Spectris Limited (SXS) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to today's presentation on our Industrial Solutions division. Thank you for taking time out of your busy schedules to join us. I'm Andrew Heath, I'm the Chief Executive. Now I am conscious that we have not spent as much time focusing on the businesses within ISD as we have on our platform businesses over the past 2 to 3 years. And as we are now coming to the end of the disposal program, I thought it was timely to put the spotlight on the businesses that we are retaining: PMS, Servomex and Red Lion. So I'm delighted to be here today to introduce you to Mary Beth Siddons, who is our President of the Industrial Solutions business. She joined Spectris in February this year, and today is going to provide a teach-in on the 3 businesses that form our Industrial Solutions division going forward. 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 when I stood up at our Capital Markets Day back in 2019, I said then that I believe Spectris represented an exciting opportunity to make a good company even stronger, and that we would benefit from being a more focused and simplified business. 28 months later, I am very pleased with how we have executed our strategy for profitable growth, alongside the balanced and socially responsible approach we have taken to managing our business. As you saw from both our recent interims and Q3 results, this approach is really delivering for us. We are benefiting from our focus on end markets with strong fundamentals. We've addressed our cost base. We've simplified the portfolio and optimized our assets while also continue to invest in our strategic growth initiatives and also R&D, while also driving the application of the Spectris business system. So 2 years on, we've repositioned our portfolio, prioritizing those businesses where we are leaders in high-growth markets, where we have compelling and differentiated customer offerings, and where we can deliver the greatest value. And in the process, we are improving the quality of the group. And nowhere has this been more the case than in Industrial Solutions. Within ISD, we have gone from 8 disparate operating companies to focus in on 3 high-quality, leading specialist businesses: PMS, Servomex and Red Lion. We have delivered 5 divestments and the sale of our share in a joint venture in just 2 years. And that's an outstanding achievement by our teams, especially against the backdrop of the pandemic. This has also been done at attractive valuations, generating GBP 682 million in proceeds at an average multiple of 14x. And for some of those businesses, the model achieved was notably above those for the group as a whole. We have exited a number of end markets, and we are now concentrated around pharma, semiconductors and energy, all underpinned by strong sustainability thematics. Pro forma sales in 2020 were around GBP 260 million. But importantly, the operating margin has improved from 15.5% in 2018 for the division as a whole to 20% for the 3 retained businesses on a pro forma basis. ISD is now the most profitable segment within the group. In the past 2 years as well as delivering our divestment strategy to focus on the higher-margin businesses, we've also been deploying the Spectris Business System, improving the business's underlying operational performance and investing in them for future growth, and this is reflected in that higher margin. So today, the Industrial Solutions division is more focused and has a much improved financial profile. And as Mary Beth talks in further detail about the retained businesses, I trust you'll see how they fit within the wider group and how they are very much aligned both with our strategy and with our purpose. Back in 2019, I outlined the attributes of the type of businesses we wanted to own, and PMS, Servomex and Red Lion all meet these criteria. They are positioned in high-growth markets with leading technologies, differentiated products and deep domain expertise, which positions them really well with customers. From a financial point of view, they are asset-light, have strong growth potential, high gross margins with further operating margin expansion opportunity. There's also the scope to compound growth here through M&A, and we have an active pipeline of potential acquisitions from bolt-on technologies to larger synergistic transactions. Our balance sheet provides us with significant firepower to look at transactions here as well as for our platform businesses. So today's presentation is a chance for us to really highlight the positive attributes we see and outline the prospects for each of the businesses, both individually and collectively. And with that, I will now hand you over to Mary Beth. As I mentioned, she joined us in February this year, had some really exciting ideas as to how to get the most out of these businesses and how they can work best together to grow and deliver on the opportunities. We'll be talking more about this next year. But today, our objective is for her to shine a light on each of the businesses in turn. Thank you.

Thank you, Andrew, and good afternoon, everyone. It is a pleasure to be here today and talk to you about the great businesses that form the Industrial Solutions division. I am truly excited to be a part of this team. What I have observed since joining Spectris are the many opportunities in these 3 businesses, the passion and our commitment to our customers, our purpose and the dedication of our employees. Over my career, I have had the very good fortune of working with some iconic industry brands like Snap-on, ITW and the Marmon Group, a Berkshire Hathaway company, industrial businesses that participate in a wide variety of end markets: automotive, food and beverage equipment, retail, consumer goods, food manufacturing and aftermarket service. And I have to say, I have a very high affinity for service, and view it as an important strategic differentiator. The similarities in business models, diversified portfolios, managing the concept of flexibility within a framework, is 100% transferable to Spectris. Additionally, having over 25 years of continuous improvement experience, learning from some of the best like ITW, and the disciplined approach to business management aligns completely to the Spectris business system. I would also like to take a moment and acknowledge the teams at Servomex, Particle Measuring Systems and Red Lion along with all the ISD folks for their grace, patience and support as I was introduced to ISD and Spectris. Thank you. Now let's turn to the strategy for the division, how each of the businesses fit into that vision and how they align with the Spectris purpose. Our vision is to be the leading provider of high-precision in-line sensing and monitoring solutions. And as you'll see later, we have differentiated products and support our customers when they experience challenges. We are focused on attractive end markets with attractive growth drivers, and we have deep application expertise providing value. And we differentiate ourselves through product quality, application knowledge and service. Let's talk about our businesses. PMS is the market leader in micro-contamination monitoring solutions in the cleanest of clean environments, such as pharma and semiconductor manufacturing. Our customers rely on our products to detect the smallest trace contaminations, helping them make cleaner drugs and better chips. We can trace contaminants down to 10 nanometers, which is 20 atoms-wide and equivalent to measuring how much your finger nail grows every 10 seconds. Think about that. Servomex is an expert in gas and moisture analysis. Their instruments are utilized in critical applications such as monitoring emissions or ensuring the purity of gases where purity and control are essential for regulatory, safety and quality reasons. As you'll have seen from our annual report, they produce oxygen sensors that are used in critical care ventilators to monitor the amount of oxygen administered to a patient and also measure the purity of gases in a wide range of sometimes hazardous environments where normal sensors just can't operate. Red Lion sits at the heart of the industrial Internet of Things, and their products help customers to connect and monitor disparate assets, providing them with the information they need to control their operations and improve operational efficiency. For example, a large mining company uses Red Lion's products to remotely monitor water levels, usage flows and quality to improve their operations and to use water in a more sustainable and beneficial way. As you can see, all 3 companies are helping make the world healthier and cleaner and our customers be more productive. We are a global business with a local presence. We have more than 1,300 employees in 21 different countries around the world, plus a network of partners in those where we aren't physically present. Together, we serve over 7,000 customers a year. Over 1/3 of our employees are in sales and services, which highlights the strong touch points we have with our customers. All 3 businesses have strong brands in their industries with a reputation for industry-leading technology and quality. Turning to our financials. The left-hand side chart shows the pro forma financials over the last 5 years. We have delivered a strong underlying performance, and this really illustrates the continued investments the business had been making while we have been delivering the divestment strategy. Sales have grown progressively through 2016 to 2019 with a compound annual growth rate of 10% and we're very resilient against the backdrop of COVID. In 2020, sales only declined 8%, 9% on a like-for-like basis, and orders were only 3% lower like-for-like. Year-to-date, we are up 11% to date, so we have seen good recovery, getting back to pre-COVID performance. This reflects the growth in our end markets, but also continued investment in our businesses. For example, PMS introduced 20 new products in 2020, '21, with another 9 planned for next year. Both Red Lion and Servomex have completed product line refreshes and are executing on additional new product launches. We have also been driving improvements in operational performance, as you can see in the margin expansion. This reflects the implementation of the profit improvement program as well as the deployment of the Spectris business system and pricing power from new product introductions. The right-hand side shows the splits by business, geography, route to market, and between instrument and services. Our 3 businesses are roughly equally sized, with PMS and Servomex very similar in terms of geographic focus and routes to market as well as sharing other characteristics. Red Lion partners with more resellers and is very strong in North America. I'm excited about the opportunities for further growth and margin expansion, whether through growth in Europe, increasing our direct sales or increasing revenue from service. And as I mentioned earlier, I love service, supported by continued new product development, deploying a digital strategy and driving the Spectris business system. We are also looking at inorganic opportunities to invest in the businesses, to fill targeted gaps in our product portfolio and to expand into adjacent markets and technologies. While I can't go into specifics, the focus is on synergistic acquisitions where we can leverage our existing businesses to increase value, which are closely aligned to our vision and focus. Our businesses are positioned in a number of attractive end markets with high growth supported by a number of sustainability trends. For example, in pharma, more widespread access to health care, more localized production to ensure the security of supply, increasing regulatory security and the need for data integrity and pharma companies being more receptive to automation. And we're seeing this market grow between 5% and 7% over the next several years. In semicon, localizing production is also a trend, for example, with major U.S. fabs now being built. Rising demand for advanced chips with greater processing power, increasing desire for consumer electronics, and we're seeing this market grow around 6% to 8% over the next 3 years. In the energy sector, the climate challenge is driving a need to reduce emissions, meet net zero targets and be more efficient with resource use, with increasing regulatory controls around this. And it underpins the growth that we're seeing of 4% to 6% over the next several years. And factory automation is ever more prevalent with ever greater demand to connect assets and access information to understand, control -- and control the performance of production processes, compounded by more remote working, with more disparate assets, with more advanced process instrumentation and an increasing focus on productivity growth and yield management with impacts on waste and safety. We see this growth of between 5% and 8% again over the next several years. So overall, we see these businesses growing well above that of GDP, driven by both strong market drivers and the additional initiatives and investments I talked about earlier. Let's look at each business in more detail. We'll start with Particle Measuring Systems. PMS is the leader in particulate contamination monitoring. PMS was founded in 1972 and invented laser particle counters. Its technology can measure extremely small particle sizes, as small as 20-nanometer in water and 20-nanometer in air molecule contamination concentrations in parts per trillion. PMS is organized around 2 key end markets where purity and sterility is critical to the manufacturing process. The clean rooms are controlled environments where product quality can be impacted by contaminants. In their electronics business, which is 50% of their sales, as an example, PMS instruments ensure ultrahigh-purity gases for semiconductor manufacturing and production of electronics such as LED and LCD displays or ensuring ultrapure water for critical cleaning rinsing steps in the semiconductor processing. In their life sciences or pharma business, our instruments and real-time monitoring systems are used by aseptic pharma manufacturers to monitor airborne particles and undertake continuous air sampling. This helps eliminate process contamination and meet regulatory requirements. PMS has recently won the Pharma Innovation Award for the IsoAir Pro product. This award is given by the Pharma Manufacturing journal and is of one of many of awards PMS has received for product innovation. So what are the key drivers for customers to invest in our products? Contamination or poor quality inputs can cause yield loss, product degradation and loss of process control. Customers need the highest sensitivity instruments to help maximize yield and productivity, measuring where the products are exposed to enable fast decision-making. In pharma, sterility insurance is critical to product safety and ensure customers meet regulatory requirements. As well as instruments and systems, PMS offers advisory services, supporting aseptic pharma manufacturers at every step of the process. They really understand the regulatory requirements and provide end-to-end solutions, a real competitive advantage versus our peers. Customers come to PMS for their superior technology with market-leading levels of precision and sensitivity, giving customers a peace of mind. Quality and reliability. PMS sets the standard for contamination monitoring by first designing reliability into its products and advisory services and their expertise. Its people are recognized as thought leaders. They actively participate with customers and industry standard committees to understand the evolving challenges they face. They have an ongoing interaction with regulatory agencies, ensuring continuous knowledge of new industry requirements, providing expert knowledge to support all stages of production. As a result, we stay close to our customers and add value working in partnership with them. The high-purity contamination monitoring market totals around $2 billion. In its served market, PMS is the market leader, operating in a premium niche of the market, given its high precision technology, expertise and breadth of offering. Its market share is around 30%, and it is a widely respected brand, given its high-end offering, which also supports good margins. As well as a growing underlying market, there are a number of adjacencies such as bio-decontamination and environmental monitoring to expand into that can support this growth. This case study is a great example of PMS working in partnership with one of our customers, AST. AST supplies aseptic filling and closing machines for sterile life sciences products. Its customers require a flexible, reliable and safe aseptic and pharmaceutical processing solution to bring their products to market quickly, but most importantly, safely, and in accordance with regulatory controls and good manufacturing practice compliance. AST has partnered with PMS, so its contamination monitors are placed in AST's aseptic filling machines, providing them with a fully integrated system. This fully integrated solution reduce risks, ensures the quality and safety of the product and that it is in full compliance with regulation. Now Servomex. Founded in 1952, Servomex is a premium player and experts in gas analysis, sensing solutions that measure the composition and level of major gases used, produced or manufactured by global industries. Servomex products tell you what gases you have, when you have it and how you can use that information to improve your process control, quality, safety, emissions management or combustion control, all very important information. Gas analyzers can measure gas concentration across a wide range from complete purity to tiny traces. Applications looking to control processes for safety and efficiency need to ensure that the gas concentration or percentage stays within a certain level. Gas purity measurements need to measure ultra trace levels of contamination to ensure the required purity. Parts per trillion levels is equivalent to taking all the water from 20 Olympic swimming pools and being able to detect one single drop of food coloring in it. Think about that. Servomex is organized around 3 applications. One is Hummingbird, which represents 20% of sales, and are sensing technologies for medical and industrial applications. For example, its oxygen centers are used in ventilators, which saw a rapid increase in demand last year for COVID treatments like with GE medical. Purity and specialty applications for high-purity gas analysis, for example, in semicon manufacturing or air separation applications, working with customers like Samsung and Intel. And our Industrial Process & Emissions, what we call IP&E, primarily in oil, gas and petrochemical process and safety applications and the combustion cycle and power generation and manufacturing processes. Servomex products and services help its customers with process control, quality, safety and efficiency. It also helps customers monitor and control emissions and manage combustion processes for safety and resource efficiency. With regulatory compliance and environmental concerns high on customers' agendas, Servomex instrument and systems assure their processes are compliant and safe and help improve operational productivity. The variety of sensors and measurements that Servomex offers is a major competitive advantage and many applications require accurate stable gas analysis at extremely low detection limits. Servomex offers a single-supplier solution for ultra trace analysis. We supply the widest range of gas analyzers available from a single manufacturer, with a total of over 40 products using 14 different sensing technologies. Instead of choosing from just 2 or 3 sensing technologies to resolve an application challenge, we can apply the most accurate and cost-effective solution from its entire range. This underpins our reputation as a gas-sensing technology expert. It is the market leader for paramagnetic oxygen measurement as well as application experts in gas analysis. In addition, its depth of system and service capability is also a key attraction. Its portfolio also includes customized system builds and flexible support packages alongside technical support and training to ensure optimum analyzer performance from the outset. Development of a Servomex system requires genuine partnership between the systems team and our customers. Servomex operates in a GBP 600 million served market in which it has around an 8% market share. However, Servomex does not compete with the industrial automations company who offer high volume and less critical applications, and differentiates itself in the premium end of the market, supplying customers with the higher precision they need. If you were to look purely at this segment, then the market share would be much higher. The wider process analyzer market is much larger in scale, providing the opportunity to expand into attractive adjacencies. Many of Servomex's IP&E customers operate in hazardous environments. Gas monitoring and control in these scenarios is, therefore, critical to safety. It is also important from an environmental point of view, ensuring lower emissions and better resource use. In hydrocarbon processing and power generation applications, process heaters and furnaces are integral. They allow fuel and air to react together and produce extremely high gas temperatures. In doing so, they use large quantities of fuel, generate emissions and can create a safety hazard for plant and personnel. Servomex's FluegasExact and Laser 3 Plus Combustion are highly accurate, responsive gas analysis technologies. They measure oxygen, carbon monoxide, methane and other combustibles to help optimize the air-to-fuel ratio to control the combustion process. Excess oxygen would lead to reduced efficiency and increased emissions. Keeping the combustion reaction at the optimum point therefore ensures safe operation, improving efficiency while also reducing both fuel cost and emissions, and ensures compliance with regulations. Since 1972, Red Lion has provided access to industrial information through automation and networking hardware, enabling communications to disparate plant assets and/or remote installations. Its products include routers for industrial connectivity, Ethernet switch products, human machine interface products and panel meters. These products enable customers to connect, monitor and control their processes remotely, enabling companies to harness real-time data visibility to drive productivity. Red Lion is focused on 2 segments: factory automation, and it's split between automotive and food and beverage; and infrastructure, where assets are dispersed geographically such as water and wastewater, power transmission and distribution, upstream oil and gas and transportation. The expanding IIoT trend, remote working and more advanced process instrumentation are all driving the growth for these products. Customers want to better understand and control how their processes are running to drive improvements in performance and predict problems and maintenance requirements ahead of them occurring. They need to be able to connect multiple types of equipment and systems, aggregate real-time data and have that presented in a readily understandable format. Data is required and information is invaluable. Red Lion provides high-quality, easy-to-use products, which can seamlessly integrate customers' existing systems. Red Lion's USP is able to translate data from all industrial supervisory control and data acquisition and PLC systems. It is agnostic of who provided the industrial control system to its customers. This is supported by its responsive customer service and tech support. These are why customers come to Red Lion. In its core North American market, there is a strong brand awareness. And here, it is the market leader in the panel meter product segment, having won the Control Design magazine's Readers' Choice Award in this category for 21 consecutive years. If we look at the market it operates in, it is sizable and growing. It does come up against some large-scale providers with a full product range operating globally. However, that is not who we compete with. Our focus and value is our ability to connect devices from multiple suppliers seamlessly, and that underpins our strong reputation in North America. It is a highly fragmented market, which provides opportunities and Red Lion is also looking to expand further geographically into specific markets in Europe and Asia. In this case study, Red Lion worked closely with a food packaging equipment OEM who needed an architecture to access real-time data globally to assess and monitor its performance. The existing setup did not allow the monitoring of real-time data, inhibiting its ability to improve efficiency. It required local access to operational data, but without access to private machine data. It also wanted to significantly reduce its maintenance costs. FlexEdge, one of Red Lion's new advanced automation devices, was installed at the machine layer, connecting and communicating with multiple different PLCs and then configured the different data sets to the required destination so that the data privacy was maintained. As a result, the OEM eliminated $1 million in annual licensing fees. Importantly, it had the real-time data needed to monitor operational output and increase efficiency, allowing it to further reduce its cost base. So we believe we have 3 attractive businesses with good organic growth and margin prospects with the ability to compound our growth through M&A. PMS provides leading high-precision monitoring solutions and advisory services in 2 high-growth areas. Given its technical leadership, it has a strong, sustainable margin and opportunities for further growth. Servomex supplies differentiated premium gas analysis products and systems, combined with application knowledge and customer intimacy and is well positioned in a growing market. The markets it serves are underpinned by attractive regulatory and environmental drivers, again, with opportunity to expand into adjacencies. Red Lion provides products which help customers connect and monitor different technologies in an easy way. It operates in a highly fragmented market, and again, has the ability to grow. We continue to develop our M&A pipeline and evaluate and engage with potential targets to scale the businesses individually or in combination. There are some targets that provide the potential opportunity to assist both PMS and Servomex and to build an even stronger portfolio of premium in-line sensing and monitoring capability. As you will have seen, we have 3 really fantastic businesses who all have differentiated offerings and serve attractive markets, which are underpinned by attractive trends. We have delivered strong performance, and we will continue to grow, expand our margins and gain market share to make us the leading provider of high-precision in-line sensing and monitoring solutions. I would also like to say how excited I am to be here to help these businesses achieve this. Our vision is to be the leading provider of high-precision in-line sensing and monitoring solutions. We have differentiated products and services. We support our customers and work with them to solve their challenges. We will leverage the expertise across the group, driving the Spectris business system, building our service organizations, providing analytics to improve customer performance, continue the investments in new technologies, and execute on our inorganic strategies to drive growth. Thank you for your time. We are really excited about our future.

Thank you, Mary Beth. So in summary, we have delivered on the disposal program, significantly simplifying and refocusing ISD as well as the group portfolio. Industrial Solutions is now made up of 3 high-quality specialist businesses, which we have profiled today. Going forward, ISD's focus will be on building on our strength in high precision, in-line sensing and monitoring solutions based around PMS, Servomex and Red Lion. Our strategy remains to invest organically to grow these businesses and to also pursue M&A to compound growth and build scale. In the meantime, we will also take steps to run ISD as a more integrated division. We will retain the business units and brands while looking for opportunities to leverage the existing infrastructure and drive efficiencies. This will involve some restructuring, including leveraging common channels to market where they exist and make sense across PMS and Servomex, leveraging our service infrastructure, building our service as a key competitive advantage across the businesses and strengthening the deployment of the Spectris business system in back office and manufacturing processes. Thank you for listening. We are now very happy to take your questions.

[Operator Instructions] Our first question today comes from Jonathan Hurn of Barclays.

I just had a few questions, if I may. Firstly was just on the margin. Can you just give us a feel for the margin by the various businesses? And looking forward, which one of these businesses do you feel has the greatest upside? That was the first one.

Jonathan, thanks very much for your question. So we're not going to sort of disclose sort of margins specifically by the businesses, but suffice it to say they are all high-margin businesses. They are all either above 20% today or have the absolute potential to be above 20%. And as we sort of profiled earlier, the net of ISD as a group is above 20%. So we continue to invest in the businesses actually quite heavily. All the businesses have strong organic product development roadmaps. We've been investing in Red Lion through a complete product refresh that Mary Beth took you through. Within PMS, we are continuing to invest in making sure we retain our leadership positions in terms of that level of precision and accuracy of measurement. And likewise, across the Servomex portfolio, we're making investments, including sort of next-generation gas analyzers. So from sort of year-to-year, the profile within each of those businesses can vary a bit depending on just where we are in the phase of some of that investment. But say, overall, we certainly see the ability for the Industrial Solutions division to certainly stay above 20%. And as we deploy the Spectris Business System, we will use that to drive further efficiencies.

Okay. So just thinking about it going forward, I think if you look sort of pre-2020, you look at sort of 2018, 2019, in terms of that margin, it's sort of increasing sort of roughly sort of 250 basis points a year. Obviously, 2020 was impacted by COVID. As you sort of look forward sort of '22, can we kind of feel that you can sort of regain some of the momentum that you saw in sort of 2018 and 2019 in terms of the growth?

Absolutely -- yes. No, absolutely. I mean these are high-quality specialist businesses, which as Mary Beth profiled, our customers come to because of the level of precision we can offer or the flexibility and the ability to integrate our instruments into the manufacturing process clearly from Red Lion's perspective. And as you saw in our sort of trading updates earlier through the year, the order intake has been very strong, and that's certainly been the same case within Industrial Solutions. I mean, Mary Beth, you may want to add your own flavor to that?

I think the specialty, the applications, the service offering, the advisory services, I think that there is lots to look forward to as we enter 2022.

Great. Okay. That's very clear. The second one, can I just ask about acquisitions? Obviously, you talk about the pipeline, but if we kind of look at that pipeline, there's some quite big acquisitions out there that could potentially make one of these businesses into a platform business and take it out of the Industrial Solutions sort of portfolio.

Well, so our strategy absolutely remains in place in terms of continuing to invest, as I said, just in terms of our organic offerings, but also to sort of seek out good M&A to further scale the businesses, compound growth and to create either, depending on the nature of the particular target, a -- the businesses have potential to be platforms in their own right or ideally collectively. Because it was with now sort of winnow down the portfolio within Industrial Solutions , there's clearly a lot more overlap, particularly between sort of PMS and Servomex. And if we can find good acquisitions that can complement both businesses, then that really sort of strengthens our position in high precision in-line sensing and monitoring. So that's very much our focus going forward. So the strategy remains, and it really, Jonathan, depends on the nature of the M&A that we could potentially transact on in terms of then really determining what the sort of structure and shape of Industrial Solutions will be going forward. But as you say, I mean, there are plenty of opportunities out there. At the sort of precision end of the market, it is less consolidated. If you look at the sort of general sort of in-line process sensing and monitoring market, there are some big players in the sort of generalist space, big industrial companies. And what differentiates us is really, we pick those specialty parts of the market that require the highest level of precision, require the premium products where we can build strong positions that are then defendable. And that's sort of the nature of sort of the businesses that we are looking to acquire with exactly the same sort of business exposure and business model. And as you look to the sort of market share graphs, you can see that sort of -- if you break that down at the sort of high precision end, it's quite unconsolidated. Customers come because they need a certain level of precision. They need a certain analysis, performing certain measurement, and as such, it's very sort of technology-specific in terms of which is the best technology to deliver that measurement. So that gives us opportunity to sort of build out the portfolio of ISD along those lines.

And if I can just sort of squeeze one final one in. If you kind of look at those sort of growth rates that you put out there, obviously, if you take the sort of weighted average of those by the sort of end market exposure, it kind of implies a level of around about 6%. As we look to FY '22, is that a level that you feel that you could at least do within Industrial Solutions? Or are there supply chain issues maybe within Red Lion for semicon or something that maybe stops you sort of hitting that round about sort of 6% growth?

Thanks, Jonathan. I think that we are fairly confident that those are achievable growth rates given where we're at today and the markets that we find really attractive and their growth rates look like, for sure, they will continue into 2022.

Yes. I think your question was also, Jonathan, sort of -- that was sort of through-cycle basis. For 2022, given our order intake during this year, we are well placed going into 2022. We're going to carry a much larger order book, opening order book into 2022, which positions us very strongly for sustained growth next year. The semiconductor market is still very buoyant. We're still seeing very strong demand in pharmaceuticals, certainly in the aseptic lab market. The -- whilst in sort of Servomex, our oxygen sensors had a big boost last year because of ventilator manufacturing under COVID, that's actually sustained at high levels than we anticipated this year. And we've also been able to sort of put the Hummingbird oxygen centers into other markets. And we're seeing the energy markets now back into positive territory. So there's certainly some good momentum there going into next year.

The next question today comes from Mark Davies Jones of Stifel.

Can I ask a little bit further on the criteria for what you retained and what you sold? Because some of the sold businesses obviously are quite well positioned in their niches as the exit prices indicated and of what you've retained, from what you've said, it's much easier to see how PMS and Servomex fit together and fit with your overall strategy in terms of precision, relatively small niches, relatively strong market shares. Red Lion sits slightly differently, I think, in terms of where it -- how it addresses its market and where it's positioned in the value chain, and it seems to be a bigger market overall. So why does that make the cut and some of the other slightly more specialist companies not?

Yes. Thanks for your question, Mark. I mean when we did the sort of initial analysis back in sort of 2018, 2019, as we said at the time, we very much looked at the relative positions of all of our businesses in terms of their positions in the markets, the nature of the competition, the growth prospects, the sort of the growth underpins and certainly sort of the relative strength of each of those businesses. So it's sort of -- in some ways, it's quite a lot -- it'll be a long answer to go through sort of blow by blow. So like a company like BTG as for instance, which was the first business that we sold, a high-margin business, very good business, had done well over many years, but one that, that business really, its genesis was in high-quality graphic paper, which clearly that market is in sort of long-term decline. The business was repositioning itself to be able to access things like the cardboard packaging markets and the tissue market, but there, the levels of quality control are lower there. And the business itself, about 60%, 70% of the revenue was service-related aftermarket spare parts-related, which ordinarily you would say, fantastic, we like a business like that, which we do. But the -- it was very much driven by their sort of creping blade business, which was under quite significant pressure from low-cost producers in China and across Asia. So we just -- is a net-net imbalance. As a case study, we looked at that business, said, "Yes, look, that business has performed well. It's got very good margins, but its prospects for future growth and sustaining those margins was under quite a bit of pressure." And therefore, we felt that it was the right time to sell the business and to sort of maximize value and then recycle those assets. And that's the sort of analysis, that's the sort of snapshot we took across all the businesses, so without actually going through them individually. But the ones that we have kept: PMS, Servomex, Red Lion, they all made the cut in 2019, and they still make the cut now. We see that they've all got very strong technology, strong brand, strong customer presence, asset-light businesses, high gross margin, good growth prospects and with good sort of market underpins. Certainly for PMS, it's very much sort of pharma; semicon, that business has grown very strongly, even through COVID as a consequence of that. Likewise, in Servomex, pharma, semicon and then high-end sort of industrial processes. But we see opportunities there in terms of sort of the energy transition away from sort of hydrocarbons. I mean we're going to be using hydrocarbons for many years to come, but there is going to be a transition, and we can play both in the emissions control, combustion control of hydrocarbons, which is very important from a safety and cleanliness perspective, but also as we look at the whole energy transition, particularly into the sort of blue hydrogen and potentially ultimately to green hydrogen, that we see that our capability in gas analysis as being quite critical for that market and a good opportunity for Servomex. And then within Red Lion, the Internet -- industrial Internet of Things, Industry 4.0, the whole drive to greater connectivity and really understanding what's happening on the manufacturing process in real time, plus as a consequence of the pandemic for much greater demand from customers for even further remote monitoring. We see that the Red Lion portfolio is very well suited to really for sort of brownfield manufacturing process applications because there, they have -- the sort of USP for Red Lion is that their ability to interface into pretty much 99% plus of the world's SCADA systems, PLCs, remote terminal units. They have all the protocols and they can -- you can basically plug and play a Red Lion interface device into a manufacturing process. It can read other suppliers' controller units, provide that information back to the customers so that they can actually interpret what's going on in the manufacturing processes. We use our switches as well within the manufacturing process at least to communicate that data around the manufacturing facility, then also provide that in class-leading monitors and displays. The panel meter business in Red Lion, as Mary Beth said, we've had 20 plus years of continuous awards on that. So that's -- so Red Lion is a bit of a different business, yes. But again, we see from a sort of monitoring solution perspective, it's got a strong reputation with strong capability.

Great. That ability to read across all the SCADA and PLC inputs, is that something you think is unique there?

Well, that's pretty unique to Red Lion. I mean there are others there. But I mean that's really what differentiates us. And certainly, our position in North America, I think, just underlines the capability of Red Lion. It is recognized in the industry as a -- it was a supplier that you can buy -- you can basically install it, and it will plug and play with your existing SCADA PLC systems.

Great. And just one final detail on that. Is auto the biggest end market for Red Lion overall?

It's one of the big end markets, and we are doing some direct sales to some of the larger OEMs. I mean traditionally, sort of Red Lion has been more of a -- is going to market through sort of distribution. We still -- that's still a big and important part to Red Lion, and that's one of its core capabilities is working at distribution network. But we also do direct sales to the auto OEMs. But again, oil and gas industry is a big buyer of Red Lion equipment and then it spreads across a multitude of industrial process all the way across food and beverage to the other end of the spectrum.

[Operator Instructions] The next question today comes from Andrew Douglas of Jefferies.

A few questions for me, please. Can you just give us a feel, and I understand this will change every year given the strength of the businesses. But for a rough operational gearing that we should be modeling for this division, if we're assuming whatever, 6%, 7% growth going forward, just how we should be modeling that? Secondly, there was a comment before on product refresh helping margins. Does that mean that going forward, you have to continue to be producing 9, 10, maybe even 20 products every year, just to keep that kind of margin -- kind of progression going? Otherwise, you'll have to kind of find other alternatives to improve that margin? And then that leads to my third question. You talked about Spectris Business System deployment. Are we in early days with regards to this division compared to maybe others? Or just trying to figure out how much upside there is potentially from the deployment?

Yes, Andy, always good to hear from you. So I'll take the first question, and then I'll pass to Mary Beth for your second and third questions. I mean just in terms of operational gearing. I mean the 3 businesses, PMS, Servomex, Red Lion are all high gross margin businesses, pretty much aligned with the group gross margin. So from a modeling perspective, you could certainly use the group numbers to model that. So as a consequence, they will have high operational gearing consistent with the other businesses across the group.

Okay. And then the second question, Andrew, around product refresh. So for sure, over the last couple of years, lots of product launches. I would say that over the last few years, we've invested more in our R&D with these 3 businesses. So the outcome is some nice product launches based on voice of customer, et cetera. So I think what you can expect from us is some more of that. We've got fairly robust product roadmaps. Now is it going to be in the same quantities? We'll see. But what I think you can also expect from us is to see different types of product offerings. And as you know, innovation comes in many, many different types, not just product. So we're excited to start to talk about service a little bit more and software. And so the short answer, I guess, is, it going to be the same volume? We'll see, but we should start thinking about innovation beyond just product offering.

Yes. Just quickly before you go to the -- there's a third question, do you think you need to spend the money better? Or is it a question of just making sure that the products that come out of the hopper are actually the ones that you need to drive this business forward?

Yes. Go ahead. Go ahead, Andrew.

So I mean I think -- I mean we've been on -- we'd be very much on the journey of making sure we are spending our R&D dollars better and better. When I came into Spectris 3 years ago, I commented then that we were spending too much money on sustaining and maintaining some of our older product, and as part of the strategy for profitable growth and subsequently, we'll be managing the portfolio strategy at a group level in terms of companies. But within the individual operating businesses and the platforms, they've also been looking very closely at their product and service portfolios and really looking at sort of the 80-20 sort of Pareto of where do we make money, who are our -- where does sort of -- who are our key customers, which are the key regions on some of the older products and services? Are we really making the margins that we should be making? Should we either be increasing the price or even retiring them or selling them off? And we've been going through that process. So our vitality sort of index is now improving as we talked about, I think, at the half year, that's hit very much sort of an inflection point in 2021. I mean, we're typically looking to sort of be running our vitality index going forward sort of between 30% and 40% for all our businesses. And within Industrial Solutions, and maybe I'll just let Mary Beth just quickly just talk about some of the -- get into the -- let's talk about some of the individual product programs that we are doing today because I think that will give you a bit of a flavor of how we're spending our money more wisely.

So again, it will vary by business a little bit. PMS, the funding to improve sensitivity, right; product refresh in Servomex, again, a new line of gas analyzers; Red Lion around new platforms that have been developed, some have been launched. So I would say that in each of the businesses -- again, that robust product roadmap based upon 80/20 and our customer -- voice of customer is all adding to the increase in our product vitality rates, which, as Andrew said, the goal is 30% to 40% to get it up in that range. But I'll say again that we want to think about innovation and driving customer value beyond just products and start thinking about other areas where we can add more value. And then your third question around SBS. It's a good question. So the way that I would categorize it is that continuous improvement in the Spectris Business System is a journey, it's not a destination. And each of these businesses are in different places as it relates to the implementation of SBS. So that's the good news, right? The good news is that we haven't declared victory and we've got lots of opportunities. So as I said earlier, I've had the luxury of being exposed to this type of business operating model and methodology for many, many years. So I'm very excited to work with the teams to drive the improvements in the businesses and the operating functions and back offices, et cetera. I'm very, very excited to see what we'll be able to do over the next number of years.

Yes. We're very pleased to have Mary Beth, given her, particularly her ITW experience, that's -- the ITW sort of 80-20 principle of how they look at their businesses. Mary Beth is actually schooled in all of that and is bringing a lot of that knowledge and experience to bear in terms of really how we look in terms of the Spectris Business System to build on not just our sort of lean, waste reduction tools and our sort of growth tools that we have, but also in terms of looking across the portfolio, again, from a sort of Pareto 80/20 perspective. So Mary Beth, one of the reasons that we -- I brought her into the group was very much on the back -- based on her experience, not least sort of her ITW, Snap-on, lean and 80-20 sort of principles that she picked up from ITW, which are all very relevant to what we're -- the journey we're on.

[Operator Instructions] Our next question comes from Robert Davies of Morgan Stanley.

I was having a look on, I think it was Slide 9 of your pack, where you showed the sort of progression in margins and sales growth over the period 2016 to '19. I'd just be curious, that's obviously kind of the 3 or 4 years pre '16, the group numbers were not as strong as they were over that period that you've shown. I'd just be kind of curious during that sort of '13 to '15 period, do you have any visibility -- I know that maybe you don't have the data going back that far. But I'd just be curious if you had any visibility in terms of growth and margin volatility of those retained businesses over that period. Because obviously the sort of 3 or 4 years here on the chart doesn't give us a huge amount of history. That was my first question.

Robert, thanks for your question. Off the top of my head, I can't -- I haven't got that information, to be candid with you. And equally, the group, it wasn't structured in the same way either. So this is sort of pro forma numbers. I'm not sure how easy that should be to go that much further back in history and give you a realistic guide. But I think what is -- I would say what characterizes the 3 businesses that we have here is that they are all really strong brands with very strong customer recognition where customers will buy from PMS, Servomex or Red Lion on a sort of no-regrets basis because they know that they're buying the highest precision, the highest quality. And as such, all 3 businesses have actually been very resilient. And that came through during 2020. I mean ISD really was the most resilient of all of our businesses last year, clearly helped by the pharma exposure within PMS and Servomex, but equally -- and also from sort of the rebound in semicon has helped. But these are fairly essential bits of kit that customers need to buy to be able to control their processes. And equally, given they're asset-light, we've also been able to sort of flex well in terms of responding to the market. So Red Lion had a more -- had a bigger exposure, obviously, to industrial automation, which got hammered last year, but they did a very good job in sort of holding their sales up as best they could, at the same time adjusting their cost base. So their margins last year held up very well, certainly not even -- absent the pandemic, they held up well. So these are 3 quality specialist businesses that are well regarded in the marketplace. And with an operating model, absolutely fits what we're looking for from a group perspective.

Okay. So it's not fair to assume that there's quite a big differentials in the drop-through on those different businesses? So I guess, given -- I was sort of leading myself towards the question around Red Lion versus sort of PMS. Do you have sort of, I guess, much higher operating leverage on the Red Lion business than you would on PMS because of the different end markets of industrial automation versus semi -- versus pharma? Or is that not the case?

Well, I mean going back -- I've had a quick look at the numbers after Andy Douglas' question. So PMS and Servomex are very much in line with the sort of -- around the sort of group average. Red Lion, from a gross margin, just is a few basis points lower but is still in the 50s. So they're all pretty much in the same space. And -- but clearly, as markets come back and we launch our new products and stay -- keep our vitality up, we're well placed to grow and grow profitably. And I think the interesting aspect of all the businesses is the end markets that are underpinned by some good fundamental drivers, whether it be pharma, semicon, from a more connected world perspective and just the sheer computing power demands that's required through to making sure, from an industrial process, they're controlled safely, but also cleanly, and our customers meet their emissions requirements and certifications. And equally, from a Red Lion perspective, it's really the connectivity trend that is really underpinning various end markets and positioning.

My 2 other questions. One was just on, I guess -- apologies if I missed it earlier in the presentation. But just on the medium-term outlook, are you keeping these -- is the plan to kind of keep these 3 businesses together? Is it to sort of bolt-on and build up to have these convert themselves into stand-alone platform businesses, if you can get the right acquisitions? Is that the plan? Or is there a possibility that in 3 or 5 years' time, we could still have these 3 businesses sitting within Industrial Solutions as a kind of stand-alone division, and just kind of ticking along? That was my second question.

Yes. So our focus is very much around now that we've rationalized the portfolio, significantly simplified and refocused ISD, not just the group, the focus is around high precision in-line sensing and monitoring. And we have 3 great assets within that space today. And I think I answered the question earlier, just about the M&A prospects, the premium end of the market, it's not consolidated. Customers very much buy around key technologies, key products that are capable of the highest level of precision and accuracy for specific applications. So that gives us a good feel actually for finding acquisitions that either sort of overlap with our existing businesses or immediately adjacent to them. So certainly, our intention would be to build out a portfolio of businesses very much focused on this space. But equally, as I said earlier, it just depends on what an acquisition might be or the number of acquisitions we can do, whether it's focused on one of the businesses and whether it overlaps one or more of the businesses. So sort of Industrial Solutions portfolio, clearly, we're looking to compound growth through M&A and scale the business up. But just exactly how that evolves over the next few years is not necessarily fully in our control.

And then my final question was just around the M&A opportunities. I guess when you look across the competitive sort of landscape, where do you see the biggest opportunities for M&A? Is it sort of small sort of -- is it divisions within larger industrial companies? Is it sort of small private players? Who are the sort of potential targets when you look across the different divisions or different bits of that division?

So I think that it's a sum of all of that. So there are opportunities for product line bolt-ons for some of the businesses. There are more transformational opportunities. So it's -- we are looking in all of those areas. So it's not going to be any one solution. I think it's going to be a combination of those that will drive our M&A activity.

We have no further questions on the line. So I'll hand back to Andrew for closing remarks.

Thank you, Lydia. And look, everyone, thank you very much for joining us today and for your questions. As I said at the outset, I'm really pleased with the delivery of the execution of our strategy for profitable growth over the last 3 years. We've repositioned the portfolio, we have significantly simplified and refocused the group and not least so within Industrial Solutions. And as you've seen today with Industrial Solutions, we have now 3 high-quality specialist businesses in PMS, Servomex and Red Lion. I hope you found the profiling and the explanation of those businesses really helpful today. But if you have any further questions, please come back through Siobhan Andrews, our Head of Investor Relations. If you have any further questions, we're happy to try and answer those. And as I said through the questions, our strategy remains to invest organically in these businesses as well as to seek out good accretive and attractive M&A to further scale and compound the growth within Industrial Solutions. And I'll leave it there. Mary Beth and I very much look forward to updating you on the future progress of Industrial Solutions in our upcoming various updates. So thank you very much for joining, and if I don't speak to you between now and the end of the year, I wish you all a very happy Christmas. Thanks very much, and take care.