Spectris Limited (SXS) Earnings Call Transcript & Summary

Well, good morning. I love that video. You may remember that we first showed it at our Capital Markets Day back in last October. And the reason I love it because it really captures exactly what we're about. And that's combining precision with purpose to deliver progress for a better and more sustainable world. The need to make the world cleaner, healthier and more productive has never been clearer. So our key focus today is to provide you with a greater understanding of Spectris Dynamics and how the trends that are shown on the video there, combined with the work we've done to reshape the business over the last 4 years, really positions Dynamics as a leading sustainable compound growth business that is capable of outperforming its core markets. I'm Andrew Heath, I'm the Chief Executive of Spectris and absolutely delighted to be here with you in Udine to welcome you to the home of VI-grade and our virtual test business. You'll get this sample directly how our simulators, our products and solutions are used by our automotive customers to accelerate, to derisk and to reduce the cost of product development. And you'll also get to see a number of other recent product innovations that reinforces Dynamics established position as a leader across the premium test and measurement industry. So as I start, I just want to make sure you leave today with the following messages. And that's firstly, that we've transformed Spectris into a leading, sustainable compound growth business, where Dynamics is absolutely essential to that mission. Secondly, that we have ambitious plans for the Dynamics division. And we want to only show you how the division aligns with the group's purpose, but we will also demonstrate how dynamics will grow at 6% to 7% compound through the cycle and to the 20% operating margins over the next 4 years. And then lastly, that we're making strong progress. Dynamics is benefiting from both its advantaged and established positions as well as its exposure to attractive growth markets that are underpinned by key megatrends where we have been and will continue to invest for growth, namely virtualization, electrification, automation and digitization. And you're going to hear from Ben and members of his brilliant team about how they are leveraging Dynamics leading and unique position right across the customer innovation life cycle, from design modeling, simulation to sensing and data analytics, driving growth by integrating the worlds of both virtual and physical tests through to advancements in automation and robotics. And you're also going to hear about the plans and actions that are already underway in Dynamics to deliver improved profitability. And that's through streamlining its organization model, process simplification and by the rigorous deployment of the Spectris business system. But just before I move on to that, I want to take the opportunity just to remind you about our strategy for sustainable growth and the progress that we're making. So last year, we set out in detail our refresh strategy and our medium-term targets. Now these targets are underpinned by our business model, which is shown on this slide. We are owners of world-class advantage Precision Measurement businesses with industry-leading domain expertise. And last year, we showcased Modern Panalytical, and you'll see today how Dynamics also fits the bill. Following the simplification of our portfolio, we are aligned more than ever with attractive, sustainable growth markets, fueled both by secular and sustainability trends with high barriers to entry. Our direct go-to-market model means we are even closer to our customers, and we're solving some of the most critical challenges. As the video says, to improve the [indiscernible], the cars that we drive and the planes that we fly, materials we build with, the food we eat, all the way through to the semiconductors that power our devices. And we're investing for growth, both organically through elevated levels of R&D and by M&A. And last year alone, we spent over GBP 100 million in R&D and a similar amount on M&A. We're also driving operational excellence, as you know, through our lean mindsets. We're investing in new systems and processes that will also drive efficiency and enhance our profitability. Our process transformation initiatives are on track, and they'll deliver 150 basis points of operating margin and the continuing and mature deployment of the Spectris business system is removing waste, it's improving productivity, it's improving quality, and it's also driving customer satisfaction. And last year alone, it delivered almost GBP 10 million worth of [indiscernible] benefits. And all this is underpinned by being a purpose-led business committed to developing our people, building our domain expertise and living our values every day. Consequently, today, we are a very different business to the one that I joined back in 2018. And this really reflects the work we've done to fundamentally reshape and transform the group since then. And this provides a strong foundation on which to meet our target of delivering 6% to 7% organic growth through the cycle. We've also expanded margins by 130 basis points since 2018, reaching 16.8% last year, and that's despite significantly higher input costs and supply chain disruption that we incurred last year. We fully expect to deliver further strong margin expansion this year, and we have a clear path through a set of resource initiatives, particularly with Inspectors Dynamics, which you'll see today, to meet our medium-term target of 20% plus. And having returned Spectris to an asset-light business, we are now highly cash generative and expect to deliver cash conversion of at least 80% through the cycle. Our return on gross capital employed has also improved significantly from 13.7% in 2018 to 16% last year. And this is where we broadly expect it to remain as we continue to invest for growth. And as a leading sustainable business, we have set ourselves ambitious targets. We are committed to achieving net 0 emissions in our own operations by 2030 and right across our value chain by 2040 whilst also achieving top quartile levels of employee engagement. And importantly, we are on plan to achieve this. We are clear about the benefits of having a strong growth and efficiency mindset in all that we do. We are hungry for success. And as you can see, we are delivering on our promises. So before I leave the stage, let's return to the reason why we're here today. And that's to show you just what a fantastic business Spectris Dynamics is and how it can grow 6% to 7% through the cycle while delivering strong margin expansion and at the same time, underpinning the group's targets. Now I've always been impressed by Spectris Dynamics, advanced high-precision testing and measurement solutions. They have the broadest offering in the industry and we are uniquely placed to integrate the world of physical and virtual test by deploying the most advanced simulators and simulation software, data acquisition systems and high-precision sensors. The work we've done to focus the business has given us new customers and new opportunities, expanding our served market over the past 3 years to round about GBP 5 billion of the overall -- it's about 9% of the overall market. And this provides further opportunities for us to grow both organically and by M&A. Division grew 15.6% last year and has delivered a 4.7% compound growth since 2019. And that's despite the pandemic. And as you're going to hear the business is delivering new novel solutions that are aligned with the 4 key megatrends that have been shaping and that will continue to shape the industry and they're going to drive sustainable above-market growth for us. Dynamics also has a compelling self-help story and a series of actions to deliver strong margin expansion. In the near term, margins will benefit from pricing, the easing of supply chains and the impact of changes in Dynamics organizational structure, which is resulting in ever closer alignment with our customers. And all this is further underpinned by investment in new systems and ways of working. Also, the adoption of our lean philosophy that's being delivered through the Spectris business system. Dynamics has a significant opportunity to drive sensing and testing into the heart of today and tomorrow for a cleaner, healthier and more productive world. Our technology is well beating. We have a winning strategy, and we are well on our way. And with that, I will now hand you over to Ben Bryson, who is President of Spectris Dynamics and who along with his team will demonstrate how we will take advantage of the opportunities that lie ahead, how we're going to grow our business and how we will drive margins to the group's target. Thank you.

So thank you, Andrew, for the introduction. And hello, and I want to extend a really warm welcome to our Simulation Center of Excellence. This is the home of innovation for our virtual test division. My name is Ben Bryson, and I've been in Spectris for 3.5 years, and I'm incredibly proud to be leading the Spectris Dynamics business. We have really great people around the world, putting our precision technology into the hands of our customers. And I have no doubt that you have benefited from it too. Later today, we'll get up close with some of our technology and some of you even may drive the simulators. I have no doubt it will be a bit bumpy, but you will be fully immersed. You'll also witness the integrated hardware in the loop solution. This is a fantastic example of how Spectris Dynamics brings the virtual and physical world together, and we will also show our precision sensors in action demonstrating how we empower more productive equipment. I'd like to kick off with a short video. We empower the innovators and here's how. [Presentation] Spectris Dynamics, we empower the innovators by integrating the virtual and physical worlds, providing the essential sensing and data insights, software and analytic solutions. Empowering our customers to innovate with greater confidence, more quickly, more efficiently, solving big challenges for a better world. The green energy and the electrification of mobility, connecting society, accelerating automation, advancing production, driving productivity, ensuring safety and reliability; cleaner, healthier, more productive, we are Spectris Dynamics. Dynamic solutions for dynamic world.

Fantastic. I really love that video. I think it brings to life what we do and how we serve our end markets. But first, I want to introduce you to my fantastic team. We are a blend of talent with experience from inside and outside of Spectris across industries and functions. From global logistics, aerospace, automotive, FMCG and digital. Together, we own the growth and margin expansion journey for Spectris Dynamics. Tony, Tanneke, Kimberly and Thomas are here with me today. And later, they will join me on the stage to convey how we are harnessing the growth megatrends in our end markets. So look, Spectris Dynamics is a fantastic business. We are an established leader and we are in premium. Customers place higher value on what we do. This supports our margin ambitions. The end markets we serve are benefiting from 4 global megatrends. We'll share more on these later. We are continuing to invest to improve our customer offering. We are the only partner that can innovate from virtual test to physical test and back again. Our customers realize that benefit. Finally, we're delivering above-market growth and 2022 was a really strong year for Dynamics. In 2023, we are maintaining that growth and have a laser focus on margin expansion. We are on that journey to deliver 20% operating margin. As Spectris Dynamics, our purpose is to empower the innovators for a cleaner, healthier and more productive world. We have a long pedigree as a global leader in our markets. We serve customers in over 50 countries with 3,500 employees and over 1,000 customer-facing roles. To be successful in this industry, you need to be where the customer is, and that's where you'll find us. I draw your attention to 4 things. If you look at the first pie chart, Europe is a great place for doing business, and we are growing here. But I am excited by the growth in Asia and North America. Together, they represent more than 50% of our sales and are growing at double digits. North America remains a strong sector with physical testing needs for EVs, auto and aero and fast adoption of smart and OEM sensing to improve efficiencies. Second, the pie chart shows -- sorry, the second pie -- middle pie chart shows how we balance the portfolio that enables us to offer end-to-end solutions. Take note, software is delivering double-digit growth and is a key contributor to our margin expansion. Third, we achieved GBP 492 million of sales in 2022 and that was up 16% on prior year, and we continued that positive momentum this year with 21% growth in the first quarter. Finally, our margin will expand from 15% as we deliver on the material cost reduction strategy and our business transformation program. The creation of Spectris Dynamics has been a strategic success formed in 2019 with the merger of BKSV and HBM and subsequently grown through M&A. We are now one company offering a combined solution across multiple electrical and physical domains under one strong leadership team. The chart on the right shows the positive trajectory of Dynamics. We've delivered 4.5 -- sorry, 4.7% compound sales growth since 2019 and 16% last year. And we get significant synergies from the business, both operationally in sales and support and in our products. For example, all business support teams have been merged to be part of their own global functions, including one global supply chain. At a product level, we can now lay one data acquisition solution over all of our domains. We identified the shift towards virtual test early and built a new division around it, carving out existing technology and consolidating it with acquisitions. We have adjusted our operating model to be customer life cycle focused. That means more people are accountable for the P&L, improving decision-making and driving margin and sales expansion. And then there's SBS, which is transforming how we operate our business. The lean mindset is driving out waste, out of our processes and really improving productivity. We have a focused range of technical solutions that enable customers to innovate across the whole product life cycle, and we are now arranged into 3 business units. In the blue box, you can see virtual test, physical tests and on the right in process. Our org design is best reflects how our customer needs our support. For R&D, we provide solutions to test virtual virtually and physically and in process, we provide precision sensing and software. Key to understanding what we do is what we call the closed loop. That's what's happening on the left-hand side of the chart. Today, engineers want to design and test in the virtual world using simulators with simulation and analysis software, then they move to validate in the physical world using data acquisition, software and sensors. Our technology is the bridge between both worlds taking the learnings from each and applying it to help engineers accelerate innovation. The backbone of Spectris Dynamics is our domain and physics expertise and the attractiveness of the business is that what we can learn in R&D, we can apply to in process. This completes the customer life cycle. To understand in process, think about precision sensing in process or production quality, making machines more efficient and productive. And then what we call in use is asset optimization. For example, monitoring a bridge for structural safety. And sitting across our portfolio is the integrated software, which is how we are solving the big data challenge from design to manufacture. I'd now like to demonstrate how our solutions come together. In this example, I'm using the automotive sector. In virtual test, our range of simulators speed up the development cycle using different tools, engineers learn how the vehicle will feel, handle and where the modifications need to need to be made. The physical test solutions then validate the design for safety, durability, reliability and more, making sure the vehicle works. Our software connects the physical and the virtual test. This is the closed loop that we know is key to R&D efficiency. But at the bottom of the slide, you can see how our precision sensors help end-of-line testing. And then out on the road, we use our software to monitor performance, helping customers and companies optimize their fleets with predictive maintenance. As you can see, we are bringing value to the customers throughout the entire life cycle. Spectris Dynamics has a leading position. We are either #1 or #2 in the premium end markets. The chart on the left shows we have built a 9% market share, serving a 5.1 billion addressable market. The second chart highlights software and virtual tests have the fastest market growth rates. They're forecast to deliver 10% CAGR over the next 5 years. Sensors and data acquisition have slower growth, but they have a far bigger market to address in excess of GBP 3.5 billion. That's because customers will always need to validate in the physical world. But how do we ensure we win? At the bottom of the slide, you can see the answers. First, we're the only provider to span all product segments. Second, the market is fragmented, so there are plenty of opportunities for organic and inorganic growth. Third, our focus is precision. We are the best-in-class. And as an example, our talk sensors put us significantly ahead of our competitors, and Tanneke will be talking more about this later and how that really matters for electric vehicles. Finally, we are exposed to structural trends accelerating growth. Moving from a product view, we will now take a look at our end markets. We are very well placed in 4 attractive end markets. Automotive is our largest sector, representing 33% of Dynamic sales and growing at 17%. The industry is grappling with dramatic change, notably electrification of mobility and the acceleration of new design techniques. This is where we can help the likes of Ford and Pirelli. Machine manufacturing represents 20% of sales in its growing -- sorry, its growth is powered by an aging population, decreasing size of workforce and ever scarcer materials. We help customers to develop smarter machines to enhance productivity, even marginal gains in this space bring huge value. The aerospace and dispense sector market is 14% of our sales. Investment in this sector is focused on improving sustainability and exploiting commercial space flight. Our solutions help jet engine OEMs in commercial space companies with acoustic and vibration testing, improving safety and efficiency. Finally, Electronics represents 7% of sales. Our customers include Bose and Boston where voice activation has been made the norm. Our microphones support precision testing for accurate recognition every time. On the right of the chart, you can see how all our end markets benefit from the exposure to the global megatrends. So now I'd like to outline how those global megatrends before I hand over to my team to go a little bit deeper. So growth in the virtual innovation. Automotive is moving to simulators to design. We are speeding up the development process, reducing cost, being more sustainable with significantly fewer prototypes, and Tony is going to share more on this later. Growth in digital innovation, there is more and more known about complex system that can be modeled digitally. This means software engineers have the confidence to rely on the insights, innovating virtually, validating physically, and Thomas is going to bring this to life. Next is electrification to decarbonize transport, more sustainable solutions will see car markets advance the development of EVs, and Tanneke will explain how Spectris Dynamics will benefit from this trend. And automation and productivity in a connected world, customers continue to pivot to solutions to enhance their processes and assets. Kimberly will showcase how in-process solutions makes machines more productive. These trends represent more than 60% of our growth through the cycle, and I would draw your attention to the tremendous impact on our sales growth across all 4 in the last 12 months. Now I'd like to hand over to Tony, who's going to share his view on virtual test.

Good morning. You are sitting now in SimCenter Udine, the automotive R&D and demonstration headquarters for virtual test. A lot of amazing technology that I'll discuss today is installed in this facility, and you'll get to see and experience much of it later today. Three weeks ago, we hosted our annual summit here. We had 270 industry experts participating in live demonstrations and customer presentations, how our technology is revolutionizing the way cars and trucks are designed, tested and built. I'm excited to have a chance to show you what we do Now let me show you a short video on the industry trends that will set the stage for the remainder of this presentation. [Presentation]

My name is Tony Spagnolo, and I lead the virtual test team. I've spent my entire career in simulation sales, operations and engineering in both aerospace and defense and automotive. I joined Spectris in 2019, and I was honored to be appointed the virtual test leader position in 2003 -- 2023. Three stats from the video that I'll talk about later are 2x faster, 20% less cost and 14x less emissions. Well, let's first talk about the big trends. There's a big shift to EVs to achieve net 0. Many of our cars are now software driven. They're essentially computers on wheels. This has significantly increased the complexity of vehicles. You simply need more disciplines to develop a car such as ADAS, which stands for advanced driver assistance systems and traditional requirements haven't gone away. Ride quality, as an example, is more challenging to master in an EV. If you couple this complexity with the drive to save cost and time, there's a fundamental need to transform the development process. Virtual Test has the right solutions for that challenge. Spectris Dynamics is the leader in virtual test and real-time simulation. The capability and scale of what we do is unmatched globally. It's a gem of a business combining leading-edge technology with outstanding financial performance. Virtual test has seen dramatic growth from its formation in 2018 when revenues were just GBP 11.5 million and in 2022 when we hit GBP 61 million. This result has been achieved through 4 strategic acquisitions, VI-grade in 2018 brought real-time simulation software and simulators. Right [ hook ] then extended our synthetic environments to include traffic and sensors, which puts us at the forefront of advanced driving systems. Imtech expanded our mechatronics and simulator design and construction capability. And in 2021, we were proud to add Concurrent, which gives us the core capability to simulate in real time. This is critical to testing how systems will operate in the real world. These 4 businesses were leaders in their categories and the combination allows us to execute a larger, more valuable business in a broader category. We spent GBP 158 million on acquisitions, and we expect to double revenue in the next 5 years with a 20% return on invested capital. Why do we feel confident in this growth? Today, we estimate only 10% of vehicles are developed using simulators. There's so much further to go. EVs will be 60% of the new vehicles by 2030, and software R&D is forecasted to grow to 50% of the total in that time. In other words, the traditional dependency on physical prototypes will become too expensive. The industry needs Spectris Dynamics to revolutionize the automotive development process. What is at the core of this value chain? It's the ability to drive the vehicle after you dream it. In the traditional process, you conceptualize the vehicle, build it and then drive it. This creates significant costs. We transformed the process, allowing automotive companies to dream it, then drive it. Think about the fundamental changes provides automotive companies. They can now optimize the design much early in the development process on a simulator -- faster, easier, safer. And the more OEMs realize these benefits, the more opportunity for growth it creates for us. How do we do it? Virtual Test is a complete range from the compact to the full dynamic stimulators called Driver Emotion. We need to offer this full breadth to cover the full range of engineering and capabilities OEMs need. And our simulators are backed by leading edge software and hardware in the loop systems. This gives our customers a complete solution. Our simulators allow engineers to check motion, vibration, visuals and sound. These are the critical elements for the driver to have the same subjective experience as they would in the real world. And our simulators are also scalable and configurable, providing greater flexibility. Our attention to detail is the competitive moat that we've built for virtual test. Ford is one of our leading customers. So let's hear how their engineers use our virtual test technology. [Presentation]

Now that's impressive. With the click of a mouse, they can drive more than 50 iterations safely in any environment in the world. They get a better quality vehicle by making decisions much earlier in the development process. Virtual test is transforming how vehicles are developed, and we're just at the beginning of that transformation. And it's not just forward leading the charge. We have a who's who list of customers, some of which are listed on the screen. Why are they investing? Because they can develop vehicles twice as fast with 20% less cost and 14x less emissions in the process. That's a winning combination in today's world. Maserati is one customer who has used our technology at the core of their process. Without it, they would not be able to develop vehicles like the MC20 supercar at an acceptable cost. From the logos on the wall, you can see we're also how wide our customer base. It's not just carmakers. We also serve tire and brake manufacturers amongst others. Our virtual solutions have wide applicability. Today, we are meeting in SimCenter Udine and this is a demonstration center for the future. SimCenter Udine is the model of a virtual prototype laboratory. The vision is that OEMs can come to places like this to collaborate with suppliers before physical prototypes are constructed. This enables them to optimize the design to make cars better and more quick at a lower cost. This vision is becoming a reality. At the summit, that I mentioned, we are honored to hear that a major German auto manufacturer who use our technology at their new virtual development center. You will get the experience of technology in your tours today. To wrap up, to understand the virtual test business, it helps understand what customer challenges are. They need to launch faster at a lower cost, implementing digitalization and bring new technology to market. Our solutions enable all that. They combine simulators with software and hardware in the loop to meet their challenges. We are growing fast. Sales growth last year was 50%, and we think there's much more to come. We are transforming the testing process to provide a more scalable environment to the new software and EV paradigm of the auto industry. Physical testing will continue to thrive and Spectris Dynamics is in a pole position to combine those 2 worlds. And because of that, I'm confident we will play a key role in the future of the automotive industry. I appreciate your time today. And with that, I'll hand it over to Thomas.

So next megatrend, we are exposed to is digitization, which is driving significant growth globally and for Spectris and here's why. [Presentation]

I'm Thomas Lippok, Chief Strategy Officer for Spectris Dynamics. I joined the business in 1999. And since then, I've seen every version of Spectris plc, but I've never been more excited about how our purpose will make a difference in the world and our prospects for growth. And let me explain to you why digitization is a key to achieving that. The life of engineers has changed with digital ways of working, making a huge impact. Imagine you were an engineer, say 30 years ago and you wanted to create a new car [ study ]. You would make a drawing, you would build it, you would test it, you would fail, you would build it again until the design had the strength you needed. Today, engineering work starts in the digital world, and stays there for a long time. You might not leave the computer for the first 6 months of the project where we design, simulate and test virtually. And at the end, we go for a physical prototype and test it in the real world. This way of developing creates lots of data, but making sense of this data is really hard as it doesn't gel together in an easy way. So as an engineer, we literally spend days and weeks to get the insights you want. This is the data challenge, volume, velocity and variety. So how do you solve this for the engineer -- with 3 things. First, connect. Engineers need a place where all the data sits where they can look at it, play with it and analyze it to create insights from that data. So we need to bring it into one place, then collaborate. Engineering teams are not in the same location anymore. Some companies use follow the sun engineering, somebody runs a simulation in Europe, some in the U.S. consolidates and analyzes, and someone in India signs it off. We have to enable this collaboration amongst disparate teams. And lastly, validate. In the end, we must do a physical test. No one really wants to sit in a car or a plane that hasn't been thoroughly tested, right? The outcome of this physical test and the outcome of the simulation and virtual testing need to be validated and correlated so that the loop is closed. And this means we can really speed up learning. And this gives the answer to the data challenge that we had in the slide before, connect and collaborate. So picking up on this idea of connecting, we have a fantastic relationship with PSA Citroen. Their engineers -- the company's engineers needed better tools for what we call fatigue analysis. This analysis is crucial for carmakers. It helps them check if a car or a car part, can survive the stresses of heavy wear and tear, for example, on bumpy country roads, but at the same time being designed in a way that it does not become too heavy, and it doesn't cost too much. The old tools Citroen had were slowing down the design process in many ways, so they needed a new tool. One key element though was to stay connected to the past data and results. If you suddenly have a break in continuity, it's like an organization losing its long-term memory. You lose the insights from the past previous designs were based on. And quite simply, we have the best software solution for this kind of problem. So Citroen choose Encode design life. It is fast, the most user-friendly application of its type and it can integrate previous data so they can rely on the results. This takes hundreds of engineering hours and consequently, a lot of time and money. Another example is how our solutions have helped Rolls-Royce to design the most complex machines that we build as human kind, jet engines. Jet engines have thousands of parts and subsystems coming together to create trust, an incredibly complex machine. And it needs to be safe and robust for many hours of operation. So when you design such a complex system, you need to make sure that possible failures of parts and systems are understood and obviously, best avoided, not only for each part, but also regarding the way they interact. There is a standard approach for this. It is called the failure mode and effects analysis process, FMEA. Engineers spent many hours to review the design, identify what could go wrong, but the effect of the failure would be and how to avoid or mitigate that failure, all for a safer, more robust process. Now in the past, this process was often run on Excel sheet that did not facilitate collaboration. Different teams are involved and need to be interfaced with. The process flow is not visible in Excel, virtual control is difficult and so on. So Rolls-Royce needed a better way, and they decided to implement ex-FMEA from ReliaSoft. A tool that brings together all the knowledge about how to do a great and efficient FMEA and allows for great collaboration. When using that for their design and process FMEAs Rolls-Royce engineering teams could reduce the efforts by 50%, simpler processes, better use of information, better designs by improved collaboration. Fifteen years ago, Spectris Dynamics was very much focused on physical tests and testing software. Since then, we have radically expanded what we can do for our customers. And this is what you see here on the slide. As you can see on the left, [indiscernible] customers right from the start with design optimization. We then help every step of the way to production in operation. On the right, you can see the products that we have today to solve customer challenges all leading in their respective niches. We are strong in reliability and durability with tools that are used to simulate and optimize designs and to analyze and visualize data. As Tony said, we have a fantastic virtual testing business with a virtual testing product suite and real-time solutions. We have a great heritage and physical testing, creating digital data for insights into the physical world. And we ensure production quality, for example, on EV motors and monitor assets in the field. Lastly, data management is a key focus and a development vector for us. Our strategy is to become absolutely mission-critical through the design cycle. Customers value any solution that accelerates learning and simplifies collaboration. And this is exactly what we do, and we are going to do more of it. There are still huge opportunities in connect and collaborate. So I want to show you now where we are heading. We are creating a software ecosystem as seamless flow of data, insights, ideas and learning. This is a big evolution for us. We bring our existing suite of products closer together and enhancing them in 4 domains. First, we closed the loop, bringing virtual and physical tests together. Then we add data from design optimization, testing, production and operations. We feed that into our analytics suite, which will soon enhance with applications for electrical propulsion and battery technology. And finally, anyone, anywhere at any time will be able to collaborate with a coworker using our technology. We are ambitious for this business. We will do a lot of the work ourselves using our 200 software engineers. But our strategy will definitely involve acquisitions in the software space as we have demonstrated last year for CCRT. This ecosystem will truly empower the innovators. To summarize, everything we do is about enabling customers to accelerate innovation. They worry about increasing efficiency, how to connect the different domains and how to manage and make sense of huge volumes of data. The answer to all of this is software. Look around you, you see our demonstrator set up here in the room. Every one of these has software as a key component. There's a screen with everyone where you see something happening. You see that at the simulators, software is a key part of that. Software is the core element of our future growth. Ultimately, we will provide a great collaboration platform and best-in-class data management, a closed loop between virtual and physical testing and with analytics that create insights into the engineering challenges to make the world cleaner, healthier and more productive. And you see the numbers out there, I am pleased with our sales growth of 25% from 2021 to 2022. But the way this industry is evolving, makes me certain we can definitely go further. So I hope that gives you a sense of why after 24 years at Spectris, I've never felt better about our ability to make a difference in the world and grow. [Presentation]

Good morning. My name is Tanneke Reinders, and we might have met during the October CMD when I was still working for Spectris Scientific. In general, I moved to Spectris Dynamics, and I'm now the Executive Vice President of the physical test business unit. Joining the Dynamics team has been an excellent opportunity for me to leverage my broad business experience and take the learnings from Scientific to further build out the physical test business. In physical test, the energy transition has a major impact. And it's a pleasure to share with you some of the exciting work we are doing in support of a cleaner environment driven by electrification. During the last 6 months, I've had the pleasure to meet our biggest key accounts around the globe. These customers are the global OEM and mainly Tier 1 players in automotive and aerospace. Currently, these partners are in the middle of one of the largest transformations they have ever been through. That is the move away from internal combustion engines to electric power. And they are part of a bigger story, the societal trend towards electric mobility. You will have seen e-scooters, e-bikes, e-ships and more. We work with all these manufacturers. As you can see on this slide, the investments in automotive R&D to manage the transformations are significant, [ $626 billion ] through 2030. Also in aerospace, the research and development activity is accelerating fast. An estimated 200 companies global are pursuing sustainable propulsion projects. These companies range from big aerospace players to a number of startups. The challenge for all the R&D departments of these companies is significant. They need new expertise, new capabilities, new test methods and new instruments and software. So where do they turn when they need this vital support, they turn to the people they trust, and that means us. As long-term partners, they know we are the company of innovators and innovators thrive when disruptive transformations are taking place. So let's talk about some of these engineering challenges our customers face. This transition to electric power is not -- has not been easy. It is not only about the obvious power drive challenge, it's about the design of the whole vehicle. Take range, for example, there is a race for range. Consumers are searching for the cars with the longest range. This has become a major differentiator for carmakers. How well a car performs is closely tied to weight, but lighter doesn't necessarily mean better, this because lighter could compromise safety. In aerospace, we see similar engineering challenges. Think, for example, about challenges of building an electric vertical takeoff and landing vehicle, otherwise no EV tools. You can imagine -- you see an image here of one of them on the bottom corner of this slide. Some of our larger customers believe that this is the transport of the future for goods logistics to passenger transport. How fast this new segment will develop is still unknown. However, the first vehicles are planned to come to market this decade. And for that to happen, critical engineering challenges need to be tackled such as a new electric proposal system, safety and noise. And in this highly regulated environment, extensive physical testing will take place to guarantee safety, comfort and performance. When this kind of work takes place, our customer calls us first. Why? It's because our insight and analytics help them bridge knowledge gaps. We have 80 years of experience helping new technologies to market, that is what we do in physical test. By partnering with our customers, we help them to find solutions when they are operating in the unknown pioneering new ideas. So let's get a little bit deeper in 2 of these engineering challenges, starting with range. What do we need to do to help EVs go further? There is a critical limiting factor, and that is energy storage of the batteries. Our customers need to make the most efficient powertrain to get the highest range. How do we help others [indiscernible] out of scans? What you can see in this slide is an electric car in the test rig. Connected to the rig is a power analyzer, the fastest on the market, that's our competitive advantage. HBK's analyzers have the best algorithms, meaning they produce better data and faster insights. It measures 10x faster across the motor inverter and battery, allowing our customers to make quick data-driven decisions. But it's not just about speed, it's about quality of the data. Our torque sensors are 50% more accurate than anyone else in the market. And you are going to see this in action in a live demo later in the morning. But it's not just power that changes -- that needs to change. When you change the powertrain, you need to change the design of the actual vehicle. One of the main issues is that batteries are heavy, so to manage weight, manufacturers need different materials and components, which, of course, need testing. It impacts the structural design, the noise emissions and the durability. Spectris Dynamics is known for the highest levels of precision, reliability and efficiency, in particular, we RD-expert in tigressional sensing. These solutions encompass our entire product offering from high-precision measurement through our suite of sensors, the data captured from these sensors, the instant insights gains at the point of test and our software, which assesses fatigue durability and reliability. More and more, our customers are realizing that there is a huge value for them to engage with one complete solution with a single trusted partner offering global service and support. This is actually how we work with all the global car manufacturers. In that way, we are growing the depth and the breadth of these customer relationships. This relationship extends also to NASA, with whom we have a long-standing partnership. Those who follow NASA will know that the agency has wanted to build an all-electric plane for a long time. The project is called [ X57 Maxwell ]. And I'm very proud that Spectris Dynamics has been an important partner in this project. We are useful because we know how electric engines impact the whole design of the vehicle. You need to balance efficiency and durability and key to all of this is fibration expertise. To test the X57, NASA engineers built a model of the airframe, tested it on the ground using our equipment. The fibration data was gathered using our Lennox size system. Our BK Connect software was then able to analyze data from 191 test runs with 14 different test configurations. The result is a plane that is not only incredibly energy-efficient, but also safe to fly. So -- as you have been hearing, the transitioning to electric vehicles is a significant challenge for our customer in automotive and aerospace and a huge opportunity for us. We combine our expertise in testing, electric powertrains, battery development, structure and durability and precision end-of-line testing with our deep domain knowledge, expertise, thought leadership built over 80 years. Because of all our history with all main vehicle manufacturers, we have a front row seat. They turn to us for our experience and knowledge. We are able to support these customers by bridging their knowledge gaps, collaborating with them to provide a system that integrates hardware and software for an easy-to-use solution and that's why we delivered a 60% sales growth last year. We are a company of innovators, and we are fully grasping the new opportunities, electrification trend brings us to grow our business and build with our customers a cleaner world. Thank you for your time, and let me pass over to Kimberly.

Hello, and welcome. I'm delighted to be here to talk to you about the automation megatrend. Before I start, let's take a look at a short video. [Presentation]

As you can see, the need for automation across a number of end markets has never been greater. This is providing us with a number of opportunities to work ever more closely with our customers to incorporate our premium solutions to help them solve their critical challenges. As some of you may know from Capital Markets Day last year, I'm Kimberly Miller, Executive Vice President of the In Process Business Unit for Spectris Dynamics. I joined Spectris in 2021, leading product management and prior to that, worked in a number of organizations for the last 30 years. gathering experience in industrial manufacturing and operations. So why is automation so important to the future landscape of production? One driver relates to labor scarcity. Just in the U.S. alone, according to McKinsey, 2.4 million industrial jobs were not filled in the last 10 years. That economy lost $2.5 trillion due to that. The ongoing challenge of inflation, rising input costs is driving the need for greater efficiency in manufacturing and operations. In advances in technology, more connected factories and increased competition is driving the need for increased productivity, digital connectivity and ultimately automation. So as you can see, there's a huge requirement for automation, and we are well positioned to support it. The automation market we address is already large at GBP 1 billion and is expected to grow strongly at 10% a year for the next 5 years. At the same time, we're seeing this drive for automation, our customers are facing a number of challenges. Input inflation drives the need for reduced waste and to save cost, the scarcity of labor that I talked about, has the need to make processes more efficient and deploy the automated assembly processes and increased competition drives the need to produce product variation and improve quality. So you can begin to see why this is the strategic need for our customers. An example of one of our automated solution provides end-of-the-line testing, which you can see in this picture. What we're looking for here is our acoustical problems. Those annoying noises you have in a car that gets ever more clear in electric vehicles because they're so quiet. Each occurrence of this problem if found by our customers, cost over EUR 3,000 if found in a finished car, EUR 500 if found in the transmission. EUR 50, if found at the component assembly but only EUR 2 if found as a component when it's being produced. One of our customers alone estimates that our solutions save them $1.5 million a year. Now let's talk about how we support our customers with leading technology. On the left-hand side of this slide, you will see our smart sensors being used in a filling line. Our smart sensors measure wait in this picture, but they also measure a range of other parameters, including force, torque, strain, noise, acceleration and vibration. And they make decisions in real time, speeding up production at the highest quality levels. On the right-hand side of this slide, we are showing you an example of how our OEM team embeds that sensor technology into our customers' products. The example here is under the line arm tooling for robotics. Sensors are required at every joint of the arm, shoulder, elbow and rest to control movement. In addition to movement, resistance is required at the gripper fingers to ensure appropriate cater of any product being handled. Now as some of you may have seen earlier this week, we have just acquired MicroStrain from Parker. We are extremely excited about adding another domain, which is highly relevant to the robotics of factory automation and inertial sensing. The addition of this technology allows us to grow in the premium end markets we serve, specifically in robotics and automation. Now let's look at how our Smart Sensors improve productivity ensure that you get all of the catch-up you pay for. The food and beverage industry is regulated. So basically, it's how far off advertise weight mass and delivered weight masses. Essentially, if you purchase a 16-ounce bottle of ketchup, you can't get 15 ounces. The manufacturers continuously have to make decisions about which waste is better over filling bottles or speeding up production to get that closes of the pin accuracy. That quality quantity deliver dilemma has haunted production floors for decades. By incorporating our smart load sensors in the filling machines, our customers can increase productivity decrease waste and improve product quality. In this example alone, we are able to improve accuracy of weight by 1%, cycle time by 5% allowing 1,200 more ketchup bottles to be filled every hour, saving 3,000 ounces in that same hour or 15 million ounces in a year. The medical industry has really taken off for our OEM sensors. For medical device manufacturers, it's safety, consistency and accuracy that required the most attention. We work closely with surgical device manufacturers, helping them solve some of these problems with our OEM sensors. One of these is surgical stapling. As you can imagine, tissue math differs from individual to individual. When stapling post surgery, the correct force makes an enormous difference in the healing, infection and potential scarring for an individual. Our [ bestowed ] sensor at the end of the stapler provides precise measurements of the clamping force, enabling the patients to get better, more quickly. I hope you've seen that our equipment plays an incredibly important role in this supporting the trend of automation and how big an opportunity this is for us. Our customers are facing real challenges with increasing input costs, labor shortages and consistency and quality. They are also continuing to innovate their own products, creating smarter solutions for their customers supporting health, safety and productivity. Automation and production and operation is one of the most important megatrends in the global economy, and we make it smarter. The financial returns recognized are recognizing the benefit that we are delivering to our customers. As you can see, we grew sales 43% last year alone to GBP 40 million. I'm really excited about the future of our growth potential supporting these customers in an increasingly automated and connected world, and I thank you very much for your time. I'm now going to hand it back to Ben, who's going to round off our presentations and then we'll get on to product demonstrations. Thank you.

Thank you, Kimberly, and thank you, team, for the presentation. Really well done. Really great to see those Look, we're focused on how we win by harnessing the 4 mega-trends. You've seen the virtual test, digitization, electrification and automation. All 4 are outgrowing the market. This is really validates our decision to invest in these areas. Now I'm going to share with you why we're making those investments. Look, our customers are driving innovation, and so are we. We'll continue to invest 8% of our revenue on R&D. We will do this across 6 strategic growth initiatives aligned to our megatrends. First, expanding virtual testing. We consolidated our technical leadership with our immersive software capabilities and building real-time computation, so we benefit from hardware in the loop. You'll see this firsthand on our hardware in the lube demonstrator here today. And in fact, it's over there in the right-hand corner electrification. For advanced software, simulation solutions and data management are key. We're increasing our software capability and solving the big data challenges faced by our customers. We have launched [ query 2.0, ] our data management platform with huge interest while continuing to invest in our simulation and analytics software. Fusion and Advantage, we're consolidating to one data acquisition system, it's high speed, multichannel has a seamless integration with our sensors. We launched our first product in November last year, and we're continuing to roll out functionality through '23 and beyond. And if I just pause, that's the blue box on the right-hand side. So when you do the product demonstration on the digitization, you'll be able to see that there. And in electric powertrain testing, Genesis and perception are the most precise solutions on the market. It analyzes power in milliseconds across the motor, inverter and battery. It pinpoints insights that would otherwise be missed in testing. And as a result, we're outgrowing the market by over 50% and delivering a return on invested capital of over 300. We are growing our smart sensor portfolio. We apply firmware and software to existing precision sensors enabling them to become smarter and make decisions. The result of this business growth of over 50%. And last but not least, investing for growth in our OEM sensor product line -- by using our domain expertise, we adapt the customer hardware to make it sense. We're delivering more than 17% CAGR and around 200% return on capital invested. We will also benefit from a continuous revenue stream. We added new customers to the portfolio in '22, notably robotic customers, which use force sensing to improve process precision. It's these products that driven our vitality index up to 35%, and we intend to keep it there. M&A is a key element of our growth agenda. It's compounding growth, and we're going to do it in a very disciplined manner. We will add further technology and capability within domains of electrification, analytics, simulation and software and sensor technology. Tony shared earlier the success story of virtual test and how we built our offering shortening time to market, radically reducing our customers' development costs. We've built on this with our acquisition of Dytran which strengthens our precision vibration sensing with significant exposure to the North American commercial space industry. And excitingly, we announced the acquisition of MicroStrain on Monday. This is an inertial sensing business. It adds highly synergistic new domain with fantastic growth potential for the in-process business. Now on to margins, which is a core focus for me and my team. We reiterated that we said in Q1 results in April, we have seen the benefits of pricing decisions made at the end of last year. And we expect this to continue for the remainder of this year. But price is only one part of our margin expansion strategy. There are 4 further elements. First, growth, and I've already shared with you the strategic growth projects, each one is accretive to our journey, Key will be the increase of our software revenue to over 25% of our sales. Second is our operating model, focusing on the customer life cycle and improving cost efficiency. Third is our business process transformation, including Salesforce.com plus SAP deployment. This increases to -- sorry, this creates a common set of processes for the business and will enable significant economies of scale. Fourth is the deployment of the Spectris business system using lean tools to create a continuous improvement culture where everyone is empowered to improve the business every day. As you can see from the chart on the right-hand side, in the short term, we expect to deliver strong margin expansion through our organization structure and recovery of the supply chain. In the medium term, we anticipate a further 150 basis points margin expansion from our business process transformation and a similar amount to come from the operational drop-through and continuous improvement. Taken as a whole, these initiatives give us line of sight to our 20% return on sales target and as such, will make a significant contribution to the group margin. We have a winning culture that is definitely helping us to expand our margins. First comes the new structure implemented this January. Which is aligned to the customer life cycle, virtual test, physical tests and in process. The new model is empowering teams to think about what a customer really needs, also allowing them to recognize things that they don't need. This focus brings higher quality decisions faster. We promoted and hired strong leaders and empowered them. The business teams include sales, engineering, product management, together, they own growth and margin for their portfolios. The engineering teams are focused on their core disciplines. They are the physics experts for sensors, data acquisition and software. The teams are making early decisions on where to rationalize, removing services where growth or profit prospects are limited and culling part numbers where they don't meet our profit expectations. All this enables us to unlock the value of our transformation projects really delivering that one global go-to-market model. We are making significant investments to transform our business. We will transition to one common set of processes moving from 9 ERPs to just one. Our sales team will benefit from a single CRM, arming them with the tools they need to drive growth. Both will be in place by the end of 2024, and we are well on our way. On the right-hand side, we can explain the benefits of the transformation. First, we can be more efficient on transactions. All products and services around the world will transact exactly in the same way. We will reduce our cost to improve margins, removing waste and requiring lower working capital. Our processes will be simplified, standardized and automated so our teams can focus on the data insights to constantly improve the business. Our global customer support organizations will be armed with information to increase our service standard ultimately making it easier to do business within and with dynamics and increasing engagement. And bolt-on M&A will become easier because we will have a standard set of business processes that all can adopt. Taken together, our business transformation initiatives will deliver 150 basis points margin expansion. The next element of our margin strategy is embedding of a lean, continuous culture under the Spectris business system. Having grown up in the Honeywell and [ Eaton ] operating system, I've seen what good looks like, and I'm pleased to say we are on the right trajectory. We are investing in our culture building the foundation with a learning mindset, teaching the tools, learning how to deploy through Kaizen events in turn, this is generating more ideas on how to improve. To help drive growth, we improve customer lead times. As an example, in Darmstadt, we use value stream maps to radically reduce our manufacturing cycle time. This has delivered as much as 50% reduction enabling faster customer reaction times and less inventory. To be more profitable, we are removing waste. This drives increased productivity in Suzhou, China is leading the way. By investing in automation, we are lowering the cost there by as much as 20% and removing variation. This enables us to upskill the workforce and produce millions of precision sensors at optimal cost. And to optimize cash, we have implemented an integrated sales and inventory management process. This means we have the right stock on hand and our warehouses can better meet our customer needs. In Spectris dynamics, we're investing in talent and culture. We have a great team where we promote and hire top talent, some of whom are in the room, and we've embedded a high-performance culture with a clear focus on sustainability. It's an exciting place to work. There are 3 focus areas we've created an environment where diversity is valued and inclusion is a priority. We have 40% gender diversity within the executive team and over 1/3 overall. We've embraced the work from anywhere culture, enabling our employees to innovate with our borders. Second, talent and tools. We invest in our leaders through the global leadership programs, empowering them to steer their teams towards success. The focus on team development and engagement ensures that our success is a result of collective effort and our achievements are shared. And finally, leadership and teamwork. We promote from within and open doors for the next generation of innovators through our graduate and apprenticeship programs. Put simply, I believe Spectris Dynamics is a great place to work. So in summary, we are an established leader in a high-performance virtual test software, data acquisition and sensing. We are well positioned in strong end markets supported by megatrends shaping a more digitized, automated world. We are executing and expanding on strong fundamentals, integrated virtual and physical test solutions, more software-orientated R&D, operational excellence and strategic value-creating M&A. We are focused on margin expansion through strategic growth initiatives, business process improvements and creating a lean culture. All of this will deliver on our target of a 6% to 7% organic growth through the cycle and sets us up on a robust path to 20%-plus operating margin. At Spectris Dynamics, we empower the innovators. Thank you for listening this morning. We'll now invite Andrew and Derek onto the stage to host the Q&A session before starting the product demonstrations. Thank you.

So thank you, Ben and team. We'd now be very happy to take any and all questions. I think we've allocated about 20, 30 minutes, so we've got plenty of time and then we'll go on the product demos, and we will have some sort of final time at the end 15 minutes, say, for another sort of wrap up in Q&A. So we'll start now.

So I'm slightly surprised by just only 10% of cars being developed with simulation at the moment. So what transfer and the customer base seems to be for plus quite high-end European automation. So how do you get more of the mass market to convert? What's going on in Japan? Are they doing their own solutions because any Japanese names on there. Can you talk about how that market might develop over the next few years?

Yes. I mean, if I can get a microphone to Tony, I'll let him just give you some of that color, Mark. But let me give you my view. I mean, I think the opportunity for this is huge. That stat about only 10% of our current customer base is in really embracing that virtual test just shows the size of the opportunity for what we just offer to date. And beyond that, when you really start to think about not just the driver in the loop, but the vehicle and the software in the loop, the hardware in the loop subsystems, et cetera. X in the loop, that opportunity is massive. And as the automotive industry embraces it, and it's not just large OEMs, it's not just the super car manufacturers. You saw on the there's Ford, there's Maserati, but we are selling into quite a hundred in Japan, we're selling into the new car manufacturers in China, startups in California and Tony will give you some of those names. But we're also selling today into tire manufacturers, they're developing tires on our simulators with break manufacturers developing brakes, and we just sort of started this whole journey. But I mean, Tony, just feel free to add.

Yes. First off, the 10% is really about using simulators to drive this subjective testing process. It's not simulation overall. I'm sure you can read lots of things about how pervasive simulations in the automotive industry. It's around the subjective testing, which is really where the large value chain is. That's not a complete list. You could go to our website rather pervasive on announcing our customers. I could have added a lot more logos up there. And yes, we're quite active in North America, Japan, China and Europe. Those are our main focus areas. So we do have customers in each of those regions. In certain instances, they don't allow us to use their name. Okay, so those logos don't show up, but I can assure you we're quite active in those areas. So you have to understand the vehicle development process. The vehicle development process is really around subjective testing. Somebody actually physically gets in the vehicle. And historically, that's been done in approving grounds. We're moving that into a laboratory. So you have to sort of separate what's called offline simulation. From what we're doing is combining simulators along with models to eliminate that proven house testing. That's a huge value chain. And with the expansion of EVs and software it's extremely critical. They move to that because you can't wait for a prototype.

Greg? Yes, Jonathan? Just down here.

I just have 2 questions, please. Firstly, just in terms of Spectris Dynamics overall, can you just talk a little bit about the 40% that sits outside of mega-trends just in terms of growth, but also maybe the margin potential there is that less than the stuff that sits within the mega-trends side?

Yes. So I mean I'll give you my view and then I'll pass to Ben. But I mean, I think one of the key things, I think, to like to recognize with dynamics is that we are at the forefront of innovation and therefore, we need to stay the forefront of innovation. So what you see is on those mega trends, that's what driving the growth, and you can see the significant growth rates we've achieved. And we need to make sure that we are focused on the right areas, on the right trends of putting those investments in. And if you just take a step back, I mean, if you look at virtual tests have gone from GBP 11 million to GBP 60 million revenue business over the last 5 years. In Sensors, it's gone from virtually sort of from an OEM Sensors perspective about sort of GBP 10 million, GBP 15 million over 5 years ago to sort of GBP 40 million. Our software offering is now GBP 75 million business, grew over 20% last year. We are focused on those key areas. And this goes back to the work we did back in 2018, '19, when I arrived. Let's really think about where we are the most advantaged where we see the attractive end markets where the end markets are growing and we can really have or can build those strong positions.

Yes. No, I think you've answered the question. Just to give a bit more color. I mean we're still very confident in that the other parts of the business that serve other segments that maybe not be benefiting from those mega-trends, but the mega trends are the ones where we're getting accelerated growth. It's where we're going to continue to invest. And the percentage growth rates are truly exciting in these fields because the industry is changing, it's really pivoting around those 4 key points. That the rest of the business is still growing and will support growth through the rest of the performance period.

And then second one, just maybe for Derek, just in terms of Spectris Business Systems. Obviously, if we look at the bridge 15 to 20, we've got an idea of what sort of the ERP and the process it give. Can you just give us a feel of maybe the potential improvement to margin coming from SBS please?

So it's blended in with the remainder of the balance. So if you think about how SBS works, that's a key underpin to a lot of the drop-through. So as you're growing, you're keeping your cost base fixed. So it's not quite straightforward of splitting out SBS separate from drop-through because it's an efficiency improvement. So there are cost saves by doing things better, but there are also abilities to hold the cost while you can grow and then see that drop through come through. So the bridge that Ben gave really looks at the margin recovery from the pricing we talked about this year. So we have a good -- if you look at last year's margin at 15% dynamics, we said last year that a good chunk of that was down because of gross margin impacts from pricing coming through in our cost base, but we're not going through in sales. So that reverses this year. So you see a pick up. And on top of that, you've got 150 basis points in ERP and then the balance has dropped through. So that will get you sort of through that path up to 20%. But we're not splitting out individual components of SBS.

Just make a point, just maybe still on a longer-term basis, is there any structural reason why dynamics can't generate say margin scientific? Is there at some point in the future do you think those 2 good kinds deliver the same level of profitability.

Well, they're both of that 20% trajectory. I mean, steps already there. And we're saying that these guys can get to 20% plus whether you'll sit and actually see the exact same margin numbers. I mean, obviously, that depends. But there's no fundamental structure reason why we can't go there.

We believe they're both real high-quality provisions and both have that capability to get north of 20% scientific is already there. I think it's in markets may be a little bit more helpful but absolutely no reason why dynamics kind of get to 20% as we demonstrated. And I mean just building on your SBS point, Jonathan. I mean, I personally delighted with just how far we've got in the last 4 or 5 years. I mean when we sort of said SBS is going to be core of the strategy, it was revive twinkle in RI, frankly. We are maturing our capability rapidly when I go around facilities now. We have our sort of rates for goals, all our facilities have a process where we sort of have an internal sort of calibration and expectation that we're going to go from bronze, silver to gold certification internally. We have a very clear methodology. People have been trained. I can go on any of our shop floors now and our frontline supervisors can tell me about our lean operating model, standard work, their daily work, how they run their factory to that. We go again to the shop floor, talk about problem solving, how they're driving performance every day. And then real examples of Kaizen events are stripping out based, reducing lead times, helping save working capital. And to Derek's point some of it absolutely hard savings, some of it's avoided cost and we embrace both.

And actually, just to your point on comparing the 2 divisions as well. I think it's fair to note that the Dynamics division is further behind the call kind of merger bringing together the Scientific is a couple of years behind just because of the timing. But when you actually look at the leadership team may now have and the fact that the Ben the team are now one very clear team, I think you will accelerate that sort of merger benefit that we've seen in scientific. And as they bolt in the new acquisitions as well, that will generate that margin improvement.

And if there's the opportunity to add, again, when we do acquisitions, the SBS journey we expect and we will ensure that those businesses come online and adopt quickly. We've seen that in Dytran. We've set out a very clear program for them to mature and get up the learning curve from a standard work perspective. So it's great from an M&A point of view. And then when we open up new factories, we start from that perspective. So we're in the process of setting up a new facility in Porto, moving our fiber sensing business and giving us a growth potential for OEM sensors plus a supply chain strategy with China. And we're going to start with the lean mindset from the beginning, a very focused approach to lean so that we don't have to reinvent the wheel once we've set the factory up. So we're in and we're off and we're running.

It's Rory from UBS. My first is on -- well, I suppose you say that your customers are the only player active across all segments, but in virtual tests, that's could be a buy and build strategy, and you say there's of a highly fragmented market out there with a long tail. What are you doing today to kind of build that moat so that someone else can't come and essentially employ the same strategy and enter the complete spectrum of services that you're currently -- currently offering -- that's my first question.

I'll let Ben answer it. Otherwise, I'll just steal his thunder.

But when you go and go on the simulators -- the one thing that you're going to hear is that these are multi-attribute simulators, and this is where we really differentiate. So you can go on a simulator in a virtual test with our integrated software and the hardware -- or sorry, the human in the loop test. And that is truly immersive. We talk about immersion because you have this multi-attribute test. So you can we differentiate because our competition doesn't offer that capability. Plus, we have the breadth and scale of capability across the whole virtual test environment. One, we also have real-time computation with in-house. So we're able to make sure that the simulators performed to the highest level of accuracy. But ultimately, it's the quality of the software that enable you to take the real-time car dynamics in the physics vehicle, apply that to the simulator with immersive software that you're seeing. You won't see that the physics attribute software because it's invisible it's what operates and drives the machine. But what you will see is SimWorld. And it's the combination of those 3 things, the hardware the software and that multi-attribute that creates the moat that's really a differentiator for us and why we're seeing significant growth over our competition.

I mean I think -- I mean what strikes me is that when I talked to the team here, they have customers come and use the facility actually went space sometimes from the facility. So we get first-hand experience on how our customers are using the simulators, have the interface with the HMI, the machine interface, how they use the software, how they actually sort of which attributes are looking for plus when we're in the field with our customers as well. That knowledge is gold dust and building the whole software and offering based around that feedback from customers. That really builds the defendable moat because there's so much empirical knowledge that unless you're in the market, you can't go in access. We are creating those simulation models that real-time immersive experience based on what our customers actually want and how they experience and use our equipment. I'd say that's worth a huge amount and makes a very strong barrier to entry I think equally, I mean, our sales in virtual test now 40% of that GBP 60 million last year was software related. So that is annual subscriptions software where we're providing as part of the annual subscription regular software updates as part of that. So this is -- not only are we selling physical hardware, we're building a long-term annuity in terms of our software base.

And maybe I just can add on the risk as we bounce off each other here. But the -- you heard from Ford, 50 to 60 different vehicles were tested in a day, without having to touch anything physical and it's that car real-time simulation software linked to the simulator that enables them to do that effectively using that software to drive innovation in a very, very, very efficient manner.

And just picking up on that software piece and apologies, this is maybe more of a modeling question. So one for Derek. But it's really very high gross margins in software. Is there any kind of comment you can add on if we think about the mix over time, the gross margin differential across virtual hardware and well the core kind of sensor piece as well.

Look, I mean, I think in terms of direction of travel, you'll see the margins decrease. They're supported by that software sale. So as the mix of revenue goes more towards software that underpins the gross margin. I'm not going to give a sort of breakdown as you well know, based on the way you file and knowing that, that was going to go there. We're not going to give a breakdown by mix and time because it's quite difficult. I think the important thing is to look back and just look at it again as part of that growth piece. If we step right back and just look at the dynamics division and the underlying historical components of this division, we've never done really much more than sort of 15%, 16% return on sales net. So the fact that we are confident of breaking through that barrier and they can see a path to 20 plus, that's the key message to take away from today.

Yes, Rich, you go next on.

Rich Paige. A couple for me. First, on collaboration because obviously, with the streamlining of dynamics. It's clear that's one of the key motivators in driving what you did. But incentivizing people to do so and what that brings you. And I'm also thinking across 2 Spectris Scientific as well if there's any coloration battery testing, for example, in Morton Panalytical and how that may relate to some of your or customers.

I'll let Ben talk about the collaboration point within Dynamics overall because clearly, there is crossover between virtual test physical tests and in process between Tony, Tanaka and Kimberly, they are sort of joined at the hip in many ways on those things, but Ben talk about that. And at a group level, I mean, we share market intelligence. We share sort of where the opportunities lie, what trends are but typically scientific is looking at things like materials, they're looking at the advanced materials that are going into the bank --battery manufacturers, they're looking at the anodes, cathode materials can interconnect layers. And so the interims of focus on that analysis. And that's typically more focus of the chemical input material producers than it is other battery producers, whereas Dynamics is very much more around the battery manufacturers onwards. So there's a little bit of synergy, but not, but not a huge amount.

Yes. And building on that, the message in the pitch today is that our value proposition is at the main expertise with physics experts. And what we learn in R&D, we applied to in process. So as we've deployed the 3 business units, what's really core to us is that we don't -- we make sure we don't lose that value because that is core to who we are. One of the things that we've set up is a clear and well-defined technology forum chaired by a simple individual that looks across the whole entity and brings together the subject matter experts across the group to make sure that we think about how we bring our R&D communities together, how we innovate at the right things, how we share not just ideas, but resources. And more importantly, as we convert to our more digital platform, how we're going to change the skills and capability of our engineering community maximize our potential in those markets. So it's a very conscious and deliberate approach. We haven't lost that value by creating these 3 pillars something that's going to be core, not just to me but my team with Tanaka, Kimberly and Tony because they see the value of the group from an R&D point of view, not just the pillars within their own business units.

And then just secondly, software, 25% of sales, very ambitious. And obviously, we've made a point that will require some acquisitions together. Can I just ask, it sounds as though given it's a driver of the margins you're getting for value with subscriptions, but how you value that to the customer? Because I assume that's an element of software that comes with the hardware as part of the selling point and how you capture that in terms of also the continuity of your customers because given that some big feedback with what you're doing, just to understand sort of pricing I guess.

Yes. Well, I'll share with you the commercial approach, not necessarily the pricing element, but think about the -- we have multiple layered software suite -- so it's not just one dimensional. You'll see simulation suite of software today. You'll also see on the screen, our application software that sits alongside our data acquisition. You also see our analytics software. So that's the first 3 layers of the stack. On top of that then sits our data acquisition. Sorry, our data management that is the governance and has enabled the customer to manage those depending on the market, the customer and the application will depend on the commercial strategy that we apply to how we leverage value from that software. And it will vary and what we have in place is a very clear strategy around how we will monetize software plus also how we'll have a vehicle to sell it through tokens and licensing applications and how the customer downloads it. So as we've formed the group now with Dynamics, we have a clear digital strategy, how we go to market with software and how we converge our software approach across that 4 layer stack.

I mean I mean approximately half the dynamics engineers and software engineers today already. I mean, it's software is embedded in everything we do from the operating system all the way through the stack has been as I explained.

Sorry, can I just come back to the other side of the virtual question, which is the threat of cannibalization, I guess, to your core sensors business and the physical test. I mean a lot of the virtual proposition is the ability to do more of this pre physical test. Does that not over time, shrink the size of the tenses market?

Yes. I mean, I think if you look at sort of commodity, it's more lower end of the sensor market, more the commodity market, I think there is a risk of that. But I mean we operate at the premium precision end of the market where customers absolutely need that fidelity of the measurement and the most accurate measurement and there's those measurements that's -- it's critical to making the difference in terms of their product designs. So like our top centers, for instance, on electric motors, yes, you absolutely -- they'll do more and more work in the digital world, both in terms of design, modeling and simulation, but ultimately, when you come to sort of look at that, then probably even in the hardware that we make from the state of looking maybe at the sort of electric motor drive system, you're going to use our tool motors absolutely ensure that you're getting the most accurate measures talk and maximizing the performance of the vehicle versus maybe the durability of the battery, the range of battery or even the trading in an electric car on the drive shaft is far higher than it is an internal combust engine. So the strength and the characteristics and the talk characteristics is vital to the integrity of the drive shaft. So in many ways, these advancements in technologies in our customers' end products is driving that need for higher levels of precision. And that's where we play.

So it's based on either and the other question I have was just Ben and chart of market share. There was a blue slice of the pie that looked to be bigger than the Spectris close to the pie. Can you tell us who that might be.

We don't know, it's your answer I could, but I'm not going to. But I -- can I build on Andrew, I'd go back to the previous question because we're virtual testing, we are the human in the loop. So it doesn't -- the prototype approach that the OEMs had was that subjective testing was done in a physical environment. We now do that in a virtual environment. That shift doesn't remove the need to validate in a physical test. So you see we're only talking about prototypes to. Then once you get past the prototype stage to the validation stage, they're still going to have cars and still have cars that they put on a test track with our sensors, data acquisition solutions and applications to validate that test and it's that closed loop that brings back the learnings from that validation back into the virtual world. And this is where Spectris dynamics is unique because we are the only person or provider in this market and can create that closed loop. When you add that to analytics software and the [ mythology ] capability and physics expertise, we really have a complete offering with a solution provider where we can help OEMs really develop cars and bring them to market faster or significantly lower cost.

Your question on the market share point, Mark. I mean I think the key message takeaway is that we are #1 or #2 in all of those subsegments of the market. So if you look at the total market of EUR 5.1 billion, that we are the only player that covers across all of the different end segments. So to some extent, our 9% is spread across sort of sensors, data acquisition, software, virtual test. But at the premium end, we're #1 or #2 and so I think, Gary, it's -- if you look at that pie, really add it up, we're still sort of #2 overall in the industry. But in those subsegments, we are #1 or #2 at that premium end of the market. And the GBP 5 billion is really the total available market.

I'm Lush Mahendra from JPMorgan. A couple, please. On the software side, you can get into 50% to 25% of sales on like M&A is a big driver of that. I guess, how do you get comfortable around the multiples you pay there because clearly those assets aren't cheap.

Yes. So I think it all comes down to what the asset is and what it does. I mean if you take concurrent real time that we bought last year, a lot of the revenue of current real time are software related, but equally, they sell very high-performance computing equipment that we use to drive our simulators to provide real-time performance and the simulators, but they also sell real-time hardware for the likes of Rolls-Royce, Lockheed Martin and aerospace applications where they're simulating and emulating jet engines, aircraft. So it's a -- that was a combination of hardware and software. So I think typically, we are not looking to sort of just go and buy software business for the sake of buying software businesses. Software businesses absolutely apply to these key mega-trends and how we can apply that software into that whole product physics environment lead to our hardware. So it's -- I think you would expect to see a combination of where we look to be looking where the target of a combination of providing premium hardware with a strong software component.

I would add as well that we are bringing something of value to those software companies as well. So we're not looking at going out and buying massive established software companies that creates a multiple. This is cutting-edge technology. So that technology creates value when it's used in our applications. And I think that's what the partnership often will find we'll start with the partnership, and then we can enter into some sort of M&A or some sort of arrangement and then find a way into actually making an overall acquisition. So sometimes the multiples may look a little higher because it's early stage, and they're not quite as profitable. But actually, if you look through where we think we can take that software or take that business, then the multiples are not crazy when you're on an established basis. There's a judgment call as do you wait until the profitability is established, then the price is really high, would you pay a slightly higher multiple by a lower price but get in early. So it's a bit of a balancing to be honest, depending on each different situation. The other thing I would say is that there is a good amount of organic growth in there. It's not all down terminals. That to get to 25% requires M&A is a big statement, and that's not entirely true. There's a good amount of organic growth.

The second one is on just the ERP benefits, things sort of putting it in, in 2024, presume those benefits start coming through in 2025. How do we think about that phasing? Is it presumably more back-end weighted? Or is it quite linear across sort of the next 3 years or so?

The benefit -- I mean the benefit will come in predominantly [ 325 ] It also helps as you sort of look to grow. I mean I think the important thing to think about is, certainly, if you take dynamics, these guys are running 9 ERPs today, and we replaced that with one ERP. So the simplification of doing business right away from placing an order to managing the inventory to billing customers to looking at production cycles. I mean it's the amount of handoff between systems and people today, hugely complicated. It's more complicated in the Dynamics division than it is in the scientific division, but it's still complicated in both. So as it gets rolled out during '24, we'll remove some of that complexity. It's difficult exactly to say, okay, this month, we'll see this come through because obviously, there's going to be ebbs and flows, and it will depend on how much activity comes through. But the 150 basis points is through that cycle dynamic. So we've said, if you look at the chart, we said by 2027, over our planning period, we can see us getting to 20% plus. So that [ 150 ] is part of that journey.

Just the last one, a slightly different attempts on Rory's question I guess. But in terms of that 6% to 7% sort of side growth, how do we think about volume and sort of pricing mix given some of the more innovative things you're doing?

Yes. So I mean, dynamics has sort of had a very similar profile to the rest of the group in terms of that sort of volume and price trend over the last 18 months, in particular, with high inflation. So we were about, what, 60-40 split last year, volume over price. And we said that inverts through this year, which is progressively years, and we can see that in the order book. But I think pretty much from here on in, we're expecting the markets to normalize. We're not seeing anywhere near the same level of input cost inflation. That's definitely eased. We are benefiting from the pricing that's already in the order book as a consequence, and that's providing gross margin recovery as we speak. We saw that in Q1, we've seen that continually progress as we've gone through the year, and Ben reiterated that point, and I think from here on in, I think we're pretty much back to a much more sort of normal situation in terms of just price inflation. I think things seems to be calming down considerably.

So this is on virtual testing. I guess it's quite easy to track for you guys, but could you provide some color on your installed base today? And also, I guess, what your backlog also looks like today in terms of equipment that's yet to be shipped to customers.

Yes, sure. I mean -- so as we said earlier, installed base of about 10% of the market, north of 100 machines out there in the field with major OEMs helping them innovate today. One of the interesting stats that we look at is how many millions of hours of development times of being run. And I think Guido is there about 9 million development hours so far this year or so far. Yes. So to try and convert that into something that's more tangible, that's 9 million kilometers, sorry, in Europe now. I remember, 9 million kilometers of track time that hasn't been expended this year through R&D development that this business has helped to generate that reduces cost, reduces emissions, really helps to accelerate products to market so backlog is good. It's good as it's ever been. I look more forward and think about what our potential is. And then our forward-look growth opportunities are continuing to grow significantly, almost an exponential rate in order to help us think forward what those potentials could be. So plenty of opportunities in the market forward look strong backlog really helping customers to innovate with millions of miles saved on a yearly basis, kilometers.

Yes. I mean I think it's a testament to the business. I mean, we had a very large tender that went out to the industry end of last year from a German auto OEM for a broad suite of simulator offerings. We were successful in winning that EUR 10 million order value. One of the reasons we won is that we offer the broadest range and we could -- we actually were the only supplier that could offer the complete range of the similar troughing that they needed, and that was really the winning combination for us. So that's, I think, is just a further testament to the progress we're making and the opportunity.

And just as a follow-on, I'd be interested in the revenue potential, obviously simulators useful life. So you make a sale, I don't know what the number is. How -- what multiple over that price of that original equipment, are you able to generate over the useful life in terms of aftermarket software sales, recurring revenue, et cetera?

Well, we're already making about 40% of last year's revenue was basically software related on an annual subscription. So as that installed base grows, then obviously, that recurring software base and element is going to continue to increase as a proportion of that. And there's just going to be a balance of the rate at which we're selling new simulators versus our ongoing revenue stream. But I think this is a highly innovative, rapidly evolving market and customers have bought our early driver emotion simulators. You'll see the DiM150 which has 1.5-meter movement spread on the beds. Our latest one is a 5-meter that in 500 and customers are upgrading to the larger capability where they need to equally. We've sold some customers with -- you'll see the cab loaded on top of the simulation on top of the hexapod. They're now asking for lighter weight, carbon fiber caps that they can actually then do more. More with a single agent the less mass you all on the top, the more you can you can throw around so it's something that we are just seeing continued upgrades with our existing customer base and customers coming back and then asking for more the German auto OEM example I've just given you. 10 million order at the end of the year. They have now come back and asking for already. So this is highly evolving. So I don't think we could be very precise if we wanted to be. But I think the opportunity is huge.

And just in terms pay back to the customer. So if they make this investment, I know you mentioned in the slide pack, it reduces time to market by sometimes what is the payback?

1 to 2 years planning on the intensity. Wish for a significant CapEx, that's a great return. I'd say that. CapEx will prove a would put it front of me.

Yes. And just finally, on ASPs for this for the simulators, what have you noticed in your own business? And as the operations scale and as adoption also increases, do you think there's a potential that selling prices come under pressure or not so much that doesn't on risk.

I think at the moment, we are very confident in terms of our pricing power and our ability to price for the value that we're delivering because it is significant on the value 1x to 2x return on that investment issues and I think customers we absolutely see tangibly the fourth video, I think it's a brilliant example. They can see at the click of a mouse, they can make 50 to 60 to 70 iterations in a day, and it's just driving the pace of innovation, reducing the cost. So I think it's a very strong value proposition that we provide.

And we work early in the cycle. So it's really -- we get to the customer early. We help them define what their needs are, and then we set the engineering characteristics of the solution around those requirements. So you almost help them to define the solution. And that is the key characteristics of the business. We're so intimate with the customer in that sense, the value is generated in that way.

Just going back to the GBP 5.1 billion addressable market, how have you performed in terms of market share gains organically? Obviously, there's been a few acquisitions along the way. And obviously, you've identified that virtual testing opportunity. Was that part of the rationale that we disposed of Millbrook obviously that being sort of more physical testing company.

Let me take the mobile question and I'll pass the market share one to Ben. But I mean, as we looked at Millbrook, I mean it didn't really fit our business model. It was very capital heavy as a business. I mean it was consuming GBP 40 million of capital a year. And it's very much you have to build the assets and then hope the customers will come to you and take contracts with you. So we build it and keep fingers crossed, and had a big ongoing annual maintenance costs. And frankly, we also didn't want to be. Our view is that, that proving ground part of the prototyping that is the bit that is going to go down they will still need a proving ground. You'll still need to drive the physical vehicle and validate it and do the crash test and do the final validation certification requirements. But the amount of hours that's going to be needed is going to be much reduced. So we certainly saw that as it's a business having a lot less potential. And from a sort of sustainability angle as well, uses a lot of energy to drive all that. So we felt that wasn't the market we want to be in. And we really wanted to focus much more upfront on the digital digitization on the virtualization aspects of the business. And that's clearly what we've done in we're getting the benefits of that. And from a market share perspective?

Yes. So strong for sensors. Acquisitions are really complementary Dytran, MicroStrain, premium end market precision sensing growing. Virtual test taking market share. And you'll see that today, we're really making strong inroads into that, along with it very focused software solutions around the 4 stack that I spoke about earlier. And then on data acquisition, we're probably stable, but that's why we're investing in the next generation of data acquisition system that's on the table to my left. Which is the fusion coupled with the advantage software so that we can make sure in a high-speed multichannel environment for everything from car aerospace, any physical product testing that we need to do, we have a solution that can make sure that we continue to grow in that space. So we're well placed on market share.

Great. And I just see that developing in the future. Obviously, you've got about 9% now. How quickly do you that could expand to say something close to the teams?

Yes. I think you've seen the 4 mega-trends. We're going to continue to push on and grow beyond the market. So I expect us to continue to think about how we can grow beyond that 9%.

For me, a big thank you for all of you making the effort to come here. I certainly feel and I know from the feedback of talking to you, and that you feel there's real benefit in coming to site and seeing the products and seeing the people seeing us in action, our products in action, but also our culture in action. And hopefully, all that's come through really strongly over the last 24 hours. A big thank you to the team. I wish a big thanks to Gabriel here in particular, who's been instrumental in organizing the event. So thank you very much, Gabriel, and all your team. I mean I had sort of 3 objectives that I said when I opened this morning for this event. Firstly was to sort of really make sure that you're getting the message that we have transformed Spectris. We are a very different company to what we were in 2018. As Derek said at the Capital Markets Day in October, if your models go back earlier than 2019, tail them up, throw them in the bin come and see him later, he'll give you the latest model, the latest forecast because we are very different and modeling is in the past, I think it's quite irrelevant to where we are today. We are a very different business with a very different focus. We have absolutely been purpose-led, followed our strategy and executed routinely and robustly, and I'm hugely thankful to my colleagues and really impressed actually by the culture with in Spectris in terms of coming up with a strategy, sticking to it and executing and delivering on it. And that's what we've been busily doing over the last 4, 5 years, and we are seeing the benefits as you could see today. Secondly, the dynamic is absolutely central to our mission as a leading sustainable compound growth business, focused on precision measurement. I think all the presentations and the demonstrations, hopefully, have really underlined just how critical our applications are for our customers and what the difference we make. And that clearly dynamics absolutely fits the Spectris model. Secondly, it's our ability to grow dynamics 6% to 7% compound through the cycle by our focus on the mega-trends, by our focus on the secular trends and sustainability trends, we are very confident of being able to deliver that. We'll clearly be shaped by the macro environment, but I'd encourage you to really think about those mega-trends in the micro economics that's driving our business and underpinning our growth going forward. And then also our ability to grow 20%. I mean Ben took you through the journey. We have a clear pathway, we have a clear direction. We have a number of levers we're pulling, clear actions that will deliver clear results and therefore, gives us confidence over the next 4 years, we'll get dynamics to at least a 20% operating margin. And I think lastly, my other point was I hope that we have been able to demonstrate that we are making real progress and really strong progress. And certainly, I felt that came through and certainly talking to those of you that I have, I think you can clearly see that. And a number of you said, yes, it's great to see the progress that is being made and what a difference the business is. So we are harnessing the power of precision measurement to equip our customers to make the world cleaner, healthy, more productive, never more so within dynamics. I think we are true to our purpose. It is about combining purpose with precision to really make a difference for society to make progress for a better, more sustainable world. So thank you very much for coming. Enjoy lunch. We'll be available until at least 1:30 to take any further questions over lunch. So do take the opportunity and those of you who are going to drive the simulators enjoy. Thanks very much. Take care.