Spectris Limited (SXS) Earnings Call Transcript & Summary

Good morning, everyone. I hope that you are all keeping safe and well at this time. Welcome to Spectris' half year results for 2021. I'm Andrew Heath, Chief Executive, and I'll go through the headlines. And then you'll hear from Derek Harding, our CFO, who'll run through the numbers in more detail. I'll then come back to talk about some of the operational and strategic developments in our businesses before closing with our outlook and moving to Q&A. Now I'm conscious you have a busy morning, so I'll provide a quick run-through of the main points of today's results announcement. But before I do, I really want to acknowledge the great work and support of the whole Spectris team once again over the past months. Although many of the challenges of COVID-19 are still with us as a society, we have developed, as a business, really well to our new operating environment. Our priority remains safeguarding the welfare of our employees and their families, the communities in which we operate and also to maintain high levels of service to our customers. Our operating companies have embraced new ways of working as have our customers who continue to be supplied with the products, the services and the expertise they need. And it's been great to see this in person as more recent easing of restrictions has allowed me to visit a number of our facilities. Now you've heard me say before that at Spectris, we believe in being purpose-driven and very much true to our values as we execute on our strategy, delivering value beyond measure for all of our stakeholders. And I'm really pleased with how we have been executing our strategy for profitable growth alongside the balanced and socially responsible approach we have taken to managing our business. It really is delivering for us. And we're emerging from the pandemic, a focused, leaner and stronger business. The last 2 years have been characterized by restructuring cost reduction, but also investment for future growth with less reliance on the macro economy. But with a much brighter macro environment and many of our end markets now recovering strongly, we are benefiting from the high quality of the retained businesses within our portfolio, our profit improvement program and our lower cost base. Equally, we are seeing growth above the market because of our recent investments and concentration on higher growth segments. And we can see these intangible improvements coming through in our strategy scorecard, with ticks across the board versus 2020. We have achieved strong operating leverage off the back of the expansion in our top line with adjusted operating profit and margins ahead of both this time last year and also 2019. The portfolio optimization program is well progressed, and we fully expect to conclude the disposal program we identified back in 2019 later on this year. We have maintained our investment in R&D and CapEx last year, and we are increasing investments in new products and services through this year. And we can see this coming through in incremental sales growth. The balance sheet has been further strengthened, providing considerable optionality, including for further M&A. And I'm delighted that we have now completed the acquisition of Concurrent Real-Time, which strengthens HBK's simulation offering and we continue to work on our pipeline for further acquisition opportunities. And today, we've announced an interim dividend of 23p per share, maintaining a dividend growth of 5%, in line with our policy. We're now starting to move into the next phase of our strategy for profitable growth with an even greater focus on our purpose. Our ambition is to be a leading sustainable business, ensuring we have strong relationships with our employees, our customers, our suppliers and communities and, in turn, delivering attractive returns for our shareholders. So now let's look at our financial performance in the first half. We delivered like-for-like sales growth of 14%, above that of the market, which reflects the recovery in many of our end markets. And as I've said, also further supported by our new product and service launches. Encouragingly, like-for-like sales were only 2% lower than in the first half of 2019. Also, orders were 16% higher on a like-for-like basis, providing momentum going into the second half. And there was a 74% increase in adjusted operating profit, resulting in an operating margin of 12.8%, which reflects the growth in sales, but also the cost actions and the higher margin mix of the portfolio following the divestment. And all this compares to an 11% margin in the first half of 2019, again, a notable improvement. As guided, we delivered strong operating leverage. Our cash conversion also remained strong at 122% and in combination with the disposal proceeds resulted in a net cash position at the end of June of GBP 272.8 million. I have to say I am very pleased with the performance that we are delivering. The new business environment that has emerged provides us with good prospects in many of our end markets. We play an important role in sectors that are transforming rapidly such as pharmaceutical, energy, automotive and mining, which in turn offers significant opportunities for growth. Our current product offerings and new product development activities are very much aligned with our purpose, and that's to equip our customers to make the world cleaner, healthier and more productive as well as, frankly, helping them address many of the sustainability challenges that they face. And by focusing on sustainable solutions, it will not only make a difference to our planet, but also underpin our future growth. We also recognize the importance of improving the sustainability of our own operations. And today, we have also announced the publication of our net-zero ambition. We are committed to taking a leading role in minimizing the emissions footprint of our own activity and also the activity across our value chain. The net-zero pledge we have announced today is appropriately ambitious, being aligned with a 1.5 degree centigrade climate warming scenario, and we're using 2020 as the baseline. And I'll come back and talk more about our targets and the other initiatives underway in support of the 3 UN Sustainability Development Goals we have selected. And now I'd like to hand over to Derek, who will run through the financial in more detail.

Good morning, everyone. For consistency, I am once again starting with our scorecard slide. Perhaps not surprisingly, we are showing a very positive performance compared to H1 '20 with ticks across the board. Given the nature of 2020, we have also included a comparison on this slide to H1 2019 to assess how we are performing compared to the pre-COVID period. I will cover the specific numbers during my presentation, but overall, we believe that our performance in H1 is a strong step forward and in many ways, better than the pre-COVID performance of 2019. Let me now take you through the specific details. Reported sales increased by 0.5% to GBP 601.8 million. If you adjust for the impact of disposals, net of acquisitions, which reduced sales by GBP 44.8 million or 8%, and foreign exchange movements reducing sales by GBP 28.3 million or 5%, you see a growth of 13.7% on a like-for-like basis compared to 2020. On this basis, we are only 2.3% behind 2019. Adjusted operating profit increased by 74.2% to GBP 76.8 million on both a reported and like-for-like basis. Compared to 2019, our like-for-like operating profit is up 14% despite the lower sales. Adjusted operating margins increased by 540 basis points with like-for-like adjusted operating margins up 450 basis points compared to H1 2020 and 190 basis points compared to H1 2019. Improvements in the gross margin due to additional volume and favorable pricing, combined with our continued cost control, have all contributed to the higher operating margin in the period. Adjusted profit before tax was GBP 73.7 million, up 82.4%. Our tax rate came in at 22%, which is in line with guidance. And adjusted earnings per share were 49.7p. The interim dividend per share of 23p represents a 5% increase over the prior year, consistent with the growth in dividend for 2020. We remain committed to paying a progressive dividend. While adjusted cash conversion was lower than the 201% achieved in 2020, we were pleased to achieve 122% in the first half. Following receipt of funds from disposals, our net cash at the end of June was GBP 272.8 million. Finally, on this slide, the trend of our return on gross capital employed has now switched and increased from 11.3% to 12.2%. This slide provides a graphical view of the main P&L movements that I've just discussed. I've used it in previous presentations, and I include it here for your future reference. Moving on to cash. This slide shows how we generated cash in the period and illustrates what we have then done with that cash. Starting by adding back the GBP 20.7 million of depreciation and amortization charged to the adjusted operating profit brings you to GBP 97.5 million of EBITDA. Our continued focus on working capital management released GBP 15 million of cash during the period, and we spent GBP 19.1 million on CapEx. This gives us our adjusted cash from which operating activities of GBP 93.4 million, which we divide into the adjusted operating profit to get our cash conversion metric of 122%. There was then a significant inflow of cash in H1 of GBP 236.8 million, which is made up of GBP 208.8 million net proceeds from disposals plus GBP 38.3 million in relation to the U.S.-listed company shares, which we were holding at the year-end. We received cash in the first half when the takeover of that company was completed. And these inflows are offset by GBP 10.3 million of other transaction costs. In the first half, we spent GBP 79.7 million of the GBP 200 million share buyback announced in March and paid GBP 53.6 million in final dividend. We spent GBP 6.8 million of cash in relation to restructuring. Interest and tax had a combined cash impact of GBP 19.7 million, with other movements of GBP 3.7 million, bringing us to the net increase in cash for H1 of GBP 166.7 million. In terms of our funding position during the period, the group took the opportunity to repay EUR 116 million EIB loan, which was due to mature in September 2022. And we are also in the process of reviewing the $800 million RCF with a view to agreeing a reduction in size to $500 million during the second half. The reconciliation between our adjusted operating profit measures and our statutory profit measure, down to statutory profit before tax, is much simpler this year. There are no asset impairments to report, and restructuring costs were limited to GBP 3.8 million in the first half as we finished up the final aspects of activities started during 2020. And therefore, the statutory operating profit is only GBP 16.2 million lower than the adjusted operating profit at GBP 60.6 million. The largest figure on this schedule for 2021 of GBP 117.7 million primarily relates to the profit on disposal of B&K Vibro which was completed in the first quarter. Financial income in H1 relates to a GBP 5.7 million interest credit following the positive settlement of an EU dividends tax claim and a GBP 6.7 million FX gain on intercompany balances, which was a GBP 10 million loss in the prior year and included in the finance cost line. This then brings you down to a statutory profit before tax of GBP 187 million for the period. Looking ahead to the second half, this slide updates our view of things to consider when looking at 2021 on a full year basis, starting with the headwinds. We still anticipate COVID-related interruptions. We expect them to be localized, but clearly cannot predict the scale of any impact they may bring. We maintain our guidance regarding the reversal of GBP 10 million of COVID-related temporary cost savings and a similar amount of cost inflation. If our growth is near the top end of the range, that will require some additional investment, as could, responding to some of the supply chain constraints that we are experiencing. However, we will work to mitigate this where possible. At the year-end, we provided a pro forma set of numbers excluding BTG, Millbrook and B&K Vibro. Since then, we have sold ESG, which contributed GBP 11 million of revenue in 2020 and GBP 1 million of profit, which will, of course, not repeat in 2021. We continue to experience a currency translation headwind compared to 2020. And following some of the disposals, the underlying currency shape of the group has changed slightly. So I have updated the sensitivity guidance that we normally provide to reflect this. On the positive side, we have several tailwinds. We are clearly experiencing an economic recovery with markets improving as confidence builds in managing the pandemic. We have a strong order book as we enter the second half. Our organic growth continues to benefit from new products and services. And as a result, we anticipate like-for-like sales growth for the full year to be in the range of 10% to 12%. We are continuing to deploy the Spectris business system to reduce waste and further build on our self-help activities and remain confident of continued margin progression. And finally, the acquisition of Concurrent Real-Time, which completed slightly later than previously anticipated, is expected to contribute around GBP 15 million of revenue and GBP 3 million of profit in 2021. In terms of other guidance, CapEx will be around GBP 50 million, and we expect our tax rate to be 22%. We think working capital will remain around the 11% level experienced for the first half, and we do not anticipate any new restructuring programs, but there are some costs in the second half relating to 2020 programs, but they will be less than GBP 5 million. And with that, I'll hand you back to Andrew.

Thank you, Derek. Now let's take a quick look at our end markets before turning to our businesses. We have seen a good recovery in many of our end markets, pharmaceutical, semiconductor and machine manufacturing stand out as the strongest performers. In pharma, we are seeing a significant uplift in support of vaccine and viral vector development and manufacturing as well as an increase in the onshoring of production. And the onshoring trend is also supporting growth in semiconductors as is the rising demand for chips, which is driving an increase in global fabricated equipment spending. And in machine manufacturing, the positive outlook for agriculture, food and medical equipment, supported by the strong fit of our sensor applications is also driving growth. Automotive, energy and utilities do remain weaker than last year, albeit the rate of decline is easing with growth posted in the second quarter. Academic research, which was notably impacted in 2020 with research institutes being closed has seen a steady recovery. So now turning to our businesses. I'll start with Malvern Panalytical. Here, sales increased 23% on a like-for-like basis, supported by both a strong market recovery and the impact of new products like the Zetasizer Advance and OmniTrust launched in 2020. They had a strong performance in Asia, especially China and also in the pharmaceutical market. And this volume growth, combined with cost management, pricing movements and higher service revenues helped drive a 186% like-for-like increase in adjusted operating profit. And that's a 730 basis points rise in adjusted operating margin. Compared to 2019, Malvern Panalytical sales are now only 3% lower on a like-for-like basis, showing that our recent product launches are really helping to drive growth above that of the market. And like-for-like adjusted operating profit is 28% higher, reflecting the strong operating leverage on the back of cost management over the past 2 years. Malvern Panalytical's program of launching new and enhanced product offerings with a focus on software, services and analytics, is also being well received by customers. In the first half, Malvern Panalytical released Smart Manager, and that's a cloud-based control room that connects the monitors its X-ray fluorescence systems. It provides insights into the real-time utilization, also the health of their instruments, continuing analyzing data to help improve both process and also team productivity. And we expect this to be particularly attractive to primary materials customers. They also launched enhanced versions of their Aeris Compact X-ray Diffractor and Epsilon XRF analyzer both with superior new capacities. And these new products are allowing us to tap into key growth trends in our markets. Being later cycle, HBK saw 8% higher like-for-like sales with a very strong second quarter, especially in Europe and Asia with notable growth in the latter. Machine manufacturing was the strongest end market. Adjusted operating profit increased 44% on a like-for-like basis, while adjusted operating margin increased 310 basis points. When compared to 2019, HBK's like-for-like sales are broadly flat, but adjusted operating profit is 40% higher. And that reflects the operational improvements and merger benefits that continue to be delivered. I think this clearly demonstrates the enhancement that the HBK team has been driving to improve margins and also operating leverage. Alongside the operational improvements, HBK has also been investing in organic growth projects, aligned to the strongest market growth opportunities, such as electrification, simulation and also digitization. And these focus on virtual testing and simulation, but also physical testing, including electric powertrain development, smart sensors and also software. And new products launched this year include a new NVH simulator and the latest software version of the Tescia Repetitive Testing system. And as mentioned earlier, the acquisition of Concurrent Real-Time significantly strengthens HBK's simulation offering. We were pleased to complete the acquisition of Concurrent Real-Time. And I'd like to show a short video with an overview of what it does and what it brings to HBK. [Presentation]

The acquisition of Concurrent completed earlier in July, and we are delighted to welcome the team to Spectris and HBK. This acquisition is a further step in building a position of scale and provides the opportunity to meet a real unmet customer needs that have hardware in the loop testing. Moving on to Omega. Omega has demonstrated a much improved performance in the first half of the year with like-for-like sales 14% higher. It really is benefiting from the focus being brought by the new management team. In North America, growth was above that of the market with semicon demand supporting growth in Asia. Adjusted operating profit improved 145% on a like-for-like basis, reflecting the higher sales, higher gross margins and flat overheads. As such, like-for-like operating margins increased 550 basis points. Versus 2019, like-for-like sales are now only 2% lower. However, we recognize that the adjusted operating profit is 30% lower, given the higher cost base following the website investment. As such, the priority remains to scale the business to improve profitability. And as previously identified, 4 focus initiatives have been enacted to achieve this, and it is pleasing to see the impact of these coming through. Web orders have returned to 2018 levels, achieving record average order values and an improved conversion rate. Growth has been above that of the market. And the partnership with Newark has been particularly successful with sales doubling year-over-year, and Omega's now working to extend this relationship to Europe and Asia. The new product innovation strategy has shifted to fewer, more impactful launches in key growth areas. And one such example is HANI, the high accuracy noninvasive temperature sensor. This clamp-on sensor achieves the same accuracy and response times as invasive in-pipe sensors without the cost and risk. Food and beverage is a key initial target market, but we're also planning for other applications, too. Now there's clearly more to do, but it's good to see progress being made under the new management team. Turning now to Industrial Solutions. Like-for-like sales here increased 12% with a very strong performance in Asia. The sales growth was strongest in the semiconductor and pharmaceutical customers, reflecting a strong market recovery and also the impact of our product launches in 2020, such as Servomex's ultra-oxygen and moisture product range and Red Lion's FlexEdge product, with PMS launching their Lasair Pro Airborne and IsoAir Pro-Plus particle counters in the first half of this year. In ISD, like-for-like adjusted operating profit increased 41%, and operating margins increased 320 basis points. And compared to 2019, sales were just 4% lower and adjusted operating profit is 4% higher on a like-for-like basis. Good progress has clearly been made in executing each of the operating company strategies, improving the performance of the businesses in parallel with the divestment program. For the retained businesses, the strategic direction will be centered around being a leading provider of high precision in-line sensing and monitoring solutions. Now climate change is one of the greatest challenges we face as a society. We at Spectris are determined not only to equip our customers on their journey to net zero, but also to play our part in minimizing our own carbon footprint as well as limiting the impact from our supply chain. As such, I am delighted today to announce our net zero targets following an extensive piece of work to understand our baseline emissions position and the roadmap that we might adopt to achieve them. We have set stretching, but also realistic targets, encompassing Scope 1, 2 and 3 emissions, and that's all from a baseline of 2020. So today, we are pledging to reduce absolute Scope 1 and 2 emissions by 85%, and achieving net zero by 2030. And we're also pledging to reduce absolute Scope 3 emissions by 42% by 2030 and achieving net zero by 2040. To achieve the Scope 1 and 2 targets, we have a roadmap underpinned by numerous initiatives such as sourcing 100% renewable electricity across our operations by 2030 and accelerating our transition to an all-electric business and fleet vehicles by 2030 as well. To address Scope 3 emissions, we will prioritize a reduction in our own emissions, for example, through the efficiency and also circularity of our products, and we'll also be engaging with our supply chain on their environmental and wider sustainability commitments. I am excited by the innovation that this will drive within our businesses to deliver this ambition. And in support of both targets, we have submitted a commitment letter to the Science Based Targets Initiative. In parallel, we've also made considerable progress in our alignment with TCFD. Being a sustainable business also means that Spectris is generally known as a great place to work. We remain fully committed to the continued support of our mental health, well-being and resilience activities. We also want to ensure that everyone here feels that they belong. Our work on building greater diversity, inclusion and equity continues, and we recently initiated our belonging program. I'm also very pleased to announce that the Charities Commission has now approved the Spectris Foundation, where we'll be supporting STEM projects and education, and we fully expect the first investments to be made later this year. All these activities help embed sustainable thinking in our operations and also our business aims. That helps mitigate risk but also helps us capture opportunities from the increasing focus on sustainability by all of our stakeholders. We talked earlier how the combination of Concurrent RT and VI-grade helps accelerate auto development cycles. And virtual testing is also part of our sustainability strategy. And as an example, Aston Martin Lagonda has adopted VI-grade's compact simulator and is now able to conduct numerous tests on a virtual vehicle model at an early stage well before building a first prototype. And this leads to higher reliability and confidence in the prototypes with more effective testing, resulting in a higher quality vehicle. But ultimately, it saves costs and resources in the development of new vehicles. thereby helping in the reduction of emissions compared to building numerous prototypes and testing these on physical proving grounds. So in summary, we've adapted to the new operating environment. The actions and approach taken in the last 2 years have positioned us well to benefit from the market recovery and from our investment in product innovation. We delivered a strong financial performance in the first half with our order book providing good momentum going into the second half. We expect full year like-for-like sales growth of between 10% to 12%. And we are now starting to move into the next phase of our strategy. Our ambition is to be a leading, sustainable business, improving the sustainability in our operations and to be more focused on our purpose, equipping our customers to make the world cleaner, healthier and more productive. And in support of this, we have set ambitious net zero targets. We are absolutely committed to taking a leading role in minimizing emissions of our own activity and across our value chain. We are placing sustainability at the very core of our strategy and embedding a sustainable approach in our operations. As such, I believe we are well positioned to deliver long-term sustainable financial progress. Thank you. We'll now be happy to take your questions.

[Operator Instructions]. The first question comes from Andrew Douglas from Jefferies.

I've got a few questions, please, if I may. Can I start with organic growth? Clearly, a very strong performance in the first half, orderbook's up, I think, was it 28%, I think, in the second quarter, yet we still got a 10% to 12% organic sales guidance for the full year. Can I just double check, I'm not missing anything? I appreciate you got a big second half weighting and there's uncertainty around that. I just want to make sure that I'm not missing anything specific there. ESG target is clearly very punchy. Can you just give an indication whether you think customers now kind of really properly care about this thing? It's been developing quite strongly over the last couple of months. But it feels like customers are now carrying and it really makes an important differentiator for you guys. Third question is on working capital and just how sustainable that working capital improvement is if we're thinking over the next kind of couple of years? And then last, but by no means least, can you just give us a bit of a feel for the M&A outlook as you currently see it?

With organic growth, you're correct. The order book grew 28% in Q2. So we have seen strong order intake coming through really over the last 4 quarters, starting Q3 last year. The 10% to 12% sales growth guidance for the full year really sort of brings into our thinking around potential supply chain constraints, obviously, some inflationary pressure, but also some labor capacity issues in terms of actually meeting the growth. So we are absolutely seeing strong order intake. There are some headwinds there. But clearly, we are battling well against them at the moment. But we're really mindful that there are some levels of uncertainty out there that we've got to sort of factor in, too. And frankly, I think the top end of the sales range is going to be naturally a bit muted by just how much the supply chain can respond and our ability to actually build the capacity to ship as well. So our teams are working really hard with our suppliers and internally to make sure we obviously do the best we can this year. Then just on ESG targets and customers. Absolutely, the trend is a lot of our larger customers are very much asking for what we are doing in relation to ESG targets and sustainability. That is an active dialogue with a number of them where we get requests to complete questionnaires, et cetera. And as we've seen, I think, with sort of like cyber security, where there are standards emerging around the level of security I'm sure equally, there's going to be requirements and standards that are going to be set around supply chain partners in terms of meeting ESG requirements. So we certainly see this is not just a societal shift, a legislative shift by government, but also our customers are also going to drive part in this direction. And we have to recognize we are part of their Scope 3 emissions. So they're going to be looking to us to play our part, which in turn is why we set suitably and appropriately ambitious targets around sustainability and net zero. I hand over to Derek on the working capital point.

Yes. So on working capital, Andy, what you're seeing now is the sort of the results of the systematic work we've been doing over the last 18 months focusing on collecting receivables, managing our payables in the right way and a real hard focus on inventory. So our guidance is that we will, we think, sustain this level around about 11% of sales for the remainder of this year. And I'll give a bit more guidance beyond that, but it's not one-off. So in that sense, we are in a better control of the working capital, managing it a little tighter. So I would anticipate the range I've given in the past to sort of tighten and for us to not see a rebound from this. So in that sense, it's positive and sustainable. And then M&A was your fourth question. As you could see on the balance sheet, we have a good amount of cash. We are not looking to have that burn a hole in our pocket. But at the same time, we are keen to execute on that part of the strategy. Obviously, we have done Concurrent, that's a start, but we're not slowing up and we're focusing on the pipeline and looking across all of our core platforms to find acquisition opportunities to complement what we do today. So there's no change on the M&A strategy at all. If anything, we are doubling down our work and our focus is building the pipeline.

The next question comes from Michael Tyndall of HSBC.

Just a couple for me. I think I may have asked this one before, but if we think about this very strong performance, is it possible at all to split it out in terms of what is new product that you've developed maybe over the last 12 to 18 months? And what is underlying market improvement? And I guess within that, can you then give us a sense of what the pipeline for new product looks like going forward? I guess, some sense of the vitality index within the business? And then the second question is around Omega. Interestingly, you're mentioning Asia and Europe. Is there any change in the thinking of this business with the new management in terms of those international opportunities? Is that something that perhaps given the strong growth you've seen in Asia that you might think to invest a bit more into?

Michael, thanks for your question. As you said, we're really pleased with the performance in the first half, seeing strong organic growth coming through. I mean it is difficult to sort of be precise of trying to parse out how much the growth is coming from new products. But I think if you read through our statement consistent with our statement of the full year back in February. I think you can just see the number of new products and services that we are putting out there and we are getting very good traction with our customers. When we really looked hard at the strategy back in 2019, we identified which end markets we really felt were the most attractive, which had the best growth prospects where we could have the strongest fit. And we've been very focused over the last 2 years to make sure that our whole product development, service development activity is targeting on those attractive sectors. And we're certainly benefiting from that. But I mean, if you look at really against any measure, GDP, industrial production growth, we're clearly outperforming both of those measures by some distance. So we're confident that we are growing faster than the market. And then your second question, just about sort of product pipeline vitality. I'll go back to what I said when I came into Spectris. And my initial observation was that we were spending too much of our R&D budget on sustaining and maintaining older products. And again, as part of the sort of profit improvement program, we did a lot of work looking at the portfolio, which ended up with a -- we sold some business lines. We discontinued an end of license product line to really sort of make sure we had a higher quality product in the portfolio as well as making sure we then put in more of our engineering effort on to those new products and services that I've just spoken about. So our vitality sort of index, if you like, has sort of inflected in the last sort of 6 to 12 months. And as we're driving that R&D investments that we maintained through last year, we are starting to see the benefits coming through. And then lastly, on Omega, it is pleasing to see the impact the new management team is having. The business is responding to their treatment and the focus that they're bringing there. As I've said before, the priority for Omega is to scale that business. And it's so encouraging to see the top line growth coming in. The margin progression we still need to sort out because of the higher cost base as a consequence of the website investment. So we need that trend to continue. And as I said before, all of our businesses will have to justify their place in the portfolio. So encouraging to see the progress, but clearly, we need the business to carry on progressing at the pace it's going at, seeing similar sort of second half performance.

The next question comes from Jonathan Hurn of Barclays.

Just a few questions for me, please. Firstly, can we just come back to the order book. Obviously, you saw strong order growth in Q2. But can you just give us a little bit of flavor about the order book by division? Where is it strongest, which division has the greatest visibility in terms of orders? And also just in terms of that margin of that order book, are we starting to see the margin of the order book increase? That was the first question.

Okay. Good to hear from you, Jonathan. I mean, all our businesses are seeing strong order growth. So it's sort of hard to sort of just pull out any one in particular. I mean clearly, Malvern Panalytical has come back very strongly, which is great to see. They had some headwinds going into 2020 before COVID hit, we talked about that before. Great to see that the market has responded. They're predominantly pharmaceutical, life science applications, really driven a lot of that growth, and it's still powering the order intake. And that's both in terms of obviously, vaccine development, viral vector manufacturing of the new drugs as well as a lot of government money going into pharmaceuticals. And that's starting to feed through into some of the academic research and we're starting to see a pickup there, which again is encouraging. And I think the other part of that is the onshoring trend. A lot of countries are within pharma and looking to bring activities back onshore. And again, that's sort of helping with -- from an order demand perspective. But equally, we're seeing that within semiconductors, similar trends, which again, is helping our semi offerings within Malvern Panalytical. That same sort of onshoring trend in semi and pharma is certainly helping some of the ISD businesses, particularly PMS, within Servomex. So again, we've seen very strong order intake in ISD around pharma, life science, aseptic lab development as well as electronics. And then within HBK, again, the order book actually has been -- or the order intake has been strong over the last 12 months with outstripped sales. Machine manufacturing is the standout there. Our range of sensors in HBK is very well matched to a lot of new applications around process industries in drug manufacturing, food, chemical production, where our weighing technologies, I say, are a great fit. And even within Omega, there is strong order intake in Asia in semi, but also strong order intake in North America as -- which is way ahead of sort of industrial production in the first half which we talked about. So that's sort of a general flavor. I mean, automotive, it's good to see some of that -- the decline easing now. We would have done better in the auto side if it hadn't been for some of the customer access restriction issues in the first half because of COVID, particularly in sort of around VI-grade because a lot of the sort of high-end simulators. But they sell sort of EUR 0.5 million up to over EUR 1 million for the larger simulators. And for some of these larger ticket items, clearly, customers want to come and sort of touch the product, feel it, drive it and they've not been able to get to our facilities or some of our simulation centers around the world to be able to do that. So we certainly feel we've got some sort of pent-up demand which would hopefully start to come through in the second half in VI-grade for HBK. Hope that gives you a bit of a feel for what's going on.

Yes. That's very helpful. The second one can -- just staying on automotive. I think if you look over the recent months, obviously, we've seen a lot more news flow from the auto OEMs about going fully electric. Obviously, setting time lines and increasing targets. I mean how does that impact HBK? Do we see from here essentially an increasing momentum and growth rates for HBK sort of benefiting from that -- those sort of targets that have been brought forward by some of the auto OEMs?

I mean, I think in simple terms, yes. But we have been benefiting really for the last 12, 18 months for all of that hybrid platform, electric vehicle platform development. One of the big target areas for HBK is around electric powertrain testing and electric grid, testing battery development and testing equipment that they're providing. Again, it's one of the biggest strategic growth initiatives, HBK identified back in 2019, and has been pursuing, and we've had very strong uptake from customers. So that's definitely helped. But clearly, the continuing acceleration of development into electric vehicles we only see all that is positive. And again, it's also good news for the VI-grade simulation and virtual test capability because of sort of the ride and handling dynamics loading of battery vehicles is quite different from internal combustion-powered vehicles, just given where the mass of the batteries versus the mass of the engine sits. So that's leading to a whole, again, good demand for our simulator products.

Great. And then maybe one last one, just a very quick one. Just in terms of pricing, and apologies if I missed that, but can you just sort of flush out what you saw in terms of pricing? I think you mentioned it was positive. It was good, but just in terms of sort of the increase in pricing and maybe where that sits relative to cost inflation in the business?

Yes. So I mean we -- in the first half, our businesses saw somewhere between sort of 0.5%, 1.5% pricing coming through. So generally, we're still seeing -- we have good pricing power, and we are able to offset a lot of the supply input inflationary cost increases that we have been seeing. We are considering or having these actually implemented a second round of price increases in some of our businesses already this year. We are clearly seeing input costs going up. But so far, we've been able to pretty much offset most of that.

The next question comes from Mark Davies Jones of Stifel.

Can I go back to the potential risks around this very strong growth or the challenges that come out of the very strong growth. Are there any particular business lines or areas where things are particularly tight in terms of supply or any of your more specialized products that are dependent on specific components that might be particularly at risk in Malvern Panalytical, for instance, given how strongly that's bouncing back, is the stuff down the supply chain that could hold you back materially there?

Mark, I mean there are clearly risks, and we are managing them on a day-to-day basis. The team is working really hard. I think I said it back in February around the full year results that it was frustrating but manageable. It's still frustrating but manageable maybe more frustrating getting to the irritating we are still being able to manage it. Your specific question on Malvern Panalytical, I mean we have some product lines at the moment that are being throttled on growth by supply chain constraints. We've got a particular power supply unit issue that we are working through, and we're looking at developing an alternative source for that as we speak. But I think generally speaking, we are able -- because fundamentally, most of what we do is assembling. And therefore, we have supply chains around the world, providing the components. We're set up with the suppliers. If we end up with a constraint, we can -- we're fairly well set up to be able to go and find an alternative supplier to be able to create a second source reasonably quickly. And that's really what we've been doing. I would say semiconductor chips, electronics is the single biggest hotspot. All our businesses are wrestling with finding constraints there, and we're having to some extent redesign printed circuit boards or go find alternative sources for chips, but generally manageable. The business has had the most impact is Red Lion, which is stuffing a lot of chips and electronics into its components. And there, we are seeing that it is sort of impacting the growth prospects of Red Lion this year. But as I say, we're working hard. And within our sales guidance range for the full year, 10% to 12%, we factored that into the guidance we've given.

Okay. Understood. Do you think those pressures are getting worse in the second half? Or are they just running at the same level? Because I think there was hope that things would ease, but that seems to be pushed back well into next year from a lot of companies now.

Yes. I think that assessment gels with our view. I mean clearly, we hope it doesn't get much worse from where it is today. I mean I do wonder in certain areas whether a bubble is being created in reality because lead times just keep going out, therefore, companies like ourselves place orders further and further, and put more short-term orders in to compensate. And we are building inventory...

[indiscernible]

Yes, we're building inventory to protect ourselves. So we are not the only ones doing that. At some point we will all turn around and find we've got a lot of inventory on hands, but that's just how it goes.

Okay. Can I ask you one more possibly slightly unfair question. On Omega, it's great to see the numbers going the right way. But what can you point to, to prove that you're really fixing the issues at that business rather than just effectively being bailed out by an exceptionally strong electronics market.

Well, I mean -- well, one, I mean, electronics is a key part of Omega's end market, but it's certainly not the only part of their customer base that they serve. If you look at industrial production in North America, which is 65% to 70% of Omega's revenue. It hasn't grown anything like as strongly as Omega has in the first half. So that points to us taking share. Certainly, the relationship with Newark has been very successful. We are certainly taking more of the share of Newark sales into our sort of process engineering space versus competitors that also sell to Newark. And we're looking to expand that relationship, as we said, into Europe and Asia. And in terms of web performance, it's good to see it's coming back in terms of -- our web performance in June of this year was better than it was in 2018 before we implemented the new website. So there are a number of touch points that clearly are a testimony to the work that's going on by the management team there. But clearly, as I said in earlier, there is more to do, and the team is focused on delivering that.

The next question comes from Andrew Wilson of JPMorgan.

It's just one, just one left. Just looking at some of the markets where the recovery doesn't look quite as full, if you kind of look at your sort of pie chart sales. And kind of looking at the likes of, I guess, academia, energy, we've touched a little bit on automotive, but it's probably quite a straightforward question, but just interested in terms of when you look out at those markets, is the full recovery just a passage of time? Or is there anything that's changed in those markets, which either give you a guess a bit more caution on them recovering to previous levels? Or I guess, conversely, you've been a bit optimistic that this sort of even more than the 2019 level to come. Just interested in terms of the market, which maybe have lagged a little bit.

Andy. Yes, I mean we've talked a lot about auto. I mean it's good to see the decline easing there. As I said, we would have done better in the first half if it hadn't been for some of the customer access issues with VI-grade. I mean that pulled back from the sales for HBK in auto, which is our biggest exposure there. And we certainly see some pent-up demand coming through. Our assessment is that with some of the production constraints that the automated companies have that is holding them back a little bit at the moment in terms of spending that bit extra on CapEx or new programs. So we -- as supply chain constraints ease production rates go up. They're selling more new cars, then we'll see that continue to improve. On the academia front, I think we've had 4 months now of sequential progress. So that's good to see that coming back. And a lot of the areas of interest in academic research, particularly in sort of pharma, drug development, particularly large molecules within the semiconductor development, new materials, fine chemicals, advanced additive layer manufacturing, those areas are still high interest. Battery materials and technologies, all the things that we are focused on across our businesses. So we're sort of in the sweet spot of a lot of the areas of most interest by the research institute. So our view is that, that will progressively come back as societies and economies reopen. And on the energy side, interestingly, oil and gas prices are going back up, which I think will inevitably support some of our customers there. But most of our portfolio is more -- really attuned to sort of either sort of specialty purity around gases and liquids from the refining and the measurement of those, which, again, as the macro improves, we'll see flowing through. And the other area that we're really exposed on is sort of emissions control compliance. So again, as sort of production ramps up in a number of facilities of the macro environment, we'd expect demand to pick up there as well. So we certainly see there is more to come in those markets which will be helpful to maintain momentum.

The final question comes from Richard Paige from Numis.

Just a couple of questions from me, if possible. If I'm interpreting your sales and profit bridge slide correctly. I reckon you managed 46% operational gearing on a like-for-like basis in the first half. Now obviously, you've mentioned some constraints or hold ups for trade in the second half. But I guess I'm thinking on the longer term as well, so some products being held up, we should look at that for the second half and then into '22.

Yes. Rich, this is Derek speaking. So your math is right for the first half. We anticipate that we probably won't repeat that necessarily in the second half, but we're not giving specific guidance on exactly how the second half will play through in terms of operational leverage. And indeed, we're not giving guidance beyond '21 either. And the reason for that is because as we sort of continue to drive the business forward, we are investing. We are looking to double down on some of the areas that we see real growth opportunities. And therefore, that kind of makes the drop-through move around a little bit and make it difficult to give specific guidance on. Nevertheless, what we are seeing, and you can see this in the first half is the operating margin improvement, and we expect that to continue. And our previous comments on operating margin and believing that we can get the business back to historical highs remains intact.

Okay. And just a second one, probably just more on a reporting or strategic basis. Obviously, you were expecting to complete the disposal program in the second half of this year, with the IS businesses, how -- are you going to continue to lead those in that Industrial Solutions division? Or are we going to see those move into their own segments or attach towards the platform business?

Richard, yes, it's a great question. As I said earlier, our sort of focus for Industrial Solutions is to build that into -- really focus it on sort of being a specialty in line measurement and sort of control business. Really sort of leveraging the capabilities that we have within PMS and Servomex in particular. So as we go forward, clearly, the strategy remains in terms of trying to find good M&A bolt-on opportunities to scale up ISD. And we are obviously targeted both at looking at suitable acquisitions for the individual operating companies, as well as acquisitions that could help more than one of the businesses directly. So that's really our focus. And then it really comes down to one of just the timing of being able to execute on some of these bolt-on acquisitions.

It appears we have no further questions at Q&A. So I'll hand the call back to the Spectris team to conclude.

Yes, thank you, everyone, for joining us today. As I said earlier, look, I'm really pleased with the performance we've delivered in the first half of the year. The actions and the approach that we've taken over the past 2 years have really positioned us very well to benefit from the faster-than-anticipated economic recovery that we are clearly now experiencing. And as I said at the outset, we are emerging from the pandemic and more focused, leaner and stronger business. And that gives us the opportunity now to focus on moving into the next phase of our strategy for profitable growth, with an even greater focus on our purpose and very much placing sustainability at the very core of our strategy. And as I said at the full year, I felt we were well positioned coming into 2021. We're starting to absolutely sort of see the benefits of our strategy to execute it coming through in the results in the first half. And I completely still stand by what I said that we are well positioned to deliver long-term sustainable financial progress. So thank you again for joining today. We'll report our Q3 trading update in October. Until then, I wish you well and have an enjoyable summer. Thanks very much.