put through, you know, it's going to take six months really to start to have any material impact. So, you know, we are carrying some pricing in the order book, unrealised pricing, through into this year. So we will see some pricing benefit from what's... already in the order book from Q4, that's been occurred in January, flowing through into the rest of the year. I think in terms of the price volume ratio, last year we were 8% volume, 6% price, and we would expect that to invert through this year. So it will skew more to price over volume.

In terms of just ordering it, I guess it's a similar question to one of Andrew's, which is just around, you don't sell a lot into distribution, if anything, and I don't think there's really anything that goes into channel partners. I'm assuming that cancellations are just a very rare event, if at all, seemingly because everything is just application specific. Just to check, is that right?

That's correct. I mean, I think we've been on record in these events over the past two years. We've been tracking cancellations ever since that sort of COVID rebound happened. And were we just seeing some sort of speculative buying? And our cancellation rate is very, very small and hasn't changed over that period and still hasn't changed.

And then just, it's a quick one, just on M&A. So I've noted your comment, I don't know whether it was deliberate or not, in terms of interest in technology, early stage technology, and then bolt-ons. And I don't think you sort of extended to larger deals. I don't know if that was deliberate. I guess that's kind of the question, whether that forms a bigger part of, well, no longer forms part of the thoughts on M&A.

I did actually say, you know, we absolutely will consider larger transformational deals as well in my speech, unless I missed that line out, but I think I did. I think so. It's probably more likely I missed it. So as we said all along, we look at everything from early stage technology businesses through bolt-ons through to businesses that are equivalent in the size of our current divisions or slightly larger. But we maintain a very active pipeline, as I said. That pipeline is still healthy. Clearly, it's been very much a sort of seller's market over the last two years. We haven't seen really much sign of that shifting. I mean, clearly the cost of debt has gone up quite significantly, which has changed the complexion in terms of affordability of deals for us and for everyone else, particularly PE. So if anything, we've sort of seen the market quieten down over the last six months and not seen a huge amount of sort of price multiple valuation shift as of yet. Now, maybe it will become more of a buyer's opportunity over the next 12, 18 months, but I think it's still too early to say.

Thank you. I'll pass on to someone who's listening.

Mark, do you want to go next? Sabine, just behind you.

Thank you. Can you just run us through the moving parts of the margin progress you're expecting this year? Is that mostly going to be out of dynamics? Can scientific go even higher than it is at the moment? And is that about gross margin recovering or is that more squeezing of overheads?

Yeah, well, I'll make a few comments and I'll pass to Derek. So, I mean, clearly, the dynamics presents the biggest opportunity for us. As I said, we absolutely see no reason at all why dynamics can't get to 20% margins. That's not going to happen overnight, but we are driving... continuous improvement through our SPS initiatives. We also will be installing the new ERP and process transformation within Dynamics in 2024. So they'll get the benefit of that coming through in 2025. In terms of their gross margins, that is really sort of what hit them last year. As Derek said, it was the disproportionate exposure to low volume, high performance computing chips and sort of high performance PCBA boards for their simulators, for their real-time computing, for the advanced data acquisition systems that we provide. And we were just, in terms of availability, we were having to pay extremely high input prices. We have been putting prices up, but as I said to Andy, it takes time in terms of flowing through those prices that's going into the order book to actually realise in terms of the sales line. So we have got some pricing benefits.

So, I mean, with that, I mean... The only thing I would add, so I totally agree, dynamics is where the bigger opportunity lies, but scientific can do better. And we're not so much in the question of squeezing overheads, but just focusing on good costs and bad costs. So, you know, where we think we can get a good return and it's a good spend, we're not afraid to spend. You know, it's also worth noting in that overhead line how much is R&D. so there's a there's a big chunk of spend there that we're expensive that is r d and that sort of brings the margin down but it obviously gives us opportunity in the future um and the only other thing i would observe on the overheads is the spectrous business system which we've now been talking about for sort of three four years is is is delivering so we are improving process efficiency we're improving the way we do things we're simplifying the way we do things that means that when we grow the top line six or seven percent we're not having to put in the same level of cost as we would have done in the past and that operation leverage comes through so you know all of those factors will come through and that all gives us confidence towards the the 20 plus that we guided to in the capital markets day okay one slightly raised one if i may what are you expecting for for wage cost inflation this year some people have suggested that's harder to pass through than higher material costs in terms of pricing but Yeah, I mean, it's a slightly tricky one because it differs by territory and differs by person, if you like, and differs by dynamics within the organisation. So if you were to take a kind of a planning assumption of around 5%, that's not a bad planning assumption.

But in terms of markets, there's your point about sort of passing it through. I mean, clearly, as we looked at pricing through the end of last year, we were anticipating what we'd be paying in terms of wage inflation and cost of living supplements this year. So we have factored that into our thinking and our guidance for this year already. Thank you. Right next to you, sir.

Morning, it's Rory Smith from UBS. Thanks for taking my questions. Just to come back to Andy's question, the 6% to 7% organic growth for this year, how much of that is underpinned, do you think, by the carry-through on pricing in the order book? If you're thinking that that volume price skew and mix turns, inverts this year, I'm just trying to work out if you're actually maybe being slightly too conservative on that guidance. And if the world isn't as awful as some of us believe it, that it will be that that could actually be a low number?

Yeah, I refer back to my earlier response. I think we're too early in the year to be able to sort of talk about all of the moving parts. I mean, there are a number of moving parts in both the top line growth and the margin that we're clearly working through. We do have a record order book, six months cover. started the year strongly. But we certainly anticipate that our end markets, like we talked about in pharma and life sciences, will progressively normalize to the 4% to 6% through cycle growth rates average. And it's just at what point does that happen? I mean, we are butting up against some very tough comps now. You know, we grew very strongly in the back end of 21 and for the first half of 22. And, you know, I think we will be updating you another three times this year. And as we go through the year, you know, we'll clearly provide more colour.

Great. Thank you. And then just to follow up on that six months of visibility. Do you know what the range is or what is the range across your businesses? Thinking more about the short cycle at the sort of lower end.

Yes. So, I mean, for both the two divisions, scientific and dynamics, it's very similar in terms of the order cover. Dynamics has actually got slightly more because they had a very strong order intake through or stronger order intake through the second half of last year. But they're slightly later cycle compared to the scientific division. But again, it's quite nuanced. If you want to buy a wafer analyzer in semiconductor, you'll join the queue for 2024 at the moment. I mean, we're rapidly increasing capacity and supply chain, but at the moment, we go out over 12 months in terms of availability on that product. Some of our particle analyzers, again, in semiconductor, it's eight, nine months order times at the moment. which, again, we're trying to actively work down. But it does depend within the businesses as well. And really, within the other side, it's really only Red Lion that sells into the distribution network. And there, they've got quite a high backlog, much higher backlog than ever they've had historically because of all the electronics. Basically, everything they sell has got stuff with electronics so um uh you know they they are doing very well at the moment you see that come through in the you know in the other uh results that derek showed you know strong operational performance from both companies uh definitely responding to you know the treatment we wanted there um but you know it's really only the red line business that's on shorter lead times very clear thank you right next year

Thank you. Tom Frame from Shaw Capital. Just one very quick question initially. Is any of the R&D spend, is any of that capitalized at all? And then in terms of M&A, have you seen a sort of more, you know, greater pipeline, more opportunities since interest rates have come up and there's potentially less competition from PE now?

Yeah, so to answer the questions, I mean, in terms of R&D, we're not capitalizing any R&D. I think we have a few trail projects still, because when I joined, the policy had been changed to capitalize some R&D. And so some of those projects are just running out now, but it's a very small amount. But our policy going forward is we do not really want to capitalize R&D. We'd rather expense it and have a clean set of numbers. And then in terms of M&A, as I said, we've really not seen any sort of shift in behaviour within the market other than the fact that the deal flow has dropped dramatically. I think a lot of assets that people are thinking of potentially selling have just been put on hold or put on ice for the moment. on the waiting and seeing so you know there's a lot less activity from p at the moment because of all the cost of capital and the access to debt um but you know they're sitting you know they're sitting on a lot of those assets and there's not much happening so thank you

Thank you. It's Bruno Jani from BNPPEXAN. Just coming back to the backlog, I appreciate it's the longest it's been ever, so it's six months. Normally, you operate with a backlog that's closer towards four months' worth of revenue coverage. So I'm just wondering, if we look out over the next 12, 24 months, would you expect that normalisation back to around four months, or is there some structural reason or otherwise that it should remain really at these abnormally elevated levels?

Yeah, so we don't anticipate sustaining a sort of six-month backlog forever, Bruno. The timing of that will obviously just depend really just on that whole book-to-bill ratio and how we see demand flowing through. But as our own markets normalise back to that sort of 4% to 6% growth, And I think it's important to sort of reflect on the sort of micro trends that's driving our business rather than the macro. I mean, we are definitely benefiting from the sustainability thematics, electrification, demand for health care, life sciences, automation, greater levels of productivity, particularly in a high inflation environment. I mean, that is all helping drive our business on a micro level. So we expect that our markets are normalised back to that more like 4% to 6% growth rate. And then we are doing 100 basis points better as our minimum target. And it's just when does that happen? So I would expect to see some of that happening this year. But the extent to which it is, I think it's still too early to say.

And just a quick follow-up on that. I guess if you put the semi-market to the side, and if we look at orders at the group level, lead times that you're quoting to customers today, are they closer towards those historic average levels, or are they still quite... Relatively, they're still elevated, but we are actively working to bring them down.

As I said in my speech, the... Certainly for our particle analyzers out of the mobile and analytical business where a number of you visited last year and you saw the SBS flow line there, we've deployed more flow lines through that business and deployed the similar methodology with our suppliers. And we've actually now almost back to making to stock. which is for that product line is where we want to be because we historically used to book and turn a number of those units in the month. Now that seems like dim and distant history, but we're getting back to that level. But that, as I said, has made us much more competitive in the market. So if you want a master size as each side, you want a particle analyzer, we can offer greater availability than most of our competition. So that's a really helpful place to be.

And just a final one. So the revenue outlook is quite encouraging. On the order front, particularly as we look towards H1 of this year, the comps look incredibly tough. So should we expect really quite a divergent trend between like-for-like revenue growth and like-for-like order growth as we look towards H1 of this year?

Again, I think it's too early to say. I mean, January, we had a book to build greater than one in January. So we are maintaining and our sales were up over 10% in January. So we're still seeing strong demand. Now, we keep coming back to this question, when we will see things sort of normalise, I think it's going to be, my sense is it's going to be progressive through this year. Just how fast that happens and the extent to which it happens, I think it's best that we update you as we go through our quarterly and half-yearly trading statements.

Got it, thank you.

There's George over here.

Thanks very much, George Featherstone, Bank of America. I just want to come back to the comment you made, Andrew, on the other businesses. So they've shown some encouraging improvement towards the back end of the year, responding to treatment, as you put it. How much further can you improve them? And has there been any change in your longer-term view on these businesses?

Yeah, so as we've always said, they're high quality businesses. Historically, they have had margins higher than we achieved last year. So we're really pleased with the progress on the margins last year. Much better operational execution. We replaced the leadership in both businesses through last year. I'm very pleased with the progress they're making. We certainly see opportunities for them to further progress their margins through this year. and going forward. The question is that they are niche in nature and it's really a question of scale. And are we the best people to scale them or would it be, are we effectively, are we going to be the best owner for those assets? But for the moment, we're very pleased with the performance and we'll continue to drive their operational and strategy execution forward.

Thanks. And then on the R&D spend, clearly stepping up again a little bit this year. When we think about the medium term operating margin, is there any, can you give us a sense, I guess, in terms of what you expect the ongoing beyond this year R&D share of sales will be? Will it continue to step up or will there kind of be a bit of a reduction as you go through a new product cycle?

I mean, our guidance is 8%. So we're sort of, you know, we're getting it to 8% and then holding at 8%. I mean, year to year, it could fluctuate a little bit, but I think, you know, 8% as a guidance is a good level. And certainly our vitality index, you can see, is ticking up nicely as we have ramped up the R&D. We are accelerating the vitality index. And our target there is to get, you know, we finished 25% last year. It was up on the previous year. And, you know, get that to sort of 30, 33% over time. Yes, Rich.

Hi, it's Richard Page from Numis. Just a couple from me. On the like-for-like end market breakout you gave us, the one that stood out to me was the automotive, very strong. Can you just give us an idea of how much that's new customers versus growth with existing customers, please?

Yeah, well, Rich, I mean, a lot of the growth is actually in our virtual test division. So that's, you know, we highlight as the capital markets and a little bit of a case study on the acquisitions that we've made there in terms of concurrent RT, the Imtek acquisition we did back in 19... the right hook that we did in 19, Imtek in 21, I think it was, and really strengthening the VI grade acquisition we made in 18. So by the end of last year, we actually doubled the sales over the last four or five years for virtual tests. So we've gone from about 40 million euros to almost 80 million euros so very strong growth there and it's really is this you know we are riding the shift of you know certainly an automotive by large automotive OEM customers trying to accelerate time to market reduce development costs also it's a big part of their sustainability agenda I mentioned the Myra during my speech I mean they bought one of our large simulators and part of that was accelerating development times for their customers but also from a sustainability perspective. There's a nice case study in our annual report you can read where we actually model the sort of CO2 savings and the environmental impact savings from actually designing through simulation and doing it's not just the digital twin it's actually the hardware in the loop, driver in the loop, software in the loop capability that we offer that's allowing customers to develop products far more sustainably, including reducing the number of tires used in the prototype vehicle by about 3,000 sets of tires. I mean, it's a lot of rubber not being produced. So it's actually quite impactful. So we are seeing huge demand. A quote from Jim Farley, that was a nice post on LinkedIn that he put up there, driving one of our simulators with him in the cockpit. So it's a great testimony.

Thank you. And just the second one. You mentioned the statement, obviously, the US orders softening in the second half. Can you just elaborate a bit more on that? Is that where the farmer...

Yeah, so pharma, the pharma normalisation was happening in North America. But I think generally we've sort of seen North America just sort of normalise faster or slump a bit. But to me, that's sort of fairly normal behaviour for North America. I mean, typically North American companies are much quicker to act on the macro signals than maybe European or Asian companies are. So it's not unexpected and we don't see it as problematic.

Thank you.

Yeah, Harry.

Excuse me, it's Harry Flores from Peel Hunt, finally. Just a question on capital allocation, because if you run your cash flow number and you run circa 90%, let's say 200 million just to pick a number, you've got some of the buyback left to do, 230 million net cash, you start to see the maths quite quickly, clearly. I'm just slightly surprised. When do you pull the trigger on a buyback or something like that? Because unless you do some significant M&A,

it's clearly going to be very inefficient um so do you what's the trigger for sort of deciding to go down that route rather than sort of doing it now or yeah whatever i mean there's never one trigger harry in reality i mean so we we we're very clear that we look at our capital that we have our primary desire is to invest organically grow the business that way and we we're doing that Our second desire is to grow it inorganically and make acquisitions. And we're doing that and have done that. And if we think we've got excess, then we give it back to shareholders, either through buyback or special div. So we're in the middle of giving money back to shareholders, the 300 million. So that's sort of in train. Look, I mean, we'll continue to monitor the balance sheet. look at the options between those three options and decide which makes most sense. Obviously, we would like to make some more M&A. We've undertaken 124 million last year of spend on acquisitions. You don't have to do significant acquisitions to eat into that balance. But equally, having the money available, if there's something bigger that comes along and there's a good opportunity to take it, then we will. So we kind of look at it in the round. We have a buyback that's in train at the moment. We didn't feel the need to extend it. There are acquisition opportunities that we would like to take. So we'll keep it monitored. There's not a specific trigger or a specific balance sheet date or anything in reality. We kind of look at it at the time, looking across the whole spectrum of what's in front of us and try and get the balance right. And I think, I mean, obviously I would say this because we've made this decision. We feel like we've got the balance about right. It's also quite nice to include the ordinary dividend. That sort of sits outside our CAF's allocation. It's the 33rd year that we've increased that. That's quite a nice trend as well, I think. We do have a couple of questions, Andrew, that have come in online. So let me just fire a couple of these. So just when you look at dynamics and the mix of the growth, the 7% growth between physical tests, virtual tests, and software, is there any interesting story there?

There's nothing really I'd call out that differentiates the split between physical, virtual or our software sales. Within physical tests I highlighted our end of line testing for electric motors has been particularly strong. We almost doubled the revenue of that product line over the last 18 months. Virtual tests I've spoken about. Software, some of our material analysis, durability analysis software again is selling very well. So, you know, broadly, broadly, it's a pretty common sort of growth across the whole of dynamics we're seeing.

And then also how much additional capacity does the new facility for PMS give us?

So the new facility for PMS is over doubling the size of their existing footprint. The existing footprint is getting quite tight in fairness. So we've been looking for some time at a new facility and found a building last year which we bought outright because we believe that gives us greater flexibility over time in terms of how we use it. but we're also looking at it with an eye to acting as a distribution centre towards the west coast for our scientific division in North America as well. Any other questions? We are about at time. All right, well, let me draw to a close. So thank you again for coming. Great to see so many of you in the room. It's great to be back to doing these things physically. Just so I have a summary, we delivered a very strong performance in 2022. We're very pleased with how we performed. But equally, we're very pleased with the momentum that we've carried over from last year into the start of this year. with both a very healthy order book, but also continuing strong demand and a book to bill above one. That gives us the confidence in terms of the guidance that we've given today in terms of 6% to 7% organic growth this year with strong margin progression. And we look forward to updating you through our trading update in April. Clearly, some of the questions that you asked today will maybe give a bit more... Sorry? HBK, yeah. I'll come to that. And we, just as a way of a sort of pre-advert, if you like, we are organising a Dynamics mini Capital Markets Day teach-in at our virtual test facility in Italy in June. It'll be the week of the 19th of June. We've just got to land on the day. And we may extend that to sort of a broader sort of Dynamics investor sort of roadshow in Europe if there's sufficient interest as well. But the facility in Italy is where we design and build our full-scale simulators, and it really sort of will showcase not just the virtual test division within Dynamics, but we'll also be bringing in some of our other software solutions and physical test and smart sensor solutions that we will showcase on the day. So we'll advise you the date as soon as possible, but if you want to ride on a simulator, book early. With that, I look forward to seeing you all again in April. Thanks very much for coming.