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.