Earnings Transcript for SXS.L - Q2 Fiscal Year 2019

Andrew Heath: Good morning. Thank you, everyone, for coming along. Welcome to all of you in the room, but also to those on the webcast to the Spectris' first half results for 2019. I'm Andrew Heath, Chief Executive, and I'm joined today by Derek Harding, our CFO. You've all seen and heard from us fairly recently at our Capital Markets Day back in June. Today, we're going to focus the presentation primarily on the H1 results, but also talk about the outlook for the rest of the year. I'll go through the headlines, then pass over the Derek to run through the numbers and how we currently see the second half. I'll then come back to talk to you about some of the operational developments in the business before opening the session to Q&A. So let's get into it. In terms of the headlines, you've already seen the details of our H1 results. I'm pleased to say that, overall, they were in line with expectations. Sales at £759 million reflect a 1.2% like-for-like increase year-over-year, a moderation in growth admittedly from 2018 were very much as we anticipated. As a consequence of our focus on profitable growth, our adjusted operating margin was up 30 basis points on a like-for-like basis, and we also saw a strong operating cash flow conversion of 89%. Adjusted EPS was up 4%, and we've also increased the dividend ahead of this by 7%. The strategic review, as you know, is now complete. And we're firmly focused on executing our strategy for profitable growth, and that's very much where our management's attention is now moving. And we've been very busy implementing initiatives also under the profit improvement program. And as you have seen in this morning's announcement, we now expect the benefits from the program to be at the upper end of the £15 million to £20 million range that we've previously guided. And we are reconfirming the exit run rate coming out of this year of £30 million. As part of the strategic review and our focus on profit improvement, as you know, we've been critically appraising all aspects of the business. And inevitably, this has consequences. And as such, we've taken a number of decisions on restructuring, which has led to a charge of £35 million relating to an impairment of goodwill and £45.8 million relating to other intangibles, and I'll speak further about those in a moment. But before I do, I just like to reiterate a few of the key messages from our recent Capital Markets Day. Spectris represents an exciting opportunity to make a good company even stronger. We're moving away from a number of disparate businesses to a small number of highly attractive, focused platforms, investing to maintain and build their leadership positions and also their differentiation into the future. Simply put, we're going to be a more focused and less complex business. We've confirmed the selection of Malvern Panalytical, HBK and Omega as platforms. We're clear on the direction for each of the Industrial Solutions businesses and our capital allocation approach has been redefined and communicated. As I've just said, going through the strategic review, alongside the focus on the profit improvement program, this has led us to critically assess all of our assets and businesses. As well as identifying the future growth drivers for Spectris, we've also had to appraise any businesses, which are underachieving in our eyes. And as a result, we've concluded it necessary to cease business line within the Test and Measurement segment, and we are proposing a restructuring at Concept Life Sciences. Just in terms of Concept Life Sciences, I think it's absolutely fair to say we've been disappointed with the performance. It fell significantly below expectations, again, in the first half of this year, posting underlying loss of £4.9 million. And despite all the remedial actions that we put in place to improve operational effectiveness in the environmental analyst side of the business, we continue to be loss-making. The integrated drug discovery and development services business also lost its major customer, and we were unable to backfill that work in the first half. Consequently, we replaced the senior management at CLS in the second quarter and asked the new team to undertake a detailed review of both businesses. And the result of that, it's proposed that subject to consultation and the usual legal requirements, the environmental analytical laboratories will be closed. Significant investment would be required, in our view, in order to recapture share and build that business back, and we don't see that investment as being viable. As a result, a noncash impairment of goodwill and other intangible assets has been charged to the income statement, as previously mentioned. So to be clear, we still see the markets for pharmaceuticals, life sciences and food analysis as being attractive for CLS. There, we see customers continue to outsource more analytical services and also pharmaceutical development work. From the start of July, CLS is now part of the Malvern Panalytical platform. And in combination, the 2 businesses will provide the opportunity to develop both differentiated instruments, but also differentiated CRO offerings for customers. And the work the two businesses has been doing since they -- CLS joined Spectris back in February of last year is already starting to demonstrate that point. So I'll now pass it over to Derek, who will take you through the numbers and also how we see the second half. Derek?

Derek Harding: Thanks, Andrew. Good morning, everyone. It's nice to see some familiar faces, and also to meet those of you who I've not met before. I'm Derek Harding. I'm the CFO here at Spectris since March of this year. So my first slide is a summary of the key metrics. Andrew's been through these, but I'll take you through them again just in a little bit more detail. You can see that sales have increased by 4% to £759.1 million. And off that, 1% came from acquisitions net of disposals and 2% came from favorable Forex, leaving a like-for-like sales increase of £8.3 million or 1%. And I'll take you through each of the component movements of that shortly. Adjusted operating profit increased by 8% to £83.5 million. Again, 1% of this came from acquisitions, 3% came from favorable foreign exchange, leaving a like-for-like increase of £3.3 million or 4%. I'm pleased to report an improved adjusted operating margin at 11% for the first half. This is 40 basis points higher than the same period in the prior year. And the difference between the adjusted operating profit, you see on this slide, of £83.5 million and the profit before tax of £77.2 million is interest and our share of post-tax results from the EMS joint venture. And you can see that, that number also grew by 4% year-on-year. Our tax rate came in at 21.5%, which is in line with the guidance given at the year-end, and that increase resulted from the unwind of our previous finance company structure. Adjusted earnings per share have increased by 4% to 52.4p, reflecting the net impact of the 4% increase in adjusted profit before tax. The increase in the effective tax, offset by the increase in effective tax rate and the decrease in the average weighted number of shares, which went from 119 to 115.7 at the half year, following the share buyback last year. We've increased the interim dividend by 7% to 21.9p, and this is in line with our stated policy of progressive dividend based on affordability and sustainability. And the recovery remains good at 2.4x, and is consistent with our long-term average, which has been around about 2.5x. Adjusted operating cash flow generation of £73.9 million during the period, resulted in a cash conversion of 89% compared to 69% in the first half last year, and I'll talk about cash a little bit more later as well. During the period, net debt decreased by -- sorry, increased by £15.5 million to £312.6 million. And our net debt-to-EBITDA covenant, for covenant purposes, is 1.1x compared to an upper limit of 3.5x for our RCF and 3x for our EIB loans. And our interest cover at the half year was well in excess of our minimum requirement of 3.75x. And then finally, on this slide, you can see our new measurement of return on gross capital employed. You can see that it fell from 14.2% last year to 13.4% at the half year, and that's mainly due to the full year impact of the CLS acquisition. And I'll talk you through that measure as well slightly later. So the next slide just looks at the first half at a glance. Starting on the top left, I've bridged the key drivers of the 4% increase in our sales. So to arrive at a comparable basis, we've reduced last year's reported sales by £8.8 million, which reflects the 5 months of sales from EMS, which we sold to the joint venture to Macquarie on the 31st of May in 2018. We then have incremental revenue from acquisitions of £15.9 million, and that was 6 months of VI-grade, 3 months of Revolutionary Engineering and 1 month of CLS in the comparable. Translation FX has increased our reported sales by £15.7 million. The majority of that came from weakness of sterling against the dollar. And that leaves the like-for-like sales growth of £8.3 million or 1.2%. And the majority of this like-for-like increase has come from improved pricing, resulting from the additional focus on the factors in the business that we can control. The chart at the bottom left of the slide reconciles the adjusted operating profit, which, as I said, went up by 8% to £83.5 million. Disposals net of acquisitions contributed £0.5 million in the period, and this primarily relates to the disposal of EMS, which was loss-making last year, plus a small net contribution from the other acquisitions mentioned above. Currency movements gave a benefit of £2.5 million, again, due to weakness of sterling against the dollar. And a change in the mix of product and an increased material and labor overhead has offset our improved pricing, and that resulted in a small decline in our gross profit, despite the increase in the sales, and that resulted in a 70 basis point reduction in the gross margin to 55.5 -- oh, sorry, 55.2%. Now despite the reduction in gross margin, we still delivered a 40 basis point margin expansion from 10.6% to 11%, and that is as a result of our continued focus on the cost base, which more than offset inflation and incremental depreciation. If you look more closely at that overhead's improvement of £3.8 million, there are a number of moving parts worth noting. Overall, our employee costs have remained broadly flat in the period compared to the prior year, with the actions of our profit improvement program offsetting those inflationary increases. Additional depreciation and net transactional FX charges were broadly offset by slightly lower R&D charge due to the capitalization of £3.5 million of R&D following the policy implementation in the second half. And then looking at savings in marketing spend, travel expenses, consulting and external services have all contributed to the net profit contribution and the overhead control that we've seen. Notwithstanding the progress we've made in the first half, we do see -- still see opportunity to improve further in H2 and beyond. This is a waterfall showing how we generated cash and then what we did with it. It's another way of looking at sources and uses as I talked about the Capital Markets Day as a key focus of the group. So starting by adding back the depreciation and amortization. This is all on an adjusted basis as well, by the way. There's £28 million of depreciation, and that brings you up to the £111.5 million EBITDA generated in the first 6 months. Working capital was broadly stable, with a decrease in receivables being offset by higher inventory and lower payables. I'll come back to that later when we look at the balance sheet. And CapEx, net of grants, at £39.3 million was broadly in line with the same period last year and includes investment in Millbrook of £18.4 million. As you think about your modeling for the full year, we're anticipating total CapEx in '19 of around £90 million, of which £40 million will relate to Millbrook. And that thing gives us the adjusted operating cash from operating activities of £73.9 million, which we divide into our operating profit to give our cash conversion. At 89%, we're very happy with the first half of the year, and we anticipate the full year conversion will be in the range of 80% to 90%. Interest and tax had a combined cash effect of 20.7, and the full year dividend utilized £46.9 million of the cash generated in the first half. We completed one acquisition during the period, which had a total cost of £3.8 million. And then there was a £1.9 million paid in respect to prior year acquisitions, making net outflow of 5.7. And then furthermore, we spent 1.7 on transaction-related costs, which gives a total transaction outflow of £7.4 million in the period. We spent £13 million on restructuring. And within the other items of £1.4 million, there is a lease payment of £9.9 million, which was offset by cash from the sale of the property at Omega. And overall, that then leaves you the £15.5 million increase in our debt position during the period. Now there are a number of moving parts in the announcement this morning, and I thought it'd be helpful to give you a reconciliation between our adjusted operating profit and the statutory profit measures that you can see in the accounts. So I'll take each one in turn. We have incurred restructuring costs of £29.1 million, of which £8.1 million relates to noncash items. The largest of those restructuring costs, the £29.1 million, relate to redundancy payments across the group. We have consistently adjusted for transaction-related costs, depreciation and fair value adjustments relating to acquisitions. As you can see, they're broadly similar year-on-year. And then we've also put in £5.2 million of profit on disposal, which is a property sold as part of our facility footprint rationalization across the group. Andrew has already discussed the situation of Concept Life Sciences. And here, you can see the £35.1 million impairment of goodwill relating to that asset. And there's also £32.4 million impairment relating to customer relationships and technology within the CLS decision today. And that balance is part of the £63.9 million that you can see there showing on the slide. The remainder of that balance being made up with the normal annual amortization, which you can see was £18 million last year. And then there's £13.4 million relating to other restructuring activities that we undertook as part of the profit improvement program. Again, the impairment of customer-related intangibles. So if you then look at the statutory loss for H1 of 2019 and compare it to the profit in the prior year, the comparison's further complicated on that bottom line by £57 million of profit that we made in the prior year. So as you can see, there are a few moving parts to consider. But hopefully, the slide helps you see the wood from the trees and get a sense of our underlying performance in the first half. It was good to have a look at the balance sheet. I'm not going to get through every line on here, but I've pulled out a couple of the key metrics. First of all, you can see the effect of the goodwill and the intangible impairment at the top of the table. Just a reminder, although this impairment does have the impact of reducing the group's net assets in the way in which we're calculating our return on growth capital employed, we will actually add that impairment back. PPE appears to have significantly increased in the half, and that's mainly due to the accounting impact of IFRS 16. And actually, on this balance sheet, as presented here, you can see the other side of that accounting with a lease liability balance there of £70.2 million at the year-end. We do not include that balance in our definition of net debt. So as you're looking at your models and I talk about net debt, it does not include that £70.2 million. And the reason for that is because our banking covenants don't include that either. So we report our net debt in line with our banking covenants. Then there's a balance, three down for net investment in JV. Well, this is an interesting balance actually. It was generated as part of the disposal of EMS to the joint venture with Macquarie last year. And as you recall, at the time, we recognized a profit on disposal of £57 million. So the recoverable amount is based on the future value, which is expected to be achieved from an ultimate sale of that JV. And the estimates derived from the operating cash flows, future growth rates and multiples achieved from sale of similar entities in the same sector. It's worth noting that the JV is in the early days of delivering a nascent business plan. And as such, any future event could change the assumptions used to determine that recoverable amount. If there are changes in the future to that balance, that will be noncash and accounted for below operating profit in the same way as the profit that we recognized last year that effectively generated the balance in the first place. So moving on to working capital. As you can see, the overall balance has not moved materially since the year-endwith increases in inventories being offset by elsewhere. But average trade working capitals, expressed as a percentage of sales, did increase by 1.2 points to 12.6, which is well inside the range of 11 to 15, which I outlined at the Capital Markets Day. Notwithstanding that, I do think there are pockets around the group where we can do better, particularly around stocking the right inventory and swifter collection of receivables, and this will remain a focus for the finance teams around the group over the coming 6 months. And then finally, on this page, you can see our pension liabilities that increased slightly since the year-end due to actuarial assumptions. But as you can see, in the context of the group, our net liability is not material. So unlike many companies, pension's not particularly a major area of concern for us. The return on gross capital employed. So this is the slide that bridges the primary movements in that calculation. And as I said at the Capital Markets Day, our return on gross capital employed is defined as the ratio of adjusted operating profit to the average year-end shareholders' equity, net debt, accumulated amortization and impairment of goodwill and acquired intangible assets. So we've chosen the measure because it's easy to calculate from looking at the accounts, and it's also easy to compare to our group work, which we've determined to be around about 10%. At the half year though, it's not quite so easy to determine from the accounts because we're using a trailing 12-month set of numbers. So when you look at the operating profit, it's effectively the adjusted operating profit number you see there of £254.6 million is the sum of £171.1 million, which is H2 last year, plus the £83.5 million that we're announcing today. So it's effectively the trailing 12 months. And then the average working capital is the average of the 2 averages from last June and this June. So that's why when you look at that number at 13.4%, it's slightly lower than the number I gave at the Capital Markets because that was a year-end position. And then once we get into the rhythm of this, you'll see how it flows. The main driver of the difference year-on-year, there's a full year impact of having CLS come through the whole 12 months of this year versus not being in all of last year's starting point. So before I hand back to Andrew, I thought it would be helpful to share some guidance on how we see the second half. Although I'll let you be the judge of how helpful when I get to the end. At the end of the day, when you're managing a business in a dynamic environment, there are headwinds and tailwinds that we face. So starting with the headwinds, we remained cautious about the impact of the current political and economic environment in which we operate. Like many of our peers, we have experienced a slowdown in the second quarter compared to Q1, and we do not have enough feasibility at this stage to determine if this is a slight blip or the beginning of a concerning trend. Our lack of visibility does extend to the fourth quarter as well, which has traditionally been our strongest performing period. The uncertainty is highlighted best perhaps when looking at North American industrial market and the automotive sector. Over recent weeks, we've seen external commentators give both positive and negative views on each of these sectors. So it's fair to say that we are operating in less than perfect information. In this environment, we intend to focus on the areas that we can control, and make plans on the assumptions that the market will not help us. So to this end, we do have some reasonable tailwinds. We're confident that our profit improvement activities can continue to offset inflationary pressures in our cost base. And a number of challenges that we faced in the first half, such as the launch of the Omega website, the restructuring of HBK sales and marketing teams are now behind us. And furthermore, the recent CapEx invested at Millbrook is now coming online, and we anticipate an improved performance here in the second half. In the case of CLS, we do anticipate losses in the second half, but there will be around £1.5 million to £2 million, which is broadly the same as the second half of last year. So if you're doing an H2 to H2 comparison, it doesn't make a big difference. Perhaps a little easier to model is our tax rate, which we expect to -- and our CapEx spend, which we expect to be around 21.5% and £90 million, as I said earlier, and £40 million relating to Millbrook. And then finally looking at foreign exchange, the sensitivities haven't moved materially since prior guidance. The table on there shows the impact of £0.01 within euros and dollars, both in terms of the sales line and the profit line. So you can see that $0.01 move in dollars is a £4 million move in sales and around £600,000 in profit. Overall, we do expect to deliver a modest improvement in our H2 profit compared to the prior year. And with that, I'll hand back to Andrew.

Andrew Heath: Thank you, Derek. So let me take you through the operational performance, and how we see the business is performing today. And I'll start by looking at sales and give you a high-level summary of the sales by region and by segment. And then I'll go through each of the segments in turn and more detail. So by region, like-for-like sales were lower in both North America and in Europe with sales in Germany down. I think this generally reflects what we're seeing in terms of PMI trends across these geographies. We have seen softening industrial production in the U.S. where -- with Europe, particularly Germany and the U.K. also down. Asia continues to deliver good growth, broadly spread across the region. Although in China, we have seen like-for-like sales marginally lower. I think that just reflects a lower -- sorry, a tougher comp and the impact of U.S.-China trade tensions. Across the end markets, we saw growth in semicon, electronics, advanced materials, academic research and with pulp and paper, energy utilities well up on last year. By segment, we saw a particularly good growth in Materials Analysis and In-line instrumentation. Weakening U.S. production and a declining automotive environment, however, has negatively impacted Test and Measurement and Industrial Controls, in particular. And of course, I think this is the last time we'll be reporting in this way by segment. As we committed to at the Capital Markets Day, I will be reporting by platform and the Industrial Solutions segment in the future. So moving on to Materials Analysis. There, we saw a good sales growth, up 6% on a like-for-like basis, particularly in advanced materials, semicon and academic research. Adjusted operating profit increased 3%, however, the like-for-like decline in operating margin reflects the dilutive effects of CLS. Pharma was flat year-over-year, reflecting a tough comp, particularly for North America. But we saw good growth in Asia in the first half, especially in China where efforts to the health care system to support a rising middle class supports the demand for retail pharmaceuticals. Our formal order book and pipeline are good, with Malvern Panalytical's order intake notably ahead of last year. There's also been some softening in metals and mining. But offsetting that, we are seeing good orders in building and also advanced materials, I mean, they remained robust. Sales into academic research institutes have also been particularly strong in the first half. Both Malvern Panalytical and PMS achieved good sales growth, delivering strong financial performance and operating margin expansion. Malvern Panalytical also benefited from improving pricing and lower overheads as a consequence of its focus on its merger, but also on implementing the profit improvement program. Malvern Panalytical has also continued to deliver new products with its latest generation of X-ray fluorescence spectrometers and a new laser particle size analyzer, adding to the steady number of products that we've launched since 2018. They're also looking to extend their offering with more predictive and prescriptive solutions and are partnering with the University of Bristol here in the U.K. to open a new data science facility, using artificial intelligence to develop these new software offerings. PMS delivered a strong H1 performance, especially in Asia, again, reflecting a strong year-end order book for PMS. While this semiconductor market has been weaker this year with sales or sort of manufacturing equipment products to be down almost 20%, PMS's strong order book coming into 2019 enables sales to grow year-over-year. And in 2020, all the signs are that the equipment market is expected to recover. On the strength of memory, spending our new products in China starting in the second half of this year. So we fully anticipate a return to sort of strong order intake towards the back end of this year moving into next year. Our pharma and life sciences has also been strong for PMS. They've launched a new cleanroom monitoring software product. The software is used with its FacilityPro Processors, which connect directly to environmental, temperature and humidity sensors. And these monitor solutions are key to helping customers meet regulatory requirements, which are becoming ever more stringent. In Test and Measurement, like-for-like sales declined 3%, which reflects a tough comparator in automotive, especially in Asia and Europe. Adjusted operating margins were flat. The impact of the lower sales volumes and high depreciation of Millbrook was mostly contained by lower overheads for the segment and ESG also moving into profitability. However, we do remain positive on the near-term opportunities within Test and Management, and I'll take you through those in a moment. Technology developments in automotive, such as the wider preparation of platforms across conventional electric and connected vehicles is supporting significant R&D spend and demand for our products, in particular vehicle electrification is accelerating. And 2019 is set to become the year when model activity in the battery electric vehicle sector appears to be finally taking off. We're positioning ourselves to take advantage of these trends. And for instance, HBK is seeing good demand for its new e-drive system, we showed that at the Capital Markets Day. And that's used for testing electrical inverters and motors, utilizing our data acquisition systems, dedicated application software tool and other sensors. And that's in addition to the battery durability testing solutions, which cover voltage, temperature, vibration measurements and also life cycle testing. And there's increased interest in our sound measurement tools to simulate the exterior sound of hybrid and electric vehicles and also evaluating exterior passerby noise. At Millbrook, we have new capacity coming online. Eight of the new battery test chambers are now in operation, with a further 4 to follow in the second half. And we also have a new test facility for ADAS and connected autonomous vehicles at the Millbrook facility supported by the recently installed 5G network. And in the U.S., Millbrook has doubled its capacity at Millbrook RE with the new test facilities, it's in both Detroit but also in California for the testing of electric vehicle developments. And VI-grade is partnering with Multimatic for simulation center near Detroit to serve the U.S. OEMs. In aerospace, sales were slightly lower in the first half. But again, we see good opportunities in research and development for electrification of aircraft, plus business jet programs, focus on component testing and various space programs as well. In telecoms and electronics, our acoustic testing products were also in demand for the increased audio quality requirements for new products, both in terms of voice activation and also noise abatement. However, I guess, the one -- that's what is really in oil and gas at the moment, the outlook is uncertain for our ESG business in microseismic, the U.S. onshore looking more challenging after more encouraging into 2018. But just in terms of HBK, it's one of our platform businesses. They are merging HBM and Brüel & Kjær Sound & Vibration. As you know, the extended leadership team is being formed and is almost fully complete. They have integrated their sales team and developed a new go-to-market model. And while we saw some interruption from the merger activity in the first half, encouragingly, orders picked up quite significantly in May and June, which gives us more comfort going into the second half. And I think it's fair to say, we see 2019 very much as a transition year for HBK, but with good opportunities for margin expansion as we bring the businesses together. On In-line Instrumentation, there was good like-for-like sales growth of 7%. Though to be candid, this is against an easier comparator from last year. Growth was broadly spread across most of our key end markets, being particularly strong in North America and Asia. The segmental operating margin improved 360 basis points on a like-for-like basis, with all companies contributing to the improvement. Predominantly reflecting the higher sales and gross margin of BTG and Servomex, but also had the profit-improvement program benefits coming in across all of the operating companies. BTG is performing very well. We're seeing good like-for-like sales growth there, particularly in tissue in Europe and Asia, with graphic paper doing well despite the decline in the coated paper market and the slowdown in China. We expect the overall market additions to continue for BTG into the second half. Servomex, we saw good sales growth there, as -- particularly into energy and utility customers in Asia and North America, with hydrocarbon orders and particularly doing well. We're seeing the demand for gas analysis is increasing, as increasing emissions regulations become more stringent. On Industrial Controls, our like-for-like sales, disappointed. They declined 7% in the first half. And this is also reflected in the profit decline and the lower margin achieved over that period. Both Omega and Red Lion saw lower sales as a consequence of slowing U.S. industrial production, the U.S.-China tensions and high one-off sales, not repeating in Omega from last year. But frankly, the sales performance also reflected temporary disruption to activity at Omega. Both from some teething issues following the supply chain -- the supply change, but also some teething issues following the implementation of the new e-commerce platform and getting the traffic flows back up to the previous levels. But equally, candidly, going into the second half, the traffic on the Omega website is now back to prelaunch levels, delivering enhanced customer experience. And we are seeing our conversion rate, order volume and order value all improving. Both Red Lion and Omega are actually working on refreshing their product lines. Red Lion has launched its new halo integrated communication product to replace multiple older versions, and that's being trialed with its first customer as we speak. And Omega's launched more than 30 new product lines to date, including handheld thermal imaging and ultrasonic liquid level sensors. And they have many more such product introductions to make through the rest of the year. And we expect the combination of the new digital platform Omega and this product refresh of both businesses to drive sales into the second half and beyond. But I think especially given the 70% exposure that both Red Lion and Omega have to the U.S. in this segment, their performance will be contingent upon the U.S. industrial markets, which have been softer for us in the first half, and we do expect that to continue. Demand is clearly also being impacted by the U.S.-China tariff situation, particularly at Omega, whereas products are incurring duties as they're exported into China. And then frequently, the sensors then get incorporated into products, which are then reexported back to the U.S., so effectively getting a double hit on a number of the tariffs. Well, so that's the segment. So moving on to the profit improvement program. While there are some uncertainties in our end markets, we continue to focus on what we can control. I think we've said that consistently since I've arrived. In the first half, all our operating companies have been implementing their initiatives under the profit improvement program. We have made really good progress. As you saw with the numbers Derek took you through, the benefits fall into the 4 categories that we described before. I'll just quickly run through each, in turn. I mean firstly, on people, organization restructuring is predominantly the main driver here, reducing head count. And a number of our operating companies, including Servomex, Omega, Millbrook and ESG have all completed their restructuring. Other businesses are still continuing with that activity into the second half, which will bring further benefits into H2. On property, we have closed a number of facilities and offices around the world. Malvern Panalytical has closed its Longmont facility. NDCT has closed its property in Colorado. ESG are closing their Denver office. Red Lion has sold its St. Louis facility. And a number of other sites have been closed as well as -- again, will help introduce ongoing operating expense. On the product side, lower margin products are being phased out. We've declared the cessation of a business line within Test and Measurements and taking a charge in the results. But for instance, we also reduced our metals product line at NDCT as well as a cable-testing product as well there. So as we're going around the businesses, we continue to challenge and look at the profitability of the product portfolios in each of the businesses and make sure that we've got high-quality products on sale now and developing new products into the future. And with regards to process, we're actually deploying the Spectris business system and implementing lean and using things like value analysis, value engineering tools to make our processes more efficient and our products more competitive. So overall, this is enabling us to control cost and reverse the inflation overheads that we've seen in the past 2 years in 2017 and '18. Like-for-like overheads in the first half were down 1.2%, while sales were up 1.2%. And we can see, as Derek said, more benefits coming in the second half. We delivered £8 million of savings so far this year, at a cost of £29 million, and fully expect the benefits, as I said earlier, at the upper end of the range versus our previous guidance. And as such, we are confident in achieving the £30 million exit run rate coming out of the back end of this year. And while the costs to achieve the program have increased to £45 million, the rise reflects the impact of further restructuring, the largest item being within CLS. Before I finish, I just want to emphasize the importance of implementing the Spectris business system across all our operating companies. As we execute our strategy, it's absolutely essential we engage our people in the process of making Spectris a better and stronger business. At the heart of the business system are a set of tried-and-tested tools that help us reduce waste, drive growth, improve profitability. Kaizen on the shop floor -- as I said at the Capital Markets Day, whether it's in the shop floor, at the offices or in the field has become a way of life for Spectris. And this is a fundamental part of our ongoing profitability and profit improvement activities. Consequently, we've been placing greater emphasis on accelerating deployment of the business system this year. We've been running numerous Kaizen events across our businesses, primarily focusing on improving on-time delivery but also, not just in terms of the shop floor, but also in the offices. And there, we've been focusing on sort of what we call commercial-oriented Kaizens, focused on the flow from lead-generation opportunity through to order conversion and supporting the sales and marketing teams to become more efficient as well as more effective in translating orders to sales. As I said, the objective of these events is to engage our people. They know the processes best. And giving them the right tools, the right facilitation, we can drive significant continuous improvement across Spectris, reducing lead times, reducing waste, improving quality and also driving up customer satisfaction, which, in turn, delivers incremental, yet more sustainable profitable growth. We're making good progress. I think, as I said previously, there's considerably more to do. We're relatively new on the lean journey, but that does mean there's much more opportunity ahead of us. So finally, in terms of just sort of summary and outlook. Despite the more challenging macroeconomics and geopolitical backdrop, our results have been in line with overall expectations. And I'm pleased with the operating margin expansion and cash flow that we've delivered. Our full year expectations remain unchanged. But clearly, the current environment doesn't make that more challenging. Hence, our focus on the factors we can control. There are lots of positives in the business, helping to drive our performance in the second half of the year. We have a number of attractive markets still performing well. We have a number of product launches happening in the second half. The new digital platform at Omega is up and running and performing well now. Further benefits from the profit improvement program will continue and flow through into the second half. And we remain absolutely focused on controlling our costs in this more uncertain environment. And with the strategic review now complete, our focus is firmly on the execution of the strategy to deliver enhanced shareholder value. And with that, Derek and I will be more than happy to take your questions.

Q - William Turner: William Turner from Goldman Sachs. I've got a couple of questions. The first one is, clearly, you grew about 3% in the first 4 months of the year and then 1% for the whole half. Can you talk about which of the businesses deteriorated the most in the last two months for that slowdown?

Derek Harding: I mean I think -- I'll give you a sort of broad answer, William. I think there's -- certainly, the first quarter was -- we were pretty pleased with the first quarter. We have seen a slowing -- and a progressive slowing in the second quarter, particularly towards the end of the quarter. I think the businesses that we've seen the impact the most has been really within sort of Test and Measurement and the Industrial Controls, as we've said. The general automotive environment has been less positive for us this year than certainly last year. It was a tough comp, for sure, in automotive last year. We're still seeing a large number of R&D programs, the proliferation of new platforms within the OEMs. But there has clearly been a sort of a tightening of the belts in certain of our end customers. But generally speaking, we still see plenty of opportunities though. To some extent, it's unfortunate, the -- sort of the combination of HBM and Brüel & Kjær within HBK has sort of come at a time at just where the market took a bit of a turn down. So that's sort of not helped by the fact we've been changing the sales force, refocusing it around sort of end market focus as we combine the businesses. And I think the other part to this is the softening of industrial production in the U.S., that's certainly impacted both Omega and Red Lion.

William Turner: And then on that last point, when we'd look at some of the PMI indexes, so manufacturing distributions into the U.S., there's still points having some growth and it's often more European-related industrial production, which seems to be weak -- weakest spot. So between those 3 factors that drove the Industrial Controls' slowdown, which were the most dominant? Or...

Andrew Heath: Well, I mean for -- 70% of the turnover of Industrial Controls is North America. So it's predominantly -- it's what we're seeing in the slowing down in the -- prominently in the U.S. on IP that's impacted those businesses the most. I mean China. Asia's been a good growth, certainly, for Omega in recent years. The tariff has certainly impacted that. Yes, Andy?

Andrew Douglas: It's Andrew Douglas from Jefferies. Three questions please. The profit improvement plan, clearly, you're really happy with the numbers you've put out there and upper end is good. Are you happy with how that's been kind of driven by the business? No issues with gross customers from national? Have you taken just kind of a bit of a view on how the businesses has approached that? Again, I got a similar question for HBK in terms of the progress made. We're taking the playbook for Malvern Panalytical with figures in roughly kind of what we're doing that is broadly similar for HBK. Again, ESG was active, yes, almost a year. And happy with how HBK is doing. I'm pretty sure there's a few hiccups in the first half, that's always the way, but -- if you're there. And Derek, can you just remind us, CLS property was -- I would say loss was £4.9 million in the first half. What was that in the prior year?

Derek Harding: Okay.

Andrew Heath: Yes. Well, we're trying to take my turn. If I can remember them all, Andrew. So the first one, property improved rate. I mean to be clear, I'm delighted with the progress. I think the way the business -- and the business leadership has responded to the program, right from the get-go, has been hugely encouraging. There's been real strong ownership. And that has -- is really what's driven the £8 million of benefits we've been able to catch in the first half of the year and gives us confidence going into the second half. The message is around profitable growth, getting focused, looking at making sure we've got our -- the product portfolios in each of those businesses right and set up for the future, getting the footprint more rationalized, looking really at the efficiency in deploying the sort of Spectris business system into all of that, it's being really well embraced. And I think that's one of the powers of the Spectris operating model. We've had an operating model whereby each of the operating companies have been quite evolved. And we've just strengthened that and held them -- provided the greater accountability and responsibility to them, and they've responded really well to it. So that's going very well. I mean in HBK, we've -- we have changed the leadership. You saw Joe Vorih, the new President, at the Capital Markets Day. Joe's an impressive individual, ex-Danaher who worked in private equity. He knows how to do this. He's absolutely focused on the right things and driving things hard. We've had to make a few more changes in terms of getting the overall leadership team to come together. That's taken a bit of time, disrupting the sales force through any merger process always has some impact. As I said earlier to William's question, it's just unfortunate it's sort of coincided with a bit of a dip in the market. But in terms of our views of Test and Measurement, our views of HBK remain unchanged. They have -- I would say, their view of the world, and I agree with this, is that they have plenty of opportunities to go after. It's for them to get themselves organized and focused on that. And then Derek...

Derek Harding: CLS was breakeven in the first half last year. So if you recall that we only bought it at the beginning of the first half of last year and then it lost around £1.5 million in the second half. And I guess when we came out of the year-end, we had kind of guided that there would be a flip to kind of plus 6 in that business.

Andrew Douglas: Yes. Not have much mention of Millbrook so far. So just -- there's a lot of CapEx, obviously, that continues to go in there. With the weakening of demand in auto, do you still have visibility on the future loading of those investments that you put in over the last couple of years?

Andrew Heath: Yes. So we absolutely tracked the CapEx investment at Millbrook. I mean we have spent, as you know, quite a lot of money there. And we're continually -- are evaluating the effectiveness of that CapEx in terms of sales. I mean we've clearly seen a slowing down of test services in the U.K. in the first half, which has impacted them. But a lot of it -- a lot of the investment has gone into areas like electric vehicle, drive testing, battery testing, durability testing. And those areas -- those investments, we are getting good loading and good capacity utilization of the assets we put in place. That's both at the Bedford facility, but also in the U.S., which we have the acquisition of Millbrook RE, Revolutionary Engineering. We've had to expand the capacity, both in Detroit, but also putting new capacity on the ground in California to take advantage of the growing electric vehicle cluster that's developing around the valley.

Andrew Douglas: So we're comfortable that those investments are not going to be sitting there looking excessive with the next year or 2?

Andrew Heath: No. I mean -- I think we've -- we were clear, I think when the investments were made, where the target opportunities were. Whether we had to fully deliver on the business plans in the current environment, well, it's obviously questionable, and we'll continue to monitor it. But in terms of the actual -- the absolute demand is still strong for the assets that we've put in place. And going forward, clearly, we've been quite thoughtful and critical around any further investments we put on the ground in Millbrook. Most of the CapEx that Derek took you through, I think, quoted the Millbrook number. I mean that was committed CapEx from predominantly from last year. So we have slowed up the rate at which we've been spending CapEx in Millbrook.

Andrew Douglas: One unrelated one. On -- I'm going to go on those tariff issues in and out of China. Is there anything you can do about that? Or is that just where you sit in the supply chain?

Andrew Heath: It's mainly where we sit in the supply chain. We manufacture in the U.S. And therefore, shipping to China. Unless we move the manufacturing base, which we have clearly given thought to but at the moment, we decided not to do that.

Richard Paige: Richard Paige from Numis. Just a quick question. The academic research like-for-like 26% is a standout figure in terms of the end markets. To what extent does that project -- specific project activity? I'm trying to understand, ultimately, repeatability of the growth there.

Andrew Heath: Oh, yes. So I think -- I mean it is a standout spot, for sure. The numbers show it. I think it' s -- the comp in the first half of last year, it's -- it was -- it makes it a bit easier. But even with that taken into account, we've seen strong growth there. In part, some of that is in Malvern Panalytical, the merger activity around the sales force that took place in sort of 2017-'18 did have a bit of an impact there. And now that we're sort of 12 months on from those changes. That has meant that the renewed focus has brought in more orders and sales as a consequence of that. But we've also seen strong demand in terms of, certainly, China, Asia, in terms of research. But North America, I believe, is also up as well. So there's money going into a number of the sort of target markets we spoke around the Capital Markets Day, around sort of automotive, semicon, electronics, pharma, life sciences, tech-led industrials into the technology side of that, advanced materials, fine chemicals. There's quite a lot of research around the world going into those areas, which we're well focused on.

Richard Paige: I just wanted to ask around the -- I guess how are you thinking about some of these -- the low-margin product lines? You've obviously, mentioned a few and you based at a few. And I think with the strategic review, I guess, completed, but I presume there's kind of an ongoing review of kind of where these product lines sit, where different businesses sit. And is it just a case of where it doesn't make sense at the moment, you really need to fix it or you need to exit it? And kind of should we expect this to be a theme of kind of the next couple of years? Or are you pretty happy with kind of how things are set?

Andrew Heath: So looking at sort of products and customer profitability, doing that analysis on a regular basis is a good housekeeping discipline. I think I said at a previous event, typically, it hasn't been done, inspectors on a routine basis. And we're sort of bringing that discipline to bear. And I think it's just -- it's a health index within the business because inevitably some products will get older, we could get obsolete or it just costs you more money to continue to support our older products and the profitability declines. And some of them you may want to keep because in the basket that goes to customers, they're important. And yet you accept that. But others, it's just -- well, yes, it's just something in the salesman's tool bag, which we -- which you don't really need anymore, and we need to deal with it. So that will be just an ongoing process and should be an ongoing process, which is just a refresh and continue -- just keeping the housekeeping going. And I don't think you should really worry about that. That's for us to launch new products and target markets and continue to develop the new products as well as retire older ones, that should be a natural process. I think in terms of sort of customer intangibles around product lines and things, we have had a close look at all of that. And over the last 6 months, as part of the strategic review. And where things stand today, we're comfortable with what we've done and where we got to. I mean, Derek...

Derek Harding: Yes, I wouldn't expect to see the types of impairment that we've talked about this morning in customer intangibles as a result of just ongoing product management.

Richard Paige: Sorry, just as a follow-up to just one of the comments on R&D-- on the -- it doesn't sound like that kind of granular review of the different product lines was ever really a feature possibly before. Does that provide you with some opportunities from a pricing perspective as well?

Andrew Heath: Well, inevitably, as you look at the product portfolio, if you retire some, we'll knock a bit of sales off. But from a profitability perspective, it will improve, absolutely, yes. And that's the whole focus of it.

Derek Harding: I think it also links into -- we talked at the Capital Markets Day, around looking at our R&D spend and getting that as efficient and as effective as possible. So making sure that we are spending that money on the right future products and not on sustaining older products, for example. It's another area that, that focus has come out take a while, but that's the other part of that focus.

Michael Blogg: Michael Blogg from Investec. Has the underlying rate of sales growth been affected in a measurable way in the first half by retiring less profitable products?

Andrew Heath: Yes, I would -- Michael, I would say that's not really a factor. I mean if anything and if at all. We've lost a little bit in some areas, but equally some products that we've looked to retire. We've had quite a lot of end-of-life demand from customers. So some of the sales has been actually boosted by that, albeit the profitability of some of those maybe not as what we'd want. But we -- as we manage that process out, they're just -- there is a natural churn that goes on.

Michael Blogg: Okay. And the impairment charge in Test and Measurement, what product line is that?

Andrew Heath: We're not -- for commercial reasons, we're not going to disclose what it is. It's just one of the product lines that we've had for a while that. As time has gone on, it's become less and less effective. And therefore, we've elected, given it's not profitable now to take a decision to cease trading there.

Michael Blogg: Is this quite a significant write-off?

Andrew Heath: Yes. I'm breathing. Yes, it's just so you've got the number, it's £13 million of that £63 million. Yes. Okay.

Robert Davies: It's Robert from Morgan Stanley. A couple of questions. Just, I guess, thinking about all the changes you're making in the businesses. And you're clearly doing a lot sort of on the ground. How should we think about the impact on the second half in terms of drop-through from sales to profitability? And how do you think that sort of varies depending on the potential outcomes, whether you end up in a -- I don't know, maybe a low single digit or even if you end up in a high single-digit growth rate? How much flexibility versus your current assumptions of what you're planning to do, do you have? And then the second one was just really around China. If you could give us a little more color by end market of what you're seeing and what customers are saying to you on the ground? That will be helpful.

Andrew Heath: Okay. So I think the first one in terms of the second half, I mean, we're not going to predict what the macro environment is going to be like in the second half. I think it is quite uncertain. I mean our stance, therefore, is one of end market uncertainty. And we are driving the business to improve profitability in a lower growth environment. And so it comes back to what we said, we are focusing on what we can control, controlling costs, being very clear about where we're spending money where we shouldn't be spending money and making sure we drive the profit improvement program as far as we can across the businesses. That being said, there are still some strong growth opportunities for us, pharma. Order intake in pharma is up at the end of this -- the first half. Life science is good. Advanced materials, fine chemicals are doing well. Semicon is relatively small for us, but we expect to see a pickup in the second half. We had an overall sort of -- the installation of our devices into electronic fab manufacturers is strong, so there's -- there are a number of businesses -- sorry, a number of end markets and to academia as well, emissions in the energy utility space that are still very positive, and we've got good opportunities. And even within automotive, as I said, I think there are plenty of opportunities out there. We've got to make sure we get through the merger of HBM and Brüel & Kjær S & V as fast as we can and get the sales force focused on driving, going, getting those. So our start is one of -- still very much let's push for growth, let's look at revenue, the order opportunities, but at the same time being very careful about the costs.

Robert Davies: And then maybe just one follow-up on your sales force and the way the change in your business structure will affect the type of people you have on the ground. Do you have everyone you need? Is there any additional head count you need? Or is it simply a case of retraining some of those people? Changing some of those people? How do you think -- because, obviously, your cost base has been a big focus for the last couple of years?

Andrew Heath: Yes, yes. Well, it's a big question, that is. But I think -- so where are we at the end of the first half, like-for-like overheads are down 1.2% despite the sales growth. We said when we launched the profit improvement program, the reason we called it a profit improvement program was that it -- we were looking at also growth initiatives and also pricing as well as cost-reduction opportunities. So it's not just purely a cost-reduction program. So there has been -- we're -- as we've restructured in some areas and reduced head count, we have also increased head count in targeted areas where we are looking to grow. So each of the businesses, in turn, have been making those decisions. They bring that forward to Derek and I at our regular reviews. So are we clear? Do we agree that, that's something we should be going after? If yes, then they get on to do it. If no, then we won't. So it comes back to being sort of very targeted around growth. We have a large sales and marketing team within the business. So generally, we have more than enough people to do that. We just need to make sure we're utilizing in the best places.

Andrew Heath: Any other questions? No? All right. Well, with that, let's close. Derek and I will be staying around for a bit longer. Afterwards, if you want to come and talk to us, we're very happy to do so. I think if you look at our results, yes, there are quite a number of moving parts within it, but I think we've tried to sort of lay out the entire story in both the press release and in the presentation today in terms of what are those moving parts and how they are impacting the business. But I think, overall, we are very pleased with the focus that we have got inside of Spectris and our operating companies in driving profitability and driving the improvement programs. We're also going after those growth initiatives that we talked about. Net-net, where am I? Well, I'm positive. I'm still optimistic. I mean we have reiterated our guidance. For the full year, it remains unchanged. Yes, the end markets are more challenging. The questions are clearly sort of focused a lot around that. We're not alone in that respect either. But as I said, a number of our end markets are going well. We've got product launches happening in the second half. We saw targeting growth where we can see it. But in -- at the same time, we're focusing on what we can control and absolutely learning to live to drive profitability in a lower-growth environment, and that's sort of the starts that we're taking. So net-net, I'm optimistic about the future. So thanks very much for your time today. As I said, happy to take any other questions after the end of this. Thank you very much.