Spectris plc

Well, good morning and welcome to our presentation of our results for the first half of 2024. With me is Derek Harding, our CFO. By way of starting and characterizing the first half of the year, I would say we've continued to have a strong strategic execution in the face of softer end markets. After three years of double-digit growth and against the backdrop of ongoing macroeconomic uncertainty, 2024 was always going to be a slower year for the group before returning to growth in 2025 and 26. During the first six months, we've experienced weaker overall demand, albeit conditions across our end markets continue to be mixed, with some parts growing strongly while others remain subdued. As we said last month, our first-half performance reflects a combination of soft underlying trading, which reduced our first-half sales and operating profit by around 50 million and 10 million pounds respectively, but also secondly, temporary delays relating to the implementation of our new ERP system, which went live across Melbourne Panhandle's global operation back in April. To be clear, we are very pleased with the new system and can already see the benefits that it's going to bring. However, this short-term disruption has meant that £22 million of sales and £15 million of operating profit has been re-phased to the second half. Now, while this is a higher number than we originally estimated back in June, we continue to expect to recover all of these sales in the second half. With no impact on the full year, it's very much a timing issue. Now notwithstanding the softer trading in the first half, the order book of 532 million pounds at the end of the period provides good visibility going into the second half, and we're very much encouraged by the signs that market conditions will improve as we go through the next six months, although clearly timing remains somewhat uncertain. Now in light of our first half performance, we are taking action to accelerate further self-help measures with a focus very much on operational efficiency and tight cost control. As such, excluding any incremental profit associated with the acquisitions of SIAPs and micrometrics, we expect to deliver adjusted operating profit for the full year in line with current market expectations. At the same time, we've been busy executing our strategy for sustainable growth and deploying capital to drive shareholder returns. With a number of significant milestones achieved in the first half, as we continue to build on the work we've done to transform the group since 2019. In April, we completed our portfolio rationalization program with the sale of Red Lion, and we've moved our leading gas analysis business, Servmex, become part of Spectra Scientific. Following the increase in R&D investment across the group in recent years, we have launched a significant number of exciting new products in over the last six months, and we've got more to come in the second half, very much supported by a strong pipeline. Then in the past few weeks, I was absolutely delighted to announce the acquisition of two great businesses that we've been tracking for some time. Both SIAPS and Micromeretics will further strengthen our leading positions in advanced materials analysis, and we very much look forward to working them to the group soon. Then finally, we are continuing to return capital to shareholders through the completion of our 150 million pound share buyback program. This strategic progress structurally increases our ability to deliver against our medium term financial targets. And as I look ahead, I am convinced as ever about the future growth potential of the group. Now, the progress that we've made would not have been possible without great people united behind a common purpose and values. I have to say there is something special about what we are creating in Spectrus, a culture that is really working for us, very much a great and engaging place to work. And having engaged colleagues really underpins our ability to drive our progress. So I was delighted with the results of our recent employee engagement survey where the scores increased for the third year in succession so i'd just like to take this opportunity to thank all of my colleagues who are watching online for really owning it and continuing to aim high i'd also like to take this opportunity to recognize and thank derek for being a fabulous ceo and business partner over the past five years and derek i look forward to continuing our close partnership in your new role leading our enlarged scientific division And I'm also very much looking forward to Angela Noon starting with us in September. Her breadth of experience will help further strengthen our executive team. And with that, I'll hand you over to Derek before I come back to round off the presentation.

Thanks, Andrew, and morning, everyone. I'll start today with a graphical view of the main P&L movements for the first half. So starting at the top with sales, I've removed 32.9 million pounds of the prior year sales associated with disposed businesses. This is primarily the second quarter sales from Red Lion, and that gives us a comparable organic base. FX has been a headwind of 21.5 million in the year, and on a like-for-like basis, the first half sales were 10% lower. We've seen a re-phasing of 22 million of sales to the second half, following the successful implementation of our ERP system in Malvern Panhandle School. Now, while the quantum is slightly higher than we originally estimated at the time of our June update, we continue to expect to recover all of these sales with no impact on the full year. Prior year acquisitions added 8.2 million of revenue in the first half, and that gives us a reported revenue of 589.7 million. I've then followed the same approach for the operating profit, removing 5.6 million for disposals and one and a half million for FX. Gross profit fell by 53.2 million year on year, primarily as a result of the lower revenue and therefore lower absorption of fixed costs. And in light of the reduced top-line activity, the group has been focused on the cost base, and we reduced overheads by 19.5 million. And we'll be taking action to accelerate our self-help initiatives in the second half. The adjusted operating profit for H1 was 61.1 million, a margin of 10.4%. This slide is included for completeness so that you can easily see the bridge between our adjusted operating profit and the statutory measures. I won't go through every line, but I draw your attention to the following points. There are no asset impairments to report or restructuring costs in the period. Transaction related costs were 7.4 million and we spent 22 million on our new ERP system. Amortization of acquisition related intangibles of 7.7 million brings us down to the statutory operating profit of 24 million. The disposal of Red Lion created a profit on disposal of 210.6 million pounds, bringing you to a 235.3 million pounds statutory profit before tax. So now moving on to the divisions. Against a strong comparative period, Spectra scientific sales were 12% lower on a like for like basis at 320 million pounds with adjusted operating profit of 33.4 million. While sales grew in electronics and semiconductor, this was offset by lower sales in other end markets, particularly pharmaceuticals and academia, and sales were lower across all regions. Orders were 10% lower on a light flight basis. The adjusted operating margin decreased to 10.4%, reflecting the negative drop through impact of the lower sales volumes, and the statutory operating profit was 16.4 million. As Andrew has already said, we were really pleased to announce the acquisitions of the two strategically complementary businesses, High Quality, High Growth, in SIAPS and MicroEmeretics. These acquisitions will significantly strengthen our leadership position and expand our offering to customers while delivering material synergies. And it's entirely consistent with our portfolio strategy to build higher quality, higher growth businesses. In Spectra's dynamics, sales were 5% lower on a like-for-like basis at 249.4 million. Slightly higher sales in both aerospace and defense and automotive were more than offset by lower sales to machine manufacturing, academia, and other markets. Order intake was in line with the comparative period on a like-for-like basis with double-digit growth in both aerospace and defense and automotive, offset by softer demand in machine manufacturing, academia, and other markets. The adjusted operating profit was 30.6 million and the adjusted operating margin was 12.3%. This lower margin reflects the drop through impact of the lower sales and some product mix effects partially offset by actions to manage the division's overhead costs. Statutory operating profit was 10.7 million. So moving on to cash, this slide shows how we've generated cash in the period and illustrates what we've then done with that cash. So I start by adding back 17.7 million of depreciation and amortization. This will give you an EBITDA of 78.8 million. Our working capital position continues to unwind, releasing 4.9 million of cash in the first half, and we spent 15.8 million on CapEx. And that'll give you the adjusted cash from operating activities of 67.9 million, which we divide into the adjusted operating profit to get to our cash conversion metric of 111%. We received 248.8 million of cash from the proceeds of disposals, primarily Redline, and in the first half, we paid the final dividend of 54.2, spent a further 46 million on share buybacks, and our cash tax was 26.8 million. We spent 22 million on the design and development of our Sat for HANA system, and then remaining items of 14 brings us to a net increase in cash for H1 of 153.7 million. And at the end of June, the group had a net cash balance of £292.5 million. So in April, we completed the first phase of the rollout of our new ERP system with a successful global implementation across Malvern Panhandle School. The system is working as expected. And it's really important to note that while £22 million of revenue has been delayed into the second half, Circa 200 million of revenue was successfully delivered by Malvern Pantelistical in H1. With such significant change, there are often disruptions, and the most significant for us relates to the cutover between the old and new system at our Almelo Supply Centre. The root causes of all these issues have been identified and are being addressed, and we expect our Almelo facility to be operating at a catch-up capacity in Q3. The Malvern facility is now operating at a higher capacity than before the go-live. The initial release of the system to the Dynamics Division will take place in Q3, and we have further implementation scheduled in 2025. And as I said previously, the SAS cost in H1 was 22 million. We've now taken the decision to expand the system across the remainder of the group with further implementations expected at PMS and ServerMX in 2026. And the recently announced acquisitions of MicroEmeretics and SciApps will also be added to the system in due course. We continue to leverage SBS to drive operational excellence and deliver tangible cost savings. And we anticipate another 10 million in savings in 2024. We've continued to develop and promote our Go for Gold programme with seven bronze sites pursuing silver and the additional five sites targeting bronze by the end of this year, with the aim to have all of our operational sites certified as bronze by the end of 2025. And we can already see benefits from the new ERP at Malvern Panalytical and will continue to drive SBS. However, given the conditions we've encountered in the first half, they've been softer than expected, we will be taking additional self-help initiatives in the second half, and we currently anticipate a one-off charge of around 10 to 15 million to be expensed in H2. So finally, to help with your modelling, I've set out on this slide some broad areas for technical guidance. As an overarching comment though, excluding any incremental profit associated with the new acquisitions, we expect to deliver adjusted operating profit for the full year in line with current market expectations. Working capital is expected to continue to reduce, should be in the range of our, in the middle of my guided range of 11 to 15%. And the acquisitions are expected to complete by the end of Q3. Net debt is expected to be around 1.5 times EBITDA at the end of the year, and interest costs are going to be between 5% to 6%. CapEx in the second half should be about $25 million. SAS costs in the second half will be around $30 million. We think the tax rate to be around 23%. The remaining $100 million of the share buyback will recommence and will be completed in the next 12 months. I've also put here our assumed exchange rates for the second half at $127 and 118 Euro, and the table shows the impact of each cent change in that assumption. And with that, thank you, and I'll hand you back to Andrew.

Thank you, Derek. So as I said earlier, conditions across our end markets remain somewhat mixed. So let me just take you through some of our markets in turn. In tech-led industrials, slightly higher sales in aerospace and defense were more than offset by machine manufacturing. Order intake remains very strong for A&D, particularly commercial space, and our acquisition of Dytran is proving to be particularly successful. In civil aerospace, we have seen good demand in physical test, and in defense, we equally see a lot of opportunities. On the other hand, machine manufacturing remains subdued, although we do expect the market to pick up later in the year and into 2025, as the interest rate environment eases and customer confidence returns. In pharmaceutical and life sciences, sales were significantly lower, which reflects continued muted conditions. However, and encouragingly, we continuously strong demand and order intake for aseptic manufacturing, particularly linked to the production of new drugs, plus the construction of new facilities linked to onshoring. However, demand for instruments to support R&D and drug development do remain weak, especially in small molecule, although our leading indicators are now showing signs of improvement. In semiconductors and electronics, we saw solid sales growth against a tough comp, and we expect demand to continue to grow into the second half and into 2025, driven by strong secular trends. And in automotive, sales were slightly ahead with strong order intake. We are seeing a lot of demand for our leading virtual test and simulation offerings with a number of large orders secured already during the first half of the year. Moving on to materials, in primary, we saw a reduction in sales and orders during the first half, but with a robust performance from building materials, which was more than offset by lower demand in mining, and that has to be recognized. It's against another strong comparator from 2023. Sales in advanced materials were down. That was notably linked to the slowdown in EV sales that we talked about in June. And lastly, academia, where, as expected, sales and order intake were significantly lower following a very strong comparator from last year, which very much benefited from Chinese government incentives. Now, the Chinese government did announce a similar package of incentives earlier in the first half of 2024, so we still remain hopeful that this will feed through into increased demand in the second half. The outlook over the medium term, however, remains positive, with our market supported by a number of structural growth and sustainability trends that we feel are very much here to stay. And with the strength of and continued investment in our business, as well as our position as a premium provider, we are well positioned to be able to outperform and grow market share. We also continue to invest for growth. And following the increase in R&D investment across the group in recent years, 2024 is going to be a record year for new product launches. And rather than me take you through each product in turn, we've got a video here that highlights the advantage that our new products will make. So if you just kindly run the video.