Spectris plc

Good morning and welcome to our interim results for 2023. Let me start by saying how delighted I am by our very strong first half results. Derek will take you through the details in a moment, but I'd just first like to emphasise that we delivered exceptional organic growth continuing the momentum from last year. Operating profit is up 41%. And with our strong top line growth and focus on operational excellence, we delivered very strong margin improvement and a record operating profit. We remain a highly cash-generative business, further strengthening our already strong balance sheet and providing the group with continued flexibility. Now this performance reflects the conversion of our record order book at the start of the year, but also market share gains and the impact of net pricing. And alongside these results, we've been very busy executing our strategy for sustainable growth, including a number of exciting new product launches, the agreement to acquire MicroStrain, and strong operation improvements, expanding margins. So a very strong set of results that de-risks the second half and provides yet another step towards meeting our medium-term targets. Again, demonstrating the improved quality and resilience of the group. So turning to the outlook for the full year. Our strong first half performance and the strength of our order book means we are upgrading our guidance for the full year. We now expect organic sales growth to be ahead of our previous guidance of 6% to 7%. We continue to expect strong margin expansion with full year adjusted operating profit being in the range of £250 to £265 million. delivering double-digit profit growth as we continue to execute our strategy as a leading sustainable compound growth business. Now, these results would not have been possible without great people united behind a common purpose and values. So I'd like to thank all of my colleagues right across Spectrus for their contribution and the healthy high-performance culture that we continue to build together. I've loved visiting a number of our sites in the first half and seeing the wonderful things going on across the business. Earlier in the year, I was at our site in Suzhou to see firsthand the fabulous progress they have made in deploying our lean operating model over the past three years. The site has been transformed. I also met with the sales team in China who have delivered over 25% sales growth over the past 12 months. And likewise, I had the pleasure of visiting our recent acquisitions, Dytran and CCRT in the US, and learning more about how they are solving customers' challenges through high-performance compute and advanced sensing. And just the other week, I was in ServerMix, again, talking to colleagues there who are using the SVS toolkit to improve operation performance, and also others working on some exciting new product innovations. We have a truly diverse, highly skilled and customer-centric team who collectively are creating a great and engaging place to work. I'll now pass you to Derek, who will take you through the financials in more detail.

Thank you, Andrew, and good morning, everyone. Reported sales increased by 23% to £702.5 million. Adjusting for the impact of acquisitions, net of disposals, which increased sales by 8.1 million, and foreign exchange movements, which increased sales by 16.2 million, you see a growth of 19% on a like-for-like basis. Adjusted operating profit increased by 41% to 102.1 million, and as expected, our operating margins have improved, increasing by 180 basis points from 12.7% to 14.5%. Adjusted profit before tax was 103.4 million, up 47%, and our tax rate came in at 22% in line with guidance. Adjusted earnings per share were 77.2 pence, up 55% on the prior year. The interim dividend per share of 25.3 pence represents a 5% increase over the prior year, and we remain committed to paying a progressive dividend. Adjusted cash conversion was 117% as we begin to see the benefits of a normalising supply chain and subsequent release of working capital. At the end of June, the group had a net cash balance of £214.3 million, providing significant flexibility. Finally, on this slide, our return on gross capital employed continues to improve and is up 290 basis points at 16.7%. 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. However, I would like to highlight two points of note. We experienced a strong improvement in gross profit from the incremental 108 million pounds of like-for-like sales and the like-for-like gross margin in the first half increased by 140 basis points to 57.1% due to a more stable input cost environment and pricing from 2022. We anticipate further progress in the second half. Also, it is worth noting that of the 44.4 million of increased overhead shown on the slide, around 10% relates to increased R&D investment, which we continue to prioritise. Moving 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 19.6 million of depreciation and amortization charged to the adjusted operating profit brings you to 121.7 million of EBITDA. Over the past couple of years, the group has utilized its strong balance sheet to ensure continued customer deliveries. And this is now starting to normalize. And as such, the working capital position is beginning to unwind, releasing 9.7 million of cash in the first half. We spent 11.7 million on CapEx. And this gives us our adjusted cash from operating activities of £119.7 million, which we divide into the adjusted operating profit to get our cash conversion metric of 117%. Transaction-related activities resulted in a £5.4 million cash inflow, and we had a net interest inflow of £2.9 million. In the first half, we paid the final dividend of 53.7 million pounds and spent a further 26.7 million on the share buyback. Our cash tax was 30 million. We spent 17.8 million on the design and development of our new SAP for HANA ERP system, which is due to go live during the course of 2024. And other movements of 13.5 million brings us to a net decrease in cash for H1 of 13.7 million pounds. This slide is included for completeness so you can easily see the bridge between our adjusted operating profit and the statutory measures. I will not go through every line, but draw your attention to the following points. There are no asset impairments to report or exceptional restructuring costs in the period. Transaction related costs were 4 million and as previously mentioned, we spent 17.8 million on our new ERP system. Amortisation of acquisition-related intangibles of £9.8 million brings us down to the statutory operating profit of £70.5 million. We sold the remaining parts of CLS during the first half, which is the majority of the £11 million loss on disposal recognised in the period, and we had a net financial income of £8.2 million, bringing you to £68.5 million of statutory profit before tax. Moving on now to our divisions. Spectris Scientific delivered an excellent financial performance in the first half, delivering sales growth of 21% to £334.1 million. Like for Like sales growth was 22% and after taking into account the £6.1 million impact of the CLS disposal and the foreign exchange movements of £4.7 million. Sales growth was strong across all key end markets, with the exception of life sciences, where sales were only slightly above a tough comparative period, and reflecting the fact that this market was the first to see the normalization in customer order patterns. Adjusted operating profit increased 30% to 58.6 million pounds, reflecting the strong sales growth and good operational performance. Adjusted operating margin improved to 17.5%. Spectris Dynamics delivered a very good financial performance in the first half, with double-digit sales and operating profit growth. Sales increased by 23% to £264.5 million. After taking into account 12.8 million sales growth from the acquisition of Dytran and 7.8 million for foreign exchange movements, like-for-like sales grew by 13%. Sales grew across all key end markets with particularly strong growth in aerospace and defence and academia. An adjusted operating profit of £35.8 million represented an increase of 31%, 20% on a like-for-like basis, with adjusted operating margin 80 basis points higher at 13.5%, with good gross margin progression reflecting the impact of top-line growth and net pricing, offset by costs relating to organisational restructuring. Finally, to help you with your modelling, I have set out on this slide some broad areas for technical guidance. As Andrew has already said, we now expect organic sales growth to be ahead of our previous guidance of 6-7% and remain on track to deliver strong progress on expanding margins, with adjusted operating profit expected to be in the range £250-265 million. Working capital is expected to reduce and should be in the middle of our guided range of 11% to 15% of sales, and capex should be in the region of 40 to 50 million pounds. SAS costs will be around 25 to 30 million pounds, and the effective tax rate is expected to be 22%. The remaining 83 million of the share buyback will be completed by the end of the year. And with that, I'll hand you back to Andrew.

Thank you, Derek. As you just heard, our results clearly demonstrate how our business model, our framework to deliver sustainable growth is really working for us. In Spectra Scientific and Dynamics, we are owners of world-class premium precision measurement businesses with leading market positions. We operate in attractive growth markets underpinned by a number of secular and sustainability trends that are here to stay. And we continue to collaborate closely with our customers, solving some of their toughest challenges. We continue to invest for growth, both organically through new product development and via M&A. And we're also driving margin improvement through our operational excellence by the deployment of our Spectrus business system and business process transformation projects. And that's a really strong self-help story delivering improved productivity. And this is all underpinned by being purpose-led as a leading sustainable business, developing our people and living our values. So let's now turn to our businesses. As you just heard from Derek, Spectra Scientific and Spectra Dynamics delivered exceptional sales growth in the first half, with strong margin expansion and excellent improvement in operating profit. And that really recognizes the compound growth from M&A, as well as the strong organic growth that we achieved. At Scientific, order intake was broadly flat, with strong demand in material sciences and academia, offsetting the normalization of demand in both life science and semiconductor. Orders are up in North America and Europe, with lower semi-orders impacting Asia. In dynamics, orders are only 3% lower, against a tough comparative period. And we continue to see strong demand in aerospace and defence, but at the same time, some softening of order intake in automotive since the beginning of the year, and also normalisation in machine manufacturing continuing. So this resulted in orders being up in North America in the half, but lower in Europe and China due to the auto and machine building exposure respectively. So just by way of context, the demand pattern we saw from supply chain disruption and longer lead times that brought forward orders through the second half of 2021 and most of last year has been normalizing since Q4 last year. as supply chains have eased and lead times reduced, customer ordering patterns are returning to normal. And this in turn has enabled the conversion of our strong order book into sales and recovery in gross margins. Importantly though, underlying demand remains robust with our book to bill being close to one and our opportunity pipelines remaining really healthy. As such, we continue to benefit from a record order book despite delivering more of the backlog than we'd initially anticipated in the first half. And as we look ahead and assuming no material changes in the external environment, we anticipate the relationship between orders and sales to be back to a structurally higher level in 2024 with greater visibility than in the past. So I'm delighted with the performance of both divisions. With our focus on high growth segments, where we differentiate through our solutions, I am confident in our ability to continue to outperform our overall end markets. And as you'll have heard me say many times before, as a result of the work we've done over the last few years, we are now a higher quality and more resilient business. We are aligned with markets with a strong sustainability focus and attractive growth trajectories, positioned in technology-driven end segments with strong fundamentals. Demand for our products and services is really being amplified by a number of trends, including an aging population, the transition to cleaner energy and mobility solutions, and with a more connected world demanding ever greater need for advanced computing and data. And these trends are resulting in expected market growth of 5% to 6%, with our differentiated positions providing a strong market share opportunity and supporting our ability to outperform our core markets to deliver through cycle growth of 6% to 7%. I'm delighted that in the first half, like-for-like sales exceeded expected market growth rates in all but one of our major end markets. Collaborating with customers, helping them solve their most complex challenges, is a key part of our growth strategy. Our applications-led, high-touch approach drives high levels of customer intimacy, and our customer-backed innovation has resulted in a number of new projects and customer orders during the period. In scientific, we are seeing particularly strong growth in metals, minerals and mining, driven by strong sustainability trends, especially in green metals and green mining. We have seen strong demand for our X-ray instruments as customers make their extraction and manufacturing processes greener and more sustainable. The energy mobility transition is also fueling demand in battery development, where our particle analyzers are used to assess the quality and character of the critical input materials. and demand for our instruments in this division continues to increase in biopharma. For example, a medicines research customer working with life science organizations from around the world recently announced the purchase of its third Creoptics Wave Delta system. This provides them with unsurpassed technology for the characterization of molecular interactions, particularly those between potential drug molecules and their target proteins. We are also seeing strong uptake of our smart manager solution. That's a new platform connecting customers instruments in the field to the cloud, enabling remote monitoring, diagnostic and service. And in Dynamics, as we set out recently at our capital market event in Italy, growth is being fueled by four key trends. Firstly, the move to virtual test where our driver experience simulators are class leading. Our understanding of engineering data is helping to build a software business with more on the way. And we're entering new markets like electrical powertrain testing. And I've also seen how our smart sensors can improve crop yields in farming to patient comfort in hospital beds as customers drive to automate and make their devices smarter. And sales in both divisions is also being supported by academia, where demand for our products and services aligns with the same trends across our other end markets. And that supports future growth as new technologies and applications are commercialized. So these high levels of customer intimacy and understanding really help drive our innovation pipeline, informing our research and product development strategy, such that we can anticipate our customers' needs for the future. I could talk about many of our new products and solutions that we launched in the first half, but here I highlight just two. In scientific, we launched the Nanosight Pro to measure the size and concentration of nanomaterials for rapidly growing biopharma applications used in the development of vaccines, cell and gene therapies, and drug delivery systems. The Nanosight Pro generates robust, high-quality characterization data up to three times faster than previous versions. And in Dynamics, in Virtual Test, we broadened our simulator offering with the launch of the Compact Full Spectrum Simulator, as we showcased at our recent investor event. The FSS simulates highly accurate motion, vibration, and sound effects in a small footprint, and that enables human-in-the-loop testing for automotive customers. the vital connection between objective simulation data and subjective human perception allows for early virtual testing and closely replicates the experience of driving a real car before a physical prototype is built. And going forward, we'll maintain R&D investment around 8% of revenue. We continue to invest in M&A as an important element of our strategy to compound growth, enabling us to further enhance our advantage positions, strengthening and expanding our portfolio to add further value for our customers. In the first half, M&A contributed 2.5% to our top line growth. We have an active pipeline of potential acquisitions, ranging from early stage technologies to bolt-on acquisitions of varying sizes, right through to larger scale opportunities. And with financing costs having recently increased for many market participants and with our strong balance sheet, we are well placed to take advantage of these opportunities. In June, we announced agreement to acquire MicroStrain sensing systems into Dynamics, which has a long established position in precision sensing. And when the deal completes, which we expect to do in the third quarter, the acquisition will strengthen our overall sensing offering, helping to further penetrate the rapidly growing automation and smart manufacturing markets while increasing our North American presence. And also enable MicroStrain to benefit from leveraging Dynamics global sales and service network. A key part of our strategy and our journey to delivering 20% plus operating margins is our strong self-help story, built around our focus on a lean mindset and business transformation projects. We have made really good progress with the restructuring of Spectra's dynamics in the first half into three customer-aligned units, virtual test, physical test, and in-process measurement, absorbing the associated costs during the half. We continue to drive operational excellence to improve productivity and strengthen our competitiveness through the Spectris business system. And following the supply chain challenges experienced last year, and also the significant growth in customer demand, our primary focus during the first half has been to continue to improve capacity utilization and improve flow, to convert our strong order book into sales, whilst also reducing costs and lead times. And I'm really delighted with our progress and the continuous improvement being delivered through SBS. we delivered a reduction in overheads of 30 basis points during the first half, which not only supports delivery of continued strong margin expansion for the remainder of this year, but also for our future medium-term operating margin targets. We're also making good progress with the implementation of our new ERP installation, which is on track to go live across 2024. As you know, sustainability remains at the heart of our purpose to deliver valuable measure for all our stakeholders with progress in the first half summarized on this slide. We are building a distinct, healthy, high performance culture that is underpinning our results. I'm really delighted that we continue to see increased levels of engagement right across the group with our recent annual Gallup survey showing positive results in all areas and continuing the upward three year trend. We're also making really strong progress towards meeting our net zero targets. We continued investment in renewable energy sources, more efficient lighting and insulation. And we're also accelerating the use of EcoVardis across the group to increase the sustainability focus of our supply chain. Looking at our impact on society, in April, we worked with young professionals to deliver our second STEM work experience event attended by over 700 school students from a range of backgrounds. And we remain a proud sponsor of International Women in Engineering Day, which took place in June. And this year, the day was celebrated with the Spectris Foundation, young professionals and tech girls, involving over 275 young women from across the UK and the US, exploring different career paths in technology and engineering. And in support of our colleagues who have family and friends in Turkey and Syria, Following the devastating earthquake in February, we made a donation of £100,000 to Care International as part of the Disasters Emergency Committee appeal. So in summary, we've had an excellent first half, which is testament to the brilliant work of my colleagues, our business model and our culture. The strong financial performance and further progress on strategic execution represents yet another step on our journey towards delivering our medium term targets. And as well as a compelling compound growth story, we have a number of initiatives to further strengthen and enhance the business. We are a more resilient, higher quality business today. And while we remain very alive to changes in the macroeconomic environment, our successful strategy and strong balance sheet provides us with a really good platform for sustainable growth. I am confident in the combination of our strong market positions and the long-term growth drivers enabling us to outperform our end markets. Thank you for listening today. And now Derek and I will be 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. Our first question comes from Rory Smith from UBS. Rory, your line is now open. Please go ahead.

Thank you. Good morning. Thanks for taking my questions. It's Rory from UBS. I've got three. First of all, you've described life sciences as being the first end market to see normalization in ordering patterns. and that you're starting to see that normalization in other end markets as well. I was wondering if you could put some numbers to that in terms of book to bill by end market segment, please.

So I assume we're already going to take questions one at a time. Let me just start by addressing sort of your normalization in life sciences. I mean, this pattern started really recently. companies facing off to life science and pharma saw a big demand not only just through COVID but that sort of immediate post-COVID bounce that sort of really ended about 18 months ago in life sciences and the markets were really normalized over the subsequent 12 months and sort of pretty much then flattened since then. I mean what we haven't seen that some of our peers did do is that you know we do not provide sort of stock into the system, into the distribution channels. We're typically selling direct to customers for discrete projects. So we neither saw the sort of big upswing in sort of consumables and stocking that happened sort of during COVID and immediately afterwards. But rather, we've seen a much more sort of, you know, just a usual demand pattern from a direct ordering system. That's then normalised. If you look at the other markets, I think, you know, machine building, machine manufacturing was the next market for us to sort of normalise, which sort of started about 12 months ago. There you have to sort of look at sort of the market order growth we saw in dynamics through the first half of last year. We saw about 30% order growth in dynamics overall. All that was in machine manufacturing and all of that was within China. Now, I think some of that was in fairness driven by the fact we were putting prices up at the time. And therefore, there was a bit of maybe sort of earlier ordering as a consequence of customers trying to avoid some of the price increases that were going through. But I think that sort of market is going to normalize. The flip side of that is that we've seen very strong resurgence in primary materials over the last nine months and also in aerospace and defense. and academia, as we talked about. And so, you know, as a consequence of those markets coming up, pretty much that's allowed us to sustain very strong order intake, given the tough comps, a book to build around that one. And as I said, just on the presentation earlier, I think the other thing to look at is the fact that if you look at our sort of, what we call our sort of major qualified marketing leads, plus our sort of A, B opportunities that we see in terms of the sales pipe, The number of opportunities remains very strong. The one thing we are just saying, I would say, is that it's taking a little bit longer in some of the end markets for customers to actually convert their interest into actual orders. But overall, we're very pleased that the underlying demand is very robust and the book to be remaining on about one.

That's very clear. Thank you. And my second question, and I'll limit myself just to two. Given Red Lion and Servomech made as much profit as Dynamics in the first half. Can you just give some more colour on what drove margins there and whether you see those as sustainable?

Thanks. Yes, well, I mean, as we've said all along, I mean, Redline and Certimaker are both quality businesses. You know, the question there has always been around, you know, their scale. But what we've been able to achieve really in both businesses over the last 18 months is a strong improvement in their operational performance. We changed management at the beginning of last year in both businesses. We've been very pleased with just how the operational improvements that have been implemented are now coming through in the results. So that's certainly helping to underpin the performance in both Redline and ServerMate. I think the other factor that's really driving quite an exceptional performance for the other division in the first half was Redline's ability to convert its order book Coming into the new year with electronics and particularly semiconductor supply chains easing quite quickly, Redline were able to deliver quite a bit of their order backlog, certainly much faster than we anticipated. And of course, they've done a great job in executing that all the way through the business. As you'd expect, that's delivered a very strong drop through for the operating leverage executing that backlog. So there's a slight exceptional there in the first half for Redline.

That's very clear. Thank you. Thanks for taking my questions. No, pleasure. Thanks, Lauren.

Thank you. Our next question comes from Jonathan Han from Barclays. Jonathan, your line is now open. Please go ahead.

Hey, guys. Good morning. Just a few questions for me. Can I just, again, come back to live scientists? And maybe if you could just talk about the order intake there, Q2 versus Q1. I'm just trying to sort of gauge where we are sequentially and just the feel of the Are we still seeing quite a big step down, or do you feel that sort of life science orders are pretty much at the trough? That was the first one.

So, good morning, Jonathan. Thanks for your question. So, in life science, it's pretty much Q2 over Q1 is pretty flat. So, you know, as I said, we really saw that normalization start to happen about 18 months ago. It was the first market to normalize, and then sort of stabilized really over the last six to nine months.

Okay. Great. Thank you. The second one was just on pricing. Did you see any price rises or push through any price rises in the first half? And just linked to that, can you just tell us about or talk about the sort of pricing in the order book? What kind of growth are we seeing there? Is it kind of round about mid single digits or similar levels, please?

Yeah, so on pricing, just to sort of take your first part of your question, I mean, we haven't implemented any new pricing in the first half of this year. Our last pricing round was done in the start of Q4 last year. So as we said, back at full year and our Q1 trading update, we were expecting that pricing to start to come through in the first half, which it clearly has done. So the Q1 trading update, we talked about expecting to see sort of price over volume, that ratio invert from last year. I mean, we achieved 60% volume, 40% pricing last year. we actually achieved the same ratio in the first half. We previously thought and guided that we, you know, that would invert over the last six months. It hasn't done that. That's mainly the consequence of us delivering really, you know, strongly in the first half, being able to make the battle of the supply chains ease. And therefore, you know, that supported a higher level of volume throughput in the first half. But as we go into the second half, over the next six months.

Okay. And the pricing in the order book, roughly? Any thoughts?

So, well, I mean, we've got, say, the pricing round that we implemented at the beginning of October last year. So that will come through more fully in the second half than in the first half, where we're only really expecting happening in the first half because we came into the year with about six months order backlog.

Very clear. And then maybe just one last one for Derek. Just in terms of that guidance range, obviously 250 to 265 million of EBITDA. Could you just give us or talk us through how we get or you could get to that sort of 265 million, just the assumptions that kind of underpin that upper level of the range, please.

I mean, I think to an extent, So we came into this morning, I think, some analysts at 224, some analysts at 274. So we were trying to kind of be helpful.

And there's a range of options between some more bullish views on sales growth and more bullish views on the sort of cost control versus the more negative views.

So, I mean, mathematically, clearly, if you're nearer the top end on the sales growth and you see all the margin drop through, you get to you. 265 and if you're somebody who's taking a slightly more negative view perhaps of the final part of the year you get to 250 it's a range for a reason it's only the end of July clearly we're very confident with our range and as always, hope to do well. But we thought it was helpful to give a slightly tighter range of 250 to 265 than some of the analyst ranges that are out there at the moment.

OK. Very clear. Thank you very much, guys.

Thank you. Our next question comes from George Featherstone from Bank of America. George, your line is now open. Please go ahead.

Good morning, everyone. Thanks for taking the questions. The first one would just be a follow-up on the last one there, Derek. The low end of the operating profit ignitement implies slightly less profit to be delivered in H2 than you did last year. So given you've got improved pricing versus cost, improved gross margins and improvements in the broader cost base, that number seems quite conservative. So I just wanted to know how we should think about that and the particular headwinds that we need to take into account for the second half of the year.

Yeah, I mean, I think, George, once you get into ones and twos of millions for a full year number, it's quite difficult to kind of land exactly and sort of see specific numbers. I think the way I would look at it is we expect the market to look at our range and probably land somewhere in the middle of it, which is an upgrade to expectations. When you take into account that there was £5 million of restructuring in the first half, That's actually a bigger upgrade than the screen might suggest. So I think, you know, where we land, clearly, we are still very confident of seeing our full year growth being ahead of our previous guidance. We're very confident of our margin expansion. And you're right that if all of those come through, we end up in the middle or the higher end of the range. At the same time, we're also well aware of a world that has FX uncertainty and other macro uncertainties that could give us challenges in that sense. So I think, you know, it doesn't change any of our views as to where we've got to, but we're just trying to be helpful given that range. And dare I say it, just make sure people kind of keep grounded in reality as they look at the incredibly strong first half and just think about where we're going to come out in the second half.

Okay, very clear. I understood. And then just a quick one on the order book. Obviously, you talk about it still being a very high level. In terms of the cover, I take it that's now normalised a bit. I mean, I think you're talking six months at the start of the year, maybe four to five months now in line with the kind of medium-term expectations. So is the implicit outlook then that book to bill stays one time from here, or do you expect it to drop further in the second half?

So, George, in terms of the order book visibility, I mean, we were at Q1 trading update. I mean, we came into the year with six months visibility. At the end of Q1, it was about five. Clearly, as we look forward, we're delivering more and more sales. So there's inevitably that weighs on it slightly. But as we stand at the half year, then we're just a shade under five. So pretty much our visibility has remained flat. Q2 over Q1, which is very good. We talked about previously that we'd expect visibility to normalize to a range between four and five. So we're still at the upper end of that range, which is positive. And as I said earlier, we fully expect, based on the fact we now face off to a more concentrated set of markets with strong fundamentals, consequence of the sort of reshaping we've done as a business over the past few years that we'll end up in a sort of structurally higher level with greater visibility so you know that four to five range is higher than Spectris has been historically if you want to go back sort of four five six years where it's more like three to four months of visibility so to say you know our guidance range we anticipate sort of falling somewhere between four to five months and currently we're sitting at the top end of that

Okay, so there's no reason to think then that your book to bill sort of materially deteriorates from here than if you're going from just under five months to four to five months.

Yeah, we expect it to normalise somewhere in that four to five month range. It clearly depends on what's the order intake going to be over the next six months. We'll determine where we'll exit Q3 and ultimately the end of the year. But as I said earlier, in terms of sort of our opportunity pipeline, it remains very robust and very healthy. The number of sort of strong A opportunities, as we call them, is as good as it's been over the last sort of 12, 24 months. It's just taking a bit longer for customers to convert their interest into absolute orders. We're working hard with our sales team to convert them, but it's clearly a trend that we've seen over the last six months. It's just a little bit more nervousness out there. So it really just depends exactly just how customers view the year, their outlook, and their propensity to spend money.

Understood. All right. Thank you very much.

My pleasure. Thank you, Joel.

Thank you. Our next question comes from Mark Davies-Jones from Stiefel. Mark, your line is now open. Please go ahead with your question.

Thank you. Morning, Andrew. Morning, Derek. Could I ask about China, please? I saw the Asian orders were down more than other regions. I'm assuming that's just because of the end markets that you're more heavily weighted in there. But is there anything going on in terms of export controls or issues of that nature, which is weighing on the China trend?

Morning, Mark. So China still remains a very strong market. the full year last year, so it's broadly the same. We certainly saw as China reopened or lifted all its sort of COVID restrictions post-Chinese New Year, we saw a bit of a bounce certainly in the scientific division around orders come through, but then that sort of quickly sort of softened again. Dynamics have seen sort of a more softer position in China over the last six months, mainly as a consequence against a very tough call from the previous period last year, but then also automotive in China wasn't as strong. So, you know, so China, I think, you know, we're a bit disappointed, I think, from where we thought it might be post reopening, but I think, you know, we alongside lots of other people. So I don't think there's anything unusual in terms of what we've seen there. And then in terms of sort of export controls, yes, it is a tougher environment in the sort of semiconductor space. It's really only impacting it in that space. There's a little bit in dynamics around some of the tester measurement where we have some sort of dual-use technologies. But, you know, I would sort of cap it in the sort of 10 to 20 million sort of revenue range is sort of our sort of potential exposure there. So relatively small in the scheme of things. And as we've sort of shown or seen and demonstrated in China in the past where we've had restrictions come in. We saw it with the tariffs sort of three, four years ago where with tariffs going up, some parts of the market meant that we were uncompetitive in that space. We were able to pivot our sales force to go and look at other opportunities in China. I think we all need to recognize that China's a very big market. There's lots of opportunities there. And we continue to maintain a focus on driving growth and expanding in China. It's certainly not decoupling from China for us. It's very much just managing the growth and de-risking that growth, looking for other opportunities where we can achieve orders and so on.

Okay, great. And just very quickly, while I've got you, the academia piece of your end market seems to be strong. Is that just sort of late cycle flow through from the other end markets? Or is there something more specific driving that?

I think there's two things. One, it is that sort of late cycle growth, you know, coming off the back of the other markets. But, you know, the areas that we are focused in, so A lot of the cleaner, healthier, more productive areas that we're focused on and the market's focused on are around energy transition, around electrification, battery technologies, drug development, certainly sort of large molecules, gene therapies, the new mRNA drugs that are sort of coming out of the back of the pandemic. All of those trends that we're seeing driving growth from our sort of OEM customers is also fueling demand for research, which we sort of get a natural sort of compounding effect, which also gives a good sort of forward indicator for future demand as well. In fact, a lot of this research ultimately then flows into the commercial world where we've sold instruments, test and measurement equipment to that space, ultimately then goes on to the commercialization phase. So it's an early marketing tool and a guide to sort of further growth for us. So it's good to see the sort of academia R&D space, you know, recovering so strongly.

Excellent. Thank you very much.

Thank you. Good question.

Thank you. Our next question comes from Lush Mahindrada from JP Morgan. Lush, your line is now open. Please go ahead.

Oh, thank you. Thank you both. And thanks for taking my questions. The first is just on sort of the auto sector and sort of the orders there and sort of the softening. I mean, could you give us a bit more colour on where you're seeing that softening? Is it across the board? Is it sort of simulation? Is it the EV side? Or just to get help to get a breakdown of the areas that you're seeing that softening? Morning, Lush.

So I think, I mean, I would say sort of the softening we've seen is general, really. And it's nothing specific around electrification or virtual tests. I think the demand is there from an underlying perspective. The number of opportunities that we are working on with our customers remains very strong. I think of all areas, this is just one where it is taking longer to convert, because customers are just being a bit more cautious, given their view of the macro. I think you have to recognize within auto that the supply chain shortage, they were able to price for that and were able to get good margins and good cash generation. But they are all spending a lot of money on the whole transition to electric vehicles and autonomous technologies. That is soaking up quite a lot of capex, which is good for us, but it does mean it was there sort of looking into a sort of softer macro environment with supply chains recovering you know, are they going to get the same demand for vehicles that they originally anticipated coming into the year? So we're just seeing, you know, I think a bit more of a conservative position. Whether, you know, that will resolve itself through the second half or not, we will see, you know, as our auto OEM customers and the supply chain takes a view on, you know, how 2024 will turn out.

Okay, thanks, super helpful. And sort of a similar question, is this just on... dynamics, and I guess the sort of drop-off in Q2 relative to scientifics, which held up a lot better. Is there anything to think about within that in terms of a bigger pull forward in Q1 between two divisions, or is that just sort of some of these markets being a bit softer in dynamics than scientific?

I think for dynamics, I mean, I think the key thing to recognise is that our order intake in Q1 and Q2 last year in dynamics was incredibly strong. I mean, orders were up 30%, as I said, in dynamics. Q1, they were up 20% in scientific for the same period last year in the first half. So we did see a big surge in demand through the first half of last year. but also the fact that we did put prices up in Q, the end of Q1 and Dynamics last year, which drove quite a lot of sort of earlier placing of orders potentially during Q1, the first half, than otherwise would have been expected. So I think, you know, overall, you know, order intake in scientific was up 1% on the reported basis, was only down 2% in Dynamics, sorry, about 5% in Dynamics. So, you know, to me, there's nothing to worry about there. I think it's just the fact that, you know, we're up against a much tougher comp in dynamics and, you know, some of the end markets are just, you know, slightly, you know, in a different phase than we're seeing in scientific.

Okay. Very helpful. Thank you.

Thank you. Our next question comes from Callum Battlesby from Berenberg. Callum, your line is now open. Please go ahead.

Great morning, guys. Thank you for taking my questions. So I think free from me, please, but they're kind of in overlapping areas. So firstly, can we talk about the overhead and headcount in the first half? The last half is obviously seeing a slight disconnect between the level of revenue growth and the headcount within the business. Are you able to say if this reflects a reluctance to hire into an uncertain macro or the benefits of the spectrum of business system or something else? And then related, is the expectation of H2 that headcount grows further from here, or do you expect it stays broadly where it is?

Thanks. Morning, Callum. I'll answer your question. So I think the answer is very simple, really. I mean, we are very disciplined around our cost control. We're keeping a very strong eye on where we're seeing volume growth as price and growth, and where we therefore need to invest and recruit sales market growth versus actually just getting the benefit from price. In the first half, I'm very pleased, as I said in the presentation, with our progress on SBS. That is maturing really well within the business. It's becoming part of our DNA and how we go about running our business, both in terms of just our sort of lean operating model and then driving Kaizen's continuous improvements event to take out waste, improve flow, reduce working capital, improve quality and customer satisfaction so in the first half you know overheads down 30 basis points so you know really pleased with the progress and in the second half I mean we are again you know same message really you know disciplined on cost control you know we recruit where we need to recruit but generally speaking you know we're not on a major recruitment drive you know we're expanded headcount where we need to over the last 12, 18, 24 months to meet the growth. But we've done that in a very considered manner. And at the same time, we're also making some restructuring moves where, again, it makes sense. So in Dynamics, we had 5 million euros of restructuring in the first half, really off the back of the organizational announcement we talked about in Italy at the Capital Markets Day. And also simplifying some of the sales, regional sales offices, looking at sort of sales force efficiency across the dynamics organization. So that's helping to drive productivity. You won't see that come through really in the first half. We're taking the charge. You'll start to see some of it at the back end of this second half, but we'll come through sort of fully next year. So we're focused on continuing to drive productivity and efficiency and using the SPS toolkit to help us achieve that.

That's really clear. Thanks, Andrew. I suppose then related, could you please update us on progress around the implementation of the new ERP system? Are you yet able to say when we'll see the various stages of completion on this and then when we might start seeing the phasing and the guided margin benefits coming through?

Yeah, so we're making great progress kind of on the on the system where we'll be on the test.

I don't want to get too technical here, but the system is up and working and it's operating and we're now entering the detailed user acceptance testing phase where we basically load up all of our data into the system and let the real people who are going to have to live and use it start operating it and go through their testing phases, which will be for the remainder of this year. I think the main rollout will be during the course of next year and we'll start to see the benefits coming through in 25. So that's the broad plan and it kind of drops in different phases in different parts of the group over the next kind of 18 months.

Very helpful. Thank you.

Thank you. Our next question comes from Andrew Douglas from Jefferies. Andrew, your line is now open. Please proceed with your question.

Good morning, gents. Three quick questions from me, please. Just going back to automotive in China, please can you give us a rough breakdown of your customer concentration? Are you Tesla? Are you domestic China? Or are you kind of Western Europe OEMs who operate in China? I'm just trying to figure out where your exposure is, because actually there's quite an interesting moving dynamic there from an OEM perspective. The second one is, well, I'm sure they do it one by one. I'm going to have to write them all down.

Good morning, Andy. Thanks for your question. So in terms of auto, generally, this is a general comment as well, but it also describes China as well. I mean, we serve the whole market. We're not concentrated around any particular large customer's We serve all the traditional OEMs, the Western OEMs, but we also serve the new entrants, the early startups across China, but also across Europe and into North America as well. And I think you have to just remember 80% of our sales into automotive is into the research and development. So it's very much new platform driven in terms of demand. And we continue to see, you know, a very large number of new platforms being developed, you know, mostly the largest it's been for decades. So, you know, that overall is helping to, you know, keep the demand up. And the fact that we are, as you're well aware, you know, looking, you know, not just sort of some of the traditional test and measurement activities, but particularly around electrification, around virtual tests, around simulation, but that progressively as we get into sort of hardware in the loop and some of the software applications around that as well, as vehicles become more software-defined, that is providing us with more and more opportunities. So for us, overall, the opportunity set there remains very strong. It just comes down to, let's say, a bit of customer cautiousness at the moment around just, you know, they've got the demand, they've got the interest, it's just placing the orders, it's just taking a bit longer.

Yeah. Understood. And if you look at the margin profile of the group, if we assume that central costs stay where they are, if you were to get rid of the two other businesses, it looks like of your 180 basis points improvement in margin, it's about 65-ish, maybe 70 from scientific and dynamics, which given the fact you've got Spectra's business system and you've got pricing, maybe looks a little bit on the miserable side. The other margins are 11 to 20. Where do you guys need to work harder over the next 12 months or 24 months or even longer on the margin side to get where you need to get to for that 20%? It feels like dynamics has got a bit of catch-up and scientific support as well. Is that fair?

Yeah, hi Andy. I mean, I love the way you phrased your question. I think a couple of things to remember. If you look at the gross margin that dynamics experienced in the second half, a lot of the challenging margin happened last year. So when we think about the dynamics margin progression that we anticipated this year, a lot of that is second half loaded as the gross margin recovers and our cost control continues to kick in. And I think some people have probably got that slightly out, maybe have averaged it in their numbers. So when you look at the dynamics margin, it's actually done what we anticipated it to do in the first half. It's then masked a little bit in the first half by restructuring costs that we're now taking above the line. So that's a charge that's gone through Dynamics. As Andrew said, it's five million. The numbers are slightly confusing. It's five million euros, four million pounds. At the group level, there's also a million pounds at the central cost as well. So we have this five number twice. So in the first half, there's five million pounds of restructuring. in dynamics alone. So I think there's an element of timing. So the second half gross margin coming through, second half benefiting from that restructuring coming through, those would all benefit. And then I think the other thing that we need to be really focused on and are is making sure that our exit run rate of cost going into 24 is positioned correctly, which it will be.

And we'll continue to see the benefits from SBS And then the other big kicker on the margin improvement is the ERP, which, as I said, starts to go live over the course of the next 18 months and will help us in 2025.

So I don't think there's anything in this set of numbers that knocks us off course from the 20% guidance that we gave at the capital markets day.

In fact, in our mind, it's a proof point that it's all coming through.

Yeah, cool. Okay, and then just with regards to M&A, clearly tons of cash there. and maybe some more coming in if you were to get rid of other. But you've got the pipeline. How's the pipeline looking? Is it getting better in terms of quality and number? Are you guys having to think maybe slightly differently given you've got a lot of cash and you need to spend it? Or is it just kind of study as you go and if things happen, things happen?

Again, as we said earlier, we've got an active and healthy pipeline on M&A. I think it's fair to say that, you know, number of the assets that are under sort of P ownership, you know, the financial sponsors, that side of the market has been much slower over the last 12 months as a consequence of the cost of capital going up significantly. So a number of processes that they were looking to run have either been sort of delayed or stopped for the time being. So that sort of, you know, We continue to track assets, but the opportunity to potentially participate has reduced. However, we have put a lot of focus on continuing to nurture and cultivate other potential targets. And we are talking to trade buyers, as you saw with the likes of Parker and Microstrain, but also privately held assets as well. We continue to work on building a relationship and cultivating our position. So we have an active and healthy pipeline of opportunities um you know the question is as always it's just that you know it's not always in our ability to actually uh transact but uh you know we're certainly very you know we're participating strongly thank you pleasure thank you our next question comes from harry phillips from pill hunt harry your line is now open please go ahead

Good morning, everyone. Again, sorry, a couple of questions for myself. Really just carrying on that M&A theme from Andy, and this is likely to be the fifth year of net cash, and no one's obviously going to berate you for that, and I think I know the answer to the question in a way, but just how much sort of pressure ranks time at board meetings is taken up with that sort of balance between sort of prudence and and sort of efficiency around the balance sheet and and then just changing tact totally in in terms of the r d sort of gets up to eight percent and and in conjunction with the customer focus and and as a theme which is clearly being very successful just How much of that R&D, I'm not suggesting it's customer-funded, but how much of that growth in R&D is customer-aligned and therefore the risk profile on it may be more reduced than pure R&D might be?

Yeah, Harry, hey, it's Darren. Let me take the first one. I mean, in terms of time at the board, we spend a huge amount of time considering capital allocation and doing what's in the best interest for our shareholders, as you might expect. So we have a very clear capital allocation policy where we are generating cash through selling businesses where we don't think we're the right owner. We'll do that, and I think we've shown a good track record in doing that over the last couple of years.

That's one side of the equation. The other side of the equation is then sources and uses of that capital.

And I think we are looking at m&a opportunities whilst at the same time maintaining our discipline whilst at the same time continuing to you know complete the share buyback and i think you kind of look at all of those things in the round um sometimes it's timing um you know opportunities preserve themselves sometimes it's a question of of holding the nerve and being patient so we will continue to follow the capital allocation policy. We will continue to pay a progressive dividend and we'll continue to keep you updated as and when.

That's very kind.

Thank you. I'll take your second question, Harry. So in terms of your customer focus point, although more around the alignment of R&D, I'll answer the second part of your question first, which is, I mean, we typically spend around about 10% of our R&D budget on sort of, let's say, pure or advanced technology development or advanced research. So, you know, clearly we are always looking at, you know, how we develop our IP, where do we see potential sort of breakthrough technologies, where we can push the technology, you know, what are the other, you know, the next set of opportunities in sort of premium precision measurement that maybe, you know, our customer's are either asking for or, you know, we can anticipate, you know, through our own scientists and engineers. And then, you know, 60% plus of what we spend is then really on sort of new product development, new service development. And that's all very much aligned around the themes that we can talk around, around cleaner, healthier, more productive. So whether that's in sort of pharma, life sciences, but also it's semiconductors where, you know, we continue to see developments in drug development, discovery, plus, you know, the next generation knows semi, and, you know, how we're then developing our product tool, you know, products, our instruments, our measuring equipment to meet those future needs. And, you know, because we have a direct sales model and we talk to our customers regularly, we collaborate on current projects, you know, that allows us to anticipate their future needs and, you know, and intercept those into the future. But, you know, certainly in sort of pharma life sciences, you know, the whole reshoring is also helping to help them out. So, you know, I think we do have a high-touch model which allows us to get that level of customer focus, that centricity, that intimacy with our customers so we can really anticipate it. And I say we spend over 60% of our R&D budget overall on sort of, I would say, applied specific product development and service development to meet, you know, known customer requirements. So, you know, it's relatively low-risk infrastructure from an R&D perspective.

Brilliant. Thanks very much indeed.

No, thank you.

Thank you. Our next question comes from Bruno Janey from BNP Paribas Exxon. Bruno, your line is now open. Please go ahead.

Thank you for taking the question. I just wanted to come back on audit trends, and I was just wondering... I want to gather your thoughts around how much of the orders slow down do you think can be attributed to just supply chain effects and how much is demand that is underlying demand coming down. As to my mind, if lead times come down, it's not surprising that orders come down in lockstep. Of course, the difference is that this time these orders turn over at a quicker rate. So actually the impact of the P&L may be more limited than we see. Could you perhaps provide some color? or share just what your gut feel is in regards to the drivers of this order normalization. Is this mostly a supply chain dynamic, or is this actually more evenly damaged between underlying demand coming down and supply chains loosening?

Yeah, so Bruno, I think I get your question. I mean, fundamentally, it's really the supply chain dynamics that are, you know, I think that's driven the order shape. If you look at I mean, we were seeing phenomenal growth, 20, 30% plus growth in orders quarter on quarter compared to the prior period. And that was as a consequence of some sort of post-pandemic bounce still, going back to 21. But then, obviously, supply chains got tighter, and then the invasion of Ukraine, uncertainty. customers were wanting to make sure that they were getting their orders in early, at the same time that lead times were going out and supply chain was constrained. So we got quite a build between, our book to build grew, as you know, quite strongly during that period. Now, really from, I'd say, Q4 last year, we sort of started to see it as the supply chain's ease, some of the concerns have come off, maybe a bit of the macro. We've absolutely seen lead times coming down, and therefore if customers don't need to place their orders as early as they were, they're waiting you know, right at the end of this reporting period. So at some point that was going to normalize, which has happened. So for me, it's much more around sort of just normalization of that order profile as a consequence of supply chain. As I've said, you know, our sort of marketing leads, our A opportunities, B opportunities, the numbers sort of chasing remains very healthy and very strong. And, you know, You know, to me, it all points really to that sort of normalization of the supply chain ordering patterns.

Got it. And just around H2 over H1 as it relates to sales, I guess, given the position of the backlog today, order trend, how should we think about that H2, H1 split in sales? Contrary to historically, it's usually been 44, 56 in terms of the split. I think on consensus numbers... h2 accounts for 51 percent of sales um of course there's an fx headwind sequentially i guess if we adjust for fx around 53 percent um but just keen to get your thoughts around how we should think about h2 as it relates to its share of sales for the full year yeah i mean um bruno it will be more balanced than we've normally seen um we're not going to give out

the corresponding margin would be. But absolutely, we have de-risked this year by seeing extra performance in the first half than normal.

So you shouldn't expect the sales to be quite as second-half weighted as we would normally see.

Got it. But equally, I guess, on consensus numbers, the step-up sequentially is high single-digit, which would be a very H2 over H1 growth rate. which would be very low if we compare it to historical norms or averages. So I guess that speaks to point 9b risk, so I'll leave it there. But just on profitability, just to understand it correctly, the restructuring costs taken in H1 should we expect no further restructuring costs in H2? And just going back to the scientific margin in H1, I guess the operating leverage looks a little bit lighter than, say, Dynamics or once we account for the restructuring costs taken and also the other division. Is there anything that perhaps weighed down on the margin or the drop through in H1 that we should be aware of?

Yeah, so there may be bits and pieces of restructuring in the second half, Bruno, but nothing material. And again, if we do have anything, we'll take it above the line. I mean, in terms of the drop through, we continue to invest in our underlying R&D. We invest in our people and we're sort of set up to grow. Obviously, we've seen significant growth come through in the first half. We will maintain a very sharp eye on that thing in the second half as a proportion. We'll see a little bit more drop through. you can see that there's an improvement in the drop through of the second half compared to the first half. And I would draw everyone's attention to our range at 250 to 265 as a range for a reason. And as I said earlier, we're very confident that we will deliver on the margin expansion, deliver on the sales growth, and if you put that through then you end up near the top of the range. But there's also, as I said earlier, we are only in July, and therefore there's still a fair way to go. We'll give you another update when we do keep track.

Got it. Thank you for the call. I much appreciate it.

It's all right. Thanks, Greg.

Thank you. There are no further questions on the line, so I'll now hand back to Andrew for any closing comments.

All right. Well, thank you very much. Clearly, a lot of the questions today have been around sort of normalization of the market and just sort of our views on market outlook. Hopefully, we've been clear as to what's driving all of that. But so by way of ending, what I'd just like to say is we have got good momentum in the business. And I'm absolutely delighted to see the progress that we're making on executing our strategy for sustainable growth. Without a shadow of a doubt, the strong financial performance in the first half does really reflect continued very strong execution of our strategy and also the brilliant contribution of my colleagues across the group. And I think I also would like to say, I mean, our first half results are testament that in Spectra's dynamics and Spectra Scientific, we have two great premium precision measurement businesses that are both on attractive growth trajectories and they're more aligned than ever to markets with a strong secular trends and sustainability focus. As we talked about, our demand for our solutions is being amplified by new products. spectrums over the past three years, we are now a higher quality, more customer focused and resilient business. And looking forward, we're confident in our ability to outperform our target end markets as a consequence. As we do so, we also continue to drive operational excellence to reduce emissions, improve productivity and efficiency, all in line with our ambition to be a leading sustainable compound growth business. So thanks very much for listening and look forward to catching up with you again soon. Thank you very much.