Spectris plc 2018 Half-Year Results Tuesday, 24 th July 2018 - - PDF document

Spectris plc 2018 Half-Year Results

Tuesday, 24th July 2018

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Spectris plc 2018 Half-Year Results Tuesday, 24th July 2018 www.global-lingo.com 2

Opening Remarks

John O’Higgins Chief Executive, Spectris plc

Good morning ladies and gentlemen. Welcome to the Spectris 2018 Half-Year Results. My name is John O’Higgins, I am Chief Executive. I am joined this morning by Clive Watson, our Finance Director. I would like to welcome you all here in the room present as well as those who are joining on the webcast. If I could just ask you here in the room to make sure your phones are on silent. We will go through the presentation in the normal way and then we will have time for Q&A at the end of that presentation. Picture Highlights On our opening slide here, a couple of pictures of highlights from the half year. From left to right our Malvern Panalytical business, which is a big business in the Materials Analysis space. On the hardware side, this is a picture of their new Zetasizer which you will know over the years has been a core product for that business with applications in pharmaceutical, in life sciences as well as in nanomaterials and new material development. Second picture over highlighting an acquisition which we are announcing today, a company called VI-grade in the vehicle simulation area. A very exciting development which I will come back and talk a little more about in the presentation later on. From Servomex you see one of their new products, which is their multi-gas system. Here the example highlighted being around flue gas monitoring which is obviously key for a number of industrial processes as well as combustion

• efficiency. Finally, a little example from our Red Lion business in Industrial Controls, where

increasingly Red Lion along with OMEGA are playing a more important role in the whole capture of data for industrial analytics applications, large data and large digitisation of manufacturing processes, which I will also talk to you about in the course of the presentation. Agenda The usual agenda. I will go through the highlights. Clive will give you an update on the numbers and the financial performance. Then I will be back to talk to about some of the developments in the business, strategic progress in the business followed by a summary and

• utlook.

2018 Highlights Sales In terms of highlights for the half year we had good sales growth, 5% organic like-for-like increase in sales with a further net 1% contribution from acquisitions which was actually 4% from the acquisitions minus 3% coming from the divestiture of the Microscan business last

• year. Overall a very strong top line.

Strategic Acquisitions Very good progress on the strategic front. We have added a number of key acquisitions which build out our software, our services and our testing capability. The Concept Life Sciences business which we talked about at the full-year results. Revolutionary Engineering was a small bolt-on which we have added to our Millbrook business here in the UK, which gives them a US-based testing facility and testing capability, a very interesting addition to

• that. I just mentioned the VI-grade acquisition which we are announcing this morning which

Spectris plc 2018 Half-Year Results Tuesday, 24th July 2018 www.global-lingo.com 3 we signed last week, which is a leading Europe-based but global provider of vehicle simulation for the automotive industry. Then finally the joint venture with Macquarie Capital which we announced at the time of the full-year but is now closed. It is now established and has been up and running for about a month, which positions us very nicely to take advantage of some

• f the growing opportunities in the broader industrial digital analytics space.

Project Uplift Our Project Uplift continues to do well and is on track to deliver the benefits that we forecasted at the beginning of the year. We are also making very good progress on the shared service project validation and the design study is progressing very well. Profit and Dividend We have announced profit for the half year of £70.5m which is a 15% like-for-like increase on a year ago. We continue to have a very strong balance sheet and dividend per share announced this morning up 8% for the half year.

Financial Performance

Clive Watson Group Finance Director, Spectris plc

Financial Performance – Adjusted Measures Good morning ladies and gentlemen. I will skip over the top half of the P&L on slide 5 because I will be covering that in a lot more detail as I run through the slide deck. Like-for-like sales growth of 5% was a continuation of what we saw at the time of the trading update in May. At that time we talked about 6% which was actually 5.5% rounded up. This time it is 5.2% so they are pretty close to each other. Adjusted operating profit before Uplift costs was up 9% and operating margins up 0.4pp. Project Uplift costs were £2m lower this year compared to last year, notwithstanding the inclusion of the £2m of shared service centre discovery costs. This is where we are going through the feasibility study and pretty far advanced. I will talk a bit more about that later. After Uplift costs operating profit was £70.5m, up 15% or equivalent to an 80bps margin expansion. The difference between operating profit and PBT is interest expense, which at £3.1m is pretty close to last year. The difference is purely driven by average net debt being a bit higher on the back of the acquisition principally of Concept Life Sciences. Effective tax rate for the first half was 18.7%, 2.3pp lower than last year. That is really a little bit distorted by a prior year adjustment which reads in the first-half and because of the weighting profits to the second half is overly represented. However, it also reflects the US tax reduction which contributed about 1.5pp. Guidance for the full year still remains at 20% effective tax rate so you will see about a 21% tax rate in the second-half. EPS up 9% which benefited from increased profitability and a little bit from the share buyback, which was about a tenth of a penny, as well as the reduction in the effective tax

• rate. Dividends per share up 8% in line with our stated policy of basing the dividend increase
• n affordability and sustainability.

Spectris plc 2018 Half-Year Results Tuesday, 24th July 2018 www.global-lingo.com 4 Operating cash flow, the last figure on here, was 69%, impacted by a ramp-up of CAPEX, especially in Millbrook, our growth CAPEX. CAPEX is now ahead of depreciation by some £24m. Previously we were always having CAPEX at about the same level as depreciation. Without that operating cash flow conversion would have been 103%. It is still pretty much in line with what we would expect to see for the Group. Reported Sales Moving on to slide 6, the sales figures, here you see the overall 2.5% £18m growth. To arrive at a comparable baseline figure we have reduced our 2017 reported sales by six months’ worth of sales from Microscan, which we sold in October last year, and one month’s worth of sales from EMS, which was deconsolidated following the creation of that joint venture with Macquarie at the end of May. This reduces the starting point for 2017 to £685m. Acquisitions contributed £31m with almost two-thirds of that coming from Concept Life Sciences, acquired at the end of January, and the balance from three small bolt-on acquisitions made in 2017, Setpoint, Leyland and Omnicom, and Revolutionary Engineering which was acquired in April 2018. We are expecting a second-half contribution from acquisitions of £40-50m and I will come back to that in the wrap-up. Foreign exchange, sterling weakened a little more against the euro but strengthened by more than 9% against the US dollar, which may surprise you. Together these account for around 70% of the translation loss. That leaves us with like-for-like growth of £35m or 5%. Pricing at £5m is just under 1% and we have a volume mix increase of £31m, with growth evenly spread across all three of our main regions and in most of our end markets, led by automotive and pharmaceutical. Adjusted Operating Profit Turning now to slide 7, adjusted operating profits, a similar sort of walk starting with last year’s figures, then adjusting for disposals. You can see on a reported basis operating profit up £1.4m but once adjusted for acquisitions, disposals and foreign exchange up £6.6m or 9%

• n a like-for-like basis.

I will walk you through the various components. Disposals net of acquisition, all of this adjustment relates to the effects of re-baselining the 2017 H1 arising from the disposals of Microscan and EMS. Net contribution from acquisitions for this half was zero, mainly due to a slow start by Concept Life Sciences compounded by the loss of business from one major customer who took a commercial decision to slash their R&D budget. Notwithstanding the lack of any contribution in the first-half we are still holding our guidance for the full-year at around £8-9m of operating profit from our acquisitions. Foreign exchange, as with sales the bulk of it comes from the US dollar and the euro. Also as with sales, if rates stay as they are today we would expect to see very little in the second half, maybe £0.5-1.5m. Like-for-like we have broken that £6.6m down into gross margin increase and overheads

• increase. Gross margin percent drop-through is around two-thirds, 66% so accretive, 0.5pp

higher than last year with pricing and procurement savings more than offsetting the material,

Spectris plc 2018 Half-Year Results Tuesday, 24th July 2018 www.global-lingo.com 5 labour and overhead increase of £6.1m. The volume mix drop-through of 60% is also marginally accretive to our gross margin. Hence an accretion in our gross margin. Like-for-like net overheads increased by £17m or 5.6% in line with the previous guidance given in relation to execution of our strategy whilst we continue to invest in the future. The bulk of this £17m is employee-related and can be split roughly 50/50 inflation and additional heads, including upskilling for delivery of our strategy. The £6.9m of other includes marketing, consulting costs and depreciation as the primary drivers here. As you will hear from John a little bit later, we are really ramping up delivery on our strategy and to this end have incurred incremental costs on implementation of a number of initiatives including preparatory work for the merger of HBM and Brüel & Kjær, rolling out of our lean programme, developing our industrial internet of things offering. Some of you may have seen

• ur website Spectris Advance. Strengthening of our global key account management

functions across the Group and upgrading e-commerce capability again throughout the Group, led by OMEGA. Project Uplift costs are here at £6.7m, £2m lower, as mentioned before, than last year. We spent £4.7m on the original phase of Uplift, which you will recall was to do with IT, procurement and footprint consolidation, and £2m on the discovery phase for the shared service centre. That £4.7m is generating recurring benefits of £3.2m so we are well on track to what we said we were going to deliver for this year. A net benefit from the original phase

• f about £3m with shared service centre costs costing somewhere in the region of £3-4m.

If you think about Uplift as really being about reducing complexity, increasing efficiency and a strategic enabler that is what all of these activities were involved with. If last year 2017 was about preparatory work for all of those, 2018 is really delivery, moving and ramping up the momentum created last year from Project Uplift. Adjusted operating profit after Uplift costs at £70.5m, up 15% or 80bps in terms of margin delivery. Cash Flow Cash flow, slide 8, net debt has increased by £181m in the first six months from £51m at the end of last year to £232m. EBIT is £70.5m so you can see a slight increase of depreciation, up to £16.3m. Point-in-time working capital we saw our usual seasonal movements here, seasonal inflow from collecting receivables from large sales last year and an inventory build to support the second-half growth. With respect to working capital management it is worth noting that our 12-months average working capital continues to improve. At this point in time, at the end of June, it is 11.4% of sales, as a recent low, 1.2pp below last June’s 12.6% and 0.4pp lower than the 11.8% we closed last year with. This is better than our expected through-cycle average which we had previously guided as 12-13% but we think something around this level is sustainable. CAPEX, as I mentioned before, came in at £40m, £24m higher than depreciation. Most of this is explained by increased CAPEX in Test and Measurement where both HBM and Millbrook are investing in CAPEX at a rate faster than their depreciation rate. In the case of HBM it was to do with infrastructure build and in the case of Millbrook it was growth CAPEX. OMEGA also falls into this category. You may remember we talked about an ERP remediation plan and

Spectris plc 2018 Half-Year Results Tuesday, 24th July 2018 www.global-lingo.com 6 active upgrade of their e-commerce capability. They are spending a little bit more than depreciation. Acquisition spend of £175m principally relates to the acquisition of CLS. The creation of the joint venture for our EMS business with Macquarie Capital was completed on 31st May and post-tax cash proceeds of £44m were received. The share buyback programme is well underway. It was launched on 6th March. It is a 15-month programme buying back up to £100m worth of shares. Through the first-half 960,000 shares have been bought back with average daily dealings around 6.97% of daily volume. Dividend tax interest pretty much self-explanatory at £69m. The net debt of £232m at the end of June is predominantly denominated in euros hence the £3.7m of foreign exchange loss and at that close represents about 0.9x trailing 12-months EBITDA. Sales by Destination Moving on to slide number 9, sales by destination. Nothing really much to say here other than to note that the 5% growth was evenly spread across our three regions. However within two of those regions, Europe and Asia, there were quite some differences. In the case of Europe you can see that Germany is down compared to the average at 1% and UK well-

• ahead. The main reason for Germany’s low growth rate is last year’s tough comp.

Underlying trading conditions are good when Germany grew by 11% last year. The UK benefited from strong double-digit growth in its largest end market which is automotive but also saw growth in environmental noise monitoring, energy & utilities and in academic. There’s a similar story in Asia with Japan suffering from a tough comp whilst we are seeing very good growth in China in pharma, automotive, electronics, semi & telecoms, energy and utilities. Summary Segment Performance Summarising I am moving on to slide 10 and the segment performance. John will be providing the detailed commentary so I will confine my comments to illustrate a couple of

• points. Starting on the right-hand side where you can see I have ringed three numbers is the

Group’s sales growth of 5%, operating profit pre-Uplift growing by 9% and we expanded our

• perating margins by 40bps. This is respectable but the upturn could have been so much

better if the 25%+ growth in operating profit and 170bps in operating margin expansion recorded by Materials Analysis, In-line Instrumentation and Industrial Controls had not been dampened somewhat by Test and Measurement recording a 30% drop in operating profit and a 3.6pp drop in margins on 6% top line growth. That is what this illustrates. It is not all bad news actually because if you look at the composition within here Test and Measurement is the one which is really investing heavily in its strategic initiatives. There is a lot of preparatory work required for its merger. They have got to consolidate some

• f their platforms. They need to start hiring people. They are starting to hire software
• developers. They are pressing ahead with their e-marketing and workshop initiatives. There

is a lot of front-end loading of costs in the first-half for Test and Measurement. We also saw a phenomenon which we have not seen for a while which is that the two smallest companies within this segment were growing the fastest. They also happen to carry the

Spectris plc 2018 Half-Year Results Tuesday, 24th July 2018 www.global-lingo.com 7 lowest margins whereas the two largest ones, HBM and S&V were somewhat subdued in their

• sales. That is really down to delays. We expect a big second-half pick-up. It somewhat

belies the numbers you see here, their underlying performance, which is all about delivery of their strategy and seeing the smaller companies starting to actually flex their muscles and starting to deliver some things. Front-end loading of costs will disappear. Some of the costs that we have invested in accelerating development in anticipation of the merger will continue into the second half but this is all included in the 6% guidance we gave for the Group as a

• whole. It just happens to be more heavily weighted in Test and Measurement.

The other one I would highlight here is In-line Instrumentation where you see sales down 3% but operating margins up 25%. You may recall that this time last year In-line Instrumentation sales were up 11% and operating profit down 21%. This year’s 3% sales decline is mainly down to a tough comp. We were able to grow our operating profit notwithstanding a lower top line due to a non-repeat of some of the one-offs we experienced last year. As well as some self-help measures, we were restructuring our NDCT business and that was moving from California down to Dayton and we are starting to realise the full-year benefits of that restructuring-type activity. All in all a pretty good performance by the Group across the piece. 2018 FY Guidance Turning to slide 11, full-year guidance. This is a repeat of what I actually shared with you at the time of the prelims. Nothing has really changed from the guidance given at that time so I will restrict my comments to just three areas. H1:H2 phasing, at the prelims I indicated that H1:H2 sales phasing would be 45:55 and operating profit would be 30-35% in the first half and 65-70% in the second half. Whilst we are still expecting sales to be 45:55 the operating profit is going to be more heavily weighted to the second half, along the 30:70 split as

• pposed to anything else.

Acquisitions, at the time of the prelims we said would contribute £60-70m in sales for the full year and £7-8m in operating profit. We increased that guidance at the time of the acquisition

• f Revolutionary Engineering by £10m and £1m respectively to the figures that you see here.

The acquisition of VI-grade will not move the needle much so we are going to keep the guidance pretty much as it is, as we do the same with VI-grade as we have done with other acquisitions, which is invest in it. FX sensitivity is pretty much the same as it was. I think for the second half if rates stay as they are right now you will see maybe £15m worth of a continued hit to the top line and, as I mentioned before, £0.5-1.5m in terms of operating profit in the second-half. Finally, with respect to planned CAPEX, the last bullet on this page, as previously noted there is upwards pressure on this £80m. The more so following the acquisitions of Revolutionary Engineering and VI-grade which again is a positive because these will be growth investments. That £80m will probably be exceeded and will probably be closer to £90m.

Spectris plc 2018 Half-Year Results Tuesday, 24th July 2018 www.global-lingo.com 8

Business Update and Strategic Progress

John O’Higgins Chief Executive, Spectris plc

Sales by End-User Market Maybe just to move straight on where Clive left off, the final breakdown of sales there on slide 13 is the view by end market. The two standout numbers here are the two first ones, Pharma & Fine Chemicals and Automotive, both up double-digit on a like-for-like basis versus some pretty good numbers last year as well. You see here we continued to make very good progress in those two core strategic end markets. If you also take into account that the acquisitions that we have been making this year as well as last year have largely been in the Materials Analysis and Test and Measurement segments as well so there is further inorganic growth coming on top of the like-for-like numbers that you see here. Elsewhere probably not much to say. Metals & Mining continues to do well. You see on top of 8% growth last year a further 9% so a nice, steady return there that we are seeing in that

• sector. Energy up nicely as well, again on the back of some good numbers last year. We are

seeing recovery on the upstream side. Academic, which had been quite a turbulent market for us over the last couple of years, you see has stabilised, not at a particularly high level but at least has stabilised at roughly flat year-on-year. Materials Analysis Moving on I will just go quickly and hit the highlights here by segment. Clive has covered most of the numbers in terms of the P&L by segment but Materials Analysis the highlights here clearly very good growth in the key end markets. Pharma is up and that has obviously been driven by life sciences, the regulation and the role that we play also on some of the quality control areas of the pharma industry. Metals & Mining are also doing very well and Semiconductor & Electronics continuing to do well although we have seen some lumpiness in the electronics side which is not unusual. We have seen that over the years. In fact, the semiconductor side there is continuing to do very well. In terms of the acquisitions here, Concept Life Sciences is probably a little bit behind where we would have liked it to have been by the half-year. I would say two underlying causes. First of all, as we mentioned at the time of the trading update in May, they did lose a large contract from one of their big customers which was no fault of their own. A customer who had some financial difficulty and cut back on a lot of external spending which unfortunately impacted Concept Life Sciences. At the same time the ramp-up in the drug discovery services

• f Concept Life Sciences is going well. They have got a very good pipeline but we have not

seen those pipelines converting yet into contracts. However, we are very hopeful and

• ptimistic that we will start to see that come through in the second half and thereafter.

Test and Measurement Test and Measurement again a solid top line, sales up 6% on a like-for-like basis. Then also some acquisitions helping them there, less the disposal of the EMS joint venture which came

• ut of this segment. Automotive continues to be very strong. Our Millbrook business is

performing very well, very good growth there on the back of the additional capacity, as you know, that we have been putting in over the past couple of years there.

Spectris plc 2018 Half-Year Results Tuesday, 24th July 2018 www.global-lingo.com 9 There is some phasing. Clive gave a very good exposé of the mismatch here between maybe some of the costs and the strategic growth initiative costs coming in ahead of the revenue

• curve. Otherwise I would say the end markets here, the strategic positioning of the business

is in very good shape. We have also taken the decision to merge the two largest businesses in this segment, similar to what we did with Malvern Panalytical a year and a half ago. Brüel & Kjær Sound & Vibration and HBM will merge activities in the course of next year. Then, as Clive mentioned, the Macquarie joint venture is now open for business. In-line Instrumentation In-line Instrumentation, a solid performance even though some of the lumpiness coming through in the top line there in the first half with sales off at 3% on a like-for-like basis. However, here the comps working very much in our favour on the bottom line so a good recovery in gross margins and good recovery in operating profit. In terms of end markets Pulp & Paper continues to be a challenging area but still some good growth there as we diversify into tissue, packaging and pulp. Also, as we saw on the first slide, growth in the Energy market even though we had some tough comparators here on the wind business. We had some very big orders and sales in the first-half of 2017 but despite that growth in Energy. Industrial Controls Industrial Controls, not a whole lot to say here. The top line is for the most part dropping because of the Microscan disposal. Behind that actually the core business, Red Lion Controls and OMEGA, continue to show solid growth, very good growth in Asia, particularly in China. OMEGA continues to make good performance in improving the operations there and also investing in their digital marketing campaigns. I will talk in a minute to some of the

• pportunities we are seeing here and indeed across the In-line Instrumentation around

industrial connectivity. Strategy To talk to strategy very briefly, you will recognise by now our strategy wheel and the key elements of our strategy, focusing on solutions by which we mean broadening our hardware to add software, to add services to our capability. Focusing on some of the key markets like pharma, like automotive that I talked to. Expanding the business globally continues to be a big driver of top-line growth. Then on the operational side we have good progress from Uplift. We also have made very good progress in the half year on expanding our lean capability and our lean initiatives across all of the organisation. We have also established a Lean Group at the centre to help and to drive some of those initiatives across the Group. Also, some of the activities in Uplift which were temporary in nature and being assisted by outside advisors we have taken in-house. For example, we have now established a Purchasing Group at the centre whose role it is as well to drive that purchasing consolidation across all of the operating companies. M&A Finally, deploying capital for M&A. We continue to do that. We closed the half year, as Clive mentioned, with an under-leveraged balance sheet, under 1x EBITDA to debt, or debt to

• EBITDA. Therefore, plenty of room to continue to make further acquisitions.

Spectris plc 2018 Half-Year Results Tuesday, 24th July 2018 www.global-lingo.com 10 In terms of some of the highlights there, we had three acquisitions, as I will talk about, merging the activities of Brüel & Kjær and HBM. We continue to drive through those merger activities and more general activities, collaboration across the Group. I will talk to a couple of the examples there. Finally, on our Industrial Internet of Things, there is a lot of activity there around our In-line Instrumentation and Industrial Controls businesses. Therefore, in terms of M&A, as I mentioned at the outset, we have made two acquisitions here on the Test and Measurement side. These include VI-grade, which we just announced last week and signed last week. It will close within the next few weeks. It is a very interesting business which provides full-scale vehicle simulation for the automotive industry. Essentially, it creates a physical simulator which is driven by a hardware virtual design of the vehicle, along with a digitised version of a track or route or terrain that the vehicle is to be tested on. It allows customers to model the product, it allows customers to drive over a known physical track and it allows them obviously then to look at their design, speed up the development time and reduce the cost of that process as well as the risk of that process. This will be a new operating company within the Test and Measurement segment, but obviously with very strong connections into some of the existing software and simulation capability that we have within Brüel & Kjær Sound & Vibration as well as within HBM. Secondly, we have the acquisition of Revolutionary Engineering, which we acquired in April. This is located in the Detroit area and will be and is already the North American platform for

• Millbrook. The interesting thing is that Revolutionary not only brings services and supplies

test services to the industry in the United States, but they have also, over their lifetime, developed hardware as well as software solutions, which they use for that testing. Therefore, they are in a position to sell their test hardware as well as their test software, which will be very interesting for Millbrook as a whole, to be able to integrate that hardware and software into their test labs. Moving on to pharma solutions, the Concept Life Sciences acquisition, which we made in January, we are moving very well there in terms of integrating that within the Malvern Panalytical business as well. We have established cross-technical synergy, cross- technical advisory, so that we are able to work across that segment on customer problems and on technical solutions and technical offerings. We have joint key account management being put in place across the entire platform and a very strong focus on the pharmaceutical market, helping us to leverage on those relationships across all two businesses, or all three businesses as well if you include the Particle Measuring Systems business. Particle Measuring Systems is itself doing very well and it is expanding its technical consulting services. They sell hardware and software but they are increasingly working for customers to consult on solutions to quality control issues within pharmaceutical manufacturing which, as you know, is heavily driven by the regulatory compliance framework. The merger of Brüel & Kjær Sound & Vibration HBM, which we announced in the half-year, will begin next year. We have put in place the structure at the leadership level. We have one management team today who are working and putting together the plan for the merger, right down through the organisation and the various activities of the business. This brings together all of the hardware and all of the software, which obviously will have opportunities in terms of

• ptimising design, eliminating duplication of product or design applications, but also offering a

Spectris plc 2018 Half-Year Results Tuesday, 24th July 2018 www.global-lingo.com 11 much bigger portfolio to customers, many of whom are common across the two organisations. We have a name for the new company, which will be HBK, which takes a little bit out of both, and actually in terms of size, this business will be somewhere between 25% and 30% of Group turnover, which on top of the merger of Malvern Panalytical, which is somewhere between 20% and 25% of Group turnover, means that actually two operating companies will form 50% of the Group’s turnover, barring any further acquisitions or divestitures. Finally, our Industrial Internet of Things, the whole digitisation and large data analytics within the industrial market, which is really starting to take off and really starting to move very quickly; we think we are very well positioned in that area and have made that a particular focus of our strategy. We have some very interesting products, hardware, which we can bring to bear in terms of the sensing capability of OMEGA, as well as the connectivity and data translation capability of the Red Lion portfolio, which brings data from the sensor, if you will, up into the Cloud, up into the platform, where it gets analysed. We then have, within

• ur In-line Instrumentation business, a couple of segments or a couple of operating

companies that have particular capability around data analytics as well as the joint venture which we have just established with Macquarie Capital, which will focus on environmental applications, bringing from Macquarie Capital their knowhow as well as their very large installed base of assets and the capability and the Cloud-based solution that the EMS business has established over the years. There is therefore a very exciting opportunity we think on the services and on the front end of the I-Squared OT opportunity. Also, as Clive mentioned, we have invested in the half-year to launch Spectris Advance as a brand for our digital solutions and we have been investing in R&D there to develop some and refine some of our capability and some of our solutions, particularly in the wind business, but we intend to pursue several other verticals as well in due course. Summary In summary and looking to the second half of the year, we have had a very good performance, really tied to the execution of our strategic plan, along with strong end-market and regional demand in our markets. Project Uplift is on track, as we had forecast, for the net benefit for the year. Shared service progress is also on track, with details to follow in the second half. In terms of the strategic progress, good acquisitions are adding to our software services and testing capability. Finally, our expectations for the year remain unchanged. With that, I think we have come to the end of the formal presentation and we will be happy to take any questions which you might have. If you would not mind just to introduce yourself and your institution before you ask the question, please.

Q&A

Mark Davies Jones (Stifel): First, Clive, just a clarification: that 30:70 profit split, just remind me, are you looking at those numbers before or after the Uplift costs? Clive Watson: Actually both. Project Uplift is going to be roughly a net zero for the full year. Mark Davies Jones: And then on Test and Measurement, you are talking about mismatch between those costs and benefits for the full year? Would you expect profitability to be broadly similar to last year? Can you make up that ground or should we expect a headwind?

Spectris plc 2018 Half-Year Results Tuesday, 24th July 2018 www.global-lingo.com 12 Clive Watson: No, we are not going to make up the whole of the miss in the first half. I think margins should be at least as good as we saw in the second half of last year, so we will make a good fist of it, but I do not think we will make it all the way there. Mark Davies Jones: Can you break down those costs any more? You talk a lot of it being pre-merger costs rather than acceleration, depreciation on the Millbrook spend or whatever it might be. Can you give us an absolute number for what you are spending on the merger? Clive Watson: On the merger itself, it is probably going to be similar in costs. We know roughly what we spent on the merger of Malvern and Panalytical, which was about £4.5m, so I think it will be something of that order and that is what we look as though we are ramping up towards. Mark Davies Jones: Great. One slightly broader question on auto. Obviously, volume-wise, you are trading very strongly at the moment and you are certainly very bullish about it, but the broader industry is obviously facing its challenges and there have been some indications

• f R&D budgets coming under pressure from some of the big OEMs. Are you seeing that in

any of the business or is it all seeing strong demand growth? John O’Higgins: You see in our numbers that we are seeing very strong demand growth. We are obviously focused on the R&D end of the market and so are independent of production and location decisions. However, driving the R&D, we have some very big spending going into new drivetrain, into electric, and we are adding capability and capacity, both within the hardware and software, as well as the test services area for that. We are also seeing very strong growth in all manner of software within the vehicles, so autonomous but also autonomous-related activity, which is software driven. Again, we are investing and gearing up for that. Also, there is no let-up in the regulatory control around emissions and around safety, which all needs to be tested as well from an R&D perspective. I would say therefore from our point of view it all continues to look quite solid. Jonathan Hurn (Deutsche Bank): I have just two questions please, firstly coming back to Project Uplift. Looking at that shared service project, it seems to be running at a little bit behind schedule. If we look at Project Uplift going forward, when do you think is the first clean year we get for Spectris with no costs? Is it going to be 2020 or is it going to be pushed out more to 2021? Clive Watson: We have not finalised the shared service centre study yet, but I think it will be more likely 2021. However, I think the bulk of it will have been done through 2019. Jonathan Hurn: Okay. The second question, just coming back to end markets, obviously semicon is a big end market for you guys. If you look at what some of the other people in the industry are saying, they expect probably a weaker second half in terms of spending in

• that. What is your outlook for that market for the second half please?

John O’Higgins: It has surprised us up to now, Jonathan, in that we had already flagged I think about this time last year that we thought numbers were getting ahead of themselves. In terms of what we report there in that 10%, only a portion of that is semi-conductor, so semi-conductor is not 10% of Group turnover. We have telecoms and we have electronics in there as well, so I think the semi part of that is probably only 3% or 4%. Clive Watson: Yes.

Spectris plc 2018 Half-Year Results Tuesday, 24th July 2018 www.global-lingo.com 13 John O’Higgins: The other point I would make on that is that it is also not all hardware. We do also provide services to those customers as well, so again there is a bit of resilience. Andrew Douglas (Jefferies International Limited): I have two questions please, if I can,

• ne for John. On the metals and mining, you experienced good growth on the back of good
• growth. Is that still aftermarket and OE? Sorry, is that aftermarket and is OE coming

through yet? John O’Higgins: It is growth in OE which is driving the top line or the growth that you see. Services there have been pretty good actually all the way through the downturn. We are seeing some nice steady recovery in projects, nothing major yet but just nice steady growth. Andrew Douglas: Okay. Then one for Clive: just on tariffs and the challenges we may face going forward. Can you just give us a rough update as to where you kind of see – I think it is largely in HBM if I am not mistaken. Clive Watson: It is largely in HBM but there are other companies which are being affected. We have taken a first cut at it – to the extent you can on these things – and it looks like it is about a $3-$5m exposure for the Group right now. But within that is the capability for us to actually re-supply and ship supply to more favourable…in fact, one of our operating companies is already talking to an existing incumbent supplier to shift supply from China to either Taiwan or India. So, there are plans afoot to try and mitigate to the extent we can. Andrew Douglas: So, that $3-$5m is a gross number. Clive Watson: It is a gross number, yes. Andrew Douglas: And hopefully you can get it – price rises… Clive Watson: As things stand right now, and we have yet to assess the retaliatory measures from the… Andrew Douglas: Yes, sure. Yes. Thank you. Jack O’Brien (Goldman Sachs): I just want to follow up on the end markets and geographic outlook. You have mentioned that Germany has slowed against the tough comp, so too Japan. I guess those would be two of the most cyclically-advanced economies, so does that make you nervous when you look at China growing double-digits? Have you seen anything there yet or does it still remain very strong? Clive Watson: Underlying trading conditions in China are very strong and the shift towards some of the advanced areas that they are looking at, in particular on pharmaceutical, advanced research type activities, is looking very positive for China in the longer run. Japan has had a history of being a little bit lumpier than China. China has been fairly consistent. Jack O’Brien: Perhaps just on one of the markets, you mentioned pulp and paper as being still a bit challenging. Can you just remind me… John O’Higgins: It is the paper part of pulp and paper which is challenging and has been for 30 years. Jack O’Brien: Okay. Given the structural... Fine. John O’Higgins: Yes, exactly.

Spectris plc 2018 Half-Year Results Tuesday, 24th July 2018 www.global-lingo.com 14 Jack O’Brien: I just want to clarify on Project Uplift. You talked about a £3m net benefit for this year. When I am thinking about the EBIT bridge in the model, obviously we had quite a lot of cost in 2017. Can we assume that that is one-off and therefore add it back into our net benefit? Clive Watson: Yes. Yes. Jack O’Brien: Okay. Great. Just one final thing. Obviously through time as a business you have made lots of acquisitions. It has been part of the strategy. As you look at your portfolio today, are there any obvious disposal candidates? You have talked about academic research being a laggard for some time or other various businesses that do well at various points in the

• cycle. Are there opportunities there?

John O’Higgins: There are always opportunities, Jack. We keep the portfolio under constant surveillance or examination for selling opportunities. We obviously would only sell with a view to maximising value, maximising shareholder value, so selling at the right time, at the right point in the cycle is absolutely key. However, certainly as we continue to drive the strategy and focus more around these platform businesses and these industries which they serve, there may well be in the future, I would say, things which will no longer be strategic, but nothing that we are actively involved in. Andrew Caldwell (Barclays): I have two questions. On the auto, have you seen any impact from the new emissions regulations in September? We have heard a lot of auto makers cannot get stuff tested in time. Have you seen a big push-through of that which could then drop off as they get everything tested? John O’Higgins: We have not seen the drop-off yet. We have certainly seen the demand and, as we mentioned going through the presentation, Millbrook’s business is running at very high growth levels and certainly that demand is – that particular emissions testing, real-world emissions testing, is part of the demand, and as far as I know we are totally out of capacity at Millbrook in that area. Andrew Caldwell: Is the risk then as we move past those deadlines into October, November, as things are then tested, that that then sees a very steep deceleration? John O’Higgins: No, not particularly. Certainly, some of the OEs today are delaying and not actually going to meet the deadline, so they are having to delay delivery, but that becomes part of the ongoing test cycle and part of the underlying test environment now that is in

• place. Therefore, there will continue to be, going forward, demand for those real-world

testing cycles. Andrew Caldwell: Secondly, in the Test and Measurement margin, we talked about the mix

• effect. Is there a service versus hardware element to that mix effect as well – the smaller,

fast-growing companies are more service heavy? Clive Watson: Yes. Both of those companies, Millbrook and ESG, are very service heavy. Andrew Caldwell: Is there a forward-looking element of that that as you move towards more of a solutions business, margins structurally trend down? Clive Watson: There are actually two different dynamics there. In the case of ESG, they just needed the volume. They are a high fixed cost business, so if they can get the volume

Spectris plc 2018 Half-Year Results Tuesday, 24th July 2018 www.global-lingo.com 15 through ESG then it just drops straight through to the bottom line. They were sub-scale and now they are starting to ramp up as the price of oil stays high. In the case of Millbrook, you have a depreciation charge ahead of revenue generation, so it is depressing at the EBIT level but accretive at the EBITDA level. Therefore, you will see that starting to ramp up and again you will start to see margins expand throughout that. However, whilst we are going through this early phase, it is dilutive because both of those businesses carry margins which are substantially below those of the two major businesses. Andrew Caldwell: Thank you. John O’Higgins: Thank you. If there are no further questions, I would like to thank you all for your attendance today and we will see you next time. Thank you. Bye-bye. Clive Watson: Thank you. [END OF TRANSCRIPT]