Spectris plc

Well, good morning and hello everyone and thank you very much for joining us today, be that in the room or on the webcast. As we present our results for 2024 and also our outlook for 2025. I'm very pleased today to be joined by Angela Noon, who became our CFO on the 1st September and who has made a very quick impression, a very positive impact in the business. So when I stood here a year ago, I have to say I expected 2024 to be another year of progress for Spectrus. We had delivered three years of double digit growth, and despite all the normalization through 2023, which was very much in line with the market, we expected demand to pick up in the second half of last year. Markets though in 2024 remain subdued. And this prolonged weakness that we've seen is largely unprecedented in its alignment across multiple end markets, as customers right across the board held back investment in CapEx and in R&D in what was a challenging macroeconomic environment, where an elevated cost of capital really bore down on our customers' CapEx and R&D expenditures. In the end, our like-for-like order intake was 3% lower, with demand, though, improving back to flat in the second half versus the prior year. While it's too early to say that we are seeing a sustained recovery, overall demand has stabilized, and like-for-like order growth of 6% in the final quarter is really encouraging. With a book-to-bill of nearly one, the order book finished the year broadly in line with the opening position, representing four to five months of cover. Sales for the full year were down 7% on a light-for-light basis, reflecting the weakness across end markets, and this impacted our financial performance, particularly in the first half. However, following the actions that we took through 2024, we finished the year strongly. We delivered our second half broadly in line with the second half of 2023, with orders in line and sales down 4%, and that's against quite a tough comp. We also delivered another good cash performance with cash conversion of 88%. And we have maintained our strong track record on the dividend, this being the 35th year of successive growth. Now I'd just like to thank all of my Spectra's colleagues for their hard work and delivering such a strong finish to the year with our full year profit slightly ahead of our revised guidance. Now, in a tougher market, we focused on strong strategic execution, and the decisions that we took last year will very much shape the future of Spectrus, not just in 2025, but well beyond. Collectively, the big decisions that we took accelerate the delivery of our strategy, and they position us strongly to deliver sustainable, profitable growth and material shareholder value creation. That's firstly through the decisive action that we've taken on cost. We've got in place an accelerated value enhancement plan that we call our Profit Improvement Program, and that leverages the strategic operational actions that we have taken to drive profitability, and it positions us to further capitalize as markets recover. Secondly, on M&A, as you know, we acquired three high-quality businesses in 2024, and that significantly strengthens our two divisions, and the acquisitions are strongly aligned with our ambition to make both Spectra Scientific and Spectra Dynamics global leaders in their fields. And since completing these acquisitions, we are even more excited about the progress that we can make on both cost and on revenue synergies. Thirdly, we've continued to prioritize R&D. We've invested through the downturn. As we highlighted at our previous half year results, 2024 was a record year for new product launches with our vitality index rising from 22 to 29%. And we also have a strong pipeline with some really exciting digital innovations, which will not only compound sales, but also increase recurring revenue over time. Then fourthly, on ERP, we took a big step forward this year, and we can already see how transformative the new system will be. Importantly, we were able to work through the short-term disruption that impacted the first half. Our teams did an excellent job, and we took on some useful learnings that served us well with the second implementation last October. And as a reminder, the new ERP system will deliver 150 basis points of margin improvement, and as such is an important building block towards our 20% plus adjusted operating margins for the group. And finally, the Spectras business system, again generated tangible cost savings, delivering over 10 million pounds in 2024, with at least the same amount expected for 2025. And I'm really pleased to say we are making great progress on our gold for gold program with 10 sites now at bronze and one at silver at the end of 24. And we have the aim to get all our operational sites at bronze by the end of this year. So as you can see, we have a strong grip on areas that are very much under our control, improving productivity and efficiency as we drive towards our margin goal. In 2024, we also further enhanced our credentials as a leading sustainable business. Employee engagement improved again, and we also continue to make strong progress towards our net zero goals, with a 22% reduction in our scope one and two emissions last year. Overall, while I have to say 2024 was a test, we have emerged strongly on the other side, and I'm very encouraged by the response of my colleagues and the strength of our culture. The significant strategic and operational progress we have made positions us even more strongly in 2025 and beyond. In 2024, we continued the transformation journey that we've been on for the past five years. In 2018, Spectrus was very much a disparate collection of businesses. Now, with the sale of Redline, concluding our portfolio rationalization, we have simplified and refocused the group. and through the divestment of eight businesses at attractive valuations, generating £1.3 billion in proceeds. And this programme has underpinned return to shareholders. Since 2019, we have returned over £1 billion, including £600 million through share buybacks alone. It's also allowed us to reinvest in our future, both in R&D to drive organic growth and in high-quality M&A, We invested 600 million pounds in R&D and over 1.1 billion pounds in acquisitions over the same period. So, as you can see, we have and continue to take a very disciplined and also a balanced approach to capital allocation. And last year, we took the decision to deploy our balance sheet on three highly synergistic and highly accretive businesses, they being Micromeretics, SciApps, and Piazzochrist. All three businesses have been at the top of our M&A target list for some time, and that's because we've always had high conviction on both the strategic fit and the synergistic opportunities. In scientific, the combination of micrometrics and SIAPs, along with Melbourne Pan-Littoral, creates the world's leading material characterisation business for advanced materials analysis, both in the lab and in the field. And in Dynamics, Piazzocris builds on the successful acquisitions of Dytran and Microstrain over the past two years and creates the leading premium pressure and vibration sensor offering in the market for the most advanced applications. The incremental contribution from these high growth, high margin acquisitions really underpins a significant increase in profit, but also earnings in 2025 and 2026. And we've always said that we would temporarily go beyond our target leverage range of between one to two times for the right deals. And we're a little above the top end of the range at the end of 2024. But our highly cash generative model plus the benefits from our profit improvement program give us a clear pathway to reducing leverage to back within the range this year. So moving on to the outlook. We entered 2025 in a strong position. After a year of strong strategic execution, I am even more confident about our business. However, we will, of course, remain cautious on the macro environment until there is more certainty and evidence of a sustained recovery. But what is more certain in 2025, though, is the significant uplift in earnings. And underpinning our confidence is our profit improvement programme. This is significant and will deliver circa 50 million pounds of benefits, of which 30 million is expected this year in 2025, with an additional 20 million in 2026. And Angela will cover more about this later on in the presentation. Our commitment to R&D is supporting our organic growth, and ERP and SBS are driving operational excellence as we focus on reducing overheads and in driving efficiency. And in combination with the benefits of the Profit Improvement Programme, we're on track to deliver strong progress with margins of at least 20% by 2027. Following the high quality acquisitions that we have made, we really do have great businesses with leading market positions. Two world class divisions providing premium offerings in attractive niches with market leading technologies and really strong IP. And having got to know Micromeretic, Syapps and Piezo Crispetta since the acquisition, it is clearer than ever that the combination is compelling and the synergies are very real. Additionally, we are significantly better positioned today to benefit strongly from market recovery and deliver on the operating leverage opportunity as sales improve. So, while it's still early in the year, we are comfortable with the current market expectations for 2025. And looking forward to 2026, it's hard for me to not to feel even more confident in our prospects. And this confidence is rooted in our focused portfolio of high quality premium precision measurement businesses, along with a market that's rich with opportunity and with a clear value enhancement plan in place. Consequently, we have a fantastic opportunity to deliver outsized value creation at Spectrus. And we have the people to do it. The resilience and determination that our teams showed in 2024 really demonstrates the depth of our healthy, high-performance culture. And we're well-placed, therefore, to deliver on our ambitions. And with that, I'll hand you over to Angela.

Thank you, Andrew, and good morning, colleagues, ladies and gentlemen. I'm delighted to be here for my first results presentation at Spectris. As you know, I joined last September, shortly before we announced our third acquisition in 2024. Since then, I've spent time learning about our businesses, meeting customers to understand their challenges, and getting to know our people. I've been impressed by what I've seen, especially the strength of technology and depth of talent within the group. Spectris is a great business with huge potential, and I believe we are now at an important point in our strategy. With three new acquisitions, I'm fully energised about the future. So let's jump into the numbers. I'd like to start with the key highlights of our profit performance. Orders for the full year were 3% lower on a like-for-like basis. As you heard from Andrew, demand in the second half was stable. We ended the year with robust order growth in the fourth quarter. Our book-to-bill ratio was just under one. Sales were down 7% on a like-for-like basis, given prolonged softness across a number of our end markets. And you can see the impact of this on both profit and margin, where our direct costs are sensitive to volume changes. In order to mitigate this impact, we worked hard to reduce overheads, and I'd like to touch on that a little bit later. Adjusted operating profit was £2.6 million with operating margin of 15.6%. Moving on to cash, adjusted cash flow of £177.6 million resulted in cash conversion of 88%, which is fully in line with our framework. On return on gross capital employed, it was 11.6% for the year, mainly as a result of assets from our acquisitions and, of course, the reduced profit. Net debt at the end of the year was £549 million, with leverage of 2.3 times on a covenant basis. Staying with debt, one of my first responsibilities was to secure long-term financing to fund the acquisitions. We achieved this through a $400 million US private placement at favourable rates and at the right time, and I'm pleased to say the issuance was heavily oversubscribed and on investment-grade terms. To help you, this next table provides a bridge between adjusted and statutory operating profit and also PBT. In 2024, we incurred £18.3 million of restructuring costs in support of our profit improvement programme. Additionally, our M&A activity resulted in net transaction-related costs and fair value adjustments of $16.2 million. Software implementation costs were $45 million that relate primarily to our SAP 4 HANA project and Salesforce, which are seen as key enablers in our road to 20% operating margin. Further down the table, the other significant item I'd like to mention is the 210 million gain on the disposal of Red Lion that reflects the consideration received of 281 million pounds net of tax. Net finance costs of 2.8 million pounds compares with finance income last year. As a result, statutory profit before tax was 302.7 million pounds. This next slide shows the main P&L movements during the year, including the impact of FX and M&A. You can clearly see the drop through impact on operating profit from lower volume of almost 70 million pounds, together with higher production costs of 23.5 million pounds. You can also see that we were able to partially mitigate the impact of lower sales by restructuring in both divisions during the second half, reducing overheads by £43 million. Now turning to cash and net debt. We finished with a slightly higher net outflow in working capital, including higher receivables and inventories, which reflects the momentum that we saw in the last quarter. Higher capital expenditure was a result of investment in our new PMS facility in Colorado and our new strain gauge facility in Porto. As a result, adjusted cash flow was £178 million. As previously mentioned, the restructuring costs incurred for our various initiatives resulted in a cash outflow of £8 million. Tax payments were £45 million. The larger bar is the cash outflow for our three acquisitions, which include transaction-related costs of £34 million and the proceeds from the disposal of Red Lion of £226 million is net of capital gains tax of 48 million pounds. The foreign exchange translation of 26 million pounds mainly reflects the group's new debt facilities, which are US dollar and Euro denominated. Sterling has of course weakened against both currencies since the facilities were put in place. Taking all of these movements together, net debt at the end of the year was 549 million pounds. Let me now move to our divisional performance, and I'd like to start with Spectris Scientific. Orders for the year were 2% lower on a like for like basis. Book to bill for the scientific division was marginally below one. Again, scientific had a much more positive second half where orders were actually up 6%. On the bottom right, I've shown the quarterly order growth for 2024 that highlights the momentum in the second half, especially in the last quarter. Moving to sales, after a strong year in 2023, when like-for-like sales grew 13%, sales in 2024 were 6% lower at £776.7 million. Scientific experience decreases across all end markets and regions, in particular academia and Asia. Adjusted operating margin decreased to 17.7%, which was particularly hard hit in H1 due to the lower sales volumes. Looking now at Spectris Dynamics, after a strong performance in 2023, order intake in Spectris Dynamics was 4% lower on a like-for-like basis. The book-to-bill ratio in the division was one. Staying with orders, we saw double-digit growth in machine manufacturing and good growth in aerospace and defence, which was more than offset by lower demand in automotive and other end markets. Again, on the bottom right, you can see the order growth trajectory in 2024 by quarter, where Q3 was particularly impacted by softness in the automotive sector. Demand recovered, however, in quarter four, with modest growth as we close the year. In respect to sales, after a good year in 2023 where sales grew 6%, like for like sales were 7%, lower at 501.7 million. Finally, adjusted operating margin for the division was 14.4%. I'd like to talk about my four key priorities for the year ahead. which are primarily focused on value creation, efficiency and deleverage. Firstly, delivering the benefits of our Profit Improvement Programme. As you know, this identifies clear actions to drive margin expansion, including the delivery of substantial cost synergies, the new ERP system and restructuring in both divisions. Second is the successful integration of our acquisitions. I am really satisfied with the progress we've made so far and this is a topic that's very much on my personal radar. I have overseen the integration of several businesses during my career and I know only too well how critical it is to have a firm grip of the integration process. Third is ERP, the implementation of SAP for HANA was indeed complex, but I'm pleased to say that the new system is working well. In 2025, we will focus on the delivery of the financial benefits as well as harnessing the opportunities that come with greater efficiency, transparency and control. Finally, working capital optimisation is key for both deleveraging and for operation excellence throughout the group. We are targeting a £20 million improvement in 2025, especially in inventory. Our new ERP system will play an important role enhancing both collections and billing with a focus of reducing debtor days. I'd like to get into more detail on the Profit Improvement Programme now, and also share with you the building blocks to 20% operating margin. As we said in October, we expect to deliver 50 million pounds of benefits over the next two years from three main areas. First, savings derived from our focus on operational excellence, in particular from our new ERP system, which is expected to improve margins by 150 basis points. Second, significant cost synergies from integrating the three acquisitions. And third, restructuring and cost reduction savings across the entire group, as a result of action taken in the second half of 2024. As Andrew said, £30 million of savings will be made in 2025 and the remaining £20 million to come in 26. I expect to see £10 million of savings in the first half of 2025 and then building to deliver £20 million in the second half. Now, what does all this mean for our margin journey? We've announced 20% plus targets in 2022. And as you can see here, we made great strides in 2023, reaching 18.1% margin. This was then followed by the reduction we saw last year of 250 basis points as a result of the operational leverage impact from lower sales. So let me start with that lower base. The bridge to 20% plus comes from the three elements of our profit improvement programme that I've already explained. In addition, we will drive further margin expansion from operational leverage and organic growth as markets do recover, growth for our new acquisitions and business plans, importantly, continued savings from the Spectris business system. As we have highlighted several times, our operational leverage means we bounce back very quickly as the volume returns. Now turning to capital allocation. Andrew has talked about our balanced and disciplined approach to capital allocation. Having reviewed the framework, I believe this is the right approach for the group. After the significant year for M&A and a sustained period of shareholder returns through share buybacks in 2025, our capital allocation focus will be on investing in the business and the ordinary dividend. We expect CapEx to be in the region of 40 million pounds as we complete the move to our new PMS building. We will continue to allocate capital to innovation. On M&A, we will concentrate our efforts on integration and rebuilding our pipeline. And then finally, while buybacks remain a core part of our policy, we have decided not to proceed with the final 50 million pound tranche of the 150 million buyback programme, which was announced in December 2023, alongside the sale of Red Lion. Moving on to leverage, where our aim is to bring it in within the target range of one to two times achieved through a combination of what I've just described, plus the following clearly unexpected recovery in EBITDA. Second comes significant reduction in working capital. And you can see at the bottom of this slide, the outflow in working capital between 2021 and 2024, which includes the years of COVID and the subsequent supply chain disruption. This chart highlights a real opportunity to improve our cash position. As I've already said, we will also drive cash through the tight management of our major programmes. Investment in ERP peaked in 2024, so cash costs associated with this are expected to reduce. In addition, we expect tax payments and capex to return to more normal levels. To conclude, while it's still an early time in the year, we are encouraged by the momentum from the fourth quarter. In today's economic environment, building resilience is key. In that regard, we remain vigilant and we'll focus on those things we can control, namely delivering our profit improvement programme, driving it, integrating the acquisitions, realising the full potential and benefits of our new ERP, continuous improvement in working capital. With that, thank you very much, and I will hand back to Andrew.

Thank you, Angela. With the launch of the Strategy for Sustainable Growth, we took the decision to focus Spectrus on great businesses in two focus divisions to provide each with the attention and resources that they require to scale and be global leaders in their fields. Both divisions benefit from the strengths of the group's cost of capital, the group's balance sheet, our ability to execute and integrate M&A, the deployment of SBS, and also from common systems and capability. We remain committed to deliver at least 6% to 7% through cycle growth by 2027. Also, we're committed to delivery of our 20% plus operating margin target and mid-teens return on gross capital employed in the same time horizon. And as I said earlier, our confidence is based very much on the increased strength and quality of both divisions. So, let me start with scientific, which, as you know, is focused on long-term, high-growth end markets in life sciences, material sciences, semiconductors and academia, with our exposure to clean tech also having increased following the addition of micromeretics. We are strongly positioned in high value, critical to quality areas where precision measurement, domain expertise and analytics are highly valued by our customers throughout their workflow and where our customers won't and can't compromise. Our businesses are leaders in their field and are seen as being the benchmark in the markets which they operate. and the addition of micrometrics and SIAPs, both of which are being fully integrated, as you know, into mobile analytical, creates the leading material characterization business for advanced materials analysis in the world. So let's hear from them now in this short video to really drive home what we are creating.