Earnings Transcript for SXS.L - Q2 Fiscal Year 2017

Executives: Clive Watson - Group Finance Director and Executive Director John O'Higgins - CEO and Executive Director

Analysts: Mark Troman - Bank of America Merrill Lynch Stephen Swanton - Redburn Glen Liddy - J.P. Morgan Robert Davies - Morgan Stanley Mark Davies Jones - Stifel Nick James - Numis Andrew Douglas - Jefferies Christopher Dyett - Investec Jonathan Hurn - Deutsche Bank

John O'Higgins: Good morning, ladies and gentlemen. Welcome to a very full house here. I'd also like to welcome anybody joining us on the webcast this morning for the Spectris 2017 half year results. My name is John O'Higgins. I'm Chief Executive. I'd be joined this morning by Clive Watson, Finance Director. I'd also like to welcome our new Chairman to the results as well, Mark Williamson, who is sitting up the front and hope those of you here will have the opportunity to say hello after the presentation is over. I could also ask you please to make sure any of your phones are on silent for the remainder of the presentation. Thank you. We will go through the slides. Clive will take you through the finance, financial performance. I will come back and give an update on the business performance, strategic performance and summary and outlook. And of course, what's not on here, we will be taking your questions here in the room at the end of the session. In terms of the highlights for the first half of the year, we saw good growth. 5% like-for-like sales growth in the half. Very reassuringly all segments grew. All of the key geographic regions grew. And we also saw a very good growth across most of our key end markets. And we'll talk a little bit in more detail in the course of the presentation on that. Continued to make good progress on our strategy execution. The merger of Malvern PAN alytical, which now comprises almost a quarter of the group's turnover, is doing well and we've started to see some results and benefits from that merger. I'll talk later about our Project Uplift which you will be familiar with is our drive to increase simplicity, reduce complexity, drive efficiency and also act as a platform for our strategy execution also going well. We've taken a decision, the board has taken a decision to move ahead with the next phase of that program which includes implementation of a shared service center. We completed two acquisitions so far in the year. And I'll cover those in more detail later on, but both of them very much reliant to our strategic direction. And finally, we're announcing a dividend increase today of 6% which we believe underpin the board's confidence in the company's prospects for the future. So with that, I'll ask Clive to take you through the numbers.

Clive Watson: Thanks, John. Good morning, everybody. Picking up where John left on and actually expanding on his opening comments a little bit, reported sales were up 22%; 12% from the Brexit following last year's devaluation of sterling, the 5% from acquisitions and 5% from like-for-like growth. This is the first time in over five years that we've been able to report two consecutive quarters of 5% like-for-like growth, so hopefully that can continue. The 5% like-for-like growth didn't result in any operating profit growth even before incurring the charges for the Project Uplift which would normally be expected. There are two main reasons for this, both of which I'm going to come back to. But at a very high level, you'll see like-for-like overhead costs are growing faster than sales, and which is the first reason. And secondly, the performance in one of our segments In-Line Instrumentation, which posted the highest growth 11% like-for-like growth was impacted by a number of adverse factors which saw its operating profit decline by 21%.So those are the two main reasons and I'll come back to those two elaborately a little later. As John said, we made good progress in advancing the projects under the Project Uplift umbrella. As you'd expect, net uplift cost for the year are front-end loaded and benefits are back-end loaded. So we try to strip out the effect of Uplift in the first half. We'll continue to do that for the year. But we'll provide both before and after Uplift figures. A little confusing, a little more complex than normal, but we'll try and make it as simple as possible and keeping with spirit of Uplift which is all about driving simplicity. The only other point I'd make in relation to Uplift is that the board has approved moving on to the next phase of our shared service center project. The first phase was all about a detail current state assessment, future state vision, high level of implementation plan and high level business case. The second phase is all about the detailed design and implementation planning, and we'll incur a little bit of extra cost probably about £ 1 million to £ 1.5 million in the second half. But otherwise, the original program which is a net cost of £ 14 million, we're very much on track for. Earnings per share down 2%, dividend up 6% in line with our normal policy of growing dividend sustainably and affordably. Good operating cash conversion of a 119% and we're still slightly underleveraged with net debt at 0.7 times adjusted EBITDA. So here is the simple chart. Financial performance and adjusted measures. I'll provide the usual walks and commentary on the sales operating profit and operating cash flow lines a little bit later. So just a couple of points here. And just to introduce some of the new lines that we've got. Reported sales, you can see up 22%. The currency effect 12%, so change of constant exchange rates 10%, 5% from acquisitions giving a like-for-like on the right hand side final column of 5% growth with a 3% decline in operating profit at a pre-uplift level. Because of the size of uplift, we are tracking it separately. We said we'll do this and we're going to call out the numbers separately. And when you get to the segmental piece, you'll see both before and after, and here we just kept it at the before Project Uplift. And you can see here the return on sales 10.6% this year, 11.9% last year. That again is at this pre-uplift level. So down 1.3 percentage points on a reported basis. On a like-for-like basis, that's actually 90 basis points. And we'll come back to that in a minute. The difference between operating profit and PBT on this chart is the uplift charges and interest. Interest is up a little bit compared to last year; £ 2.7 million this year, £ 2.4 million last year. And that's mainly to do with weaker sterling. All of our debt is denominated in Euros. The effective tax rate for the first half is at 21%. We're still forecasting 22% for the full year. The reason it's down in the first half is we successfully closed out on a tax audit and that meant that we recognize the whole of the provision in the first half as opposed to throughout the year, but still 22% for the full year. EPS 42.3 pence. Dividends 19 pence, up 6%. And adjusted operating cash flow £ 79 million, a 119% compared to last year's abnormally high 134%. Two very different reasons for the cash flow conversion. Last year we're were on a sales decline, which meant that we've appealing of receivables without replacing and this year, we had sales growth of 5%. So very good working capital control to achieve that 119%.You'll also find the CapEx as we get to the cash flow section was a little bit high than depreciation. Net debt up a tad on the beginning of the year, up 50 million on last year. At the end of the last year, we closed at about a 150 million, so just up a 4.6 million. Here's the sales walk which I'm going to take you through. Reported sales up 22% to 710 million. Most of this coming from currency but acquisitions contributing 29 million. Most of that two-thirds of that is coming from Millbrook and the balance coming from four of the other smaller bolt-on acquisitions we made last year. Currency, as you'd expect dominated by the translation gains on euro and the U.S. dollar. We think we've seen probably the all the currency will likely to ceases, unlikely to realize anymore in the second half. If rates stay where they are today, 1.12 roughly against the euro, 1.30 against the U.S. dollar, we wouldn't expect to see much in the back half. Maybe a little bit, but not much. Like-for-like sales up 31 million, 5%. 6 million coming from pricing 1.1 percentage points. Good pricing result, particularly in Industrial Controls where we had a good strong pricing. And volume mix 25 million to 710 million for the first half. Similar operating walk for operating profit, the next slide. You see operating profits pre-uplift of 69.4 million this time last year growing to 75.3 million on a reported basis. So up nearly 6 million, 5.9 million. And you can see from here that the biggest element of that is currency 6.6 million where again the U.S. dollar and euro. There was a small transaction lost, about 1.5 million, which read through sales offsetting that. Again we don't expect much, there's a small transaction gain in the second half that we're anticipating for those hedge contracts that we've already taken out. Acquisitions, 1.6 million on 29 million. A bit of a low return which I'll talk about in a second. That contribution comes from last year's acquisitions with profitability adversely impacted by Millbrook, which incurred some restructuring costs and sales are being heavily backend weighted. It's due primarily to a fall of a particular contract with first delivery day shifting from the first half to the second half at the customer's request. So we can see all of that. And we're seeing the sales phasing now more likely to be 40-60 as opposed to a more regular throughout the year. The impact of CSA Leyland, which they acquired earlier this month, will add a little bit to acquisitions for the back half. Looking forward, Millbrook is still forecasted to deliver on its high teens return on EBITDA for the full year, but it's going to be a different mix between what would read through acquisitions and what would read through organic. Second half contribution from acquisitions. On the sales side, we should see something like 9 million to 10 million coming from the 2016 acquisitions. And profitability will be around 2 million to 3 million on that. And for the 2017 acquisitions, we should see another 6 million to 7 million. So somewhere in the region of 16 million to 17 million in sales we'll see in the second half, and very little in terms of operating profit in the second half. Like for like, as usual we've broken down the like for like margin decline of 2.3 million between contribution to gross margin and the increase in overheads. And you can see that the main driver of gross overhead is exceeding the growth in gross margin. Pricing 6.4 million. We talked about volume mix good at 16.5 million, and then we had some inflationary increases in material labor and overheads offset in combined with pricing by the procurement savings we saw in the first half. In overheads, there's two elements to this. There's 5.3 million of delta in one off and 14.8 million of underlying growth in overheads. The 5.3 million is split out here. And I'm afraid there's quite a bit of complexity to this as well. In the 3.2 million, we incurred net restructuring which we called out earlier on at the trading update in In-line and Industrial Controls of 3.8 million. That'll be just over 5 million for the full year, so 3.8 million in restructuring costs for this year. We had some restructuring benefits from last year's program which brought that net restructuring down to 1.9 million. 3.8 million in gross cost, restructuring benefits at GBP 1.9 million.And then we had some legacy costs associated with the closure of a European facility in our In-Line Instrumentation business, which was another 1.3 million. So apologies for that. The three elements make up that 3.8 million of restructuring costs, 1.9 million of benefits and GBP 1.3 million of write offs in the In-Line Instrumentation total cost. Then we showed a year on year one off gain of 5 million in 2016, which was results of a sale of a property by Omega and an insurance settlement release of legal provisions last year. We called it out separately because we didn't think it would repeat. But lo and behold, it did repeat in the first half of this year. Very late in the first half, we received an insurance settlement of 2.9 million. So there was a net decline in the one off benefits of 2.1 million. So that's the 5.3 million of one off elements. And then out of the 14.8 million of other overhead costs, that's 5.8% of on a like for like basis of cost increase, slightly ahead of sales cost increases. And there's a couple of elements associated with that. It's really along with inflation, we've seen some inflation. We've also seen orders grow faster than sales and orders carries some variable costs, particularly on the sales and agents commission side of things. And we've also made some strategic investments, targeted strategic investments in things like the consolidation merger of PANalytical and Malvern, the key management strategy we're talking about in relation to Millbrook, HBM and S&V, and the i-Squared OT initiative which Joe Alice talked about at the Capital Markets Day. Sales phasing, which I didn't touch on, is going to be a revert to the norm. Sales phasing H1, H2 should be closer to the traditional 47 to 53 split. And of that comes forward, then on a -- we'll see our normal 35 to 65 split in terms of operating profit on a pre one off basis, so pre uplift, pre one off should still be about a 35 to 65, which gets us roughly to where we thought would be getting. And then Project Uplift cost of 8.8 million for the first half. Cash flow. Net debt increasing from a 151 million to a 155 million, and you can see free cash flow more than covering our dividends and interests with currency, effectively the overall survivor with net debt up 5.6 million. Just a couple of points I'd like to make out here. There you can see the working capital inflow and it's mainly receivables reduction of 31 million driving the 22 million of reduction of working capital. CapEx. At the begging of the year, we said we're going to spend about 70 million on CapEx. We're still on track for it. It was planned to be backend weighted and it is going to be. So 24 million in the first half and 70 million for the full year as things currently stand. Inventory small increase 7 million. We normally grow inventory to recognize the high second half of activity, so inventory is normally a growth factor. CapEx at 24 million, some 9.5 million above depreciation including the EBITDA, mainly concentrated in test of measurement in Millbrook and in HBM. HBM has got an infrastructure bill project. Millbrook is looking at growth projects. Acquisitions and spend on acquisitions in the first half 13.5 million, and dividends, tax and interest, there's isn't any other and that's quite self-explanatory. So net debt, as I say, it's still somewhat under-leveraged. This summary is normally a Segway to John's business updates. So I'll just highlight again a couple of points here. Starting with the third row, adjusted operating profit. This is excluding the net cost of uplift which we're showing separately right down there at the bottom for each of the segments, since it is quite distorted whilst we going through the spend phase. And the other line I'd like to point you towards is the fifth row, return on sales. This is also excluding the cost of uplift and at 10.6% is 1.3 percentage points lower than the first half of 2016. Like-for-like margins, I mentioned, declined by 90 basis points, all of which is a result of the overheads increase. Like-for-like gross margin, which you don't see on here, but just to break down that 90 basis points, it was up a fraction on reported basis and flat on a like-for-like although this level of growth should have gone up. The fact it didn't was because of an adverse mix effect more than offsetting the beneficial volume effect. Pricing was a little stronger than historic norms, notably as mentioned in the Industrial Control segment and combined with procurement savings more than offset the increase in material labor and overheads inflation. Like-for-like overheads which you saw earlier grew by 7.8% including the 5.3 million of one-offs. So a quarter related to the one-off items which were mostly concentrated in In-Line Instrumentation and Industrial Controls. So you have about 1.6 million in In-Line Instrumentation and 3.4 million in Industrial Controls of that 5.3 million. But core overhead still grew at 5.8%. And that's on the back of the strategic initiatives I mentioned which don't fall under the uplift umbrella and the obvious examples I talked about. Here you can see and I'm just ringing this for those of you at the web and this four ovals in In-Line Instrumentation and Industrial Controls which you can see are the main contributors to a drag on operating profit. In-Line Instrumentation sales up 11%. Operating profit down 21%. Industrial controls sales at 5% and operating profit down 5%.In the case of In-Line Instrumentation, you see a couple of rows further down like-for-like return on sales has declined by a 2.7 percentage points. And that split mainly in the gross margin 1.5 percentage points and overheads are the other balance. Whilst the one-off charge, the £ 1.6 million of incremental one-off, did have a role to play in the margin decline, the main driver, the decline is actually a long laundry list of items ranging from adverse mix in three of our four operating companies to under absorption of manufacturing overheads. We're shutting down a facility in California and moving that down into Ohio. So you got a ramp down and ramp up effect and adverse manufacturing variances to increase. So there's a whole raft of different things, all of which I'd say temporary in nature. So in the second half, the In-Line Instrumentation you can expect a sharp rebound in gross margins and return on sales should be very close to what you actually saw this time last year for this segment. In Industrial Controls, this segment bore the brunt of the year-on-year one-off increase 3.4 million which is equivalent to 2.4 percentage points of sales, meaning underlying businesses are actually seeing margin expansion. Good news is that gross margin is up driven by a strong recovery in Omega which is well on track to deliver everything it said it was going to do. And John will be expanding on that a little bit later. So like with In-Line Instrumentations, we shouldn't see a continuation of any of those additional costs in Industrial Controls. We had a big restructuring one-off. And we'll actually start to see some restructuring benefits in Industrial Controls in particular, not so much in In-Line Instrumentation where they really just started on that manufacturing restructuring as you'll see in that cost continue into the back half more than offset by the recovery from the reverse in adverse mix effects. So both In-Line and Industrial Controls should get back to margins in the second half very much close to last year's margins. Both Materials and Analysis and Test and Measurements recorded small upward ticks in operating profit on the back of sales growth. Materials Analysis drop through was held back as they incurred additional merger activity related costs integrating IT systems, cross-selling initiatives, traveling and so on. Similarly in Test and Measurements, additional costs are being incurred in relation to collaborative working across the three automotive exposed entities HBM, S&V and Millbrook. Final click -- oops, just turned it off. Back on now. A final click on aftermarket sales right down at the bottom a little oval highlighting the fact that in Test and Measurement is gone up to 27%, 29% for the group and that's by including Millbrook for the first time in here; that's the principal drive here. So aftermarket includes services, consumables and spare parts and we're picking up Millbrook in these services part. Final bit from me before I move on to John. Just a little bit of what we're expecting for the full year. On the next slide full year guidance. Planned CapEx of around £ 70 million, but we are evaluating other growth initiatives particularly the automotive sector. So this could come up if the growth CapEx currently forecast to be £ 30 million warrants the same and the board approves the same. Effective tax rate, we talked about 22% for the full year. Project Uplift net cost of £ 14 million for the original program and we're starting to incur costs on phase 2. At the moment as I say, it's just going to be for the second phase the shared services center, which will be one £1 million to £1.5 million. As well as uplift, we still expect to make some modest investments in the second half to deliver our strategy including all the things which we've already talked about and John will be covering a little bit more as we go through the business segments. This doesn't mean an open checkbook and we're still therefore -- our outlook for the full year still therefore remains unchanged. On foreign exchange, the board rule of thumb on foreign exchange sensitivity still applies. A U.S. cent is about £4 million, top line £500,000 operating profit, and a euro cent is about £3 million top line and £500,000 pounds operating profit. So with that, back to John.

John O'Higgins: Thank you, Clive. I'd like to -- we move then into the next section just to put a little bit more detail and color behind the business progress in the first half of the year. I'd like to start out just by pointing out where we are in terms of our strategy execution. You will be familiar with this slide, the five key elements of the group strategy around moving towards customer solutions, adding software, adding service into our capability predominantly in Test and Measurement and Materials Analysis around our customers R&D activity. Focusing on key strategic markets, we'll talk about a few of those, but automotive, aerospace, pharmaceutical, semi et cetera; very interesting and well performing areas for us. We continue to invest in global expansion. And as you would have heard in the highlights, we have seen very good growth in some of our growth markets in Asia, which is very reassuring. Investing in operational excellence at the moment is what uplift is all about. We also have quite a bit of activity across the group around implementing lean activity, not just in our operations, but also in many of our back offices and indeed uplift is building off that; and finally deploying capital for M&A. We continue to be very cash generative in our core business and we are continually on the lookout for those acquisitions, which will grow the top line and add value to the combination with our business. Just a couple of highlights then from the first half on a number of those points you see on Slide 14. Our Malvern PANalytical business there on the top left has been combined into one entity. One of the key value drivers and the key motivations for that actually is the overlap in terms of the end industries that those 2 businesses traditionally served. And by combining particularly the sales and marketing side of those business we're able to market to our customers. We're able to transfer contacts in customers from one side of the business to the other. And we've done already quite a bit of analysis around understanding where Malvern has had strengths, where PANalytical has had strengths and making sure that we're approaching all of our customers with one combined sales force and one combined marketing thrust and making sure that we are getting the most and delivering the most value that we possibly can for customers in both of the businesses historically. And we already have quite a list of opportunities. There are quite a list of customers we know that we can approach and already we've seen a couple of notable successes there. In all cases, we continue to invest in R&D, Malvern PANalytical being no exception. And one of the new products that you see there that PANalytical, actually the PANalytical side of the business traditionally has recently launched it's called the Xflow, which is quite a new technology for PANalytical and that it is the first true online liquid X-Ray spectrometer. So it's used particularly in liquid applications, oil and gas being one of the key ones where you're looking for an elemental analysis, trace elemental analysis in fuels and oils. So that's an interesting development. Moving across to the right hand side, strategic markets. As I mentioned we have a number of those, but we're certainly very encouraged by what we see going on at the moment in the automotive segment. It's a very exciting time as I don't have to tell many of you in this room who know it as well as some of our businesses do. Huge transformation happening in terms of technology. Huge changes afoot in what has been really a very conservative and traditional industry and it is literally changing in front of our eyes. We have a very strong position in that through our Brüel & Kjær business, through our HBM business. And last but not least, through our Millbrook business which many of you came to visit in May. And we are now with the combination of those businesses really playing into a number of the trends around electric drive, around autonomous vehicle, around hybrid transmissions, you name it. We have created and we have appointed in the first half of the year a test and measurement solution, business solutions director, someone who similar to what we're doing in Malvern PANalytical. We'll start to bring together the key account management of those 3 businesses under one umbrella, so that we can go to, in particular, the automotive clients and make sure that we're serving them in a very coordinated way around the world. So that's a new departure for us and exciting development and one we see that has tremendous opportunity as we go forward. And also the industrial internet business also making good progress there in our In-Line Instrumentation business where we have a number of asset monitoring businesses. We are busy developing plants to grow those not just organically but also with an interesting pipeline of opportunities including the Setpoint acquisition which I'll talk about in a second which plays into that very well. And of course, in our industrial controls business, Omega and the Red Lion business continue to focus on the opportunities around networking industrial equipment. M&A capacity, we certainly have a lot of that. Two acquisitions as we noted completed in the first half. The small boxes you can't really see them very well on this slide from here, but the acquisition of Setpoint was made in In-Line Instrumentation as part of our Brüel & Kjær business. This is all around asset monitoring and Setpoint had developed a state-of-the-art new platform which we were embarking upon, but we saw the opportunity to acquire an already market accepted platform which we will integrate into the Vibro business. I'm very excited about that. It is the latest and greatest in terms of rotating equipment and monitoring. And we will be investing quite heavily on the back of that acquisition. The second acquisition we just completed in July is the CSA business in Leyland. This is a test services business, very analogous to what Millbrook does a much smaller sight. Probably not something we would have contemplated without first having acquired Millbrook, but Millbrook is an ideal platform as those of you who visited will have seen to acquire in our smaller businesses in this area. We have good management team in Millbrook who are focused and capable. The Leyland business is a very interesting business. It was, as you can imagine, the traditional Leyland testing site, very experienced employee base their which we're very excited about bringing into the Millbrook team has a size in Leyland up north. And we will be looking at ways to leverage that as well for some of the OE customers who are in that area. And also the specific capabilities they have which are quite interesting and quite a good add on to some of the capabilities that we have at Millbrook. And finally, Project Uplift. Clive talked through a number of the P&L impacts of that. Just again to reiterate in terms of what we are doing. Phase 1, we're well into now year one of the first phase. Phase 1 focuses on our IT infrastructure. That is the starting point upon which all of the really the future benefits from uplift will come. And we have not just a new IT organization in place, but that organization has made a very good progress already in terms of driving to common vendors and making sure that we start to use all of our operating company's volume and economy of scale in working with key selective selected global IT vendors. Procurement is somewhat similar story. We started on that quite early. There's a lot we can do there in terms of bringing the various procurement volumes we have across the group into one pool. And that is addressing both direct as well as the indirect. And again, we've made a lot of progress there, not just in terms of procurement savings themselves but more importantly in terms of driving. Driving a good procurement process bringing together the various category project teams which we're all in place. And that sets off really for the future for continuous improvement and continuous benefits to be reaped and not just in the course of Project Uplift, but well on beyond that. And finally footprint, we have a couple of projects there which are underway. The second phase as Clive mentioned of Project Uplift, we have a key decision just made recently to move into the next phase on shared service centers which is really around feasibility, around costing, around project planning. This is a large and will be very complex undertaking for the group about which we have no illusions. And so, obviously the planning phase of all of that is key to a successful delivery. We have been working for a little while, but as we go into phase 2, we will now start to ramp up on the sales and marketing in R&D. And those two programs are really around best practice sharing common process across the group. It's not that we are going to centralize either of those functions. We still see those functions as being core to the business model and core to the operating companies that we have but making sure that we have common process, common tools, common IT infrastructure behind both of those common KPIs in the case of R&D, also at an OpCo level has been an ongoing activity and I think very beneficial activity for the various businesses in the group and we're actually very excited about that. This is the part of uplift that really touches growth. I mean all of uplift enables growth, but really driving excellence in sales and marketing and in R&D will enable growth like nothing else. Just a quick look then at Slide 17 and 18, which covers the destination and the end market performance. The destination, as I said at the outset, very good in the key geographic regions of North America, Europe and Asia. I guess North America and Europe are both highlighted in that. They are both positive, North America for the first time since 2015. We've seen now growth and you see that there in the column on the right hand side which is the performance this time last year. North America was still down last year 4%. As we flagged at the time of the first quarter or first four months trading statement, we did see momentum in the first four months although it was still flat or flat to down actually. We've seen that pick up in May and June and finishing up 1% for the half. Europe, similar story, a similar turnaround from minus 6 to plus 6 in this year. And really the key driver there is on the next line, Germany, you see which is almost one third of the European business moving from minus 4 to plus 11. And as we all would say, look no further than Asia to see how Germany is doing a lot of our business in Germany tends to be to the machine building and the export technology from Germany to developing markets, to emerging markets, to Asia and Asia up double digit. Asia has been very strong, was up already last year as you see up again this year. And really the two engines for us in Asia are China and Japan, both of them up solidly 6% and 11% respectively. And also you see last year also we're performing well. But interestingly, we've seen a pickup in Asia in the first half in other parts of Asia which haven't been strong recently, Korea most notably. Also Southeast Asia has picked up and India has been moving along very nicely in the background as well. And then rest of the world, not a large part of the business and certainly has declined in recent years given the issues that we faced in Russia and given the issues around natural resources, oil and gas mining, and also the decline in Brazil and the economic situation there. So you see that also have actually although it's flat for the half year actually haven't at least stabilized at those low levels. Moving on to Slide 18 end user industries and sales there. And really a very positive picture really across all of the key end markets, most notably automotive semicon electronics you see up double digit. Energy and utilities has made a big turnaround, not surprisingly given some of the macro trends there on oil prices and also what's happening in the North American unconventional space, so minus 17% moving to plus 10%. And a similar story around metals and mining. Particularly mining where we're also starting to see some budgets returning there and capital investment on the part of the mining companies. And everything else you see in pretty good health until you get down to academic research which has been a bit of a disappointment certainly in terms of sales. The order side of things and the prospects side of things not quite so bad, so we would expect to see that recover a little bit as we go through the year. But clearly, government budgeting and changes in government funding models for universities, the U.S. budgets also had quite a bit of a wobble at the beginning of the year, and that's obviously a drag on a couple of our businesses. And turning over the page, I just then go very quickly maybe through each one of the segments just to highlight what we're seeing there. Materials Analysis, I talked about them all from a PANalytical merger which is really going very well. Strong sales in all of their key commercial markets. Obviously the 3% growth here in Materials Analysis will have been impacted by that academic research number. So 3% actually represents a pretty good result here for the group for this segment. And obviously those end markets we believe still have lots of opportunity and a good deal of momentum. Pharmaceutical, still investing. Metals and mining, we should see that continue. And semiconductor, although, there are some, I would say amber lights around investment levels currently in semiconductor, particularly in Asia. It's probably fair to say that there's a little bit of a capacity going in there ahead of demand, so that's one to be careful. And Test and Measurement -- and sorry, I was going to say -- just to note there the picture on Slide 19, it's a nice one. I talked about one of the Malvern, the PANalytical products earlier. Malvern is also adding to the combination of Malvern PANalytical. This is one of their new microcalorimeters, which is used very heavily in protein, protein analysis, protein reaction analysis, used in biopharmaceutical research and that one is doing very nicely too. On Test and Measurement, you see a big yellow truck there coming out of Millbrook's new climatic chamber. This is used obviously for high temperature, low temperature testing, and is a recent -- part of the recent capital investment spend at Millbrook. They will continue to do that. We have an expansion underway also in their Test World facility in Finland. And with the acquisition of the CSA business in Leyland, there will also be opportunity to add to that capacity as well. So automotive here clearly a highlight. Germany and China, as I mentioned, some of the key recipients of the machine manufacturing business. And the oil and gas in North America really helping our ESG solutions business. So pretty good growth here, 5% on a like-for-like business after actually a good run in automotive and aerospace now for the last couple of years. In-Line Instrumentation. Very good top line as Clive talked through. He also talked through some of the challenges that we've had here in terms of product mix and also in terms of one-off costs, which obviously result in a disappointing bottom line result. We also expect though to see the investment in some of those markets continue some of the packaging markets. Tissue, for example, in our pulp and paper business doing very well. Energy and utilities also quite a bit of momentum there, and quite some order intake and order backlog around our Vibro business particularly as the slide mentions, in the wind power, but also in some of the downstream refining and oil and gas markets. The Setpoint acquisition which I mentioned is going to be integrated to the Vibro business here in In-Line Instrumentation. And that will be also we believe a very important driver of growth for that particular side of the business which we're excited about. And then finally on Slide Number 22, you see a nice picture there of one of the red line controllers that are graphite edge controller. And this product, there's a reason it's showing back to front is to sort of highlight the amount of network interfacing that goes into these products. And these products really are made to network industrial equipment, to take signals from the factory floor and move them into networks, not just wired, but also wireless network. And it is an area that we are seeing a tremendous growth and tremendous demand in as the industrial world starts to become networked. Elsewhere in this segment, Omega continues to make very good progress and they've seen good growth in North America, which again is the first time in a couple of years they really suffered from that downturn in oil and gas and sort of the general manufacturing decline that we'd seen in North America. That has certainly turned around, helped also by some of their own pricing activity which has also had a very beneficial effect both top line and bottom line. And then finally our industrial imaging business and Microscan business, again continues to do very well. Particularly on the imaging side of that business, we've launched a new product there MicroHAWK last year, which is doing very-very well indeed. And they had, last year you may recall very good growth with their verification systems. That was a regulatory driven demand but they've replaced that very nicely with some of those new imaging devices. So again, good solid growth here of 5% on a like-for-like basis and certainly very reassuring to see growth returning to the key North American market. So with that just to wrap up or just to summarize; a good top line in the first half, very reassuring to see all segments and all regions growing. Good progress on the execution of our strategy. The mergers we talked about, uplift, the acquisitions, and we will continue to make further targeted strategic investments in the second half as it relates to execution of the strategy and a lot of that around sales and marketing and R&D related activity, and our expectations for the full year at this stage remaining unchanged. So with that, I would like to open up for Q&A. If I could ask you to make sure you get a microphone before you ask a question and also for the benefit of those on the webcast if you could introduce yourself and your company, please. Thank you. We have one of the front here.

Q - Mark Troman: It's Mark Troman from Bank of America Merrill Lynch. So the good news is growth clearly in this first half. I think as Clive said, it was first time in five years or so, we look to that growth broad based. And you look quite excited about little growth opportunities on CapEx investment, et cetera. I guess the question a lot of us get is, so growth is turned around which is great news. You've got uplift going. How should we think about leverage because the scope does look substantial, very hard gross margins? Can we keep the overhead side under control -- you've got uplift, but it looks like you are investing as well for these opportunities. How are you balancing this growth margin equation?

Clive Watson: Yes, maybe I can start off with a response to that because it goes through all of our thinking and we still have the mantra of trying to align cost growth with sales growth. This year there were a couple of things going on which we've talked about. Also I think is unusual and so far as orders growth far outpaced sales growth, and parts of our remuneration are tied to orders growth rather than sales growth. So in some ways, you could actually say it's a timing difference. So the way we'd like to think about cost growth and sales growth is that they will still be aligned over time, so if we look at the full year. And if you look at the first half, they were pretty close 5.4% and 5.8%, but 5.8% is too high in and of itself. We'd like to see it capped at around 3% is what we are thinking about, because we do want to make those investments in the strategy, delivery of our strategy. We're making the shift from being a product center to a solution center. We've already as we say combining Malvern PANalytical and these things all carry costs. So over the longer term, absolutely this is the right thing to do. Over the shorter term, we are going to start to see some cost, but it's good cost if I can clarify in that way.

Mark Troman: And just one follow up John maybe, on the M&A, so how do you see the M&A landscape basically in terms of what's out there, valuations? Is it that doable or is it tricky? How are seeing that?

John O'Higgins: Yes. And so our view on M&A, I would say at the moment is very focused, Mark. We're very focused around the -- obviously at the strategic directions we'd like to head in, adding solutions, capability in our Test and Measurement and Materials Analysis. And seeing where we can also grow our Industrial Controls and Industrial Monitoring businesses for the industrial internet opportunity. So I would say our view is probably more focused than it's been historically where we have had in the past maybe a broader view of what we could do. Our view is very, very focused. The nice thing to say, the good thing to say is that there's plenty of opportunities out there. There is a good pipeline, that there's a deals going on. Pricing is a challenge. I'm sure you hear that from many people. But I guess our view is net positive that we will be able to find the right things and that we'll be able to add to the top line.

Stephen Swanton: It's Stephen Swanton at Redburn. I have three questions. One is the data performance looks remarkable given your decent sales growth in the first half. I think it's about 30 million on the working capital side. I was wondering if you can explain that. The second question is, do you think differently about the timing of Project Uplift, if your sales growth moves in certain direction? Like if we stay quite elevated in terms of growth, if you start slowing down maybe chasing off the procurement benefits, that type of thing, just in case you kind of make a mistake on delivery and things about your customers. And the third question is just on In-Line Instrumentation and just the certainty that you have that some of these impacts are one off because three out of four subsidiaries having kind of I'd say quite big mix effects is I guess been quite a coincidence in many ways.

John O'Higgins: Well, I can cover one of the three. Well, I can't remember what the middle one was but the -- the which?

Stephen Swanton: The timing of uplift of the sales growth?

John O'Higgins: Yes, yes. Okay, so I cover three out of three. Working capital inflow, that's just been an absolute relentless focus on receivables management. And what we've seen actually, I talked about it's easy to manage a point in time working capital but average working capital has now come below 13%. I think we've indicated throughout that we see our long term through the cycle average working capital should be somewhere in the 12% to 13%. I can't remember the last time it was below 13%. So it's very good focus on receivables management and actually good inventory management as well. There's still some more we could do on inventory, probably not a lot more we can do on receivables. In the second half which I didn't really talk about, I think there will be a small working capital outflow. So maybe net, net for the full year working capital would be broadly flat on a point in time basis, but average working capital should stay somewhere close to the 13% which I think is a good thing. Timing of uplift, I think with uplift, I won't do the pig and chicken story but we are pigs in this one. We committed to uplifting so far as we want to see this through to the end. If timing of sales is such that there is a sales decline, we are going to -- we may have to slow some things down if we see that uplift is actually interrupting business. But business as usual is our ongoing mantra throughout the whole implementation of uplift. So we're doing everything we can ahead of implementing in terms of employee engagement and change readiness assessment. So there's quite a heavy quality assurance program sitting over the project. The third thing quite a coincidence three of the four companies within the In-Line Instrumentation group, it actually is a bit of a first half phenomenon that probably if you listen to the recording at this time last year, you would heard exactly the same. And it's a little bit to do with the way the system sales orders are taken and delivered. And it's system sales which is the main drag on operating profit in In-Line Instrumentation in particular. And I guess it's no coincidence that a lot of that top line growth is driven by CapEx type activities. So its energy and utilities, wordprint converting, pulp and paper had a fairly healthy clip -- got off to a healthy clip more so on the order side than on the sales side, and it was a bit of a mix shift within pulp and paper towards tissue which did have some pricing pressure in the Americas specifically.

Glen Liddy: It's Glen Liddy from J.P. Morgan. On Millbrook, the investments being made now, what's the sort of time lag to that kicking through to revenue and pulling the margin up? And also you flank that one of the customers pushed something into the second half of the year. How is it set to the list of business to customers just moving their timing around in terms of your revenue progression overall?

John O'Higgins: So the Millbrook investments, Glen, the larger ones are typically going to be a year, so the investments that we're making in Finland will come on stream next year. Probably the ones here in the U.K., probably more of a six month construction cycle and then probably a six month or so ramp up in terms of revenue. So you're looking at again at probably a one to two, probably a two year return on capital that we're heading for. In terms of the revenue delays, we've not seen a huge amount. I mean I would say it's a normal characteristic of our business that customers will delay things based on larger programs. Given where we are at the moment in the cycle and suppose is the answer to the last question as well, a lot of the projects in In-Line Instrumentation which are process related and also on the mining side, these are large projects that we are providing our little piece of equipment into. And there we are at the whim of the larger engineering contractors and other delays that other suppliers might bring into those projects that we just get pushed out a little bit. So it's not really market driven, it's not our fault. It's just the nature of large engineering projects.

Glen Liddy: And on raw materials, you flanked that there was cost inflation in the first half. What's the sort of lag between passing that on to customers? And also the procurement savings, you've made a big push. How quickly do they begin to feed through to the bottom line?

Clive Watson: Yes. And I wouldn't say so much as a pass-through as a recognition of an inflationary environment allowing us to increase prices. There was no direct link for inflation and pricing for us. But in that sort of environment where we did have heavier inflation than normal, we expect to see prices come up a little bit but not as much to cover the inflation. And on the procurement saving side of things, typically there is a time lag of three to four months before you realize the savings after you've actually negotiated. And that's the length of time it takes to work the inventory through the system very roughly, three to four months.

Glen Liddy: And finally on Omega, I mean, you've started to move some of the production, you've changed the management. Can you give us an update on where you are in the sort of transformation in that business to getting back to the healthy levels you had a while ago?

John O'Higgins: Well, it's a work in progress, Glen. As you said, we have a new management team. I think there's still a fair amount of work to be done in their New Jersey facility which is the biggest and most complex of their sites. And that's the sight into which we moved the logistics and the distribution center. That's settling down very well, but there's certainly another six months to a year of work to be done there I would say to get back to normalized levels. But in the meantime, the top line and the end market demand of that business is looking good. We also have to continue to make investments in their IT platform which is a key part of their business, and that's also something which we're currently planning and getting underway.

Robert Davies: It's Robert from Morgan Stanley. Just a few questions. First one was just around some of the comments you made around automotive in EV. You obviously just got Millbrook. How are you thinking about how your business is going to involve the next couple of years maybe pushing more into providing testing services over, maybe where you were thinking two years ago trying to rebalance the products versus software level? How are you kind of thinking about the evolution of the business in terms of providing a service rather than that kind of balance between hardware and software? Second one, I noticed your release this morning mentioned some comments about the kind of easy comps in the first half of last year. It was quite impressive growth numbers down your list of end markets everything, I think other than academic was pretty strongly positive. I guess how you are thinking a kind of a normalized level moving into the second half, and what was the biggest delta you're expecting from an end market perspective in H2? And then just finally on the Project Uplift cost. You mentioned Phase II in some early maybe £ 1 million, £ 1.5 million of cost in the second half. What are those costs for? And I guess kind of, have you got any idea out of the total kind of cost pool on Project Uplift II? How much of that is kind of caught in that £ 1 million, £ 1.5 million?

John O'Higgins: Okay. So on the automotive side and e-Drive and there's also autonomous vehicle and there's a whole bunch of other thing, I think the exciting thing for us talking about those changes effort in automotive is first and foremost, they increased R&D spending in the industry. This is good for us. We live off R&D spending. And the more that our customers have in terms of their budgets, the more opportunity for us there is to go after. The second thing is that our customers are really struggling with a lot of the new technologies coming in and one of the things that we've heard time and again over the past couple of years is that customers don't just want to quit but they also want to help. And that has led to that whole thinking around solutions, around service provision. And so we are literally pushing on an open door when we have capabilities like the capability we have at Millbrook, we've added to it with the CSA acquisition. We'd like to do further acquisitions in that space. We are not just providing test equipment to our customers, but we're also providing expertise to help them run those tests. And that's very important in an industry such as those which is incredibly constrained from a headcount, from a capability engineering point of view but also from an application point of view. The third area of course is that we're investing in technology to help them measure and test e-Drives and of course e-Drive is a completely different technology. We're investing in battery testing technology as well in Millbrook. So we're able at Millbrook to react pretty quickly actually to the demands of our customers because of the nature of that business. Over a longer time scale, we are investing in the technologies. Our HBM business for example has a market-leading technology around transintellectual testing and current testing in electric drive cars. The other I would say interesting thing for our HBM and our Brüel & Kjær sound and vibration business is that all the things that they do are required on electric cars, on hybrid cars, on whatever kind of cars you need. They still have all of the same requirements around durability, around noise, around vibration, et cetera, et cetera. So the opportunities don't go away for us, actually they multiply. In terms of your second question, the comps versus last year in the second half get more difficult in which end markets? I don't recall if that --

Clive Watson: I don't either. I think it's going to be -- well, I can tell you in a second.

John O'Higgins: And the uplift £ 1 million to £ 2 million. This is basic, the most part of this is going to be costs going into the feasibility study for that Phase II of uplift, which wasn't in the original budget. As you recall at the time of the full year, we said we were going full steam ahead on Phase I. And so those additional costs will now come in as we've taken that decision to move into the feasibility and planning stage.

Clive Watson: Well, I could tell you that. So it was wet print and converting, we had an absolute flourish particularly in the fiber optic market, there was a very strong close in the fourth quarter. And ….

John O'Higgins: So that's In-Line Instrumentation?

Clive Watson: Yes. So it's really In-Line Instrumentation which is called the toughest comps.

John O'Higgins: Yes, yes.

Mark Davies Jones: So Mark Davies Jones from Stifel. The first one just follows on from the last question really. You -- Clive mentioned a couple of times that orders had run stronger than the sales through the back end of the first half. So really where has the inflection come in that? What's incremental coming into the end of the period which is more forward looking in terms of either the geographic or the product end markets? And then the second question was just on the profitability bridge, there obviously an awful lot of moving parts in the first half. Is there anything in the onetime side of things that you need to flag for the second half outside of uplift?

Clive Watson: Yes, I can answer probably both of them. Okay. And I think in terms of where orders have spiked sales in the first half, we've seen in particular in telecoms or semicon. That's been a very healthy clip. Energy and utilities has also grown a little bit faster than sales. And the other area is academic which John highlighted down 40% on sales, actually growing on orders and academic. And that's a typical feature of academic can be somewhat lumpy if you have a strong close one half than inside the sales or weak in the first half and that's what we saw. So those are the main areas automotive orders and sales running roughly a pace, metals mineral mining. So it's a capital intensive, so they're running ahead as well, so energy, utilities metal minerals and mining. And then onetime costs in the second half is really the end of the restructuring for both In-Line and Industrial Controls. It's mainly In-Line Instrumentation which will be the second half of what it's doing at the moment in relation to restructuring activity. But other than that, end up left -- there are -- we're not aware of any at this point.

Nick James: It's Nick James from Numis. Just a final clarification on the sales by end user market. I mean all the numbers seem to be comfortably ahead of 5% percent like-for-like, so trying to reconcile how we get to 5% like-for-like with such a good performance in all of the end markets?

Clive Watson: Yes, the two which are down, the two big ones are academic and web printing conversion -- converting. And they are the ones which drive it down. They should be I think highlighted on that sheet.

Nick James: I guess that last one is not from the chart?

Clive Watson: Okay. That's -- that should be another thing.

Andrew Douglas: It's Andrew Douglas from Jefferies. Just one quick follow up on Omega. You've talked about margin going back to the exit -- when margins going back to historical levels. You got some work to do I think in the New Jersey complex for next six months?

John O'Higgins: Yes.

Andrew Douglas: If you look into '18 and beyond, is it now just the top line driving operational gearing in that business or is there still further operational [premiums] to do beyond the New Jersey complex and investments in IT? Is there more to do to get the margin beyond that number or is it now it's going to be driven by volume?

John O'Higgins: No. There's still some work to be done, so we partially closed the gap by the end of this year. But there is more to come next year and that should get us back at least to the gross margin levels historically but obviously top line growth is what takes us to end of the bottom line to where we need to get back to.

Clive Watson: And so as we exit 2018, we'll be 90% of the way there.

John O'Higgins: Yes, yes. On a run rate, yes.

Andrew Douglas: And will there be any more investment in campus now in testing services and automotive or you don't?

John O'Higgins: Well, undoubtedly. We have put in place the program manager and that individual obviously will be sort of creating a plan, the opportunity there, but in a way also the challenge is to map out how we cover all of these accounts across the world, across 3 businesses and then to start to put those into functioning account team. So they will undoubtedly then need leadership by key accounts, so each of those key accounts we nominate will have to have a nominated global leader. Some of them I think the natural leaders are there today just because they have the relationships and then we need to add to that. But no, so there will be more, more to come. And then we'll also see a similar development in the Malvern PANalytical business. That's all of course under the umbrella of Malvern PANalytical but they are also starting to put in place, and their direction of travel is one which starts to create sales teams by end market and obviously by account. So that is the future undoubtedly. And when you get into a solutions world that -- that's the only way to work really.

Christopher Dyett: Christopher, Investec. Two quick questions from me, please. Firstly around Millbrook. Would I be right thinking Millbrook first half and first half on '18, only at the first half of last year is down on an organic basis despite the fact that the part actually found the -- previously put a lot of investment in and you're also putting a lot of investment at this stage? [Am I right in] thinking it is down versus the prior period before you ran the ship?

John O'Higgins: We don't have full visibility, Chris, to whatever they were doing this time last year. So we can't answer that. But underlying performance we think is very robust, notwithstanding the timing shift into the second half. The other part of that question, Chris, is that if you recall that list of Vauxhall GM size?

Christopher Dyett: Yes.

John O'Higgins: And there was I think 10% Vauxhall business last year which we said we announced was disappearing. So is that like-for-like effect goes away? Because certainly underlying as class of the underlying business is absolutely not declining, it's absolutely growing. All of the capacity they've put in is all full.

Christopher Dyett: Okay. Same question around pricing. So I think £6.4 million of metal pricing in the first half, I think John, you alluded to in the media that seeing some good pricing wins, how much -- is there a big number related to [indiscernible] that 6.4 million? Or you'd say there's a half of it or something having...

John O'Higgins: Not going to get into individual operating companies other than to say directionally Omega was the strongest in the group. And for rest of them, we had a mixed picture. Without Omega, we would have been probably some 1%. The other characteristic I think characteristic and Stephen Swanton alluded to it in his question is that in a market such as the one we have now particularly in In-Line Instrumentation, you've got a lot of investment coming back into energy, downstream energy, mining and metals. The nature of that business is lower margin for us but also from the pricing point of view because it's projects versus service. Traditionally, our In-Line Instrumentation, this is very high service kind of -- as we come out of these cycles and we see investment in capacity then we -- this is the margin mix that we're talking about and there's very little pricing opportunity that you can really go for, you're bidding on projects. You can't compare it to anything you bid on last two because there were no projects last year. So the pricing opportunities are larger than going to be in the other three segments.

Jonathan Hurn: It's Jonathan Hurn from Deutsche Bank. Just two questions please. Firstly just coming back to In-Line, I think if you look at it historically it's had mixed issues before. Is it more of a sort of a circular trend in terms of mixed running through In-Line? That was the first question. And the second question was just coming back to the profit which obviously you talked about the sort of the one offs in the overhead space. Can you just talk about what you think about the ongoing overhead? Or what it going to be for 2017? Or we see around about 15 million in the first half? What kind of favor can we get for the full year, please?

John O'Higgins: I was just going to address the first question, Jon. I think I've answered it in relation to that last question. It's really around -- this business, it's really around where are you in the CapEx cycle. And when the cycle is down, margins go up because it's mostly recurring revenue. It's mostly service and consumables. And as the cycle recovers, margins decline because you're starting to get project business coming in that tends to run at lower margins than the recurring revenue than the service side. So that's not circular though. That is cyclical I would say in nature. And then of course, we've had over many years the decline of the coated paper business which we've talked about and that of course was a very high margin business. We've replaced that partially with the tissue business. So that's being the main circular kind of movement in that segment overtime. But I wouldn't say there is any particular issues there at all. And indeed, as we look out into the future and the world where we are doing actually more remote asset monitoring, remote services, industrial internet related services, actually the margins there are very good. So there should be actually a positive long term circular opportunity.

Clive Watson: And in relation to the second part of your question, what is the underlying trend for overhead cost increase. I'd say for this second half of this year, it's going to be about the 3% to 4%, capturing some of the strategic, continue delivery on strategic initiatives. And going forward beyond that, it really remains to be seen how much of the strategy we actually delivered on as we exit this year, so it's difficult to predict. But as I mentioned earlier, we're going to try and cap it at around 3%, but not if it's going to be detrimental in the medium to long term. So we're going to have to be flexible by definition, but we will try and guide at appropriate points in time as to what we think is likely to happen.

Jonathan Hurn: Maybe just one quick follow up. I think last time, we heard from you in terms of the guidance for the full year, you said organic growth is going to be between 0% and 1%. Obviously, very strong first half or order intake ahead of the revenue. Obviously, the cost is an issue in the second half to a degree they're getting strong, but what's the kind of feeling for you right now where you stand in terms of the organic rate for the second half?

Clive Watson: You're asking us that guess that [Indiscernible].

John O'Higgins: And how it gets up.

Clive Watson: How we're going to grow.

John O'Higgins: Look. Visibility isn't that far, Jonathan. We have 8 weeks of visibility and yes, we'll give an update on Q3, and --

Clive Watson: But we did give a clue earlier on when we talked about orders growth exceeding sales growth.

John O'Higgins: Okay. Well, if there are no further questions, then I'd like to thank you all for your attendance. Thank you for joining us on the webcast. We look forward to meeting you in the autumn for our trading update. Thank you.