Spectris Limited (SXS) Earnings Call Transcript & Summary

Well, good morning, and welcome to our presentation of our results for the first half of 2024. With me is Derek Harding, our CFO. By way of starting and characterizing the first half of the year, I would say we've continued to deliver strong strategic execution in the face of softer end markets. After 3 years of double-digit growth and against the backdrop of ongoing macroeconomic uncertainty, 2024 was always going to be a slower year for the group before returning to growth in 2025 and 26. During the first 6 months, we've experienced weaker overall demand, albeit conditions across our end markets continue to be mixed with some parts growing strongly, while others remain subdued. As we said last month, our first half performance reflects a combination of softer underlying trading, which reduced our first half sales and operating profit by around GBP 50 million and GBP 10 million, respectively, but also secondly, temporary delays relating to the implementation of our new ERP system, which went live across Malvern Panalytical's global operation back in April. To be clear, we are very pleased with the new system and can already see the benefits that it's going to bring. However, this short-term disruption has meant that GBP 22 million of sales and GBP 15 million of operating profit has been rephased to the second half. Now while this is a higher number than we originally estimated back in June, we continue to expect to recover all of these sales in the second half with no impact on the full year is very much a timing issue. Now notwithstanding the softer trading in the first half, the order book of GBP 532 million at the end of the period provides good visibility going into the second half, and we're very much encouraged by the signs that market conditions will improve as we go through the next 6 months, although clearly, timing remains somewhat uncertain. Now in light of our first half performance, we are taking action to accelerate further self-help measures with a focus very much on operational efficiency and tight cost control. As such, excluding any incremental profit associated with the acquisitions of SciAps and Micromeritics, we expect to deliver adjusted operating profit for the full year in line with current market expectations. At the same time, we've been busy executing our strategy for sustainable growth and deploying capital to drive shareholder returns with a number of significant milestones achieved in the first half as we continue to build on the work we've done to transform the group since 2019. In April, we completed our portfolio rationalization program with the sale of Red Lion, and we've moved our leading gas analysis business, Servomex become part of Spectra Scientific. Following the increase in R&D investment across the group in recent years, we have launched a significant number of exciting new products over the last 6 months, and we've got more to come in the second half, very much supported by a strong pipeline. And then in the past few weeks, I was absolutely delighted to announce the acquisition of 2 great businesses that we've been tracking for some time. Both SciAps and Micromeritics will further strengthen our leading positions in advanced materials analysis, and we very much look forward to working them to the group soon. And then finally, we are continuing to return capital to shareholders through the completion of our GBP 150 million share buyback program. This strategic progress structurally increases our ability to deliver against our medium-term financial targets. And as I look ahead, I am convinced as ever about the future growth potential of the group. Now the progress that we've made would not have been possible without great people united behind a common purpose and values. I have to say there's something special about what we are creating in Spectris, a culture that is really working for us, very much a great and engaging place to work. And having engaged colleagues really underpins our ability to drive our progress. So I was delighted with the results of our recent employee engagement survey, where the scores increased for the third year in succession. So I'd just like to take this opportunity to thank all of my colleagues who are watching online for really owning it and continuing to aim high. I'd also like to take this opportunity to recognize and thank Derek for being a fabulous CEO and business partner over the past 5 years. And Derek, I look forward to continuing our close partnership in your new role, leading our enlarged scientific division. And I'm also very much looking forward to Angela Noon starting with us in September. Her breadth of experience will help further strengthen our executive team. And with that, I'll hand you over to Derek before I come back to round off the presentation.

Thanks, Andrew, and good morning, everyone. I will start today with a graphical view of the main P&L movements for the first half. So starting at the top with sales, I've removed GBP 32.9 million in the prior year sales associated with disposed businesses. This is primarily the second quarter sales from Red Lion, and that gives us a comparable organic base. FX has been a headwind of GBP 21.5 million in the year. And on a like-for-like basis, the first half sales were 10% lower. We've seen a rephasing of GBP 22 million of sales to the second half following the successful implementation of our ERP system in Malvern Panalytical. Now while the quantum is slightly higher than we originally estimated at the time of our June update, we continue to expect to recover all of these sales with no impact on the full year. Prior year acquisitions added GBP 8.2 million of revenue in the first half, and that gives us a reported revenue of GBP 589.7 million. I've then followed the same approach for the operating profit, removing GBP 5.6 million for disposals and GBP 1.5 million for FX. Gross profit fell by GBP 53.2 million year-on-year, primarily as a result of the lower revenue and therefore, lower absorption of fixed costs. And in light of the reduced top line activity, the group has been focused on the cost base, and we reduced overheads by GBP 19.5 million, and we'll be taking action to accelerate our self-help initiatives in the second half. Adjusted operating profit for H1 was GBP 61.1 million, a margin of 10.4%. This slide is included for completeness so that you can easily see the bridge between our adjusted operating profit and the statutory measures. I won't go through every line, but I draw your attention to the following points. There are no asset impairments to report or restructuring costs in the period. Transaction-related costs were GBP 7.4 million, and we spent GBP 22 million on our new ERP system. Amortization of acquisition-related intangibles of GBP 7.7 million brings us down to the statutory operating profit of GBP 24 million. The disposal of Red Lion created a profit on disposal of GBP 210.6 million, bringing you to a GBP 235.3 million statutory profit before tax. So now moving on to the divisions. Against a strong comparative period, Spectris Scientific sales were 12% lower on a like-for-like basis at GBP 320 million with adjusted operating profit of GBP 33.4 million. While sales grew in electronics and semiconductor, this was offset by lower sales in other end markets, particularly pharmaceuticals and academia and sales were lower across all regions. Orders were 10% lower on a like-for-like basis. The adjusted operating margin decreased to 10.4%, reflecting the negative drop-through impact of the lower sales volumes and the statutory operating profit was GBP 16.4 million. As Andrew has already said, we were really pleased to announce the acquisitions of the 2 strategically complementary businesses, high quality, high growth in SciAps and Micromeritics. These acquisitions will significantly strengthen our leadership position and expand our offering to customers while delivering material synergies and it's entirely consistent with our portfolio strategy to build higher quality, higher growth businesses. In Spectris Dynamics, sales were 5% lower on a like-for-like basis at GBP 249.4 million. Slightly higher sales in both Aerospace and Defense and Automotive were more than offset by lower sales to machine manufacturing, academia and other markets. Order intake was in line with the comparative period on a like-for-like basis, with double-digit growth in both Aerospace and Defense and Automotive, offset by softer demand in machine manufacturing, academia and other markets. The adjusted operating profit was GBP 30.6 million, and the adjusted operating margin was 12.3%. This lower margin reflects the drop-through impact of the lower sales and some product mix effects, partially offset by actions to manage the division's overhead cost, statutory operating profit was GBP 10.7 million. So moving on to cash. This slide shows how we've generated cash in the period and illustrates what we've then done with that cash. So I start by adding back GBP 17.7 million of depreciation and amortization. This will give you an EBITDA of GBP 78.8 million. Our working capital position continues to unwind, releasing GBP 4.9 million of cash in the first half, and we spent GBP 15.8 million on CapEx. And that will give you the adjusted cash from operating activities of GBP 67.9 million, which we divide into the adjusted operating profit to get our cash conversion metric of 111%. We received GBP 248.8 million of cash from the proceeds of disposals, primarily Red Lion. And in the first half, we paid the final dividend of GBP 54.2 million, spent a further GBP 46 million on share buybacks and our cash tax was GBP 26.8 million. We spent GBP 22 million on the design and development of our S4/HANA system and the remaining items of 14 brings us to a net increase in cash for H1 of GBP 153.7 million. And at the end of June, the group had a net cash balance of GBP 292.5 million. So in April, we completed the first phase of the rollout of our new ERP system with a successful global implementation across Malvern Panalytical. The system is working as expected, and it's really important to note that while GBP 22 million of revenue has been delayed into the second half, circa GBP 200 million of revenue was successfully delivered by Malvern Panalytical in H1. With such significant change, there are often disruptions. And the most significant for us relates to the cutover between the old and new system at our Almelo supply center. The root causes of all these issues have been identified and are being addressed, and we expect our Almelo facility to be operating at a catch-up capacity in Q3. The Malvern facility is now operating at a higher capacity than before the go live. The initial release of the system to the Dynamics division will take place in Q3, and we have further implementation scheduled in 2025. And as I said previously, the SaaS cost in H1 was GBP 22 million. We've now taken the decision to expand the system across the remainder of the group with further implementations expected at PMS and Servomex in 2026. And the recently announced acquisitions of Micromeritics and SciAps will also be added to the system in due course. We continue to leverage SBS to drive operational excellence and deliver tangible cost savings, and we anticipate another GBP 10 million in savings in 2024. We've continued to develop and promote our go-for-gold program with 7 Bronze sites pursuing Silver and the additional 5 sites targeting Bronze by the end of this year, with the aim to have all of our operational sites certified as Bronze by the end of 2025. And we can already see benefits from the new ERP at Malvern Panalytical and will continue to drive SBS. However, given the conditions we've encountered in the first half, they've been softer than expected, we will be taking additional self-help initiatives in the second half, and we currently anticipate a one-off charge of around GBP 10 million to GBP 15 million to be expensed in H2. So finally, to help with your modeling, I've set out on this slide some broad areas for technical guidance. As an overarching comment, though, excluding any incremental profit associated with the new acquisitions, we expect to deliver adjusted operating profit for the full year in line with current market expectations. Working capital is expected to continue to reduce. It should be in the range of -- in the middle of my guided range of 11% to 15%, and the acquisitions are expected to complete by the end of Q3. Net debt is expected to be around 1.5x EBITDA at the end of the year, and interest costs are going to be between 5% to 6%. CapEx in the second half should be about GBP 25 million, SaaS costs in the second half will be around GBP 30 million, and we think the tax rate to be around 23%. The remaining GBP 100 million of the share buyback will recommence and will be completed in the next 12 months. I've also put here our assumed exchange rates for the second half at $1.27 and EUR 1.18 and the table shows the impact of each cent change in that assumption. And with that, thank you. I'll hand you back to Andrew.

Thank you, Derek. So as I said earlier, conditions across our end markets remain somewhat mixed. So let me just take you through some of our markets in turn. In tech-led Industrials, slightly higher sales in aerospace and defense were more than offset by machine manufacturing. Order intake remains very strong for A&D, particularly commercial space, and our acquisition of Dytran is proving to be particularly successful. In civil aerospace, we have seen good demand in physical test. And in defense, we equally see a lot of opportunities. On the other hand, machine manufacturing remains subdued, although we do expect the market to pick up later in the year and into 2025 as the interest rate environment eases and customer confidence returns. In Pharmaceutical and Life Sciences, sales were significantly lower, which reflects continued muted conditions. However, and encouragingly, we continue to see strong demand and order intake for aseptic manufacturing, particularly linked to the production of new drugs plus the construction of new facilities linked to onshoring. However, demand for instruments to support R&D and drug development will do remain weak, especially in small molecule, although our leading indicators are now showing signs of improvement. In semiconductors and electronics, we saw solid sales growth against a tough comp, and we expect demand to continue to grow into the second half and into 2025, driven by strong secular trends. And in automotive, sales were slightly ahead with strong order intake. We are seeing a lot of demand for our leading virtual test and simulation offerings with a number of large orders secured already during the first half of the year. Moving on to materials. In primary, we saw a reduction in sales and orders during the first half, but with a robust performance from Building Materials, which was more than offset by lower demand in mining, and that has to be recognized as against another strong comparator from 2023. Sales in Advanced Materials were down. That was notably linked to the slowdown in EV sales that we talked about in June. And lastly, academia, where as expected, sales and order intake was significantly lower following a very strong comparator from last year, which very much benefited from Chinese government incentives. Now the Chinese government did announce a similar package of incentives earlier in the first half of 2024. So we still remain hopeful that this will feed through into increased demand in the second half. The outlook over the medium term, however, remains positive with our markets supported by a number of structural growth and sustainability trends that we feel are very much here to stay. And with the strength of and continued investment in our business as well as our position as a premium provider, we are well positioned to be able to outperform and grow market share. We also continue to invest for growth and following the increase in R&D investment across the group in recent years, 2024 is going to be a record year for new product launches. And rather than you take you through each product in turn, we've got a video here that highlights the advantage that our new products will make. So if you just kindly run the video. [Presentation]

Really, we've been very busy. And I'm very pleased to say that the customer response to these launches has been extremely positive. And I'm also delighted that our innovation continues to be recognized by the industry, the Microsoft award in particular. And with a strong pipeline, there will be more launches in the second half, as I've said, that will further help stimulate the market and also drive share. But we're not just investing organically. Since 2019, we've set out to evolve our portfolio to increase the quality growth, margin profile and resilience of the group. And the recent announcement of 2 strategically complementary acquisitions of high-quality, high-growth businesses is entirely consistent with our strategy to compound growth. It also reflects the hard work of our M&A teams over several years to grow and develop our acquisition pipeline. The acquisition of SciAps and Micromeritics, both of which will be integrated into Malvern Panalytical within Spectra Scientific will significantly strengthen our leadership position in advanced material science and expand our offerings to customers while delivering material synergies. Now, we recently provided a detailed overview of both acquisitions, but I thought it would be worth quickly just reminding you of our rationale. Firstly, SciAps is a leader in handheld elemental analysis with its instruments enabling the identification of any element, any place on the planet. They provide a comprehensive suite of advanced technology offerings in attractive end markets across mining, nondestructive testing and product circularity and recycling. And their handheld portfolio is used in the field and as such, complements Malvern Panalytical's range of laboratory and benchtop equipment. The combination also provides strong cross-selling opportunities, allowing both parties to leverage sales channel and expand their presence in key geographies. Additionally, it will also accelerate our digital strategy with access to a greater volume and a variety of measurement techniques, which will move analysis closer to the sample. And the acquisition of Micromeritics also fits perfectly with our strategy to build world-class businesses, generating strong value creation for our customers and shareholders. In Micromeritics, we are acquiring an established business of scale, which represents the most attractive acquisition in the particle characterization space as it provides a unique opportunity for us to build a leading, highly differentiated offering with competitive positioning. As you can see in the top right-hand graphic on the chart here, we'll be able to offer customers the most comprehensive, fully integrated suite of instruments as a single supplier, improving efficiency and enabling deeper analytical insights, which supports the entire customer workflow from fundamental research through product development to quality of control and assurance. We'll also strengthen our offering in the rapidly growing clean tech as well as the traditional industrial technology markets and provides a great opportunity for us to leverage our respective geographic strengths. And with strong customer overlap, it will provide significant opportunities to sell a broader range of products to existing customers as well as win totally new customers with its unique and differentiated solution portfolio. And before concluding, I just want to reinforce how different Spectris is today compared to the business that we inherited 5 years ago and also remind you of the ingredients to our progress. As we first articulated in 2019, we set out to evolve our portfolio to increase the quality growth margin profile and resilience of the group. And we've been using all elements of our capital allocation framework to drive shareholder value creation. The combination of our disposal program and the redeployment of capital to acquire great businesses means we have truly reshaped the portfolio in the last 5 years, providing a higher-quality platform from which to drive sustainable growth well into the future. As you see, we transformed the way we develop new products to drive organic growth, expand our market share and ensure our best-in-class products very much remain at the forefront. And we've also been targeted in our approach to M&A, acquiring businesses to enhance our capabilities and returning excess cash to shareholders where this hasn't been achievable in a reasonable time period. We are driving operational excellence by engaging our people through SBS, and we've begun the transformation of our business processes. And we've also been investing in our people, developing a healthy, high-performance culture. So as a result of the work we have done, the business today we have is focused on premium precision measurement facing into attractive markets, taking exciting new products to market on a regular basis with a strong accelerating self-help story, but also a highly engaged and multi-talented team who have really demonstrated their ability to rise to the many challenges of recent years. So to summarize, while clearly, we've been impacted by short-term demand headwinds, we have maintained a clear focus on strategic execution with our business transformation continuing at pace. The acquisitions of SciAps and Micromeritics is further evidence of our strategy to build a world-class, higher-quality, high-growth business. And with an ever stronger platform underpinned by long run structural growth thematics including increased levels of clean technology, the rise of digital and automation, superior materials performance and the development of new medicines, the medium-term outlook for the group is very promising. And with the work we've done over the last 5 years to reshape and focus the group, we have structurally increased our ability to deliver against our medium-term financial targets. We are strongly positioned for the future. Thank you very much for listening. And with that, Derek and I are very happy to take your questions.

Can I start? It's Mark Davis Jones at Stifel. Can we start on scientific and the instrumentation business, which is clearly still very weak. What makes people upgrade those instruments? Can they extend the lifetime of them if they're feeling slightly nervous about life? What is the average life span? And what can you do to accelerate that replacement cycle?

Yes. So Mark, is your question particularly relating to pharmaceutical Life Sciences or...

Yes, probably.

Yes. So I think in pharmaceutical, what we are seeing is, as I said, is an expansion and demand growth in the aseptic manufacturing side. So manufacturing capacity continues to have to increase because of new drug development, things like these. Weight loss therapies are driving quite a lot of investments in terms of new facilities. But there's also the regulatory demands requiring ever cleaner facilities and tied to regulation. So that's very much helping sort of our aseptic particle measurement side of the business through PMS. On the flip side, your point on the scientific instruments for sort of advanced research and development of new drugs is definitely still subdued. If anything, it went backwards again last year. Small molecule development is pretty weak. We are seeing some uptick in biopharma, and we're certainly seeing some upticks in certain parts of the world like India, where that is -- we're seeing incremental investment going in there. However, I think our reflection sort of what's happened over the last 3 or 4 years is that during the pandemic, there was clearly a lot of investment in reequipping labs to invest in antivirals and in terms of mRNA research as well as vaccine development. And I think what happened was as a big reequipment of labs and refurbishing of labs during that period. And so we're just waiting now effectively for the timing of that next refurbishment cycle. But I think the last point to your question, what can we do to stimulate the market. You've seen in our new product developments, things like Revontium, things like the Zetasizer, the Mastersizer 3000+ is our largest selling instrument in Melbourne Panalytical. It is very much the sort of gold standard for particle analysis in drug development. We talked about this before. The pharmaceutical industry talks about the Malvern measurement. It is the gold standard, and the latest derivative of 3000+ incorporates new AI technology. So it can operate faster, quicker with greater fidelity and provide greater insights. So by bringing these new products to market, that also helps stimulate demand. So we're pushing on all fronts in that regard.

But can you generalize if there was a spike in refurbishment and buying new kit in '21. When would that naturally drive the next replacement cycle. And is this last...

Well, the market has been talking about the second half of this year for a time. But I think -- I mean we are not short of inquiries, but that conversion is clearly taking longer. And so we are -- we like, I think the rest of the industry, are waiting for the market to actually start to come back.

And can I just add on one for Derek. GBP 10 million to GBP 15 million of charges for restructuring in the second half. But I'm assuming all that is cash and in terms of getting the benefit through, how much of that is effective second half versus into next year?

Yes. So it may not all be cash in the second half because, obviously, some of it will relate to decisions that are made in the second half, and then we'll book it. Bulk of it will be cash in the second half, but some may flow into '25. And I think if you think about typically a one-for-one benefit on those sorts of activities on a full year annualized basis. So there'll probably be 25% -- 20%, 25% of benefit in 2024. But I would view that very much as a hedge against the guidance that we've given as part of our actions that we're going to take rather than kind of adding on. And I'd make the same point with the SBS savings as well. So we are focusing hard on our own measures that are under our control and the activities under our control. And those give us a little bit of a hedge to kind of offset the risk in your first question.

Richard Paige from Deutsche Numis. Just a couple for me. So order -- the order book GBP 532 million, just to check, that's all for delivery in the second half?

Rich, I mean the GBP 532 million does include all the orders. So some of that will be for '25 deliveries. But we've given you sort of our sort of guidance range on where we're comfortable, where sort of order visibility should sit in aggregate. So that 4 to 5 months range, and we're bang in the middle of that today. So relative to sort of history and our precedents, we're right in the middle of the range where we'd expect to be at this point in the year. So that gives us confidence going into the second half.

And then I noticed on the group costs, there's quite a big drop. It's almost half. Is that a permanent saving or is there something one-off in that?

I mean again, it's a reflection of the performance of the first half and the performance of where we're anticipating the full year to go. So there's a chunk of cost in there that is variable incentive that isn't going to happen this year. So -- is it a permanent saving? I hope not, because I hope in the future, the performance comes back, but it's the correct treatment of where we are as we sit here in the first half.

So that means, you expect repeat...

Yes. I mean, there's some savings in there from -- if you look at the GBP 19.5 million, there's a general focus on the costs that we've had throughout the business. I mean we knew coming into '24 as we certainly said back in October, and indeed, at the year-end '24, we knew it was going to be harder. And we entered the year with that in mind and the cost base was positioned for that, but we have to go further in the first half. So that's broadly what you're seeing in that central charge.

So just one last. Automotive remains remarkably strong, both in order intake and performance in the first half. Is that across your businesses that attack that industry? Or is it the virtual test?

So all our -- nearly all our automotive sales sit within Dynamics. We have seen clearly -- they've seen the same weakness in sort of the battery development, physical testing side within automotive. In terms of sort of new product development, there has been a slowdown there. However, 2 things really. One, the virtual test and simulation side of the business has been extremely strong. That's been building through the second half of last year. We've seen strong demand for our market-leading products. We are seeing more and more customers convert to the new tools to drive lower cost, faster time to market and drive productivity. And we still feel that the penetration there is relatively low. So there's a long ways to go. So that's an exciting and strongly growing part of the business. And then actually also, I mean, in China, Dynamics were up in China, and a lot of that was actually sort of end-of-line testing driven. So whilst the sort of some of the research and development of pullback, the actual production volume side in China and the sort of end-of-line testing for electric vehicles drove some incremental demand.

Alex Virgo, BofA. I wondered if you could talk a little bit about the quarterly development of your businesses through and then, I guess, into the second half. Easier comps will help, of course, but the order intake in Q2 looks particularly weak. So obviously, I appreciate you have backlog, which provides some visibility, but the order trends don't look particularly encouraging. So that's the first question. And then the second question would be taking a decision to do incremental cost savings and restructuring, tends to imply a little bit more of a structural view rather than a temporary weakness. So can you tell us a little bit more about where that is going? What are you looking at saving? Where it's being saved? What are you targeting?

Fine, let me -- I'll take the first part of your question. I'll ask Derek to take on the second part. So in terms of -- I think your question was about quarterly development of orders. So start with the positives. I mean, dynamics was actually up Q2 over Q1. So we are seeing some order momentum building in Dynamics, very much around the trends that we've been talking about. And certainly, where we sit at the half year, we see the outlook for Dynamics has been pretty resilient and robust. Within Scientific, it was the inverse, but within sort of our PMS, Particle Measuring System business, we are seeing strong demand assets for Life Science applications around aseptic manufacturing and the semiconductor side of that business is starting to pick up. It's been a bit slower than I think we anticipated coming into the year, but it is building. And we're seeing the long lead time items being -- continue to be ordered. And then for Servomex on the gas analysis side, it is against a very tough comp last year. They had a lot of project wins in the first half of last year. And just as 2024 has worked out, a lot of -- there are a number of big projects to be -- they'll be tendered in, but they're all going to happen in the second half. So there's just a bit of a phasing issue for Servomex. So I think from that side, we still see the whole gas analysis, emissions control, industrial process hydrocarbon market is still pretty resilient. So then really results then to Malvern Panalytical where the weakness in pharma, in particular, the battery materials has impacted us. And then that, I think, really leads on to the second part of the question.

So you'll forgive me for not going through too much detail. And the reason for that is obviously, as it impacts different parts of the group, we need to manage that appropriately and telling you here is not the appropriate way of doing that. What I would say, though, is that the bulk of it will be in the scientific division. And it reflects the current trading that we're seeing in that division and expectations of how we can continue to drive efficiencies and how we can continue to just kind of set ourselves up, leverage some of the benefits of bringing the businesses closer together and that's the general area, but we'll wait. There'll be more clarity at Q3.

And clearly, we anticipate strong synergies with the 2 acquisitions that we've announced. So to some extent, there's a bit of -- we can get ahead of this.

It's Harry Philips of Peel Hunt. A couple of questions, please. Just thinking about the drop through, and I appreciate the chart is sort of made tougher because of the move to the right of ERP and what have you. But it's still, even if you add that back, looks pretty punchy. I mean is it just too simplistic to say that when revenue recovers, that sort of drop-through math works back in your favor to the same sort of extent?

It does. I mean I'd make 2 observations on the drop-through. So first of all, we are a high gross margin business, and we're also a second half-weighted business typically anyway. So you have a broad fixed cost through the year. And if the volume comes off in the first half, the ability to absorb that cost is much harder. And then that has a significant -- it has more extreme impact on the first half numbers. The exact opposite is true in the second half when that volume comes through, 0.1%. So that does help us. And you see it anyway, year-on-year, normally, if you look at the numbers, you can always see that in the margin in H1 and H2. I think the other thing to think about though is the revenue and the profit from the sales that haven't been recognized in the first half. And just to kind of explain a little bit more about what's happened there. When you go through cutover between one system and the other, inevitably, everything changes. Part numbers change, customer reference numbers change, the entire process changes. So if you're halfway through, let's say, you've taken an order on something in the old system, you start manufacturing in the new, everything has changed. If you've manufactured it in the old and then you deliver it in the new, everything has changed. If you've delivered it, but then you've installed it in the new, everything has changed. So that sort of process of washing through has taken longer than we anticipated, particularly with our more complicated instruments out of Almelo. So we're through the bulk of that now. And therefore, we'll start to recognize those shipments and those installations in the second half. So it really is a move from H1 where it kind of got slowed into H2. It has no impact on the full year. If you're then kind of doing your classic sit back and say, okay, well, what is the shape of Spectris this year? You almost need to add GBP 22 million of revenue to the first half number, GBP 15 million of profit to the first half number and then look at that H1-H2 shape. And if you do that, it doesn't look particularly out of whack for a normal Spectris year. So that's kind of how we're thinking about it. And again, I made the point in the presentation, the ERP is working. I think it's really important to understand that the ERP is working. It is a transitional phase. And if we didn't have a half year in the middle of that transition, there would be no ERP conversation. So that's important.

And just a second question around sort of sitting right above you, the sort of through-cycle 6% to 7% growth. And you go back to the Capital Markets Day in October '22 when you set that out. And just sort of thinking across the whole sector, not just yourselves, but as we're here today, obviously, with yourself from 6% to 7%, that's punchy. Sort of what catalyst do we need? What's the sort of market catalyst and what's the Spectris catalyst? I think we sort of know more on the Spectris catalyst because of the M&A, but we're going from minus 10% in the first half, which I appreciate is a distortion to 6%, 7%. That's quite a big transition?

Yes. So, Harry, I think firstly, we should recognize, we've grown double digits through '21, '22, '23. So we are against a tough comp. And as Derek said, we always expected 2024 to be a softer year. We signaled that accordingly. It's been weaker than we anticipated. As we go from here, clearly, there are some softer comps. But I think really the key triggers for us is that we are facing off into structurally attractive markets. So what we've talked about automotive, what we're doing in terms of the advanced testing, simulation, software that we're developing, that's a very high-growth market. Within Pharmaceuticals, really well positioned in the aseptic manufacturing side. The instrument side on the research and development will come back. I mean there will be a reequipping cycle, and we're stimulating that with some of our new products, as we've talked about. Aerospace and defense, everything from commercial space through to -- commercial aerospace is now picking up. Defense, a lot of the spending unfortunately is going on consumables at the moment, but that inevitably leads through into a reequipment cycle. So we fully anticipate that to come through. Machine manufacturing, which for us is about what, 10-ish percent of our revenue exposure has been in the doldrums for the best part, 2.5, 3 years. As interest rates come off, cost of capital comes down. Again, we'd expect to see some reequipping coming through there. And then certainly, the sort of the emissions, the sort of hydrocarbon transition to clean technologies, both helps us on the emission side, the gas analysis side and into all of the partial characterization. So there are a number of, I think, key secular trends and sustainability trends that's going to underpin that 6% to 7%. So we still feel that is still right guidance for us, and that is where we are pushing ourselves to get to. We're clearly going through a bit of a correction year this year, but we would fully anticipate by the time we get into 2025 or '26 to be sort of heading back into that sort of territory.

Yes. And I think in '22, when I make that -- when I made that comment and said, how does it mean, what does it mean? It was always if you take a period and look back 5 years, it's more than 6% to 7%, and that remains true today and I think it will continue for the next number of years. I'll just make one observation. When you look at this slide, it's quite interesting. We do make -- there's a danger sometimes you kind of focus on Q1, Q2 of a difficult year. We have also delivered on other things we said back in 2022 as well, which is kind of redeploying our capital from businesses that were low growth, low -- not the best owners for us. With the acquisition of SciAps and Micromeritics, we've absolutely completed that phase of our strategy. So there's a number of things that we set out in 2022 that we are delivering on, that gives us confidence on that growth rate. Particularly when you look at those businesses and their historic growth and the opportunities that they have, that will give us a real -- obviously, it's acquired growth next year, but it becomes organic growth the year after that, and we start to really see that kick through as well.

And then just one final one. Just as you mentioned the M&A, obviously, 2 decent-sized acquisitions and a bit of sort of normal leverage, if you like, on the balance sheet now. Just in terms of 2 things really, I guess, more M&A, is this sort of [indiscernible] just to get these integrated? And then secondly, around broader capital allocation. Obviously, you've got the completion of this buyback. But then when would a buyback if nothing else happens, inevitable question for you, when would that sort of potentially kick back here?

Yes. So clearly, we're a highly cash-generative business. We're buying 2 equally highly cash-generative businesses. That gives us even greater capacity. So we have flexibility going forward. We have been developing our pipeline of opportunities over the years. There are other opportunities that we continue to cultivate and nurture. The priority in the short term is very much around bringing SciAps and Micromeritics onboard and driving a successful integration. And at the same time, whilst we've got the sort of flexibility on the balance sheet, we're mindful of the leverage point in terms of where the market is currently sitting and how far we should push that or not push it. So I think we demonstrated that we're patient and we're disciplined. If we see the right thing at the right time and we agree with the right decision, we'll take it. Equally, when we get to the sort of the end of the year, we'll assess what the potential uses of our cash going forward and the balance sheet, will determine whether that's going to be more M&A or more buyback. But that's, I think, a decision for the year-end and where we are at the year-end.

Another M&A one related one, if I may. I know we shouldn't read too much into it and what you buy is always a function of what you can buy at the time. But 2 deals in rapid succession, both on the Scientific side means that Scientific will be up to getting off 2/3 of sales and when margins recover, probably 3/4 of profit. So the portfolio is skewed heavily in favor of that. Is Dynamics still as core as it was previously. Are you looking for deals there? Or is Scientific going to be the core of Spectris going forward?

Yes. I mean when we bring on SciAps and Micromeritics, I mean it's going to push the Scientific to well over to GBP 1 billion of revenue in and of itself, doing margins very much in line with our targets north of the 20% plus range. So it's going to be a very attractive division, and we'll continue to -- as we are doing, seek out other acquisitions to complement an infill by those bolt-ons to expand our offering to customers and our scale and impact. At the same time, though, we see good opportunities to continue to grow Dynamics. There's a lot more value within Dynamics. Just a margin progression story there is extremely strong. We still feel very confident about that with the work that Ben Bryson and his team are doing. The implementation of the ERP system, the 150 basis points of margin opportunity absolutely flows into dynamics as it does into Scientific and the rest of the group. And we are -- to your point, Mark, we are looking at acquisitions in that space. Again, highly synergistic, absolutely then builds out our capabilities in the same way we've done with SciAps and Micromeritics and Scientific. So it's absolutely cool.

Can I do one more?

Yes, of course, Mark.

Battery Materials has obviously been very weak and you see why that could presumably last some time in terms of unwinding a sort of bloomer spending in China? Or is there a potential offset as we try and build a battery supply chain outside of China for strategic reasons?

Yes. I think there are a number of factors, Mark, in all of this. I mean there's clearly an overcapacity in the manufacturing of batteries in automotive at the moment. However, there's a lot of work going on still in terms of looking at new battery technologies, new materials, particularly solid-state batteries. And it's not just an automotive play. I mean, for the energy transition to work, we need storage and that's going to rely heavily on batteries. And then as we go forward, it's also the recycling of battery materials as well. And that will then feed into the mining industry, rare earth metals, lithiums, and other key materials. So to me, this is a -- we're going through a short-term correction, but the medium and long-term outlook remains very strong. Any other questions? No? All right. Well, thank you very much for coming. I mean just by way of wrapping, I mean, I think, as I said right at the opening, 2024 is going to be characterized by softer end markets, softer than we anticipated coming into this year, but we're taking the appropriate measures to address that. But it's also very much characterized by us being laser-focused on continuing to execute on our strategy and to build shareholder value creation from the actions that we're taking. Hopefully, that's come across strongly in the presentation today. So thank you very much for coming, and we're very happy to have a cup of coffee with you afterwards. So thanks very much.