Spectris plc 2018 Half-Year Results Tuesday, 24 th July 2018 Transcript produced by Global Lingo London - 020 7870 7100 www.global-lingo.com
Tuesday, 24 th July 2018 Spectris plc 2018 Half-Year Results 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 outlook. 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 www.global-lingo.com 2
Tuesday, 24 th July 2018 Spectris plc 2018 Half-Year Results 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 of 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 on affordability and sustainability. www.global-lingo.com 3
Tuesday, 24 th July 2018 Spectris plc 2018 Half-Year Results 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 mont hs’ 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% on 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, www.global-lingo.com 4
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