Spectris Limited (SXS) Earnings Call Transcript & Summary

Good morning, and welcome to the Spectris 2021 Full Year Results Call. My name is Seb, and I'll be the operator for your call today. [Operator Instructions] I will now hand the floor over to Andrew Heath, Chief Executive, to begin.

Good morning, everyone. Welcome to Spectris' Full Year Results for 2021. Thank you all for your continued interest in our business. I'm Andrew Heath, I'm the Chief Executive. And I'd like to start this morning by saying thank you to all of my Spectris colleagues for their hard work and support again over the past year. Together, we've continued to face the challenges from COVID-19 and the world-publicized global supply chain issues, head on. Our teams have worked tirelessly, and I couldn't be more grateful for their commitment and support. Thank you. In many ways, 2021 was a challenging In many ways, 2021 was a challenging but also a very good year for Spectris. Not only did our end markets recover strongly. On top of this, we saw equally strong demand for our products and services. It has been yet another year in which we continue to execute our strategy for profitable growth. We certainly have this strategy in 2019, and through consistent focus and execution, the Spectris we have today has been significantly strengthened, as we will come to discuss. One of the reasons execution against this strategy has been so effective has been because of my colleagues right across our businesses. They believe in it, they own it and they aim high, consistent with our core values. And this underscores the importance of being purpose-led. Right across Spectris, we're aligned behind our purpose to deliver value beyond measure. And this means heart in the power of precision measurement to equip our customers to make the world cleaner, healthier and more productive. This is echoed across the group. We know our purpose, why we're here and where we want to get to. We also know and live our values. We speak the culture of the business and how we conduct ourselves along the way. And we know our strategy, which us our guidebook and the roadmap to get us where we want to be, bringing our purpose to life. As I've said, last year we saw strong demand for our products and services. We entered 2022 with good momentum and record order book right across the group. We are creating a Spectris that is a more focused, high-quality, more profitable and a more resilient business, supported by a very strong balance sheet. We have demonstrated our ability to reduce cost responsibly, drive organic growth, expand margins, allocate capital with discipline for attractive returns and we've made several synergistic acquisitions to enhance our customer offering. In 2021, on a like-for-like basis, orders were up 19%, with sales up 10%. And this means we've outperformed buoyant end markets with market share gains supported by new product and service launches. We delivered good financial performance. Our adjusted operating profit improved 29% on a like-for-like basis to GBP 209.4 million, with an operating margin of 16.2%, reflecting the growth in sales and the operational improvements we've made supported by the Spectris business system. Having returned the business to an asset-light model, adjusted cash flow conversion was 96%, and we further strengthened the balance sheet, with net cash of GBP 167.8 million at the year-end. We want to retain this position, given our pipeline of M&A opportunities, so we elected not to do a special capital return this time. We've announced a final dividend of 71.8p per share, and that's a growth of 5% in line with our policy. In the fourth quarter, supply chain challenges and the onset of Omicron constrained our ability to convert our strong order book to revenue, resulting in some order fulfillment being pushed into 2022. Now this was clearly frustrating as we could have delivered an even better performance last year, but this revenue is not lost and will be realized in 2022. And as we look forward, I have many reasons to be optimistic. We are committed to being a leading sustainable business. We have set ambitious Net Zero targets and have started to deliver our programs to achieve them. We're also looking beyond our own operations to support the communities we operate in. The Spectris Foundation has been established to promote STEM education, and we've expanded our broader STEM outreach program. And we're also aligning our strategy with key sustainability themes that will underpin future growth. Turning to our strategy scorecard. The message here is one of strong execution. I'm very pleased with how we have continued to execute strategically. Our strategy is working. We have demonstrated our ability to reduce costs responsibly, drive organic growth, expand margins, allocate capital with discipline for attractive returns and have made several synergistic acquisitions over the past year to enhance our customer offering. And this gives us a much stronger business today than we started with in 2018. We maintained our investment in R&D and CapEx in 2021, and we'll be progressively increasing expenditure to fuel future growth and efficiency through this and following years. When compared to 2019, revenue has recovered within 2% of pre-pandemic levels with margins ahead, and that reflects the enhanced quality of the group. We're making good progress in returning Spectris back to its previous margin highs of over 18% and ultimately exceed them over the longer term. Also, during the course of 2022, we'll move into the next phase of our strategy for profitable growth, and we'll talk more about this as the year progresses. You should not expect the big themes of our scorecard to change, and we will retain our discipline and focus when it comes to driving our organic growth initiatives, growing margins and balancing cost discipline with investment in growth. However, the work over the past 2 to 3 years means that we are now well positioned to go after numerous opportunities we see in front of us. We are aligned to end markets with attractive growth trajectories and sustainability trends, providing the opportunity to accelerate our emissions, and I'll talk about this a little more later on. In 2021, we committed to being a leading sustainable business, both in the sustainability of our own operations and our wider contribution to addressing the global environmental challenge. I am very pleased by the progress we've made so far to embed our sustainability strategy. Across the group, there is renewed energy and innovation, all aimed at making the world cleaner, healthier and more productive. At the time of our first half results, we published our Net Zero targets, which will see us work to minimize the emissions footprint of our own activity and also the activity across our value chain. These targets, though ambitious, have been subsequently validated by the science-based targets initiative against a 1.5-degree centigrade climate warming scenario. And this year, we also undertook a detailed climate scenario analysis in support of TCFD reporting to gain a clear understanding of the potential risks and opportunities from climate change. We have published a detailed report on this on our website. We recognize that the greatest different Spectris can make to a Net Zero world is through our products and solutions, increasing our focus on product efficiency and circularity. We are already playing an important role in many sectors that are transforming rapidly such as pharmaceuticals, energy, transportation and where customers want to work with partners that have the capabilities and the capacity for innovation, helping them address these new challenges and accelerating their own journeys to Net Zero. As we refresh our strategy this year, sustainability will be central to how we will make a difference for our customers and the planet, very much aligned with our purpose. An important part of being a sustainable business is being able to look beyond the day-to-day operations of the group and consider the broader factors that contribute to our longer-term business success. And key to this is safeguarding the physical and mental well-being of our employees and ensuring Spectris is 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 feels they belong here. Our work on building a greater diversity and inclusion continues and we'll be strengthening our approach to this and to talent development through a number of initiatives in 2022. This year, we were proud to launch our global STEM strategy. It is focused on ensuring that the group is both an employer and partner of choice. And for example, supporting young professionals, building partnerships with universities and enhancing our apprentice program to attract young talent into Spectris. This is consistent with the rationale for established in the Spectris Foundation, which were set up to support education in STEM subjects. The Foundation recently made its first awards for a 2-year STEM education project in U.K. schools in association with STEM ENTHUSE partnership and also an employee-nominated donation to the Sheffield UTC Academy to fund a project for peoples to design and build an environmentally friendly racing car. These will be the first of many more projects that the foundation will help to fund in the months and years to come. I'd now like to hand over to Derek, who will run through the financials in more detail before I come back to talk to you about the businesses and our future opportunities.

Good morning, everyone. For consistency, I'm once again starting with our scorecard slide. As you would have expected, we are showing a very positive performance compared to 2020, with ticks across the board. As we did at the half year, given the nature of 2020, we have also included a comparison on this slide to 2019 to assess how we are performing compared to pre-COVID. I will cover the specific numbers during my presentation, but overall, we have demonstrated a strong performance in 2021 and continue to make progress compared to the pre-COVID performance of 2019. Let me now take you through the specific details. Reported sales decreased 3% to GBP 192 million. Adjusting for the impact of disposals, net of acquisitions, which reduced sales by GBP 107.5 million or 8% and foreign exchange movements reducing sales by GBP 54.6 million or 5%, you see 10% growth on a like-for-like basis compared to 2020. Adjusted operating profit increased by 21% to GBP 209.4 million on a reported basis and by 29% like-for-like. Adjusted operating margins increased by 320 basis points, with like-for-like adjusted operating margins up 240 basis points compared to 2020. Adjusted profit before tax was GBP 204.3 million, up 23%. Our tax rate came in at 22%, in line with guidance. Adjusted earnings per share were 140.7p, a 26% increase over the prior year. And the final dividend per share of 71.8p 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 141% achieved in 2020, which was unusually high, we were pleased to achieve 96% in 2021. Our net cash at the year-end was GBP 167.8 million. And finally, on this slide, the trend of our return on gross capital employed has now switched and increased by 330 basis points from 9.9% to 13.2%. This slide provides a graphical view of the main P&L movements in the year. Sales are shown across the top, with adjusted operating profit at the bottom. First of all, I have adjusted 2020 to remove the sales and operating profit relating to the disposals of Millbrook, B&K Vibro, ESG and NDC technologies in order to provide an organic baseline. Foreign exchange translation movements reduced sales by GBP 54.6 million and operating profit by GBP 10.9 million. We saw a good like-for-like growth in revenue, up 10% as well as a 50 basis point increase in like-for-like gross margins to 57.1%, reflecting the incremental volume and favorable pricing, offsetting inflationary cost pressures. There was an expected increase in like-for-like overheads up GBP 24.8 million, with the reversal of certain temporary savings, such as GBP 9 million of prior year COVID-19 overseas government subsidies, investments of growth and salary inflation, all impacting the cost base. Acquisitions, primarily Concurrent Real-Time, added GBP 18.8 million of revenue and GBP 3.9 million of operating profit, resulting in the GBP 209.4 million of adjusted operating profit, a margin of 16.2% compared to 13% in the prior year. This slide shows how we generated cash in the year and illustrates what we have then done with that cash. Adding back GBP 37.3 million of depreciation and amortization charged to the adjusted operating profit brings you to the GBP 246.7 million of adjusted EBITDA generated in the year. As trading activities increased in the second half of the year and as we invested in more inventory, considering continuing supply chain challenges, our working capital utilized GBP 10.7 million of cash during the year. Despite this, our average working capital as a percentage of sales ended the year at a respectable 11%. Capital expenditure was GBP 35.3 million. And this gives us our adjusted cash from operating activities of GBP 200.7 million, which we divide into our adjusted operating profit to get our cash conversion metric of 96%. There was then a significant inflow of cash relating to disposals, offset by the acquisition of Concurrent Real-Time. Within the GBP 225 million of cash income is GBP 333.7 million of 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 135.5 million of acquisition payments and GBP 11.5 million of other transaction costs. We then spent GBP 201.3 million, including costs on the share buyback announced last year. During 2021, we established the Spectris Foundation with a GBP 15 million donation, which was made possible by the GBP 23.2 million gain on equity investments recognized in 2020 and shown on my next slide. We paid GBP 79 million in dividends and GBP 11.9 million of cash has been spent in relation to restructuring. Interest and tax had a combined cash impact of GBP 35.1 million, with other movements of GBP 21.7 million, which included GBP 14.8 million of lease payments and GBP 5.9 million of Software-as-a-Service payments, bringing us to the net increase in cash for the year of GBP 61.7 million. The reconciliation between our adjusted operating profit measures and our statutory profit measure, down to statutory profit before tax is set out on this slide. Restructuring costs were limited to GBP 10.2 million as we completed the final aspects of activities started during 2020. The GBP 19.5 million of transaction-related costs includes the GBP 15 million donation noted on my previous slide. And the remaining GBP 4.5 million relates to costs associated with acquisitions, including Concurrent Real-Time and Creoptix. In April 2021, a new IFRIC interpretation was issued relating to the capitalization of costs of configuring or customizing application software under Software-as-a-Service, SaaS arrangements. As a result, we have amended our accounting policy and identified SaaS arrangements where we do not have control of the software. For these projects, we have derecognized the intangible assets previously capitalized and recognized the expense within the consolidated income statement. Material SaaS projects, which would have been previously capitalized, will now be excluded from adjusted operating profit as a new alternative performance measure line called configuration and customization costs carried out by third parties on material SaaS projects. These projects incurred a net P&L charge of GBP 5.2 million in the year. There were no goodwill impairments in 2021 and the amortization of acquisition-related intangibles was at a more normal level of GBP 19.4 million. And this reconciles to the GBP 154.9 million of statutory operating profit. Profit on disposed businesses was GBP 26.5 million. Financial income includes a GBP 5.1 million interest credit following the positive settlement of an EU dividend tax claim and a GBP 7.2 million FX gain on intercompany balances. After subtracting GBP 5.6 million of finance costs, this brings you down to a statutory profit before tax of GBP 388.6 million for the year. 2021 was a busy year in terms of completing disposals and we also acquired Concurrent Real-Time. I have, therefore, included a pro forma slide to help you with your models by illustrating how the group would have looked with all of the disposals removed and with a full year of Concurrent Real-Time. Starting on the left-hand side is our reported result for 2021. I have then removed the 2021 contribution for each of Millbrook, B&K Vibro, ESG and NDC technologies. Finally, I have annualized for the acquisition of Concurrent Real-Time in order to provide you with a reasonable baseline upon which to build your expectations for 2022, which brings me on to 2022. As we think about 2022, as always, we have several headwinds and tailwinds to consider. Starting with the headwinds. We do not expect the same level of COVID challenges that we have seen over the past 2 years. However, we continue to experience localized COVID-related interruptions and anticipate that this will remain the case in 2022. We also expect supply chain issues to continue, but cannot predict exactly where or the absolute impact this could have. Nevertheless, we anticipate these issues will start to ease in the second half of the year. We expect to face labor cost, material cost and overhead inflation during 2022 and have seen a wide range of forecasts from many commentators. We will continue to control what we can and are confident of our ability to mitigate this headwind through our pricing strategies. And finally, we should recognize the potential risk associated with increased geopolitical disruption. Our assumed exchange rates for 2022 are $1.38 and a EUR 1.16. If that proves to be incorrect, now for every cent change on the dollar, it has a GBP 3.1 million impact on sales and a GBP 0.8 million impact on profit. And for every euro cent change, it's GBP 2.5 million on sales and GBP 0.5 million on profit. On the positive side, we have several tailwinds. Our order book remains strong and supports our continued organic growth confidence into 2022. Our organic growth will continue to benefit from new products and services. Every year, the Spectris business system becomes more established, and we will continue to deploy it to reduce waste and inefficiency and remain confident of continued margin progression. As I mentioned on my previous slide, we will benefit from the full year contribution of Concurrent Real-Time, and we will continue to actively look at additional acquisition opportunities. In terms of other guidance, CapEx will be around GBP 50 million. In combination with our Creoptix acquisition and new projects, we expect to increase our R&D spend by an additional GBP 10 million in 2022. We expect to spend around GBP 20 million of Software-as-a-Service costs as we develop a new ERP system at Malvern Panalytical and from next year at HBK. In total, we anticipate an investment of around GBP 45 million over the next 3 years, which will be captured by our new SaaS performance measure. We expect our tax rate to be 22% and working capital will stay within our previously guided range of 11% to 15%. And with that, I'll hand you back to Andrew.

Thank you, Derek. Now let's take a quick look at our end markets and then turn to our businesses. We have seen a good recovery in many of our end markets. And apart from energy and utilities, they have all returned to growth. Machine manufacturing, pharmaceutical and semiconductor stand out as the strongest performers. In machine manufacturing, positive outlook and the strong fit of our sensor applications for food production, medical equipment and semiconductor manufacturing continued the buoyant performance. In pharma, we're seeing a significant uplift in support of vaccine and viral vector development and also manufacturing as well as an increase in the onshoring of production, and this has resulted in a record order intake. The onshoring trend is also supporting growth in semicon as is the rising demand for chips, which is driving an increase in investment programs from major semiconductor manufacturers. Automotive is now back into growth territory, recovering well in the second half of the year. And although Energy & Utilities remained weaker than last year, the second half saw growth and orders into the sector demonstrate the market is recovering. Turning now to our businesses and starting with Malvern Panalytical. We had a strong year, achieving a record order intake following 25% growth in like-for-like orders. Asia was particularly strong as was continuing demand in pharma and advanced materials. Sales increased 11% on a like-for-like basis, supported by both the strong market recovery and the impact of new products like the Zetasizer Advance and OmniTrust, which have both outperformed sales expectations. Revenue would have been stronger if it wasn't for the challenges experienced in Q4 and some sales being pushed out into 2022. However, this does position the business well for the first quarter and the year overall. The higher volume, combined with greater efficiency and positive pricing, helped drive a 36% like-for-like increase in adjusted operating profit and a 320 basis points rise in adjusted operating margin. Now this is despite investment being increased to both enhance the performance of existing products and develop new solutions, with software, services and analytics being key areas of focus. The Smart Manager Service was a key launch during the year, providing customers with insights into the real-time utilization and health of their instruments to help improve both utilization and process productivity. The key strategic focus has been on the pharmaceutical industry. It has been good to see organic sales increasing this area by 34% over the past 3 years. To compound this growth, a small but important acquisition has recently been completed to tap into key growth trends in this market. Malvern Panalytical has a leading position in measuring the structure, stability and affinity for drug development. This enables customers to ensure the arrangement of the substances, the long-term quality and the drug binding come together in the product formulation. To further strengthen our position and expand our offering in the Affinity area, we acquired Creoptix in January. They provide industry-leading instruments and software for measuring real-time biological and molecular interactions. While it is an early-stage business, the combination provides an exciting opportunity to quickly scale Creoptix's superior technology in terms of both speed and sensitivity by leveraging Malvern Panalytical's extensive customer base. HBK achieved 16% like-for-like order growth and again finished the year with a record order book. Like-for-like sales were 8% higher, reflecting the supply chain constraints and some longer-dated orders from an increase in OEM business. But again, this positions us well for 2022. Robust demand continued in machine manufacturing, supported by strong demand for our weighing technologies. It's also been pleasing to see a steadily improving automotive market come through last year. HBK continues to make solid progress on improving their financial performance. On a like-for-like basis, adjusted operating profit increased 32% and adjusted operating margin increased 280 basis points. This was mainly driven by the higher top line drop-through and ongoing efficiency improvements from the merger. But we're not stopping there with further initiatives in train. In 2021, HBK moved to a new site near Copenhagen with updated manufacturing processes to better serve customer demands and a new go-to-market model. Also, a new CRM system is being rolled out during 2022 as we work to further simplify the operating model. And this will be complemented by the deployment of one common ERP platform across HBK over the next 3 years, following on from a similar implementation planned in Malvern Panalytical. Alongside these operational improvements, HBK has also been busy investing in organic growth projects aligned to the strongest market growth opportunities, such as electrification, smart sensing, virtual testing and simulation and digitization. A number of new products and solutions have been launched this year, including our latest generation of NVH simulation software, with significant new features and capabilities to give customers a highly accurate experience of sound and vibration through the product design and development cycle, and the QuantumX data acquisition system to simplify the complex measurement environment and battery electric drivetrains, hydrogen fuel applications and structural health monitoring. HBK also made 2 synergistic acquisitions during the year, Concurrent Real-Time and VIMANA. Now we've talked about Concurrent previously. So just to say that the integration to HBK's virtual test division is going well and to plan. In August, HBK also completed a license and asset purchase agreement with VIMANA, a provider of software and services for smart manufacturing. The transaction brings data platform technology and software to HBK and will form the basis of a new engineering center of excellence, focused on data management and connectivity. Its open architecture approach will allow customers to easily integrate test data into their networks. The first product will be launched alongside HBK's new data acquisition system during 2022. Turning now to Omega. I am pleased to say that we saw a much improved performance in the business last year. Omega posted above-market growth with strong demand from a strategic OEM and distributor accounts, new business wins and other share gains. Orders were up 23% and sales up 14% on a like-for-like basis. There was strong growth through our key channel partners in North America and also from semiconductor customers in Asia. Sales through the newer partnership were up 50% year-on-year, and the relationship is currently being extended to Europe and Asia. On a like-for-like basis, adjusted operating profit increased 82%, with margins rising 430 basis points. This resulted from good operating leverage on the higher sales volume, price gains and also efficiency improvement. This performance reflects the impact of the revised strategic initiatives to drive above-market growth and in turn, improve margin. Optimizing the customer experience has seen web orders and conversion rates back to 2018 levels that's pre the new web offering and record average order values. An investment in new products is better focused, targeting both customer needs as well as emerging technologies. And the HANI, which is the high-accuracy, non-invasive temperature sensor and the Layer N products for industrial Internet of Things solutions were key product launches in the year. Alongside this, initiatives to simplify the business and improve operational performance continued. Now there is 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 8%, with strong demand from semiconductor and pharmaceutical customers, reflecting a strong market recovery and the impact of recent product launches. Like-for-like adjusted operating profit increased 10% and margins increased 30 basis points. This primarily resulted from the sales increase and also reflected the impact of the disposals, which enhanced the division's margin. As we detailed in our presentation in December, ISD is now made up of 3 high-quality specialist businesses. The strategic direction is centered around being a leading provider of high-precision in-line sensing and monitoring solutions based around PMS, Servomex and Red Lion. Each of the businesses will continue their customer-oriented strategic initiatives and product development strategies to drive organic growth. Alongside this, ISD will be run as a more integrated division, retaining the business units and brands while looking for opportunities to leverage the existing infrastructure and drive efficiencies. Before concluding, I would like to share with you just a few examples of how we equip our customers to make the world cleaner, healthier and more productive. So starting with cleaner. We are delighted to be supporting the exciting work at ITER to prove the feasibility of fusion as a large-scale, sustainable and carbon-free source of energy. This engineering challenge involves extreme environments, for example, high temperatures and huge electromagnetic fields with really large instrumentation requirements. Being experimental, everything is first of a kind and requires highly specialized materials and processes as well as precise measurement instrumentation. HBK has a long collaboration history with ITER and recently won a new EUR 1.4 million systems order, reflecting its unique capability and expertise in delivering high-performance measurement systems using both optical and electrical technologies. ITER-specific requirements often reach physical limits. And with its expertise, its centers and its software, HBK is able to build the customized solutions that the customer needs, cementing its position as a valued partner. Turning now to Healthier. We continue to be actively involved in supporting the fight against COVID. Malvern Panalytical's Differential Scanning Calorimetry technology as a gold standard technique for assessing thermal stability and facilitating the selection of stable vaccine formulations. Using this technology, Malvern Panalytical is collaborating with Leukocare, who specialize in biopharma formulation development to understand how the stability and the subsequent supply and storage of the vaccine can be improved. Bringing together Leukocare pioneering expertise with Malvern Panalytical's analytical know-how is helping to increase the production and simplify the distribution of COVID vaccines. And this technique can be further used to achieve stability improvements for a wide range of vaccines. Lastly, to more productive and Omega's new award-winning product, the HANI. In the food and beverage industry, temperature control is critical to ensure product integrity and quality, for example, measuring the temperature of a fluid moving through a pipe during manufacturing. The HANI is easily installed by clamping it externally to the pipe, delivering immediate high-accuracy temperature readings without any costly installation and downtime. Also by being noninvasive and noncontact, it avoids contamination risk, which can affect product integrity. So it allows for easy connectivity and data collection and the flexibility to easily change the temperature monitoring system around the facility. Using HANI, the Food Innovation Center at Rutgers University achieved their required temperature measurement outcome within seconds rather than days it would have historically taken, all while ensuring product integrity. So I wanted to finish with a few insights into our thinking on the next phase for Spectris as we look beyond the strategy for profitable growth. In 2019, we set out to simplify and bring more focus to Spectris. At that time, the group comprised 13 operating companies and lacked strategic clarity. By executing our strategy, we have delivered a Spectris that today is more focused, more profitable and more resilient, with sustainability at the heart. This gives us a very strong platform to accelerate our ambitions. During 2021, we conducted an in-depth review of our operations and assessed our activities across a range of key sustainability trends that offer exposure to high-growth, high-margin end markets. We are already well positioned to take advantage of these trends, which will support the next phase of our development. To go into a little more detail, we have identified 7 growth trends, which include advancements in health, the transformation of mobility, the energy transition, responsibility in sourcing and production, the transition to the circular economy, environmental protection and the evolution of food production and advanced agriculture. Spectris has strong positions in many of these areas today, and we see exciting opportunities to accelerate our growth align to these trends over the coming years, both in our organic development and in targeted M&A. For example, we see opportunities across all these trends at Malvern Panalytical. Health is obviously a key area of exposure, and we see continued strong growth in Pharma and Life Sciences, a key market for PMS, too. Alongside this, the transformation of mobility and energy transition is driving significant investment in new battery materials and new greener technologies and fuels as well as environmental protection. This will play not just to Malvern's strengths but to HBK, Omega, PMS and Servomex as well. And with material use set to double by 2060, we see an opportunity to improve the [indiscernible] of our own products in addition to developing recycling solutions in support of transferring waste materials to new product. These themes are very much aligned with our purpose, and this will feature heavily as we articulate the next chapter for the business, a chapter that will take us beyond our existing strategy for profitable growth. And I look forward to talking to you more about this later in the year. So in summary, we delivered a good financial performance in 2021. Demand for our products and services has been and continues to be strong. And although supply chain and COVID challenges somewhat constrained our ability to maximize sales in the fourth quarter, we entered 2022 with a record order book and have made a strong start to the year. This gives us confidence in our ability to deliver continued good growth and to maintain our progress in returning the group to its previous margin highs and ultimately exceeding them over the longer term. We have made significant progress in executing our strategy. Spectris is now more focused, higher quality, more profitable and a more resilient business, supported by a very strong balance sheet. We have demonstrated our ability to reduce costs responsibly, drive organic growth, expand margins, allocate capital with discipline for attractive returns and have made several successful acquisitions to enhance our customer offering. Looking forward, we will build on this progress, investing in our businesses to take advantage of new growth opportunities, strongly aligned to our purpose and to our focus on sustainability. We will continue to aim high and be bold in our pursuit of enhancing value for all our stakeholders. Thank you. And we'll now be happy to take your questions.

[Operator Instructions] Our first question comes from Andrew Wilson at JPMorgan.

I've got 3, if I can take them one by one, if possible. I was just hoping to -- you've mentioned a number of times the headwinds that you had in the Q4. And if you could I guess, help to quantify what you think the lost sales impact might have been, just trying to think, obviously, how the implications of that for 2022.

Andy, I thought you had 3 questions. I was waiting for 3 questions, but let's take the first one first. So yes, I mean, clearly, as we progress through Q4, we found a sort of progressive timing of supply chain predominantly as our volume was increasing through Q4 in terms of shipments. We ended up with some particular constraints that effectively constrained our ability to convert the per order book as we are expecting in Q4. In terms of the actual quantum, I mean it's difficult to be completely precise. But it's at least GBP 20 million that we can see that was either ready for shipping or was shipped but couldn't be received by customers. Certainly, as Omicron expanded in December, we found a number of customers closing their sites again or other supply chain constraints when they weren't ready to receive it. So we ended up with quite a significant amount of inventory that was either ready to ship or actually in transit that we couldn't recognize that particularly affected Malvern Panalytical. But likewise, with Omicron and Omega in New Jersey, in particular, where we have our distribution center. We had a number of operatives who were out, and we just don't have enough fingers and thumbs in there to actually pick back and ship. So it's at least GBP 20 million that's effectively fallen over the boundary between December and January. And the new year, as a consequence, has started very well. I mean, revenue in January was up 7% year-over-year. February revenue is also going strongly, the one we can see. And the encouraging thing, the order book continues to grow. The order book at the end of January was bigger than it was at the end of December. So we end up with orders up higher than our average through 2021 in January. So demand remains very strong, and I see this just purely as a timing issue.

Great. And I just wanted to ask around the orders in the order book, obviously, being super strong, and I guess probably an obvious question. But just in terms of, I guess, confidence around I guess, for lack of a better word, how real those orders are, whether there's any risk that you're seeing double ordering? I'm assuming that you will see some early ordering as lead times extend, but just in terms of, I guess, risk around those orders.

Yes. So yes, I mean, the order book is very strong. We do track cancellations and have been all the way through last year. So clearly, as demand picked up, we were conscious that were we just seeing speculative order intake and people reserving positions. That has proved not to be the case. Cancellations run at very low levels, consistent with long-run history. So we certainly don't see that sort of speculative element within the order book. However, your other point in terms of is the order book longer dated? Yes, it is. Clearly, we have had to extend lead times supply chain constraints as have most businesses. So inevitably, that is boosting the order book. But if you compare our order book as of the year-end, I mean, it was up over 50% year-over-year. And if you look at sort of the Spectris's business, typically, we had sort of 3 to 4 months cover historically, back to 2018, 2019. That's an ounce that was sitting in the sort of almost 5- to 6-month range. So clearly, some of that is down to a longer-dated business. But clearly, overall, the gap between order growth of 19% last year versus top line revenue of 10%, the majority of that is actually just new increased demand.

And then a final one, it's I guess it's a longer-term one. But the statement, obviously, and I think you made the comment as well around the target to get back to the previous peak on margins and then ultimately exceed them, I guess, interested in terms of what changes you think you need to see to get to those kind of levels, whether it would be the 18% or I don't know whether it's sort of north of 20% kind of thinking about? Is that just -- is it a volume thing? Or is it still changes that you want to make to the portfolio? I just wanted to understand sort of the bridge from where we are today to potentially those much higher numbers.

Yes. So I would sort of break it down into sort of 3 fundamental areas. Clearly, as we came out of the pandemic or after 2020, of the back of 2020 is COVID outbreak, we said then that we wanted to make sure we got the cost base into the right size and shape such that we grow back into the market recovery. So we did a lot of work back in '18, '19 on the profit improvement program, accelerated the completion in '20, did some further work in '20, as you're well aware. So we came out at the end of 2020 with the cost base in the right place. So that gives us the opportunity to get very strong operating leverage as volumes come back. And we saw that in 2021. And as we go forward, we'll retain our discipline in terms of costs. We clearly did add some cost into the overheads last year to support the growth rate and to some extent, the fact that the sale miss from Q4 -- or the fulfillment miss that fall over into this year, the GBP 20 million I talked about, we've built the cost base to support some of that and that sort of impacted margins in Q4 as a consequence. So that's just a timing issue. So firstly, our operating leverage. Secondly, the Spectris business system. We continue to mature and strengthen our deployment, our training, development of our tools and sort of really embedding the whole lean philosophy in terms of how we run our businesses, and I'm pleased that we are now starting to see real financial benefits coming through to help offset cost inflation. So a big driver again this year and going forward is the deployment of the Spectris business system. And then thirdly, we are also investing in better processes, better systems to support the growth to sort of make sure that we have a scalable operating model that can scale efficiently. As you're aware, we've been deploying a new CRM system into HBK over the last 12 months that went live in January successfully. And as we put in the announcements in the press release, we are also in the process of investing in upgrading the ERP system, firstly in Malvern Panalytical, and then into HBK to really drive greater efficiency in just the way we operate on a day-to-day basis and take advantage of the next generation of ERP technology.

Our next question comes from Michael Tyndall from HSBC.

A couple of questions, if I may. Can we just talk a little bit about Mal Pan because Mal Pan still some 10% below where it was in 2019. on revenues. I just wondered to what degree is there still catch-up potential there. And also if I'm not wrong, Pharma was up 27% at the first half; up 14% for the full year. So I realize, there could be some base impacts there, but it feels like it was flattish in the second half. Am I reading that the wrong way? And then the second question, I don't know if you're willing to share it, Derek, but I wonder if you could give us just some idea in terms of what you've got in the budget for labor and material inflation for 2022.

Well, let me take the first question, Mike, on Malvern Panalytical. I mean, clearly, it had a very strong year last year. I mean order intake was up significantly. I know that it hadn't been for some of the constraints in Q4, the revenue growth at Malvern Panalytical would have been that much stronger with the proportion of the GBP 20 million miss from Q4 that I spoke about related to Malvern Panalytical and just its business model and the way it recognizes revenue in terms of some of the complexity of the systems installations going into customers. But we are seeing continued strong growth in pharma. We have a very strong offering, particularly around this whole sort of stability, affinity structure area of drug development discovery and manufacturing quality. And as per the case study I highlighted earlier, we're seeing still strong demand in terms of vaccine development and antivirals, and that's also then supported by quite a strong onshoring trend, which we see continuing. But it was also good to see the growth in the Advanced Materials last year around, particularly around semiconductors and the fine chemistries associated with that. Our wafer analyzers did very well. But equally, the investment in sort of new battery materials, additive layer manufacturing was strong, and it's also great to see that the academia sector that was heavily down in 2020 recovered quite strongly. It was up almost double digits last year. So all of that is contributing well to Malvern Panalytical's growth. And certainly, as we look forward, we see continued strong growth and recovery beyond 2019 levels.

And then on your question, Mike, on the budget cost, we are anticipating inflation in our cost base on our overheads. In terms of labor inflation, we do -- I mean, we have a range of assumptions, to be honest, and we're in the process of doing pay reviews at the moment. So I don't think it's appropriate for me to give you a number because it does differ by territory and grade and all sorts of different dynamics in terms of doing our pay reviews across the piece. And I think, to be honest, given the environment that we're currently operating, and I think I'm going to have to leave it to you guys to make an assessment as to what you think the correct inflationary range is for your guidance. We have a series of planning assumptions, but I suspect my planning assumptions are no better than your market assumptions. So I don't think we're going to get drawn on trying to guide to cost inflation for this year.

Our next question is from Andrew Douglas at Jefferies.

Most of my questions have already been asked, but I've got 3 smaller ones, please. Can we talk just very quickly about the M&A pipeline? It sounds like you've been building that throughout the year. You made a GBP 34 million or [ GBP 30 million ] acquisition this morning. Can you just talk about the pipeline, how that's looking, big or small ones? And kind of the evolution of the end markets kind of that you're following, does that change the businesses that you're looking at? Or are you kind of thinking slightly different way about M&A.? That would be helpful. Second question is slightly drawn from Michael's question [ awhile ago ]. Can you just give us an update on costs in terms of percentage of sales, whether it's gas, electricity, et cetera, just so we can have a better understanding there. And then last one, [ but definitely not least ], Omega looks like it's [indiscernible] coming, I think it was plus 18% organic sales in the fourth quarter. That's good. And your comments about the improvements in the current management team you're going well. How much more do you think needs to be done there? And is it fair to say that they're kind of doing all they can at the moment and a lot of the heavy lifting has been done, which will then come through to an improved performance? Or is there still more to be done there?

Okay. Thanks, Andy. Thanks for your questions. I'll take your first and third question. I'll pass energy cost on to Derek. So firstly, just talking about the M&A pipeline. I mean, I'm really pleased with just how all the businesses have been able to strengthen their pipeline over the past sort of 12, 18, 24 months. We have put a lot of focus on it, as you know. And as a consequence of that, we're able to complete on Concurrent Real-Time back in the summer last year. And equally, the asset and license agreement with VIMANA for HBK to create a sort of data management platform is also an exciting development. And you'll see an announcement of the acquisition of Creoptix by Malvern Panalytical, which completed in January. So we've got a strong pipeline, some good momentum. And we've -- as ever, we continue to sort of actively scan the market, but have some attractive targets that we are looking at currently, and that's why we've decided this year not to do any sort of special sort of return by way of a special dividend or a share buyback. And I think your other part of the question there was is the evolution and market changing, or are we thinking differently? I mean, clearly, the whole focus on sustainability is it to us as we see opportunities there to be advantaged by the sustainability thematics I touched on in the presentation. So that is certainly uppermost in terms of our thinking and this is now part of our filtering process. And then at the acquisition of Creoptix, who we know was part of that thinking. But all of the acquisitions we're looking for are very much consistent with what we said strategically in the past, where we're looking to scale up the businesses, either looking at targets that sits bang on the same end markets, the same sort of strategic growth areas we're looking for that will complement our current offering or, indeed, our immediately adjacent spaces or offerings that we see will be highly synergistic to what we do today. And Creoptix, I think, is a classic case in point where, as I said in the presentation, Malvern Panalytical, very strong in the whole sort of drug discovery and development space, particularly around the stability, the structure, the affinity of the formulations. And we saw in Creoptix, an early-stage business that has some really strong, new leading technology in the affinity space that we thought we absolutely believe will sit very nicely alongside Malvern Panalytical's current calorimetry offerings. It is an early-stage business. It's currently slightly loss-making, about $4 million revenue. But we see the opportunity to quickly scale that business and deliver very strong returns off the back of flowing Creoptix technology and products through the existing Malvern Panalytical supply chain -- sorry, customer chain and the route to market. So it's bang on strategy. I wouldn't say don't get carried away that we are -- our M&A approach has shifted towards early-stage businesses. As we said before, we look at everything from technology through early stage startups through to small bolt-ons to businesses, the size of Concurrent, which you saw $160 million this size, all the way up to businesses that are equivalent to the size of our current platforms as we were looking back in 2020, on the potential U.S. acquisition we spoke about at the time. So we continue to look across the board. And if anything, given the current market volatility, we see opportunities.

Energy. Yes, the energy cost, it's a great question, Andy. I don't have a specific pound note number for energy cost across the group. I'll make a couple of observations. Roughly half of our energy usage is electricity. So when you look at the annual call, when it comes out, you'll see a sort of table on our energy consumption, and broadly half of it is electricity. When you think about our business, we don't have significant energy demand. We're not running big large machinery 24/7. We're not burning anything or building anything using high energy usage in that sense. Most of our production is assembly or bringing things together that have been sort of manufactured elsewhere. So it's an asset-light model, and it's also a relatively energy-light model. But in terms of giving you a specific number on the energy cost, I'm afraid that's not something that we [ could give out this time ].

That's fine, the message is clear. That's fine.

I mean just the other part on energy, I mean we've signed up to the RE 100 initiative around renewable energy. 43% of our electricity we purchase now is renewable, and we're working on negotiating contracts to increase that quickly up towards 100%. Then just on Omega. Yes, as you said that I said in the presentation, it's really pleasing to see the progress that the new management team is making there, the focus that Amit has brought in terms of really getting Omega to drive just 4 key strategic growth initiatives around enhancing the digital experience, expanding the sales distribution channels and developing new partnerships there, we're having much more sort of focused product innovation and then just, overall, continue to simplify and improve the operational performance of the business. They have done a great job last year despite all the challenges that they've had in terms of supply chain disruption and also some very tight labor markets in the U.S. So really pleased with the progress they're making. And in terms of -- your question was really around it, the more heavy lifting to do, I don't think there is. It's more much of a continued execution on the strategy and driving the focus there. As I've said, one sort of data point that I'd like to share with you that I think is meaningful is that, on the digital experience side, our web orders now are higher than they were back in 2018 before we implemented the new e-commerce web platform. So all the work the team has put in to sort of getting that new e-commerce investment, firing in all cylinders and driving order intake is now starting to yield the results that we were hoping for. So I think from a heavy-lifting perspective, the work on the digital side has been done and it's about continued execution. But as I said in the presentation, there's still more to do. The margins are still below between the group average is very much focused on driving top line growth, scaling the business and improving its margin performance.

The next question comes from Jonathan Hurn at Barclays.

I just have 3 questions, please. Maybe the first one for Derek. I know this is never really that easy to answer at this point of the year. But can you just give us some kind of feel for how you see that sort of H1-H2 seasonality coming through in the business, maybe just in terms of sort of revenue and profit. Obviously, it's going to be quite H2-weighted this year. Can you just give us a feel for the split as it stands. That was the first one.

Yes. So you're absolutely right, Jon, the [ tricky ] answer at this time of the year. I mean, I think I'm not going to give you a percentage split. There's nothing that we can necessarily see that means the business is any different to normal in that sense, other than, I guess, the supply chain challenge. So we're expecting the supply chain challenges to ease in the second half -- start to ease in the second half. So on balance of probabilities, that would suggest a stronger period in the second half as those ease and the orders that we're carrying at the moment start to get realized into revenue. But I think at this stage of the year, it's difficult to have to give you a specific percentage. Normally, we give a bit of guidance on that when we actually get through the first half. But again, I think with all the uncertainties, that's not something that we're necessarily going to look at. I think if you look overall, we are of the view, though, that this year 2022 on a like-like, when you take out all of the disposals that we've completed in the year, and before you add in the full effect of Concurrent RT on those sort of underlying like-for-like basis, we anticipate the year to be similar to 2021. But I'm not going to give a H1-H2 split at this stage.

The second question was just coming back to the order book. Obviously, if you look at that sort of Q4 order growth is quite a marked slowdown relative to Q3 and Q2. [ Take on board point ] as things are sort of picked up in Q1, but obviously, the comp there is easy. Why was that Q4 order intake so much relative to Q3. Was it essentially a comp issue? Or is there some other things sort of playing out there?

So Jon just to clarify, are you talking about revenue or orders?

I'm talking about orders. Orders were plus 14% in Q4, but it was plus 31% in Q3, and I think plus [ 21%], so why was that sudden slowdown?

It's really it's just against a tougher comp. If you kind of go back to the second half of 2020, I mean we really saw all that start to pick up progressively from June of '20. And then it was clearly within certain markets. Pharma was the first to kick off. It's taken until this year until sort of automotive and academia gets started to go positive. So it's been a progressive build from there, but we did see the order book really starting to pick up from sort of middle of2020. So it's against much tougher comp.

Okay. That's clear. And maybe the last question, just coming -- or following on for [ Manny ], just in terms of obviously, performance has improved quite a lot in sort of Q4 relative to Q3. I mean just in terms bit of -- I know it's a bit of an unfair question, but just in terms of if its place in the portfolio, are you now a lot more convinced in terms of Omega on a long-term basis? Or are there still some questions and issues that it needs to answer for you to be really happy with them, its position in Spectris.

Yes. Well, I mean, for all our businesses, they all have to earn their right to retain their position in the portfolio. I mean Omega, clearly, we've refreshed the management team and has brought in very a clear, focused approach, and that is delivering results, which is really pleasing to see because I, said there's clearly more to do. And so we will continue to review the performance at the moment as we do all our businesses to make sure that they are still tracking a trajectory that we believe, over the longer term, delivers good value and good returns.

Our next question is from Mark Davies Jones at Stifel.

Can I start just on that one again, on Omega. For the group as a whole, you're saying that you think you can get back to previous peak margins. Can the same apply to Omega? Because there was great progress, but you're still a long way below that base a bit, but that peaked out before it hit choppier waters. So is there any structural reason, particularly having increased the cost base on some of those investments, why you can't get back to that sort of level at Omega?

Thanks for your question, Mark. I mean the simple answer is there's absolutely no reason to why not. I mean the problem over the last 2, 3 years has been the extra overhead burden from the IT investment that went in back in '17 and '18 for the new e-commerce platform. That meant the business had to scale really significantly to be able to get the returns of that investment. And it's been, to be very clear, with our frustration and disappointment that we weren't able to scale it through '19 and '20. But we are now starting to get the benefit of that. As part of the sort of SaaS accounting as well, we have written off some of that IT investment as well, just in terms of the way that the new accounting rules apply, so that will help boost this sort of headline margin as well. So absolutely no reason to talk why we can't get back to -- I mean it was previously back in 2018, 18%, 19% operating margins. No reason I can't get back to there at all.

Okay. Great. And then clearly, you've simplified the business a lot over the last couple of years, which is. But there's an awful lot of moving parts. Are there any of your end markets, I mean, important end markets where you think activity is sort of super normal at the moment? You've mentioned some of the vaccine support within the pharma business. Obviously, there's been a big spike in the machine tool end of things. Is there anything that could go against you off those peaks in '22, do you think?

Well, I mean I think, firstly, I'd say from the simplification perspective, we are and have now concentrated the group on the more attractive higher-growth end market segments that we plan to do when we announced the strategy in 2019. So the fact that we're seeing strong growth in pharmaceuticals, strong growth in semiconductor electronics, strong growth in the advanced materials part of our business based on the what we call technology-led industrials, the machine manufacturing growth there as a testament to the focus that's been brought. Clearly, automotive is really the only one of the sort of target end markets that have struggled the most, but that's well publicized as the cause is why. So the simplification has certainly helped focus us on those end markets that are growing strongly and, importantly, really targeting the sort of subsegments within it where we have and where we can build strong leading position. So that strategy is working for us. I mean, just going forward, your question is of those sort of markets that have been growing really strongly, are they going to start to slow. I mean, overall, if you talk to any of the economists as we progress into the second half of this year and into '23, clearly, there will be slowing growth. We can't sustain the sort of the growth rates that have been achieved through the back half of '20 and '21. Just mathematically, that's not going to be feasible. So we will see slowing growth, but we certainly still see growth, which is important, and say we're targeting those subsegments where we see this greatest growth in the last year and focus around sustainability. I think we'll also make sure that we are focusing on real high-growth, high-margin opportunities as well. But I think the markets that have really for us has been pharma at the moment, that continues to go very strongly all the developments around viral-vector vaccine development, plus antivirals, the onshoring trend and the expansion of biopharma therapeutics. We're seeing huge investments going in there. So we certainly anticipate that momentum to continue through this year. I think semiconductor, without a doubt, is going to remain very strong. I mean our order intake in semis was up, I think, 50% last year. Whether we'll achieve a 50% growth again this year, I think I would question whether we'll get there. But in terms of the -- we still see very strong growth in the semi space. And the machine fracturing, particularly in HBK, our focus on sort of the, what we call our OEM sensor business, so providing real high-precision sensors to OEMs to build into machines, everything from machine tools, all the way through into sort of agricultural equipment for precision agriculture and even into health care applications, where we're providing waste sensors going into high-tech hospital beds who now, basically, you've got beds that are automatically measuring movement, weight of patients and optimizing the position for patients. We're selling sensors into that market as well. So I certainly see strong momentum coming into this year, and we'll sustain that in those sectors through 2022.

Great. If I can just squeeze in one final one. Are you seeing any shift in the M&A environment in terms of valuation expectations from sellers or willingness to sell, as the world gets a bit more complicated?

That's a great question. I think it's a little early to tell. Clearly, valuation expectations have risen over the last 2 years. And I think, as I say, it's a little bit early days. But certainly, from -- if you look at the listed public companies, then valuations have come off quite a bit, which as I said earlier to answer Andy Douglas' question, potentially may provide some opportunities.

Our next question comes from George Featherstone at Bank of America.

Just a follow-up on the margins. I just wanted to know what the specific time line you have in mind for achieving the 18% operating margin target is. And then how do the margins in the backlog compared to 2021 margins for the group?

Well, we'll take them in turn, George. Thanks for your question. So in terms of margin, we've never been explicit in terms of achieving the margin target. I mean, that's brought with sort of externalities. But I think I would just simply say, I am really pleased with the way we have executed on the strategy and continue to execute on the strategy, the simplification, the focus, we brought the group. We've improved the quality. We've improved the end market focus and attractiveness, the operational efficiency of the group is improving. The cost base is in a much better place. So I'm confident that we will continue to make good progress in terms of achieving our targets we put out there. And as we said all along, we don't see sort of 18% as a ceiling. Our long-term objective is to improve margins well beyond that. So your second question was about the margins on the order backlog?

That's right. Just how they compare to what you finished the year in?

Yes. So I mean, basically, George, I guess what you're taking into account is if orders are placed at certain pricing and if we see cost inflation coming through, could that impact the absence. Is that the point you're making?

That's right. Yes.

Yes. I mean it depends, honestly, because a number of the platforms have short order cycles, and therefore, although the order book is greater, the new orders reflect new pricing, so that kind of helped. Others are slightly longer cycle. But in the environment that we're in, we're able to talk to our customers and make sure that we have a sensible either discounting or mechanism in place to ensure that pricing on the order book is reflective of the environment that we're in. So the short answer to your question is we don't think having that longer order book will make a material difference to our margins. And we continue to feel that our pricing strategies and our pricing capability gives us the opportunity to offset inflationary costs where necessary. So I would say it has a limited impact on the margin.

Yes. Yes. I mean pricing is a live discussion with all of our businesses. Whenever Derek and I sit down with them, we are continuing to review pricing strategy. Gone were the days where we see them once a year. This is a much more dynamic environment. And I think if you look at 2021, the fact that we were able to actually hold up, actually slightly improved gross margins last year is again evidence that we have good pricing power and are able to offset supply input inflation.

Maybe one more for me, and I'll then leave it at that. I just wanted to talk a little bit about how much headroom you now have on the balance sheet for M&A because you ended the year with a very strong financial position with the net cash situation. So just a headwind you have, so to not just your government targets, but maybe the level of leverage that you'd like the group to be at more structurally?

Sure. So we have -- you're right, I mean the leverage targets are , way covered. So that's not the limiting factor. It really is a question of appetite. We have always said, and nothing has really changed at the right level over the sort of cycle for our leverage position is between 1 to 2x net debt EBITDA. We are happy to operate at lower than that level as we have done, obviously, for the last couple of years because of e circumstances as such. And if we have a clear path to delever, we would be happy to go slightly above that level for the right transaction at the right time. So through the cycle, you want to be looking at in 1 turn of EBITDA. So you can do the math, really. If you look at our current EBITDA for this year, and obviously, you'd add in the EBITDA of any acquired entity as well. But if you look at the current EBITDA sort of around 250 to that up to 2x and that is on the cash, you can see there's a reasonable headroom on the balance sheet at the moment. That doesn't mean that it's burning a hole in our pocket. It simply means it's available, and if the right opportunities come along, then we are confident to deploy it.

Our next question is from Harry Philips at Peel Hunt.

Yes. I appreciate [indiscernible] for a very long time, so 3 very quick ones from me, please. Just the comment around the incremental spend on R&D of an additional GBP 10 million. Should -- is that a sort of we should be taking GBP 10 million of expectations as a consequence of that? Or it's just an increase of GBP 10 million in this in normal band of 7%. The second question is for Derek, particularly around on your next set of SaaS, or whatever it refers to accounting. I know you put a number in there, but just sort of how do we -- what do we put in the model, basically, so I then have a clue? And then in terms of the comment, Derek, you made back to Jon though about like-for-like growth sort of being similar to last year, what context -- was that revenue growth? Or was I missing the point there? And then very lastly, just obviously, the strategy refresh and you've sorted everything out. We're largely out internally. So clearly, it's a sort of external focus. I've just has been talking, I've seen 3 share buybacks announced by various companies across various sectors. At what point in time, I know you won't want to answer it, but what point in time will you sort of think that, that maybe is the correct alternative reach, if you like?

Yes, okay. So if I do the -- I'll do them in order. So the incremental R&D, it kind of depends on how you build your model. But effectively, we've put that number out there, how you say you can increase your cost base by GBP 10 million relative to what you would have come up with, had you not have that piece of information. So that's what that's looking to do. In terms of Software-as-a-Service, right, how to explain that at the end of the call in a simple -- in very simple terms, the accounting standard says that if you do not own the assets that you have just created, then you do not capitalize it. And in the old days, when you bought software, you would buy a system, you would build the system on-premise, you would capitalize all of the work that went into building that system. Obviously, nowadays, we see many, many more software providers providing software in the cloud and you pay a subscription model, and therefore, you don't own it. So what we have done is we have interpreted that new guidance that came out in April of this year. And where we had Software as a Service assets on the balance sheet, we have corrected the accounting, if you like. We've written it off as a prior year adjustment. That takes about GBP 20 million net to 18.9%, I think, off our balance sheet as an opening position in 2019. And then going forward, above the line, you will incur the lease costs, if you like, the rental costs of Software-as-a-Service assets. And as a rule of thumb, that's going to be broadly similar to the amortization that we would have previously had on those capitalized costs. So to answer your question specifically in the model, what should you do, ignore it, it's a wash. And that's going to be the case in most businesses, in most scenarios. Where it's slightly more complicated for us is we're at a point in our cycle where we are actually going to make over the next couple of years, some significant investments in new ERP systems in Malvern Panalytical and HBK. Under the old rules, that would have been capitalized and then amortized over its life. But rather than have very large hits into the P&L, we have identified those specific projects and those specific projects only as an APM, and you'll see that below the line. And in 2021, the cost of those adjustments below the line was GBP 5.2 million. In 2022, we expect around about GBP 20 million of what would have historically been CapEx investment that is actually license spend or uncapitalizable spend to come through in the numbers. But in terms of the adjusted OP number that we typically look at, it will be a wash, Harry. And for anyone who wants to go into more detail on any of that, I'm happy to do it offline. But I hope that, that give you enough of an understanding of what's going on.

That's right the right kind.

All right. Excellent. And then finally, my comment on growth was around sales. So in the slides, we have a we have a pro forma slide that basically takes this year's revenue and profit as reported, takes out the disposals. So it's around about GBP 60 million of revenue in the reported number this year that relates to disposals. Once you get to that baseline, which is [ 1,226 ], I'm saying that's a like-for-like growth that, that feels, as an idea, similar to this year. And then you add on the annualizing impact of CCRT. [ And that's positive ].

To your final question, I think, about Strategy refresh. I mean, as I said, I've been really pleased with just how well the group has executed on our strategy. And what we laid out in 2019, the vast majority of that we have delivered on. We've returned the group to a much more focused, high-quality business. And clearly, we also returned it to being an asset-light business as well. So we are highly cash generative. So I think your question was really around sort of what's our capital allocation policy going forward when the [ intepreted ] around share buybacks or capital choices. But as we now look forward, and we look at being purpose-led and true to our purpose, we look at sustainability. The strategy we laid out in 2019 and our purpose around equipping our customers to make the world cleaner, healthier, more productive talks to many of the sustainability themes that I went through in the presentation. And one thing that's always certainly, since I've been [ inspector ], is that whenever we look at the strategy and look at the optionality in front of us, we are absolutely blessed by choices. And the challenge for us is always to make sure we are filtering those choices and electing to pick the best ones. So our challenge is never what are we going to do? There's always plenty of things we can do. The key for us is making sure that we pick the right choices. So as we look forward, we see -- I see some real bright opportunities for us, not just in terms of continuing to execute on the strategy that we have for each of the businesses and the end markets we're focused on, but also certainly around the sustainability, thematics driving further growth and accelerating the business further. So at the year-end date, we look at the balance sheet, we review the demand for capital investments needed in the business. We also review those opportunities, both organically and from M&A. We have -- certainly hope, we've demonstrated over the last 2, 3 years, our discipline around capital allocation, and we will continue to do so. If we feel that there's good opportunities to invest, to acquire businesses that help prosecute our strategy, then we will continue to do so. We've always been clear that M&A is a key part of the strategy. Likewise, if we feel that those opportunities are less realizable over the next 12 months, then we will return further capital to shareholders. So that's how we sort of approach things. So again, we do retain a very disciplined approach.

Our next question is from Robert Davies from Morgan Stanley.

My first one was just really on just the catch-up effect with the disconnect between orders and sales. Are you expecting to post most of that in the first quarter of the year? Or is there anything that's kind of longer lead time. That was my first question.

Thanks for the question, Robert. So in terms of the catch-up effect, I mean, our first quarter is very well covered from the order book. But as I think in response to Andy Wilson's question, it's also -- it's slightly [ longer dated ]. We've gone out from that sort of in 3, 4 months, cover to 5 to 6 months sort of order cover as a business. So Q1 is well covered. H1 is well covered, which gives us confidence, as Derek said, that we will grow in the top line this year. We're consistent with where we've -- what we achieved last year.

And then 2 other ones, I had is sort of follow-ups. One was just, could you sort of give us what the percentage of exposure in terms of sales is to Russia, or whether you have any supply chain or customers that are sort of based there, obviously, given all the news this morning? Just be interested if there's any kind of further clarity you can provide on that topic.

Yes, it's very small, Robert. We don't do really anything there at all. We did have an operation there a couple of years ago, but we closed that.

And then just the final one was just -- I know last year, Derek, you provided some color on the sort of the operational leverage for the business. Just be curious, with all the, I guess, disposals and acquisitions that you've done over the last 12 to 18 months, does that have a material impact on how we should think about operational leverage in 2022, i.e., on whatever volume growth we assume? Is it reasonable to assume a similar operational leverage? Or has the cost-adds that you've had from additional people over the last couple of years going to affect that?

Yes. It's a great question. There are a lot of moving parts still this year with supply chain, I think, and inflation coming through. So those are kind of few data points that would make our historic operational leverage slightly higher that they are as I mentioned. But there's nothing fundamental that's changed in the shape of the group. But this is our thinking, the economy have taken into account current event when you think about, but rather than just sort of sticking to a particular percentage.

Next question comes from Richard Paige from Numis.

Long call, so just one from me. Just want dig into Industrial Solutions a bit more. Because I guess at the headline level, like-for-like sales of 8% growth translated 20, 30 basis points of like-for-like margin improvement, that's pretty underwhelming. I'm assuming that Servomex is a big delta within that, given the ventilated demand in '20 drop away. But you also mentioned overheads. Just trying to understand what sort of moving parts of that a bit better, please.

Yes. Thanks, Richard. Good to hear your voice. So I mean I think for ISD, I mean, there's been quite a lot of moving parts, clearly, within ISD. So from a like-for-like perspective, I appreciate also a number of things back to get to the core numbers. But certainly, our PMS and Servomex held up very well through 2020. So from a growth perspective, that's -- they're back collectively to just 1% of their 2019 sales. So they saw -- we're smaller there. So to some extent, I think that explains the 8% like-for-like sales growth last year. And the 30 basis point improvement, really, again, their margins held up much better during COVID, as you saw last year. And we have been investing for growth in all the businesses. New product launches across the board, and Red Lion's been through a -- coming to the end of a full product refresh with lineup. PMS has been investing quite heavily in terms of its microbial monitoring for its liquid products, likewise, investments in Servomex. And we feel that all 3 businesses are well positioned for growth. And in particular, in the pharma and the life sciences space where we've certainly seen over 50% order intake growth in semicon, which I [ outspoke ] to PMS and Servomex. And the Life Sciences business is also doing well despite the fact that, yes, ventilator supply, Servomex is down. So there's a number of moving parts there, overall, as I say, I'm pleased with the progress we're making and equally how the business is positioned for future growth.

Okay. So I say we should expect probably better operational leverage next year.

Yes. Yes, correct. Yes. Yes.

We currently have no further questions on the phone lines. So I will hand over to Siobhan for the webcast questions.

There's a couple of questions come through, but [ some ] you've probably addressed. But on the strong order book, is that just a function supply chain issues and [indiscernible] to deliver in Q4. And then second one, could you help us understand about the magnitude of any price increases in this year and whether there will be any negative comps possibly?

Okay. So well, firstly, on the order book, I mean the order book is significantly up. I mean we are up, say, over 50% year-over-year. So almost GBP 200 million as the quantum, as the delta between year-end of '21 versus '20 versus a sort of GBP 20 million-ish order fulfillment miss in Q4 that's fallen through into this year. So you can clearly see that demand, overall, is significantly up very strong. Then in terms of pricing, as we've said, pricing is an active discussion that we're having monthly with all of the businesses and just reviewing what we need to do. Clearly, we need to stay ahead of inflation to offset the inflationary pressures. And I -- more than what we did this last year, and you can see in our results and our gross margin performance last year, we've been successful in doing that. Clearly, we'd always liked to be ahead of the input inflation. But given the rate that's running at the moment, I wouldn't wish to sort of make any assertions that we would be ahead this year. But equally, our objective is to be at least neutral, if not slightly ahead. So that's how we think about our pricing power.

Thank you. That's all the webcast questions.

So I think we are complete with the questions. I appreciate. It's been a long call. Thank you for your patience and also thank you for all the questions. So let me just conclude and wrap up. So for me, in conclusion, there is a lot to like here. We delivered a very good overall performance in 2021. And clearly, the supply chain and Omicron developments in Q4 did frustrate our order fulfillment, as we talked about, but I just see that purely as a timing issue. Demand for our products and services has been and continues to be strong, and we've had strong start of the year, supported by a record order book. I'm very pleased with how we're executing our strategy for profitable growth. We are today a much higher quality, more profitable and stronger business, and that gives us real confidence in our ability to deliver continued good growth and also maintain progress on improving margins. And I have to say, despite developments recently, I am optimistic about the future, and that optimism is rooted in the commitment and support and dedication of my colleagues and also how I can see our strategy evolving. We're going to build on our progress. We're going to invest in our businesses to take advantage of those growth opportunities that we see in front of us that are strongly aligned to our purpose and to our focus on sustainability. And I very much look forward to talking to you more about those later on in the year. As I said earlier, we'll continue to aim high and be bold in our pursuit to enhancing value for all shareholders and all stakeholders. So thank you very much for joining, and look forward to catching up with you again in April. Thank you very much.

This concludes today's conference call. Thank you all for joining. You may now disconnect your lines.