Spectris Limited (SXS) Earnings Call Transcript & Summary

Hello, and welcome to the Spectris trading update call. [Operator Instructions] Just to remind you, this conference is being recorded. Today, I am pleased to present Andrew Heath, Chief Executive; and Derek Harding, Chief Financial Officer. Please begin your meeting.

Thank you very much, and good morning, and welcome, everyone, to the Spectris trading update. I really do hope that you're all keeping safe and well at the current time. I'm joined by Derek Harding, our CFO. We will discuss our performance for the first 4 months of this year, January through April, but also provide an update on the actions that we are taking in relation to COVID-19. As you’d expect, with trading impacted, the outlook uncertain and our employees and customers facing a challenging environment, it is more important than ever that we take a balanced, socially responsible approach to managing our business, very much in line with our culture and values. So I’d just like to start by first expressing my thanks and gratitude to our people for their absolute commitment and selflessness during this challenging time and to really say how proud I am with everyone. Their dedication, flexibility in adapting to the new environment and innovating in how we engage with our customers has really been inspiring. It will not only help us through this period but will also ensure that we are a better company in the longer term. Of course, their safety and well-being is our utmost priority. We worked quickly to enable working-from-home arrangements for roles that we could do so and also to protect those employees that we were still having -- working at our sites. As such, we implemented revised working practices, heightened our safety standards such as split shifts, increase of PPE provision and enhanced cleaning and disinfection processes, amongst many other things. But as well as their physical health, we've also enhanced our mental health support, focused on staying connected with our people that are currently working remotely away from our offices. I think, as many of you know, this is -- this week is Mental Health Awareness Week in the U.K., and the central theme is about kindness and looking out for each other. And I'm really pleased to see our people are living up by this standard. So let's move on to customers. Clearly, supporting our customers but also our suppliers is, of course, of high importance, too. We've had to adapt to how we engage with them because many of them are also working remotely or have tight restrictions on accessing their facilities. We've notably enhanced our virtual training and webinars, our online demonstrations and also online product introductions. And we also accelerated self-installation and remote support tools to keep our customers operational as we're having to work remotely from them. We're really proud of our efforts around the group, where we are providing essential equipment to keep our customers operational, but also and particularly, where we are being used directly in the fight against COVID-19. I'll just give you a few examples, if I may. Firstly, Servomex makes oxygen sensors that are used in critical care ventilators to monitor the amount of oxygen administered to a patient as well as the purity of the gas. To meet the higher demand from our customers who make ventilators, the Servomex team have been working really hard and have found an innovative solution to adapt, not only how they make the sensors but also rapidly increase the number that we produce in a week. And we're ramping up demand from what is typically 50 sensors a week to over 400. In Omega, we've shifted our product launch sequence so that we could help customers through the pandemic by supplying new contactless infrared thermometers for health screening, and we launched that within just 2 weeks. And we've also launched a thermal imaging camera for temperature taking. That was introduced in May. And in addition to that, Omega have also provided a number of pressure sensors for several ventilator development efforts in North America. In HBK, they've also been busy providing test equipment to support the development of many of the new ventilator designs that have been in progress over the past few weeks. And many of our businesses where we have 3D printers have been using those machines to print face masks for use in hospitals and health centers and very much to help the fight on the frontline against COVID-19. So now just turning to our performance. As expected, the global macroeconomic instrument has significantly worsened over the past weeks. In the first quarter, like-for-like sales declined 9% with Asia, and in particular China, being down most notably. Sales in China, though, did recover strongly in April. However, activity in Europe and North America slowed sharply, which resulted in a 12% like-for-like sales decline for the group in the first 4 months of the year. But while the rebound in China is a positive sign and we're pleased to see it as China returns from lockdown, we are being cautious here because it may just reflect pent-up demand. And there's also clearly the prospect of a potential slower export demand that will impact the China market. So it's really too early to say if this is what we might see in Europe and North America as lockdowns ease in those geographies, too. So now turning to our businesses. Malvern Panalytical like-for-like sales fell 23%, which reflected a tough comparison against the prior year but also its high exposure in Asia, and in particular, restrictions impacting our customers' ability to actually completing some installations, and therefore, our ability to recognize revenue. This has also led to order delays in certain geographies as well as customers that have just been unable to receive goods. Malvern Panalytical also had a notable portion of its sales impacted in academia and into research. And there again, we've seen demand falling as universities and research institutes have closed. Regarding HBK, their performance has been much more resilient, placing a strong performance in the first quarter in North America and good growth in machine manufacturing. Sales, however, did start to slow in April, and we certainly expect the second quarter to be weaker. Omega, being a shorter-cycle business and 70% exposed to North America, saw a 10% fall in like-for-like sales over the first 4 months. The Industrial Solutions division had a similar decline to Omega but with variable performance across its operating companies, very much depending on which end market and which geography they were exposed to. But it's fair to say that automotive and the oil and gas-exposed companies did fare the worse over the past few months. Just moving on to costs and our financial position. Given the high level of uncertainty, we continue to take actions to actively manage costs down and conserve cash whilst protecting as many jobs as we possibly can. Our business continuity plans have been enacted to protect the core strength of the business as well as preparing for the recovery. And it's a matter of getting the balance right there. Our facilities have continued to remain operational, very much at or near full capacity. And the disruption to our supply chains has been very limited. Now we're making every effort to protect jobs and to best retain our people's experience and capabilities, their talents to ensure that we are well positioned for the recovery and for the longer term. So consequently, we are prioritizing short-term temporary cost savings over structural, long-term cost improvement at the moment to support our financial performance. And compared to the same 4 months -- same 4-month period last year, our like-for-like overheads finished 9% lower at the end of April. And going back to the 6th of April, we informed you that we were taking several measures to reduce costs, including a headcount freeze, suspension of the payable for this year, reduction in discretionary spending, CapEx, but also executive director pay and Board fees. Since then, we have also asked our people to take a reduction in pay or work a shorter week or indeed be furloughed. And we really do appreciate that this places a burden on our people. And so we ask the leadership to shoulder the biggest impact of all of that. But we do very much appreciate their cooperation and selflessness, as I said earlier, and support, that we have been given by all our employees across the world. And consistent with our objective, we also want to maintain a robust balance sheet and the liquidity position through this whole pandemic, but also protect R&D and certain CapEx investment, wherever possible, to support our long-term growth. And as of the end of April, we had net cash of GBP 59.9 million, which represents an increase from the GBP 33.5 million we had at the year-end. And therefore, our cash balance currently stands at 24 -- about GBP 244.2 million with gross borrowings of GBP 184.3 million. But we do have GBP 827.5 million of committed banking facilities and also access to a number of other facilities if we need to draw on those. The group continues to be highly cash-generative. We achieved a cash conversion of 150% for the period. And as you'd expect, there's currently an even greater focus on liquidity and capital management right across the group at the current time as well as continuing to deliver good operating cash generation during the whole year. I've also made it clear in today's update that we'll continue to review our ability to reinstate the dividend, the final dividend for FY '19, if and when the time is right. Just with regards to guidance. Due to the market uncertainty, we withdrew our forward financial guidance for 2020 on the 6th of April, as you know. As visibility continues to remain low, there is no change in this position. We have modeled various market scenarios. And given the highly cash-generative nature of the group, we believe we are in a good position to weather the various potential outcomes that we model. So in summary, we're very much taking a balanced approach to managing the business through this period whilst we continue to ensure we deliver as strong a financial performance as possible in these really unprecedented times. You can hopefully see in today's statement that we are ensuring we address the primary needs of all our stakeholders; protecting and supporting our people; working more closely and flexibly with customers and suppliers, whilst also considering how we can support communities in which we operate. And this is very much as the means that we see to deliver long-term sustainable value to our shareholders in the long run. And by taking these steps to build stronger stakeholder relationships, I think we will absolutely be better positioned to respond to the new business environment that emerges post COVID and help further drive the long-term profitable growth of Spectris. So with that, we will open up to questions. But as I'm sure you'll appreciate, we -- as I said, we've withdrawn guidance, and our visibility is quite limited. So there may well be areas of questioning on the outlook that we are just not able to address given this uncertainty, which I trust you understand. So with that, we're happy to start the questions.

[Operator Instructions] Our first question comes from the line of Andy Wilson at JPMorgan.

I've got just a couple. I suspect 4 questions. Under the -- you mentioned with revenue recognition kind of the number of areas where it's been difficult effectively to get either installations built or customer extensions built. Does that mean we can expect some kind of bounce-back from those or bounce-back at least from an income statement perspective from those sales coming through as we move through the year?

Andy here. Thanks for your questions. So certainly, we should see some bounce-back. Clearly, that is sort of just pent-up demand. Some of our customers just aren't in their facilities or haven't been in their facilities. And therefore, where we do need to particularly go and attend and install, we've not been able to do that. There are a number of sort of that are actually sitting in backlog that we will see getting booked once things start to unlock. But I think the flip side, as I've said, is that we've also seen, as a consequence of that, customers therefore are also delaying placing orders as well, which is sort of having an impact on our sort of shorter-cycle business, sort of the usual sort of book and turn within 1-month, 2-month type period.

Yes. No, that makes sense. And maybe actually 2 for Derek, if that's okay. Firstly, just thinking about the drop-through as we kind of go through the year. Obviously, in the statement, there's an awful lot of actions being taken in terms of managing the short-term cost base and prioritizing that. And so just interested in any comments you can help us with on that. And I guess, similarly, cash generation in the first 4 months have been fantastic, frankly. How should we sort of think about that as we go through the year? And any sort of help you can give us on the moving parts there?

Okay. Thanks, Andy. I guess this already kind of falls a little bit into the guidance category. So I think the drop-through, I would think about in terms of your revenue assumptions. And we're not giving revenue assumptions because, for the reasons Andrew talked about, it's difficult to look forward. But I think clearly, the more revenue falls, the harder it is for us to protect the profit line, given the -- some cost nature of the business. But I would say that as a rough guide, I mean, if you're in the 10% revenue down range, then we think that we could protect flow-through in the sort of low 40%. So for every GBP 100 of revenue that falls up to around 10%, low 40% of that drops through to profit. I think once you get up to a higher reduction in revenue, so if you're in the 20% revenue reduction range for the year, then obviously, that drop-through is going to be a little higher probably mid- to high 40s once you get to the 20% range. So depending on where you think the top line is going to end, will have some influence as what the profit drop-through is. And then, of course, that has a knock-on effect then with cash. So obviously, the more profit we make, then we are cash-generative. So the more absolute cash we would make both those in proportion to each other. Other nontrading-type cash items, we guided at the year-end of CapEx of around GBP 70 million. It's highly unlikely that we'll get near that now. Choices that we're making and projects that are being deferred and decisions we're making probably will take at least GBP 20 million off that number. So I think GBP 50 million CapEx is a good working assumption as we sit here at the moment. And then working capital for the full year. The first quarter, the first few months of the year for us are always positive working capital inflow months anyway as we have such a strong fourth quarter. You’d see the working capital flow in in the beginning part of the year. Again, it will depend a little bit on what one assumes the fourth quarter is going to look like in terms of whether working capital flows in or flows out when you get to the end of this year. As a planning assumption, I think we have a small element of cash coming in from working capital for this year, but not a lot. So hopefully, that gives you some sense of how the -- how we're seeing the group move, albeit it totally really depends on what you think the top line is going to do. And while we have an internal view, we don't have anywhere near enough visibility to be able to guide to a number at this point.

Our next question comes from the line of Andrew Douglas at Jefferies.

Three questions, please, if I may. Just looking at Omega, kind of minus 10%. I guess, not really a huge surprise. Should we still be thinking of this business as kind of -- [ I know it's not ] a proxy for kind of U.S. IP. Or are there anything else that's kind of going on within Omega that we need to be aware about from a trading perspective? Kind of last year had one or two wrinkles. Are they no longer impacting the business? Just thinking about maybe how North America comes out of this downturn. Secondly, with regards to, I guess, the structural changes that may or may not happen in your end markets as we're going kind of through the other side. It looks like you're responding very well to how things need to be done in the COVID environment. Do you think you guys are positioned well, I guess, for the future in terms of your opportunity to take market share, et cetera? Or is this just going to revert back to the norm? And then just quickly on the exec changes, just wondering if there's anything you can give us there. It looks like the MD from Malvern's off somewhere else. And just kind of any thoughts on -- is there overall any specific remit that your new colleague will be having?

Thanks, Andy. So we'll take them in turn. And remind me if I have forgotten anything.

Yes. Sure.

So I mean, on Omega, we get down 10%. I mean, North American industrial production is a good proxy for Omega's trading. It correlates pretty well to that given that 70% of Omega's market is in North America. I think in terms of the issues -- the internal issues last year, the supply chain issue was fixed in the sort of -- by sort of Q3 last year where we outsourced the electronics product line. Those issues were sorted in sort of Q3. And the sort of e-commerce development, we have basically put all the fixes that -- and updates that we wanted to post the launch of that primarily. I mean there's always continued development that goes on. But in terms of sort of getting the e-commerce platform to the level of performance, that's much all done and dusted. And I think the positive thing is that what we've seen with sales coming off in the first 4 months is actually on -- the proportion of online sales has increased, which sort of, I guess, points to that as being stickier. And that investment has clearly helped us at the current time. So that's positive. But clearly, there's -- putting that e-commerce investment in was an investment, there were costs associated with it clearly from increasing sort of depreciation but also in the IT costs. So the top line decline is unhelpful from an overall scale perspective. So our focus in Omega is very much now, just how do we continue to push our proposition to strengthen our channels to market, grow our online sales and take share on that business, which sort of leads into sort of your second question about we are prioritizing short-term temporary measures over longer-term structural measures. That's clearly on the basis that we can hold those temporary measures for a period of time long enough before we start to see -- or for enough time such that we start to see the costs coming through, which will then retain our capability, our skills, talent and protect as many jobs as possible. That's our priorities. The beauty of -- for us going into the situation, we're go in in a strong position with a strong balance sheet, good liquidity. There's really some really good products and some good end markets that will -- with [ spread of ] end markets will help support the business. And the actions we're taking, they’re awfully helpful to sort of allow us to reduce the cost base temporarily to hold that capability in place. So being strong and resilient going in and taking those actions, we believe we should retain our resilience and come out stronger as a consequence and be in a position to take share. Now the only caveat is clearly just how deep and how long the recession lasts. And we will obviously keep it under continuous review to determine whether the approach that we are taking, that we want to take around sort of the temporary adjustment in the cost base, remains appropriate.

Do you believe -- if I can follow up on that. Do you believe that you're responding better than your peers? So that actually, the reality is that in the new COVID environment, you guys are better positioned than maybe you were kind of prior to the pandemic?

I mean, it's difficult to compare ourselves directly to our peers. But I think we've clearly got a strongly diversified portfolio, which, at the time, is helpful. And I think the other measures that we are taking is allowing us to bring our cost base down quickly, which again is extremely helpful. And by retaining our capabilities, we should emerge in a stronger position. I think time will tell as our peers are taking various courses of actions, but it's unclear as to exactly how that will impact our business, I think, at the current time. And then you raised the point of our exec changes. Paolo Carmassi has been president of Malvern Panalytical for the last 3.5, 4 years. But just to be absolutely clear, Paolo was approached from outside the business. He's effectively leaving us to join a large European industrial company to become a divisional CEO to then lead an IPO of that division. So he was headhunted to effectively sell one of the -- sell the key assets and then go and lead that as a CEO once it's been IPO-ed. So it's a great opportunity for him. And I think a testament, again, to I think, some of the roles that we have within Spectris and the fact that we have a portfolio of businesses that have highly delegated authority to go and profit and even run their businesses and run their P&Ls. And it's clearly good development for him. I think this is the fourth or fifth listed CEO that Spectris will have created in the last 5, 6 years. So it is testament of the strength of our management team and our approach.

And our next question comes from the line of Jonathan Hurn at Barclays.

Just 3 questions from me. I think, first question, just on Malvern Panalytical. Obviously, it saw a 23% decline in the period. Can you just give us a flavor of what the performance was in April? Obviously, [23%] of that business is exposed to Asia. You were commenting that you've seen a decent recovery coming through in China. So just really sort of the organic performance in that month would be helpful. The second question was just on HBK. Obviously, exposure in this division is both to automotive and aerospace. How do we think of that business longer term through 2020 and into 2021? Obviously, negative news flow on both of those markets. And then the third and final question was just in terms of, obviously, your balance sheet, your net cash, you are generating good cash. If we look at your strategy, obviously, M&A is part of that. And is now a good time to utilize that balance sheet as some of your targets or potential targets in terms of valuations? Are they appearing more attractive right here? So are you essentially -- or could you use the current sort of environment to execute M&A?

Okay. Great. Thank you, Jonathan. I'll let Derek talk about the balance sheet. But let me just sort of touch on sort of the Malvern Panalytical experience in April. I think there's -- if you really look at nearly all of our businesses, the profile of their sales, generally speaking, and I’ll talk a little bit about HBK because that’s [ become ] the outlier, basically sort of follows the phasing of progressive lockdowns around the world. China, Asia, then into Europe, then into North America. So we did see, for Malvern Panalytical, sales in Europe significantly coming off in March and then into April. North America was a bit delayed, but certainly impacting significantly in April for the reasons that we discussed in Andy Wilson's question. But then equally, we saw sales in China actually go positive versus last year in April, which was some of that pent-up demand and the inability to actually install product. So generally, it's in that phasing. But I think -- I know a lot of you will be questioning sort of why was Malvern Panalytical down so much but -- especially given its pharma exposure. But I think the one thing you sort of have to recognize in the pharma industry is sort to see -- I guess of the way we -- we supply 3 parts of the market. There's the upfront research and developing the research, advanced research phase. That then moves into the formulation and development. And then the third phase is the manufacturing quality control are the sort of 3 markets that we provide support from a pharma perspective for Malvern Panalytical. It's really the R&D and the formulation development, which is the -- they're the largest, the lion's share of what we sell into. And what's happened over the past weeks is, from a survey that we were looking at the other day, something like 50% of the labs, it's not just academia and research institutes, it’s also OEMs, have been pretty much been closed over the past weeks. So there's been a significant disruption to the sort of that research and the formulation development activities within pharma, which clearly has then rolled into Malvern Panalytical and impacted us. Now as things start to unlock and ease, then we fully expect that to start to come back and pharma to exhibit its usual resilience. But there's clearly been a short-term impact because of sort of social distancing, supply chain disruptions and just interruptions into that -- into those laboratories. But there's no spared institutions, whether it be academia or large OEMs. Does that answer your question, Jonathan?

Yes. That's fine. That's very helpful.

Yes. But then for HBK, I mean, yes, they’ve got quite a large sort of automotive exposure. [ A large part ] of HBK sales are into automotive, about 10%, 15% into aerospace and defense. That has held up. Clearly, sort of a lot of those -- the sort of the nature of the equipment that's provided to those end markets are for fairly significant R&D projects, in particular, that's sort of 60% of HBK sales is sort of into R&D. But in auto it’s nearer 80% goes into R&D. So a lot of those R&D programs are already committed. Effectively, customers are still wanting the goods that they've ordered and have taken them, which has helped sales up. And on the sort of aerospace side, we're actually more skewed towards sort of defense rather than commercial, which again will help a bit and has helped us in the short term. But clearly, if you sort of look back at the 2008, 2009 global financial crisis, the HBK was later into the cycle than many of the other businesses within the Spectris portfolio at the time. I think we're just seeing the same effects playing through now. And clearly, sort of as North America and Europe has gone into lockdown really hard in April, that -- we did start to see that impacting the business. I think it's also -- the good news part of that was we did -- we were getting strong sales, particularly in North America for January, February, March, in particular, which helped set up the year-to-date position.

Great. And just coming back to that stick, can you just sort of give us a rough feel for the civil defense split within the aero in HBK?

I think it's about a 1/3, 2/3 split, off the top of my head. But we should -- we'll let you know for sure after the call. And Derek, do you want to take the question on the balance sheet and...

That was a while ago. Jonathan, just remind us specifically, what was your key question on the balance sheet?

It was essentially just -- obviously, you're running a net [ cap ] position. You generating good cash. M&A is obviously part of your strategy. Is now a good time to sort of take a -- use it?

Yes. I mean I think we are -- we're pleased to be in a strong cash position at the moment. And our guidance on leverage has been that we would typically want to be sitting around about 1x of EBITDA at [ present ]. I mean, we would be happy to go up to 2x. I think right now, we're happy and unlikely to go anywhere near the top end of that range. And it all comes down to visibility, to be honest. And I think once we're confident that we can have some visibility as to what the world is doing, that makes M&A more certain and easier to execute because you've got a sense of valuation and pricing on the target. And it also enables you to be a little more confident in terms of using the balance sheet. I think as well, we would -- for the right piece of M&A, if it was significant, we would use the balance sheet and other sources of funding as well, if appropriate. So I think there are definitely going to be M&A opportunities, and we are definitely going to look at them. I think it's all a question of timing and visibility, and we're certainly not afraid to use the balance sheet at the right time.

Great. And in terms of the opportunities you're looking at and valuations of them, have they started to come down a little bit, would you say?

Well, I think -- I mean, it's an interesting question, isn’t it, given this situation. I mean if you think about public companies, you can look at a whole range of different public companies with stocks [ and good ] valuations. And I'm sure you guys will know that there a lot of companies have done different things and are moving in different directions for lots of different reasons. And I think if you're looking at prior situations, it just takes a while for vendors to catch up and also for themselves to have a view as to what's really happening. So as always, there are ongoing conversations. And I think trying to get a sense of value, it's all about having a sense of cash flows impacted in the short term by carefully managing the shutdown. But as you know, over the next 12, 18 months, there are going to be longer-term impacts from recession. So I think it's a bit of a continuation, Jonathan. And I'm not seeing the M&A market unlocking at the moment. But I anticipate it will when that visibility clears a little bit.

Our next question comes from the line of Mark Davies Jones at Stifel.

Andrew and Derek, we’ve covered a lot of territory, but there are a couple of areas I just want to see if we can get a little more clarification. On the auto R&D side, I take what you say in terms of existing programs continuing. But what are you hearing from customers in terms of their forward intentions? Because clearly, they're under huge pressure in terms of their own financial performance. But equally, they’ve got an awful lot of targets to hit from an emissions and regulatory point of view. So what do you think the R&D picture looks like? Does it hold up relatively well versus auto production? Or is it inevitable that that's going to come down materially, too?

Mark, I trust you're well. The -- I mean, really, what we're hearing from customers is a little mixed. One end, you've got some of the auto OEMs who are a little bit more distressed and having to take some significant actions, including sort of canceling new product launches, engine programs and the like; all the way through to customers who are saying, "We are going to ensure that we continue to invest in R&D as we were planning to pre-COVID." A number of them learned through the global financial crisis that they took steps to pull back on R&D and that negatively impacted them coming out the other side. So a number of our customers are saying they are still sort of full bore ahead in terms of their previous R&D programs. And then others are deciding where they're going to prioritize, but your point around sort of emissions, regulations remains key agenda items for them. And we've been adjusting, certainly within HBK, in terms of our offerings, strengthening our e-drive offering, which looks at how do we help customers evaluate effectively the effectiveness of the electric drivetrain from the output of the motors, the charging of the batteries and all of the dynamics in terms of the performance and just how much energy used for certain cycles, et cetera. So we continue to push that initiative hard, and that's getting good traction. Battery testing, it's still an area of interest and with battery materials. And like Malvern Panalytical, we're providing equipment into investigating the material characterizations of the chemistry going into battery manufacturing as well as we're [ always ] looking at the actual performance of batteries in situ as well. So there's still plenty of activity there. So I think we will see the R&D being -- holding up reasonably, albeit we don't anticipate it's going to be at the same levels as last year.

Okay. Great. And then a broader one, we've sort of talked about this a bit already. But I absolutely understand your desire to maintain employment and to focus on the short-term cost reductions. And clearly, for most of your business, that has to be the right thing to do. But some of your end markets, you're seeing large OEMs take the view that this is not a temporary issue, that this is going to cause a structural reduction activity, particularly across [indiscernible] and I guess, bits of auto as well. Are there any areas where you think you are going to need to take more long-term action? And how long are you prepared to kind of ride the temporary wave before those decisions have to be taken?

Yes. No, your question is spot on. I think we're not saying that we won't take structural action if it's required and at appropriate. It's just that our priority has very much been -- let's -- before we take any structural action, let's really understand what's going on and try and retain our capability for us and jobs for as long as possible. I think we're still early into all of this. But there are clearly some signs in certain end market segments where customers are starting to take some significant structural action, and that will inevitably [ leak ] through to some of our businesses. And at some point, we anticipate that we weigh -- we’ll then follow with our own structural reductions. But we are very much sort of as we've said, trying to prioritize retaining capability and the ops for as long as we can whilst we least understand the situation. Now clearly, if the market is having a major structural reset and there isn't going to be the opportunities for some of our businesses in those end market segments, then at that point, unfortunately, we will have to take structural actions. And it's the same with furloughing. It's -- we're not looking to sort of furlough people indefinitely if there aren't jobs for them to come back to. The key thing is, let's see how things develop first, get a good assessment of what's going on and then take the appropriate actions at the appropriate time.

And our next question comes from the line of Robert Davies at Morgan Stanley.

Just -- the first one was just really a comment you made earlier around sort of potential China fade. Is that just something that you were concerned about from a sort of tapering of demand as you go through the back half of the year? Or is that something you've seen in terms of the, I guess, the order rates as you've come into the early part of May? My second question was just around how you're thinking about your R&D investments given, I guess, your kind of near-term sort of cost constraints and cost action. Just was kind of curious if and where you were trimming back on R&D at all at the moment? And then the final one was just really kind of a bigger-picture question, just really around the sort of planned divestments and the time lines, the types of businesses that maybe you were thinking were sort of closer to the top of the pile in terms of kind of getting rid of them. Has that changed at all since the COVID has gone on? Or is that just something that's too difficult to assess until things settle down?

All right. Robert, I mean, your first question about the sort of China fade. We certainly saw, as we said, a strong recovery in April, which we think is looking a lot of was pent-up demand. I think all we are saying is we haven't got enough data points yet to determine whether we are going to see a fade. I think relative to the sharpness of the recovery in April, I don't think we expect to see it going at that rate. The question is, will it now sort of renormalize back to where we were seeing things before or not. And so we don’t have the data points yet. So it's really just, I think, sort of tempering anybody's enthusiasm given that we did see a good recovery in China in April. If that can be extrapolated both in China and potentially extrapolated into Europe and North America, I think it's just too early to tell. And we're obviously conscious that with Europe and North America having gone into it then going into a recession, inevitably, that is going to have a bearing on export demand in China as well. The second point on R&D investment, we are maintaining the overall level of R&D investment within our current planning. Clearly, the mix of some of the things we're doing and the priorities of what we're doing, we have been reevaluating that over the past weeks. So in particular, things like Malvern Panalytical will put more engineering resource onto some of their digital initiatives with customers looking at how can we support customers through connecting devices over the cloud. And we've signed a major customer in the last few weeks in that regard, I guess, as an example. But also things like self-install and sort of [ making it ]. And some of the initiatives we already had in place but accelerating those to help customers install devices themselves and provide greater remote support. So we have our engineers predominantly working remotely at the moment. And I'm pleased to be able to report that our IT infrastructure has allowed them to absolutely remain effective. And I think it's fair to say -- and our initial thoughts was that we were going to see quite significant productivity hit with having our engineering teams working remotely. In some areas, actually, we've seen a productivity gain through people actually being able to work from home, being able to sort of concentrate and do their work and collaborate through our online collaboration tool. So we've been really pleased actually, just some of the work we did certainly last year in terms of strengthening our IP. It definitely helps us in the situation. And then I think just in terms of the final question about the sort of can divestments in the strategy. I think we said this here in overall -- I wouldn't say [ guidance but ] -- really, we've clearly had a look at the strategy, at the overall thrust and direction of what we laid out last year, we still believe is the correct course of action. Obviously, the sort of the timing of the execution of some of that has now to be adjusted given the current situation. So the direction of travel really remains the same, which is to strengthen our platforms. As Derek said, M&A remains part of our strategy. We will continue to look for appropriate opportunities there. At the same time, when we think the timing is right, the market is right, the buying appetite is right, we'll look to resume the disposal program.

And our next question comes from the line of Michael Tyndall at HSBC.

Just a couple of very quick ones for me. I suspect they're both for Derek. The first one, just working capital. I wonder if you could talk a little bit about what you're seeing in terms of cash collection. Are you seeing any strain there within your customers at this point, thinking about the phasing of that in terms of the working capital going out in the second half? Are you seeing strain already in terms of people's ability to pay? And then the second question is just around the P&L item for sales and marketing. I'm just trying to understand how flexible that is because it obviously sits below the gross profit line. Curious to know, can you flex that? And if so, by how much?

Derek, do you want to take both?

Yes. I'll take both. I mean in terms of working capital, a couple of things. I mean, obviously, the term -- in terms of receivables specifically, we're not seeing any particular strain at the moment although I'm expecting some, to be honest. I mean it's just not happened yet. I think when you start talking -- as you think about our customers, a lot of our customers are strong and have big balance sheets. So I'm not expecting a significant problem with receivables. But I expect there to be patchy areas here and there, but we're not seeing it yet [ when everyone's down ]. On inventory, of course, as a result of sales coming off and bearing in mind that we build product over a period of time, our inventory has picked up at the moment. And we're carrying a little bit more finished goods than we would normally be carrying at this stage. Obviously, we have a stronger second half and significantly strong fourth quarter. So the anticipation is that that will all wind down as the year goes on. But as we sit here right now, we have a little bit more than I would like. And the same with finished goods. We -- when the COVID crisis sort of first hit, I think everyone saw it as a risk to supply chain. So we made sure our supply chain was protected. And where we could, we ordered forward certain items -- key items. Again, we're carrying a little bit more material than we would normally do at this stage. Nothing more than we will plan to use during the course of this year, but that just gives us a little bit of a sense of what the working capital shape will go through the year. In terms of sales and marketing, I mean, we do have flexibility there. It's a flexible cost below the gross margin. I mean generally, if you look at all of our costs below gross margin, probably, I'd say, 50%, 50% in terms of flexibility. So again, as revenue comes down, we ought to be able to flex that cost -- half of that cost below gross margin broadly in line with revenue reductions. So that -- and there's a whole range of elements in that right the way from promotional advertising, marketing, trade shows, travel, sales force, commissions, all that type of stuff. There's a huge amount of individual costs, but there's a reason that affects [ when stabilizing ] below the gross margin. And if you work all of that through, that's how you get to that kind of flow-through range I gave earlier in the call.

And we have one further question in the queue so far. [Operator Instructions] And our next question comes from the line of Ryan Gregory at Liberum.

Just got one left, actually. I wonder if you could comment on the organic sales decline you saw at the end of March when the lockdowns came in. I'm just wondering how the last 2 weeks of March, in terms of organic sales, compared to the minus 21% you saw in April.

Ryan, thanks for your question. I mean, really -- I mean, realistically, I think you're tracking it sort of -- we do track sales week by week. But I don't think we would draw any conclusion just from a week over another. I think the month-to-month trend is really the most appropriate. And if you want to -- if you -- so if your question is really sort of how you see sort of April sort of performed versus March, as I said earlier, it was really the phasing of sort of China unlocking going positive in April. Europe, I think we pretty much saw most of the impact in Europe start from the beginning of March all the way through. And then North America was about sort of 2 weeks after that. So there was a sort of back-end effect for sort of North America, and it's really starting to disrupt at the end of March. But by and large, I think from a shape perspective, we clearly saw April down significantly from the first [3] of the year.

Can I just ask a question just on Europe then, with the start in early March. Do you see much difference in March to April in terms of the European sales decline with April a lot worse than March specifically?

So at a seat level, Europe was pretty similar within a percent of March and April sales in Europe. North America was slightly different. It was broadly flat generally through March, and then we saw the decline really hitting us in April.

And we have a couple more questions come through. The first is from the line of Bruno Gani at Exane BNP Paribas.

Jonathan here from Exane BNP Paribas. Two questions from us, please. Firstly, you mentioned that you continue to -- your ability to restate the dividend. I was wondering what the criteria for the dividend restatement is? What are you looking to see there? Secondly, circling back to M&A. So seeing that most of the portfolio pruning is likely to come in within the Industrial Solutions division, does the lack of the manager and I guess the market environment mean that we can assume that there's little that can be done to prune the portfolio for the foreseeable future?

Let me just quickly touch on it and let Derek follow up on that. But I think as we look at the dividend, a really important criteria for this is that, if you look at our balance sheet, you could argue that we've got the cash on the balance sheet. We can afford to pay it. We clearly want to retain our resilience and our sort of balance sheet strength. But really, we also want to make sure, relative to other priorities within the group, that we take a decision in the round. And in particular, given that our employees have been selfless and have taken a reduction in income from a variety of whether it's a pay reduction, shorter working weeks, furlough, what have you, we absolutely feel that we need to respect that and try and sort of remedy the pain that our employees have taken, first and foremost, as much as we can. Derek, do you want to just quickly add a bit more color to how we're looking at this?

Yes. Sure. I mean I think visibility is key. I mean if you think about the reasons -- all the reasons that Andrew has said, the reasons that we decided to postpone the dividend and review it later in the year is exactly -- we have limited visibility. Our employees have taken a big cut and we felt that that was sort of in balance. We need to think about potential M&A requirements. If an opportunity comes along, just kind of putting that into balance, back to an earlier question, Jonathan, it could be a good time to use our balance sheet. So what we're basically going to do is we will look at those criteria on a quarterly basis, assess where we are. It is absolutely our intention to reinstate. And as I said, I think, throughout the announcement and the call today, it's a balanced judgment call. There's also the element of understanding the implications of government support schemes that are out there as well. It's not our intention to draw down on government support here in the U.K. But nevertheless, we just need to keep an eye on sort of the macro environment that we're operating in as well, and we'll keep reviewing it. And as soon as the position changes, we'll update the market.

And your question just in terms of lack of a manager leading Industrial Solutions. Well, Andy Cowan, who is the Finance Director for Industrial Solutions, we've asked him to step up for the time being. So he's acting Business Group Director. Andy is a very capable individual who's worked with Mark Fleiner for the past 18 months. And he absolutely knows all the businesses, all the operating companies in Industrial Solutions very well. He was actually Finance Director at Particle Measurement Systems before his current position. So he knows the group very well. He knows all of the operating company Presidents well. And I think we have a lot of -- due to the Industrial Solutions division is that we have strength and depth in terms of those management teams in each of the operating company, so the presidents of each operating business and their teams. So that allows us really to continue to prosecute the strategy and maintain our approach and the pace even without Mark Fleiner moving on. And going back to a question, Andy Douglas asked that I forgot to answer earlier, just in terms of Judith Wettach's appointment as Group Head of Corporate Development. Clearly, we're bringing in expertise to help with the overall M&A, both buy and sell side, and with Judith arriving in June, obviously will be beneficial to help us continue in our approach within Industrial Solutions.

And the next question comes from the line of Tom Fraine at Shore Capital.

Mine is just on M&A. I know you touched earlier on are you seeing an increasing number of opportunities there. Could you just talk a bit more on this detail? Is this due to some peers struggling from -- they might have more stretched balance sheets? And also, if you could touch on the criteria that you're looking for, one of these companies would [ trip to the end ] market slightly seeing more shots within it so what those end markets would be?

Yes. Thanks for the question. So clearly a lot of interest in terms of M&A. As I said, it remains part of our strategy. As Derek said, as you know, we're going to take a balanced and appropriate interest to it. As we look, we continue to sort of survey the landscape, have conversations and sort of really understand appetite. I mean there are clearly some of the potential targets that we have on our list that certainly may be a bit more in the distressed category or have sort of stretched balance sheets. Therefore, that is something that we're clearly nurturing. Equally, the number of people who are thinking very much more at this current time is about what are core and noncore in terms of potential assets that might be disposed of. So it's absolutely appropriate that we continue to actively look and continue to actively have conversations. But we will be considerate and thoughtful about what we do. And in terms of sort of the end markets, it would be very much aligned with what we laid out at the Capital Markets Day last June. And in particular, it's about continuing to sort of build out our platforms, businesses but also still look at how we could potentially create 1 or 2 further platforms out of the -- some of the businesses that currently sit in Industrial Solutions as well. So it's really consistent with what we laid out in June of last year.

And we have one final question in the queue. That's from the line of Harry Philips at Peel Hunt.

Just 2 quick questions, please. Andy, you mentioned the improved productivity almost from working at home, as I've noted myself actually as well. In terms of your plants, what sort of impact has the new shift patterns and social distancing had on sort of productivity levels? And then secondly, what is the online content of [indiscernible], please?

Okay. So Harry, In terms of the improved productivity, I said we were concerned that we may see a hit at home, but we haven't, which is great. In terms of plant productivity, I think generally speaking, what we've implemented there were sort of putting split shifts, split teams in place. It's critical operations, bottleneck operations, we've got sort of red and blue teams that don't interface with each other such that if anybody catches the virus and they have to -- obviously, they then have to self-isolate or indeed have to -- the team they’re working with have to self-isolate, we can still continue to run operations. And we've been sort of working overtime in certain locations where we've had some of those disruptions. So generally speaking, the actions we put in place have enabled the productivity of the plants to be pretty much held up. I would say really the sort of the bigger disruption we've had, this is still relatively minor thought is there's just been some supply chain disruption, where we've not been able to necessarily get the right components or products in -- just at the right time. So that's caused a little bit of disruption and a slight impact in some of our [ efficiencies ] in terms of on-time delivery. But overall, that's been pretty minor. And the team has done a fantastic job in terms of business continuity planning and mitigation actions they've taken to make sure that that aspect has been minimized. So overall, it's -- I've been really pleased with how we've responded and how we've carried on. And as I said, really had marginal impact there. What was the second -- the other part of the question is I think on Omega's online business?

Yes.

So typically, Omega is about 1/3 of its sales are sort of completely transacted online. So that's -- the majority of our customers start their buying journey online, on the Omega website, doing their research, looking -- searching for products, reading our papers, our how-to guides, how to measure flow, temperature, pressure, what have you, talking to our application engineers. And 1/3 is typically will complete that buying journey online all the way through. At the current time, that's actually gone up to about half of the sales. So as I said earlier, the online piece has been holding up really well.

As there are no further questions, I'll hand back to our speakers for the closing comments.

Okay. Well, thanks very much. It was a pretty fulsome hour. Thank you very much for your questions, and it's very nice to hear all your voices. I look forward to the day when we can actually start to meet again in person. But to sort of wrap up, I think, in summary, as I hope you've sort of gained from this call, I'm really pleased and proud of just how our people across Spectris have responded to this whole new working environment. Their dedication and selflessness in supporting our business, keeping our operations going and contributing to defraying costs to offset some of the financial performance with -- in a much tougher trading environment. But whilst trading has obviously impacted us, we believe we are taking the right steps to weather this challenging period and taking an appropriate, balanced approach to do so. We entered this crisis with net cash on the balance sheet and good liquidity. Since then, we've continued to generate further cash and take further cost actions. And the approach that we're taking, I hope, comes through in terms of really a balanced way to run the business and really taking steps to build stronger relationships with all our stakeholders. And I think implementing the mitigating actions that we are doing is acting very much in accordance with our culture and our values at Spectris and [ together ] we can fall back on that and get the response from our people accordingly. But by taking a balanced approach, what we've laid out within the update today, we believe this is the right way to deliver long-term financial health and sustainability for Spectris and ensuring that we emerge from this crisis in an even stronger position and an even more resilient business. Our next planned update to the market is for our first half results on the 4th of August. But until then, I hope you and your families stay safe and well. Thanks very much for joining us today.

This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.