Spectris Limited (SXS) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to today's conference call titled Spectris 2023 Half Year Results. My name is Helen, and I'll be coordinating the call for today. At the end of today's presentation, there'll be an opportunity to ask a question. [Operator Instructions] I would now like to turn the call over to Andrew Heath, CEO to begin.

Good morning, and welcome to our Interim Results for 2023. Let me start by saying how delighted I am by our very strong first half results. Derek will take you through the details in a moment, but I'd just first like to emphasize that we delivered exceptional organic growth, continuing the momentum from last year. Operating profit is up 41%. And with our strong top line growth and focus on operational excellence, we delivered very strong margin improvement and a record operating profit. We remain a highly cash-generative business, further strengthening our already strong balance sheet and providing the Group with continued flexibility. Now this performance reflects the conversion of our record order book at the start of the year but also market share gains and the impact of net pricing. And alongside these results, we've been very busy executing our strategy for sustainable growth, including a number of exciting new product launches, the agreement to acquire MicroStrain and strong operational improvements expanding margins. So a very strong set of results that derisks the second half and provides yet another step towards meeting our medium-term targets, again, demonstrating the improved quality and resilience of the Group. So turning to the outlook for the full year. Our strong first half performance and the strength of our order book means we are upgrading our guidance for the full year. We now expect organic sales growth to be ahead of our previous guidance of 6% to 7%. We continue to expect strong margin expansion with full year adjusted operating profit being the range of GBP 250 million to GBP 265 million, delivering double-digit profit growth as we continue to execute our strategy as a leading sustainable compound growth business. Now these results would not have been possible without great people united behind a common purpose and values. So I'd like to thank all of my colleagues right across Spectris for their contribution and the healthy high-performance culture that we continue to build together. I've loved visiting a number of our sites in the first half and seeing the wonderful things going on across the business. Early in the year, I was at our site in Suzhou, see firsthand the fabulous progress they have made in deploying our lean operating model over the past 3 years. The site has been transformed. I also met with the sales team in China, who have delivered over 25% sales growth over the past 12 months. And likewise, I had the pleasure of visiting our recent acquisitions Dytran and CCRT in the U.S., and learning more about how they're solving customers' challenges through high-performance compute and advanced sensing. And just the other week, I was in Servomex, again, talking to colleagues there, who're using the SBS toolkit to improve operational performance and also others working on some exciting new product innovations. We have a truly diverse, highly skilled and customer-centric team, who collectively are creating a great and engaging place to work. I'll now pass you to Derek, who will take you through the financials in more detail.

Thank you, Andrew, and good morning, everyone. Reported sales increased by 23% to GBP 702.5 million. Adjusting for the impact of acquisitions, net of disposals, which increased sales by GBP 8.1 million, and foreign exchange movements, which increased sales by GBP 16.2 million, you see a growth of 19% on a like-for-like basis. Adjusted operating profit increased by 41% to GBP 102.1 million. And as expected, our operating margins have improved, increasing by 180 basis points from 12.7% to 14.5%. Adjusted profit before tax was GBP 103.4 million, up 47%, ad our tax rate came in at 22%, in line with guidance. Adjusted earnings per share was 77.2p, up 55% on the prior year. The interim dividend per share of 25.3p represents a 5% increase over the prior year, and we remain committed to paying a progressive dividend. Adjusted cash conversion was 117% as we begin to see the benefits of a normalizing supply chain and subsequent release of working capital. At the end of June, the Group had a net cash balance of GBP 214.3 million, providing significant flexibility. And finally, on this slide, our return on gross capital employed continues to improve and is up 290 basis points at 16.7%. This slide provides a graphical view of the main P&L movements that I've just discussed. And therefore, I will not go over them again. However, I would like to highlight 2 points of note. We experienced a strong improvement in gross profit from the incremental GBP 108 million of like-for-like sales, and the like-for-like gross margin in the first half increased by 140 basis points to 57.1% due to a more stable input cost environment and pricing from 2022. We anticipate further progress in the second half. Also, it is worth noting that of the GBP 44.4 million of increased overheads shown on the slide, around 10% relates to increased R&D investment, which we continue to prioritize. Moving to cash. This slide shows how we generated cash in the period and illustrates what we have then done with that cash. Starting by adding back the GBP 19.6 million of depreciation and amortization charged to the adjusted operating profit brings you to GBP 121.7 million of EBITDA. Over the past couple of years, the Group has utilized its strong balance sheet to ensure continued customer deliveries. And this is now starting to normalize, and as such, the working capital position is beginning to unwind releasing GBP 9.7 million of cash in the first half. We spent GBP 11.7 million on CapEx. And this gives us our adjusted cash from operating activities of GBP 119.7 million, which we divide into the adjusted operating profit to get our cash conversion metric of 117%. Transaction-related activities resulted in a GBP 5.4 million cash inflow and we had a net interest inflow of GBP 2.9 million. In the first half, we paid the final dividend of GBP 53.7 million and spent a further GBP 26.7 million on the share buyback. Our cash tax was GBP 30 million. We spent GBP 17.8 million on the design and development of our new SAP S/4HANA ERP system, which is due to go live during the course of 2024. And other movements of GBP 13.5 million brings us to a net decrease in cash for H1 of GBP 13.7 million. This slide is included for completeness, so you can easily see the bridge between our adjusted operating profit and the statutory measures. I will not go through every line but draw your attention to the following points. There are no asset impairments to report or exceptional restructuring costs in the period. Transaction-related costs were GBP 4 million, and as previously mentioned, we spent GBP 17.8 million on our new ERP system. Amortization of acquisition-related intangibles of GBP 9.8 million brings us down to the statutory operating profit of GBP 70.5 million. We sold the remaining parts of CLS during the first half, which is the majority of the GBP 11 million loss on disposal recognized in the period. And we had a net financial income of GBP 8.2 million, bringing you to GBP 68.5 million of statutory profit before tax. Moving on now to our divisions. Spectris Scientific delivered an excellent financial performance in the first half, delivering sales growth of 21% to GBP 334.1 million. Like-for-like sales growth was 22%, and after taking into account, the GBP 6.1 million impact of the CLS disposal and the foreign exchange movements of GBP 4.7 million. Sales growth was strong across all key end markets with the exception of Life Sciences, where sales were only slightly above a tough comparative period and reflecting the fact that this market was the first to see the normalization in customer order patterns. Adjusted operating profit increased 30% to GBP 58.6 million, reflecting the strong sales growth and good operational performance. Adjusted operating margin improved to 17.5%. Spectris Dynamics delivered a very good financial performance in the first half with double-digit sales and operating profit growth. Sales increased by 23% to GBP 264.5 million. After taking into account, GBP 12.8 million sales growth from the acquisition of Dytran and GBP 7.8 million for foreign exchange movements, like-for-like sales grew by 13%. Sales grew across all key end markets with particularly strong growth in aerospace and defense and academia. And adjusted operating profit of GBP 35.8 million represented an increase of 31%, 20% on a like-for-like basis with adjusted operating margin 80 basis points higher at 13.5%, with good gross margin progression, reflecting the impact of top line growth and net pricing, offset by costs relating to organizational restructuring. Finally, to help you with your modeling, I've set out on this slide some broad areas for technical guidance. As Andrew has already said, we now expect organic sales growth to be ahead of our previous guidance of 6% to 7% and remain on track to deliver strong progress on expanding margins with adjusted operating profit expected to be in the range GBP 250 million to GBP 265 million. Working capital is expected to reduce and should be in the middle of our guided range of 11% to 15% of sales, and CapEx should be in the region of GBP 40 million to GBP 50 million. SaaS costs will be around GBP 25 million to GBP 30 million, and the effective tax rate is expected to be 22%. The remaining GBP 83 million of the share buyback will be completed by the end of the year. And with that, I'll hand you back to Andrew.

Thank you, Derek. As you just heard, our results clearly demonstrate how our business model, our framework to deliver sustainable growth is really working for us. In Spectris Scientific and Dynamics, we are owners of world-class premium precision measurement businesses with leading market positions. We operate in attractive growth markets underpinned by a number of secular and sustainability trends that are here to stay. And we continue to collaborate closely with our customers, solving some of their toughest challenges. We continue to invest for growth, both organically through new product development and via our M&A. And we're also driving margin improvement through our operational excellence by the deployment of our Spectris Business System and business process transformation projects. And that's a really strong self-help story delivering improved productivity. This is all underpinned by being purpose-led as a leading sustainable business, developing our people, and living our values. So let's now turn to our businesses. As you just heard from Derek, Spectris Scientific and Spectris Dynamics delivered exceptional sales growth in the first half, with strong margin expansion and excellent improvement in operating profit. And that really recognizes the compound growth from M&A as well as the strong organic growth that we achieved. At Scientific, order intake was broadly flat with strong demand in Material Sciences and Academia, offsetting the normalization of demand in both Life Science and Semiconductor. Orders were up in North America and Europe with lower semi orders impacting Asia. In Dynamics, orders were only 3% lower against a tough comparative period. And we continue to see strong demand in aerospace and defense, but at the same time, some softening of order intake in automotive since the beginning of the year and also normalization in machine manufacturing continuing. So this resulted in orders being up in North America in the half but lower in Europe and China due to the auto and machine building exposure respectively. So, just by way of context, the demand pattern we saw from supply chain disruption and the long lead times that brought forward orders through the second half of 2021 and most of last year has been normalizing since Q4 last year. As supply chains have eased and lead times reduced, customer ordering patterns are returning to normal. And this in turn has enabled the conversion of our strong order book into sales and recovery in gross margins. Importantly though, underlying demand remains robust with our book-to-bill being close to 1 and our opportunity pipelines remaining really healthy. As such, we continue to benefit from a record order book despite delivering more of the backlog than we had initially anticipated in the first half. And as we look ahead and assuming no material changes in the external environment, we anticipate the relationship between orders and sales to be back to a structurally higher level in '24 with greater visibility than in the past. So I am delighted with the performance of both divisions. With our focus on high-growth segments, where we differentiate through our solutions, I am confident in our ability to continue to outperform our overall end markets. And as you'll have heard me say many times before, as a result of the work we've done over the last few years, we are now a higher quality and more resilient business. We are aligned with markets with a strong sustainability focus and attractive growth trajectories positioned in technology-driven end segments with strong fundamentals. Demand for our products and services is really being amplified by a number of trends, including an aging population, the transition to clean energy and mobility solutions and with a more connected world demanding ever greater need for advanced computing and data. And these trends are resulting in expected market growth of 5% to 6% with our differentiated positions providing a strong market share opportunity and supporting our ability to outperform our core markets to deliver through cycle growth of 6% to 7%. I am delighted that in the first half, like-for-like sales exceeded expected market growth rates in all but one of our major end markets. Collaborating with customers, helping them solve their most complex challenges is a key part of our growth strategy. Our applications-led high-touch approach drives high levels of customer intimacy, and our customer-backed innovation has resulted in a number of new projects and customer orders during the period. In Scientific, we are seeing particularly strong growth in metals, minerals, and mining driven by strong sustainability trends, especially in green metals and green mining. We are seeing strong demand for our X-ray instruments as customers make their extraction and manufacturing processes greener and more sustainable. The energy mobility transition is also fueling demand in battery development, where our particle analyzers are used to assess the quality and character of the critical input materials. And demand for our [ instrument ] division continues to increase in biopharma. For example, a medicines research customer working with life science organizations from around the world recently announced the purchase of its third Creoptix WAVEdelta System. This provides them with unsurpassed technology for the characterization of molecular interactions, particularly those between potential drug molecules and their target proteins. We are also seeing strong uptake of our SMART Manager solution. That's a new platform connecting customers' instruments in the field to the cloud, enabling remote monitoring, diagnostic and service. And in Dynamics, as we set out recently at our Capital Markets event in Italy, growth is being fueled by 4 key trends. Firstly, the move to virtual test, where our driver experience simulators are class-leading. Our understanding of engineering data is helping to build a software business with more on the way. And we are entering new markets like electrical powertrain testing. And I've also seen how our smart sensors can improve crop yields in farming to patient comfort in hospital beds as customers drive to automate and make their devices smarter. And sales in both divisions is also being supported by academia, where demand for our products and services aligns with the same trends across our other end markets, and that supports future growth as new technologies and applications are commercialized. So these high levels of customer intimacy and understanding really help drive our innovation pipeline informing our research and product development strategy such that we can anticipate our customers' needs for the future. I can talk about many of our new products and solutions that we launched in the first half. But here, I highlight just 2. In Scientific, we launched the NanoSight Pro to measure the size and concentration of nanomaterials for rapidly growing biopharma applications used in the development of vaccines, cell and gene therapies and drug delivery systems. The NanoSight Pro generates robust high-quality characterization data up to 3x faster than previous versions. And in Dynamics in virtual test, we broadened our simulator offering with the launch of the COMPACT Full-Spectrum Simulator as we showcased at our recent Investor event. The FSS simulates highly accurate motion, vibration and sound effects in a small footprint, and that enables Human-in-the-Loop testing for automotive customers. The vital connection between objective simulation data and subjective human perception allows for early virtual testing and closely replicate experience of driving a real car before a physical prototype is built. And going forward, we'll maintain R&D investment around 8% of revenue. We continue to invest in M&A as an important element of our strategy to compound growth, enabling us to further enhance our advantage positions, strengthening and expanding our portfolio to add further value for our customers. In the first half, M&A contributed 2.5% to our top line growth. We have an active pipeline of potential acquisitions ranging from early-stage technologies to bolt-on acquisitions of varying sizes right through to larger scale opportunities. And with financing costs having recently increased for many market participants and with our strong balance sheet, we are well placed to take advantage of these opportunities. In June, we announced an agreement to acquire MicroStrain Sensing Systems into Dynamics, which has a long-established position in precision sensing. And when the deal completes, which we expect to do in the third quarter, the acquisition will strengthen our overall sensing offering helping to further penetrate the rapidly growing automation and smart manufacturing markets, while increasing our North American presence. And it also enable MicroStrain to benefit from leveraging Dynamics' global sales and service network. A key part of our strategy and our journey delivering 20% plus operating margins is our strong self-help story built around our focus on a lean mindset and business transformation projects. We have made really good progress with the restructuring of Spectris Dynamics in the first half into 3 customer-aligned units, virtual test, physical test, and in process measurement absorbing the associated costs during the half. We continue to drive operational excellence to improve productivity and strengthen our competitiveness through the Spectris Business System. And following the supply chain challenges experienced last year and also the significant growth in customer demand, our primary focus during the first half has been to continue to improve capacity utilization and improve flow to convert our strong order book into sales whilst also reducing costs and lead times. And I'm really delighted with our progress and the continuous improvement being delivered through SBS. We delivered a reduction in overheads of 30 basis points during the first half, which not only supports delivery with continued strong margin expansion for the remainder of this year, but also for our future medium-term operating margin targets. We're also making good progress with the implementation of our new ERP installation, which is on track to go live across 2024. As you know, sustainability remains at the heart of our purpose to deliver valuable measure for all our stakeholders with progress in the first half summarized on this slide. We are building a distinct healthy high-performance culture that is underpinning our results. And I'm really delighted that we continue to see increased levels of engagement right across the Group with our recent annual Gallup survey showing positive results in all areas and continuing the upward 3-year trend. We're also making really strong progress towards meeting our Net 0 targets with continued investment in renewable energy sources, more efficient lighting and installation. And we're also accelerating the use of EcoVadis across the Group to increase the sustainability focus of our supply chain. Looking at our impact on society, in April, we worked with young professionals to deliver our second STEM work experience event attended by over 700 school students from a range of backgrounds. And we remain a proud sponsor of International Women in Engineering Day, which took place in June. And this year, the day was celebrated with the Spectris Foundation, Young Professionals and Techgirlz involving over 275 young women from across the U.K. and the U.S. exploring different career paths in technology and engineering. And in support of our colleagues who have family and friends in Turkey and Syria, following the devastating earthquake in February, we made a donation of GBP 100,000 to Care International as part of the Disasters Emergency Committee appeal. So in summary, we've had an excellent first half, which is testament to the brilliant work of my colleagues, our business model and our culture. The strong financial performance and further progress on strategic execution represents yet another step on our journey towards delivering our medium-term targets, and as well as a compelling compound growth story, we have a number of initiatives to further strengthen and enhance the business. We are a more resilient higher-quality business today. And while we remain very alive to changes in the macroeconomic environment, our successful strategy and strong balance sheet provides us with a really good platform for sustainable growth. I am confident in the combination of our strong market positions and the long-term growth drivers enabling us to outperform our end markets. Thank you for listening today. And now Derek and I will be very happy to take your questions. Thank you.

[Operator Instructions] Our first question comes from Rory Smith from UBS.

It's Rory from UBS. I've got 3. First of all, you've described Life Sciences as being the first end market to see normalization in ordering patterns and that you are starting to see that normalization in other end markets as well. I was wondering if you could put some numbers to that in terms of book-to-bill by end market segment, please?

So I assume, Rory, we're going to take questions one at a time. Let me just start by addressing sort of the normalization in Life Sciences. I mean this started really back over 12 months ago. We like, most of the other companies based on life science and pharma saw a big demand not just with COVID but that sort of immediate post-COVID bounce, that really ended about 18 months ago in Life Sciences, and the markets have really normalized over the subsequent 12 months and sort of pretty much then flattened since then. Then what we happened to see in that some of our peers did do is that -- was the fact that we have seen quite a bit of destocking. And as we have repeatedly said, we do not provide sort of stock into the system, the distribution channels, we're typically selling direct to customers for discrete projects. And so we neither saw this sort of big upswing in sort of consumables and stocking happened sort of during COVID and immediately afterwards, but rather we've seen a much more sort of just unusual demand pattern from a direct ordering that's been normalized. If you look at the other markets I think machine building, machine manufacturing was the next market for us to sort of normalize, which sort of started about 12 months ago. There you have to sort of look at sort of the market order growth we saw in Dynamics through the first half of last year. We saw about 30% order growth in Dynamics overall, that was in machine manufacturing and overall that was within China. Now I think some of that was in fairness driven by the fact that we're putting prices up at the time. And therefore, there was a bit of maybe sort of earlier ordering as a consequence of customers trying to avoid some of the price increases that we're going through, but I think that sort of market subsequently normalize. The flip side of that is that we've seen very strong resurgence in primary materials over the last 9 months and also in aerospace and defense and academia as we talked about. And so as a consequence of those markets coming up pretty much, that's allowed us to sustain very strong order intake, given the tough comps, a book-to-bill around about 1. And as I've said, just on the presentation earlier, I think the other thing to look at is the fact that we look at our sort of what we call our sort of major qualified marketing leads plus our sort of A, B opportunities that we see in terms of the sales pipeline, those trends remain very healthy. The number of opportunities remains very strong. The one thing we are just seeing I would say is that it's taking a little bit longer in some of the end markets, the customers to actually convert their interest into actual orders. But overall, we're very pleased that the underlying demand is very robust and the book-to-bill remaining around about 1.

That's very clear. And my second question and I'll limit myself just to 2. Given Red Lion and Servomex made as much profit as Dynamics in the first half, can you just give some more color on what drove margins there and whether you see those as sustainable?

Yes. So I mean, as we've said all along, I mean, Red Lion and Servomex are both quality businesses. The question has always been around their scale. But what we've been able to achieve really in both businesses over the last sort of 18 months is a strong improvement in their operational performance. We changed management at beginning of last year in both businesses and have been very pleased with just how the operational improvements that have been implemented are now coming through in the results. So that's certainly helping to underpin the performance in both Red Lion and Servomex. And the other factor that's really driving, what's an exceptional performance for the other division in the first half was Red Lion's ability to convert its order book coming into the new year with electronics and particularly semiconductor supply chain easing quite quickly. Red Lion were able to deliver quite a bit of their order backlog so much faster than we anticipated. And, of course, that's -- they've done a great job in terms of executing that all the way through the business. But as you'd expect that's delivered a very strong drop-through from the operating leverage executing that backlog. So there is a sort of slight exceptional there in the first half from Red Lion.

Our next question comes from Jonathan Hurn from Barclays.

Just a few questions from me. Can I just again come back to Life Sciences, and maybe if you could just talk about the order intake there, Q2 versus Q1? I'm just trying to sort of gauge where we are sequentially, and just a feel as if, are we still seeing quite a big step down or do you feel that sort of life science orders are pretty much at the trough? That was the first one.

Jonathan, thanks for your question. So in Life Sciences, it's pretty much Q2 over Q1 is pretty flat. So we -- as I said, we really saw that normalization happen -- started to happen about 18 months ago, it was the first market to normalize, and then sort of stabilized really over the last 6 months to 9 months.

Okay, great. The second one was just on pricing. Did you see any price rises or push through any price rises in the first half? And just linked to that, can you just tell us about or talk about the sort of pricing in the order book, what kind of growth are we seeing there? Is it kind of around about mid-single-digits or similar levels, please?

Yes. So on pricing, just to sort of take your first part of your question, I mean we haven't implemented any new pricing in the first half of this year. Our last pricing round was done in the start of Q4 last year. So as we said back at the full year in our Q1 Trading Update, we were expecting that pricing to start to come through in the first half, which it clearly has done. So in the Q1 Trading Update, we talked about expecting to see sort of price over volume, that ratio invert from last year, I mean, we achieved 60% volume, 40% pricing last year. We actually achieved the same ratio in the first half. We previously thought and guided that would invert over the last 6 months. It hasn't done. And that's mainly the consequence of us delivering really strongly in the first half and being able to make a few more of the backdrop, the supply chain is eased. And therefore, that supported a higher level of volume throughput in the first half. But as we go into the second half, we certainly would expect that ratio to invert over the next 6 months.

Okay. And the pricing in the order book roughly, any thoughts?

So, well, I mean, we've got, I'd say, the pricing round that we implemented at the beginning of October last year. So that will come through more fully in the second half than in the first half, where we would then really expect to get sort of about a quarter's worth of that pricing benefit happening in the first half because we came into the year with about 6 months order backlog.

Very clear. And then maybe just one last one for Derek, just in terms of that guidance range obviously, GBP 250 million to GBP 265 million of EBITDA. Could you just give us or talk us through how we get or you could get to that sort of GBP 265 million just the assumptions that kind of underpin the upper level of the range, please?

I mean I think to the extent if we -- if we look at where some of the analyst assumptions are at the moment, they are very wide. So we came into this morning, I think some analysts say GBP 224 million, some analysts say GBP 274 million. So we were trying to kind of be helpful and the range of options between some more bullish views on sales growth and more bullish views on the sort of cost control versus the more negative views. So, I mean mathematically clearly if you are nearer the top end of sales growth and you see all the margin drop through, you get to GBP 265 million. And if you're somebody who's taking a slightly more negative view perhaps at the final part of the year, you get to GBP 250 million. It's a range for a reason. It's only the end of July. Clearly, we're very confident with our range and as always hope to do well. But we thought it was helpful to give a slightly tighter range of GBP 250 million to GBP 265 million than some of the analyst ranges that are out there at the moment.

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

First one, just a follow-up on the last one there, Derek. The low end of the operating profit guidance implies slightly less profit to be delivered in H2 than you did last year. So given you got improved pricing versus cost, improved gross margins and improvements in the broad cost base, that number seems quite conservative. So I just wanted to know how we should think about that? Are there any particular headwinds that we need to take into account in the second half of the year?

Yes, I mean I think, George, once you get into 1s and 2s of millions for a full year number, it's quite difficult to kind of land exactly and it's got to see specific numbers. I think the way I -- the way I would look at it is, we expect the market to look at our range and probably land somewhere in the middle of it, which is an upgrade to expectations. When we take into account of those GBP 5 million of restructuring in the first half, that's actually a bigger upgrade than the screen might suggest. So I think where we land clearly, we are still very confident of seeing our full-year growth being ahead of our previous guidance. We're very confident of our margin expansion. And you're right that if all of those come through, we end up in the middle or the higher end of the range. At the same time, we're also well aware of a world that has FX uncertainty and other macro uncertainties that could give us challenges in that sense. So I think it doesn't change any of our views as to where we've got to, but we're just trying to be helpful giving that range. And so I'd say just make sure people kind of keep grounded in reality as they look at the incredibly strong first half and just think about where we are going to come out in second half.

Okay, very clear. Understood. And then just a quick one on the order book. Obviously, you talk about it sort of in a sort of very high level, in terms of the cover, I think that's now normalized a bit. I mean, I think you're talking 6 months at the start of the year and that would be 4 months to 5 months now and in line with the kind of medium-term expectations. So if the implicit outlook and the book-to-bill stays kind of 1x from here or do you expect it to drop further in the second half?

So, George, I mean in terms of the order book visibility, I mean we were at Q1 Trading Update, I mean, we went from -- we came into the year with 6 months visibility, at the end of Q1, it's about [ 5 ]. Clearly, we've got -- we're -- as we look forward, we're delivering more and more sales. And so it is inevitably that weighs in it slightly. But as we stand at the half year, then we're just a shade under [ 5 ]. So pretty much our visibility has remained flat at the end, Q2 over Q1, which is very good. We talked about previously that we would expect visibility to normalize to range between [ 4 and 5 ]. So we're still at the upper end of that range, which is positive. And as I said earlier, we fully expect based on the fact we now face off to a more concentrated sort of markets with strong fundamentals as a consequence of the sort of reshaping we've done as a business over the past few years that we will end up in sort of structurally higher level with greater visibility. So that [ 4 to 5 ] range is higher than Spectris has been historically, if you're looking -- if you want to go back sort of 4 years, 5 years, 6 years where it's more like 3 months to 4 months of visibility. So as I say, our guidance range, we anticipate sort of falling somewhere between 4 months to 5 months, and currently, we're sitting at the top end of that.

Okay. So there is no reason to think then that your book-to-bill sort of materially deteriorate from here [indiscernible] just under 5 months to 4 months to 5 months?

Yes. So we expect it to normalize somewhere in that 4-month to 5-month range. It clearly depends on what's the order intake going to be over the next 6 months, will determine where that's -- where we will exit Q3 and ultimately the end of the year. But as I said earlier, in terms of sort of our opportunity pipeline, it remains very robust and very healthy. The number is sort of strong opportunities as we call them is as good as it's been over the last sort of 12 months to 24 months. It's just taking a bit longer for customers to convert their interest into absolute orders. We are working hard with our sales team to convert them, but it's clearly a trend that we've seen over the last 6 months, it's just a little bit more nervousness out there. So it really just depends exactly just how customers view the year, their outlook and their propensity to spend money.

Our next question comes from Mark Davies Jones from Stifel.

Could I ask about China, please. So the patient orders were down more than other regions. I'm assuming that's just because of the end markets that you are more heavily weighted in there. But is there anything going on in terms of export controls or issues of that nature, which is weighing on the China trend?

So, China, I mean it still remains a very strong market for us. I think it was 17% of our sales in the first half. It was 18% for the full year last year. So it's broadly the same. We certainly saw as China reopened or lifted all its sort of COVID restrictions post Chinese New Year, we saw a bit of a bounce certainly in the Scientific division around orders come through but then that sort of quickly sort of softened again. Dynamics is seeing sort of a more softer position in China over the last 6 months, mainly as a consequence of its exposure to machine building, which I talked about against a very tough comp from the previous period last year, but then also automotive in China wasn't as strong. So China, I think we're a bit disappointed, I think from where we thought it might be post-reopening, but I think we're alongside lots of other people. So I don't think there's anything unusual in terms of what we've seen there. And then in terms of sort of export controls, yes, it is a tougher environment in the semiconductor space. It's really only impacting us in that space, there's a little bit in Dynamics around some of the test and measurement, where we have some sort of few used technologies. But I would sort of cap it in the sort of GBP 10 million to GBP 20 million revenue range is sort of -- sort of potential exposure there. So relatively small in the scheme of things. And as we've sort of shown it or seen and demonstrated in China in the past, where we've had restrictions coming is sort of the tariffs sort of 3 years, 4 years ago where with tariffs going up in some parts of the market meant that it was becoming -- we were uncompetitive in that space. We were able to pivot our sales force to go and look at other opportunities in China. I think we all need to recognize that China is a very big market. There's lots of opportunities, and we sort of continue to maintain a focus on driving growth and expanding in China. It's certainly not decoupling from China. For us, it's very much just sort of managing the growth and derisking that growth looking for other opportunities where we can achieve orders and sales.

Okay, great. And just very quickly while I got you, the academia piece of your end market seems to be strong. Is that just sort of late cycle flow-through from the other end markets or is there something more specific driving that?

I think there's 2 things. One is sort of -- it is that sort of late cycle growth coming off the back of the other markets, the areas that we are focused in. So a lot of the cleaner, healthier, more productive areas that we're focused on in the market is focused around energy transition, around electrification, battery technologies, drug development certainly for the large molecules, gene therapies and the new mRNA drugs that are sort of coming out of the back of the pandemic, all of those trends that we're seeing driving growth for our sort of OEM customers is also fueling demand for research, which we sort of get a natural sort of compounding effect, which also is a good sort of forward indicator for future demand as well. In fact, a lot of this research ultimately then flows through into the commercial world where we've sold instruments, test and measurement equipment to that space, ultimately, then goes on the commercial phase. So it's sort of early marketing tool and guide to sort of further growth for us. So it's good to see sort of academia R&D space recovering so strongly.

Our next question comes from Lushanthan Mahendrarajah from JPMorgan.

The first is just on the auto sector, and so the orders there and sort of the softening. I mean, could you give us a bit more color on where you're seeing that softening? Is it across the board? Is it simulation? Is that the EV side or just to get help to get a breakdown of the areas that you're seeing that softening?

So I think, I mean it's -- I would say it's sort of the softening we've seen is generally and it's nothing so specific around electrification or virtual test. I think the demand is there from an underlying perspective, the number of opportunities that we are working on with our customers remains very strong. I think of all areas, this is just one way, plus it is taking longer to convert because customers are just being a bit more cautious given their view of the macro. I think you have to recognize and then also the supply chain shortages, they were able to price for that. And we're able to get good margin to do cash generation, but they are all spending a lot of money on the whole transition to electric vehicles and autonomous technologies, that is taking up quite a lot of CapEx, which is good for us, but it doesn't mean it was they are sort of looking into a sort of softer macro environment with supply chains recovering, are they going to get the demand or same demand in vehicles that they were originally anticipated coming into the year. So we're just seeing I think a bit more of a conservative position. Whether that will resolve itself through the second half or not, we will see, as our auto OEM customers and the supply chain takes a view on how 2024 will turn out.

Okay. And sort of a similar question is just on Dynamics. I guess the sort of drop-off in Q2 relative to Scientific which held up a lot better. Is there anything to think about within that in terms of bigger pull forward in Q1 between the 2 divisions or is that just sort of some of these end markets being a bit softer in Dynamics than Scientific?

I think for Dynamics, I mean I think the key thing to recognize that our order intake in Q1 and Q2 last year in Dynamics was incredibly strong. I mean, orders were up 30%. As I've said in Dynamics, Q1, they were up 20% than Scientific the same period last year in the first half. So we did see a big surge in demand through the first half of last year. I'd say, some of that was just the fact that Dynamics markets were a bit later cycle than Scientific, but also the fact that we did put prices up in the end of Q1 Dynamics last year, which drove quite a lot of sort of earlier placing of orders potentially during Q1, the first half than otherwise would have been expected. S, I think overall, order intake in Scientific was up 1% on a reported basis. It was only down 2% in Dynamics -- sorry, 5% in Dynamics. So for me, there's nothing to worry about there. I think it's just the fact that we're up against a much tougher comp in Dynamics, and some of the end markets are slightly in a different phase than we're seeing in Scientific.

Our next question comes from Calum Battersby from Berenberg.

Great. So I think 3 from me, please, but that's kind of in overlapping areas. So, firstly, could you talk a bit about the overhead and headcount in the first half? The last 2 halves obviously seen a slight disconnect between the level of revenue growth and the headcount within the business. Are you able to say if this reflects a reluctance to hire into an uncertain macro or the benefits of the Spectris Business System or something else? And then related, is the expectation of H2, the headcount grows well from here or do you expect it stays broadly where it is?

Calum, thanks for your questions. So I think the answer is very simple really. I mean, we are very disciplined around our cost control. We are keeping a very strong eye on where we're seeing volume growth is and where we therefore need to sort of invest and recruit sales marketing effort to sort of expand the growth versus actually just getting benefit from price. In the first half, I mean, we're very pleased as I said in the presentation with our progress on SBS that is maturing really well within the business. It's becoming part of our DNA and how we go about running our business both in terms of just how sort of lean operating model and then driving Kaizen's continuous improvements event to take out waste, improve flow, reduce working capital, improve quality and customer satisfaction. So in the first half, overheads is 30 basis points. So really pleased with the progress. And in the second half, I mean we are, again, same message really, disciplined on cost control. We recruit where we need to recruit, but generally speaking, we're not on a major recruitment drive. We've expanded headcount where we need to over the last 12 months, 18 months, 24 months to meet the growth, but we've done -- we've done that in a very considered manner. And at the same time, we're also making some restructuring moves where again it makes sense. So in Dynamics, we had EUR 5 million of restructuring in the first half really off the back of the organization announcement we talked about in Italy at the Capital Markets Day and also simplifying some of the sales -- regional sales offices looking at sort of sales force efficiency across the Dynamics organization. So that's helping to drive productivity. We are going to see that come through really -- come through in the first half, we've taken the charge, you will start to see some of it in the back end of this second half, but will come through this hopefully next year. So we're focused on continuing to drive productivity and efficiency and using the SBS toolkit to help us achieve that.

That's very clear. I suppose then related, could you please update us on progress around the implementation of the new ERP system? Are you able to say when we'll see the various stages of completion on this and then when we might start seeing the phasing and the guided margin benefits coming through?

Yes. So we're making great progress, Calum, on the system. We're beyond the test. I don't want to get too technical here, but the system is up and working and it's operating. And we're now entering the detailed user acceptance testing phase where we basically load up all of our data into the system and the real people who going to have to live and use it, start operating it and go through their testing phases, which will be for the remainder of this year. I think the main rollout will be during the course of next year, and we'll start to see the benefits coming through in '25. So that's the broad plan. And it kind of drops in different phases in different parts of the Group over the next kind of 18 months.

Our next question comes from Andrew Douglas from Jefferies.

3 quick questions from me, please. Just going back to automotive in China. Please can you give us a rough breakdown of your customer concentration? Are you [ Tesla ]? Are you domestic China? Are you kind of Western Europe OEMs who operate in China? Just trying to figure out where your exposure is because that's a quite interesting moving dynamic there from a OEM perspective? The second one is -- I will shoot one by one, if you don't mind, in the down order?

Andy, thanks for your question. So in terms of auto generally, this is -- this is a general comment as well, but it also describes China as well. I mean we serve the whole market. We don't -- we're not concentrated around any particular large customers. We serve all the traditional OEMs, the Western OEMs, but we also serve the new entrants, the early startups across China, but also across Europe and into North America as well. And I think you have to just remember is 80% of our sales into automotive is into the research and development. So it's very much new platform-driven in terms of demand, and we continue to see a very large number of new platforms being developed, mostly the largest it's been for decades. So I think that overall is helping to keep the demand up, and the fact that we are, as you are well aware, looking not just sort of some of the traditional test and measurement activities, but particularly around electrification, around virtual test, around simulation, but progressively as we get into sort of hardware-in-the-loop and some software applications around that as well as vehicles become more software-defined that is providing us with more and more opportunities. So for us, it's overall the opportunity set that remains very strong. It just comes down to, let's say, a bit of customer cautiousness at the moment around just -- they've got the demand, they've got the interest, it's just placing the orders is just taking a bit longer.

Yes, understood. And if you look at the margin profile of the Group, if we assume that central costs stay where they are, if you were to get rid of the 2 other businesses, it looks like of your 180 basis points improvement in margin, it's about 65-ish basis points, maybe 70 basis points from Scientific and Dynamics, which given the fact you've got Spectris Business System and you've got pricing maybe looks a little bit on the middle side, the other margins are what [ 11% to 20% ]. Where do you guys need to work harder over the next 12 months or 24 months or even longer on the margin side to kind of get where you need to get to that 20%? It feels like Dynamics has got a bit of catchup and Scientific got some work there as well. Is that fair?

Andy. I mean I love the way you phrased your question, I think a couple of things to remember. If you look at the gross margin that Dynamics experienced in the second half of last year that was where a lot of the challenging margin happened last year. So when we think about the Dynamics margin progression that we anticipated this year, a lot of that is second half loaded as the gross margin recovers and our cost control continues to kick in. And I think some people who probably got that slightly out maybe have averaged it in their numbers. So when you look at the Dynamics margin, it's actually done what we anticipated it to do in the first half. It's then masked a little bit in the first half by restructuring costs that we're now taking above the line. So that's a charge that's gone through Dynamics, as Andrew said, it's EUR 5 million -- the numbers are slightly confusing. It's EUR 5 million, GBP 4 million, and at the Group level, there's also GBP 1 million at central costs as well. So we have this 5 number twice. So in the first half, there is GBP 5 million of restructuring costs, GBP 4 million in Dynamics, GBP 1 million at the Group in pound terms, EUR 5 million in Dynamics. So I think there's an element of timing for the second half gross margin coming through, second half benefiting from that restructuring coming through, those would all benefit. And then I think the other thing we need to be really focused on and are is making sure that our exit run rate of cost going into '24 is positioned correctly, which it will be. And we'll continue to see the benefits from SBS, and then the other big kicker on the margin improvement is the ERP, which as I said, starts to go live in the next -- over the course of next 18 months and will help us in 2025. So I don't think there's anything in these -- in this sets of numbers that knocks us off course from the 20% guidance that we gave at the Capital Markets Day. In fact, it's in our mind it's a proof point that it's all coming through.

Yes. Okay. And then just with regards to M&A. Clearly, tons of cash and maybe some more coming in if you were to go into further, but you've got the pipeline. How is the pipeline looking? Is it getting better in terms of quality and number? Are you guys having to think maybe slightly differently given you've got a lot of cash that you need to kind of spend it or is it just kind of goes and if things happen, things happen?

Andy, again, as we said early, we've got an active and healthy pipeline on M&A. I think it's fair to say that number of the assets that are under sort of PE ownership, the financial sponsors that side of the market has been much lower over the last 12 months as a consequence of the cost of capital going up significantly. So a number of processes that they were looking to run have either been sort of delayed or stopped for the time being. So that's sort of -- we continue to track assets, but the opportunity to potentially participate has reduced. However, we have put a lot of focus on continuing to nurture and cultivate other potential targets, and we are talking to trade buyers, as you saw with the likes of Parker and MicroStrain but also privately held assets as well. And we continue to sort of work on building the relationship and cultivating our position. So we have an active and healthy pipeline of opportunities. The question is, as always, it's just -- it's not always in our ability to actually transact, but we're certainly very -- we're participating strongly.

Our next question comes from Harry Philips from Peel Hunt.

Again, sorry, a couple of questions from myself. Really just carrying on that M&A theme from Andy, and this is likely to be the fifth year of net cash and no -- obviously going to rate you for that. But -- and I sort of I think maybe I will ask the question in a way, but just how much sort of pressure around time of Board meetings is taken up with that sort of balance between sort of prudent and sort of efficiency around the balance sheet? And then just changing track totally, in terms of the R&D sort of get it up to 8% and in conjunction with the customer focus and as a theme, which is clearly being very successful. Just how much of that R&D -- I'm not suggesting this customer sort of funded, but how much of that growth in R&D is sort of customer aligned and therefore, the sort of risk profile on it maybe more reduced than pure R&D might be?

Yes, Harry. This is Derek. Let me take the first one. I mean in terms of time at the Board, we spend a huge amount of time considering capital allocation and doing what's in the best interest for our shareholders as you might expect. So we have a very clear capital allocation policy, where we are generating cash through selling businesses where we speak with the right owner, we will do that. And I think we've shown that good track record in doing that over the last couple of years. That's one side of the equation. The other side of the equation is then sources and uses of that capital. And I think we are looking at M&A opportunities, whilst at the same time, maintaining our discipline, whilst at the same time, continuing to complete the share buyback. And I think you kind of look at all of those things in the round, sometimes, it's timing. If opportunities present themselves, sometimes it's a question of holding the nerve and being patient. So we will continue to follow the capital allocation policy. We will continue to pay a progressive dividend, and we'll continue to keep you updated as and when.

That's very kind.

I'll take your second question, Harry. So in terms of your customer focus, a bit more around the alignment of R&D. I'll answer the second part of your question first, which is, I mean we typically spend around about 10% of our R&D budget on sort of say pure advanced technology development or advanced research. So clearly, we are always looking at how we develop our IP, where do we see potential sort of breakthrough technologies, where we can push the technology, what are the other -- the next set of opportunities into the premium precision measurement that may be our customers are either asking for or we can anticipate through our own scientists and engineers. And then 60% plus of what we spend is then really on sort of new product developments, new service development, and that's all very much aligned around the themes that we talk around cleaner, healthier and more productive. So whether that's into the pharma, life sciences, but also semiconductors where we continue to see development -- in drug development discovery plus the next-generation semi and how we are then developing our product tool -- products, our instruments measuring equipment to meet those future needs. And because we have a direct sales model and we talk to our customers regularly, we collaborate on current projects that allows us to anticipate their future needs and intercept those into the future. But certainly in sort of pharma, life sciences, how reshoring is also helping product demand. So we do have a high-touch model, which allows us to get that level of customer focus, that centricity, that intimacy with our customers, so we can really anticipate it. So we spent over 60% of our R&D budget overall on sort of, I would say applied specific product development and service development to meet known customer requirements. So it's relatively low-risk from an R&D perspective.

Our next question comes from Bruno Gjani from BNP Paribas Exane.

I just wanted to come back on the order trends, I was just wondering, I want to gather your thoughts around how much of the order slowdown do you think can be attributed to just supply chain effects and how much is demand, that is underlying demand coming down? To my mind if lead times come down it's not surprising that orders come down in lockstep, of course, the difference is that this time these orders turn over at a quicker rate. So actually the impact of the P&L may be more limited than we could see. If you perhaps provide some color or share just what your gut feel is in regards to the drivers of this order normalization? Is this mostly a supply chain dynamic or is this actually more evenly balanced between underlying demand coming down as supply chains easing?

Yes. So, Bruno, I think I can take the question. I mean fundamentally, it's really the supply chain dynamics, but I think that has driven the order shape. I mean if you look at -- if you go back and look at 2021 and the first half of last year, I mean, we were seeing phenomenal order growth, 20%, 30% plus growth in orders quarter-on-quarter compared to the prior period. And that was as a consequence of some sort of post-pandemic, and still, again, go back to '21, but then obviously supply chains got tighter, and the invasion of Ukraine uncertainty. So customers were wanting to make sure that they get their orders in early, at the same time, lead times are going out and supply chain is constrained. So we've got quite a -- quite a build between -- our book-to-bill grew, as you know quite strongly during the period. Now as -- really from, say, in Q4 last year, we saw surplus here, as supply chain eased, some of that the concerns have come off, maybe sort of the macro, we've absolutely seen lead times coming down and therefore customers don't need to place their orders as early as they were, they're waiting and so that just sort of brought the book-to-bill back to a more natural level. And you have to remember, we've had a positive book-to-bill for almost 36 months right at the date of this reporting period. So at some point, that was going to normalize, there's a plenty that has happened. So for me, it's much more around sort of just normalization of that order profile as a consequence of supply chain. As I've said, our sort of marketing leads are, A opportunities, B opportunities, the numbers sort of chasing remains very healthy and very strong. And really to me that points that sort of normalization of the supply chain ordering patterns.

Got it. And just around H2 over H1 as it relates to sales. I guess given the position of the backlog today, order trend, how should we think about that H2, H1 clearly on sales. Contracts historically is usually then [ 44%, 56% ], when it comes into split. I think on consensus numbers H2 accounts for [ 51% ] of sales. Of course, there is an FX headwind sequentially, I guess if we adjust FX, its around 53%. Just keen to get your thoughts around how we should think about H2 as it relates to its share of sales for the full year?

Yes, I mean, Bruno, it will be more balanced than we'd normally seen. We're not going to give out specific percentage because obviously, then that's a great step-up, we got our sales number. As you know, we are guiding clearly on the operating profit. And we'll have to let people decide kind of what their view is in terms of sales profit, what the corresponding margin would be. But absolutely, we have derisked this year pricing and performance in first half that normally. So you shouldn't expect the sales to be quite second half weighted through normal sales.

Got it. But equally I guess on consensus numbers, the step-up sequentially is high single-digit, which would be a very sort of H2 over H1 growth rate, which will be very low if you compare it to historical norms or averages. So I guess that [indiscernible], I'll leave it there. But just on the -- on profitability, just to understand it correctly, the restructuring costs taken in H1, should we expect no further restructuring costs in H2? And just going back to the Scientific margin in H1, I guess, the operating leverage looks a little bit lighter than say Dynamics or once we account for the restructuring costs taken and also the other divisions? Is there anything that perhaps weigh down on the margin or the drop-through in H1 that we should be aware of?

Yes. So there may be [Technical Difficulty] in terms of restructuring in the second half, Bruno, but nothing material. And again, if we do have, I think we will take it appropriate. I mean in terms of the drop-through, we continue to invest in our underlying R&D. We invest in our people, and we sort of step up to grow, and obviously we've seen significant growth come through in the first half. We will maintain a very sharp eye on that though in the second half as a proportion and we'll see a little bit more drop. If you just look at the math of where the revenue expectation may be and the profit expectations, you can see that there is an improvement in the drop-through of the second half compared to the first half. And I would draw everyone's attention to our range, at GBP 250 million to GBP 265 million is a range for a reason. And as I said earlier, we are very confident that we will deliver on the margin expansion, deliver on sales growth, and if you put that through, then you end up be on the top of the range. But also, as I said earlier, we are only in July, and therefore, there's still a fair way to go, we'll give you a lot more update on sales and revenue in the future.

There are no further questions from the line. So I will now hand back to Andrew for any closing comments.

All right. Well, thank you very much. Clearly, a lot of the questions today have been around sort of normalization of the market and just sort of our views on market outlook, hopefully, we've been clear as to what's driving all of that. But -- so by way of ending, what I would just like to say is we have got good momentum in the business, and I'm absolutely delighted to see the progress that we're making on executing our strategy for sustainable growth. Without a shadow of a doubt, the strong financial performance in the first half does really reflect continued very strong execution of our strategy and also the brilliant contribution of my colleagues across the Group. And I think also, I'd like to say I mean our first half results are a testament both in Spectris Dynamics and Spectris Scientific. We have 2 great premium precision measurement businesses, they are both on attractive growth trajectories and then more aligned than ever to market with a strong secular trends and sustainability focus. As we talked about our demand, demand for our solutions is being amplified by new products, but also services as we address these trends. And having repositioned Spectris over the past 3 years, we are now a high-quality, more customer-focused and resilient business. And looking forward, we are confident in our ability to outperform our target end markets as a consequence. As we do so, we also continue to drive operational excellence to reduce emissions, improve productivity and efficiency, all in line with our ambition to be a leading sustainable compound growth business. So thanks very much for listening, and look forward to catching up with you again soon. Thank you very much.

This now concludes today's conference call. You may now disconnect your lines. Thank you very much for joining. Have a lovely rest of your day.