Earnings Transcript for SXS.L - Q3 Fiscal Year 2018

Executives: Andrew Heath - Chief Executive Clive Watson - Group Finance Director

Analysts: Andrew Douglas - Jefferies Mark Davies Jones - Stifel Robert Davis - Morgan Stanley Glen Liddy - JP Morgan Jonathan Hurn - Deutsche Bank Tom Fraine - Shore Capital Richard Page - Numis Mark Troman - Bank of America of Merrill Lynch Harry Philips - Peel Hunt

Operator: Welcome to the Spectris Trading Update. Throughout the call, all participants will be in listen-only mode, and afterwards, there will be a question-and-answer session. Just to remind the call is being recorded. And I hand the floor to Andrew Heath, Chief Executive. Please begin your meeting.

Andrew Heath: Thank you very much, good morning, ladies and gentlemen, and welcome to the Spectris' trading update call. I'm Andrew Heath and I'm joined this morning by Clive Watson, our Group Finance Director. As you know, this is my first time representing Spectris and I'm delighted to be speaking with you this morning. So in terms of what we will cover, firstly, I would like to go over the trading performance and then reflects some my initial impressions since becoming Chief Executive at the end of September. In terms of our trading, the group delivered obviously a strong trading in the period from July to October with an 8% like-for-like sales growth. Reported sales grew 9% with acquisitions, net of disposals contributing 2%, and that was partly offset by a negative 1% impacts in foreign currency movements. On a regional basis, Asia led with organic growth of 16% on a like-for-like basis with strong demand in both China and Japan. North America also continued to see good growth of 6%. The story however was a little different in Europe, with growth moderating to 2% albeit we saw good growth in orders. Looking at things by segments, both Materials Analysis and Test and Measurement showed similar organic growth during the first half at 12% and 6%, respectively. In-line Instrumentation returned to growth, encouraging after the first half decline and we posted $0.08 like-for-like growth. Industrial Controls revenues were 2% growth, which was down the 4% in the first half. Again the orders remained robust. So, overall for the 10 months year-to-date like-for-like sales growth now stands at 6%. Well, there have been some challenges such as the weaker performance that comes at life sciences. Overall, the group's performance has been good and as such we expect the full year adjusted operating profit to be in line with our expectations. And on Concept Life Sciences just to be clear, we are taking a number of remedial actions to improve the operational effectiveness of that business. Turning now to project uplift. Phase 1 has made good progress and is on track to deliver the expected both budget -- I'm sorry, the expected benefit and cost as we previously highlighted at the half year. With regards to the second phase of uplift that's the shared services proposals, we have decided not to proceed with the shared services model. With the complexity posed by our current structure, the speed at which the return would have been delivered, we thought about it did not justify the size of the investment. So instead, we will be implementing a more comprehensive cost reduction program in 2019 that will deliver greater benefits and sooner. The uplift program is now in the process of being actively transferred to the operating companies and as such will become part of business as usual. Going forward, we will not be reporting separately on uplift in our future results. So turning now to my reflections since joining Spectris, I have been at all 14 of our operating companies and all the major regions in which we operate. I have to say that I thoroughly enjoyed meeting both the leadership teams and our people. I have been impressed with the commitment and passion of the teams across the business and also the openness and the welcome that I have received. It's clearly evidenced to me the Spectris benefits from high-quality technologies with well recognized brands in the targeted markets that we serve. We have some strong market positions and good customer relationships where our customers clearly value our products and services. Nonetheless, I already firmly believe the Spectris has a great deal of untapped potential. We have strong gross margin businesses, but our operating margin performance frankly remains low both historic highs and that of our peers. We are spending more than our like. However, there are plenty of self-help measures where we can take to improve the efficiency at which we translate our gross margins to operating profit, and we can almost improve on this. We are there for commencing a cost reduction program as I mentioned with a number of targeted initiatives within both the operating companies and other center to deliver greater operational gearing and drive margin expansion. As already said, this would start to take effect in 2019 with further opportunities over the near to medium term. Spectris also serves a diverse and wide ranging set of end markets. And whilst there is diversity of the some protection from weakness in any particular industry, it also brings with a complexity. The group would really benefit from being a more focused business, targeting higher gross markets where we have a competitive advantage. There is also need to be a sharper focus on asset optimization, the composition of the portfolio and capital allocation to really hone-in on those markets segments where we cannot further value to our customers and in the process value to our shareholders and will be more disciplined in this regard going forward. Consequently, I have already initiated the strategic review, and to be clearly explicit objective is to develop and execute our strategy for profitable growth, and this is the basis for delivering a significant and sustainable increase in shareholder value. There will be no sacred cows. So in summary, we are seeing strong trading in the period and our outlook for the year remains unchanged. There are lots of positive attributes and strength to the Spectris and there is clearly a firm foundation from which they build on. The opportunity exists for us to be a more efficient focus in the effective organization and able to deliver sustainable profitable growth. I have to say, I'm really excited to join the group at this time and I'm really looking forward to helping deliver along with the team on the clear potential that exists to drive enhanced shareholder value here. I look forward to be presenting more detail on both our strategic and cost initiatives at our full-year results in February next year. And with that, I'd like to open the call for any questions that you might have. Thank you.

Operator: [Operator Instructions] Our first question comes from the line of Andrew Douglas of Jefferies. Please go ahead. Your line is open.

Andrew Douglas: Just clear question for me please, if I may. China or Asia growth in the period was very strong, China in particular and also in Japan clearly. Can you just give us a feel for where that China growth comes from? Is it across the board? And is it kind of maybe little lumpy? But just kind of gives us feel for that that would be very helpful. And also Materials Analysis is growing nice double digits, again, I'm assuming that's the benefits of underlying market is going your favorable, but also the stuffs that you are doing from a sale flow perspective, which is a bit of an update there. And then, couple of questions for Clive, please. Just give us an update on where we are for tariffs for next year, if you can? And then just thoughts on cash flow as we go into the year end, we've heard of the companies talking about a little bit of working capital increase as get towards the year end the Brexit, [indiscernible] product shortage that would be really helpful?

Andrew Heath: I'll just take the first two and then pass over Clive. So, firstly your question about sort of China growth in particular, I mean we have seen a strong growth really across the board across all our operating companies that sell into China. I was out there three weeks ago, talking with all our operating company country managers. We have over about 1,500 people across Asia at the moment, so I was touring around the business. And there is clearly a lot of positivity still out there with all our operating companies selling strongly. I wouldn’t really want to pull out sort of any of the markets in particular really is across the board. Until the Materials Analysis, again, we are seeing good growth there particularly driven into the pharma and life sciences. Semiconductors, electronics has been strong for us and still remain strong. And beyond that what they do across sort of broader analysis in the other end market segments, generally we're seeing those being supported as well.

Andrew Douglas: And the benefits with Malvern Panalytical being kind of putting together coming through as well?

Andrew Heath: Yes, I was going to, yes, come onto that.

Andrew Douglas: Sorry, apologies for that.

Andrew Heath: No, it's okay. So, clearly within sort of the integration of Malvern Panalytical is really starting to bear fruit. It's allowed us to integrate the saleforce and the marketing activities sort of realign the business to sort of focus more strongly on end market segments rather than just on applications. And that, we have seen the benefit of that as well as starting to see the benefits of scale coming through and being more efficient as a consequence of the increase in the scale there. Clive, if you want to address tariffs and cash flow.

Clive Watson: Yes, so on the tariff side of things, the trade flows between U.S. and China about 55 million, 47 going from the U.S. into China and 8 million the other way. The 2018 impact is probably going to be quite negligible. We estimate about a £1 million and that’s the direct and indirect. So it's our estimate of both the tariffs and sales, and a loss of business associated with the imposition of the tariffs and the [indiscernible]. For 2019, we are estimating a fairly broad range of about 4 million to 8 million again direct and indirect for most trade flows, and so it's the somewhere around £6 million as we think it would be a reasonable estimate. And that’s after the mitigations that we can see currently. We're hoping that's conservative. We haven’t completed all of our planning there, but as we see it right now, it's about 4 million to 8 million and we hope to bring it down from there.

Andrew Douglas: Okay, thank you.

Clive Watson: On the cash flow side of things, yes, I think there will be for us a cash outflow in relation to working capital, but no more than is normal you're aware [indiscernible] building the first half and that swapped the receivables in the second half after this using an increase in working capital when top line is growing.

Operator: Our next question comes from Mark Davies Jones of Stifel. Please go ahead. Your line is open.

Mark Davies Jones: Two things for me. Firstly, a trading one and then more strategic one. The trading one in the first half margins at Test and Measurement were a lot weaker and were promised a big recovery there in the second half and that was about phasing reinvestments. Can you update us on that? And then possibly related, on the strategic review that you're pushing through, is this informed by the same sort of vision of moving from hardware focus to more solutions focus? And how you are thinking about the capital implications of that because obviously you are moving to Millbrook is being great from the revenue growth point of view that is consumed a great deal of capital?

Clive Watson: I'll address the first part there. In relation to test submission, yes, we are suddenly narrowing the gap. I'm not sure we'll get all of the way to the second half margins that we experience last year is significant improvement clearly over the first half, and the gap to the margins generated in the second half of last year is to say narrowing. So, overall at the half year, we are about 360 basis points drift. You can expect that will probably enhance something like that.

Andrew Heath: Thanks Clive. Mark, so your question on strategic review and targets to sort of the directions strategy overall, I mean it looks to be clear, our current strategy around developing software and services to enhance our hardware offerings is wholly appropriate for business like us. I think it's fair to say, we haven't yet harvest the benefit from some of the recent acquisitions. But if you look at our end markets, they continue to develop the pace creating broader opportunities for us to expand our scope into greater levels of software analytics and services. There are customers that are looking for greater insights on services and in many instances, and given the diversity of the portfolio, we have that gives us a broad range of choices frankly where we can look to us expanding what we do today. The strategic review is all about placing the sharper focus on how we are going to optimize these of our assets, how the portfolio is going to be composed, where we are going to be prioritize and allocate capital and that will help us to inform of choices that we have across the business. So, I think generally speaking, as I've said, directionally, the whole move into software and services is correct, where and how we chose to play those choices across the business will be determined as we go through the strategic review.

Mark Davies Jones: Can you just give us a couple of more details? It feels discontinued on the shared services measures and getting for more traditional cost cutting approach I guess. A bit of color, is that largely about headcount? Or is that the more process and that as well?

Andrew Heath: I think as I said it earlier, there's plenty of self-help opportunities for us, and we've spent a lot of money between our gross margin and operating profit. So, we will be looking at certainly what we’re doing in terms of building on the all the work that's being done on uplift one. We will take the learnings out of uplift two or the work was done on looking at shared services. There were putting some labor arbitrage opportunities to sort of lift and shift what we are doing in terms of some of our back-office activities and moves them to lower labor cost areas. We are going to be looking at sight rationalization, product rationalization as well and to really look at sort of the profitability of the portfolio of the products that we have. And you look at our sort of SG&A costs, they are very high. And within that, there is more we can do in terms of driving efficiency in a lot of our activity. So, there will be a blend here sort of structural change, process change as well as some straightforward headcount reduction.

Operator: [Operator Instructions] Our next question comes from the line of Robert Davis of Morgan Stanley. Please go ahead. Your line is open.

Robert Davis: Just a couple of questions. First one, if you could just flash out a little bit around some of the end market trend. There is quite interesting, you called out the strength in automotive and semis. Just wondering, if you could give us some regional color on there anything sort of changed in the last month or two in terms of directional or growth rates in those particular segments that obviously you are getting quite a lot of airtime across capital goods investors at the moment. So just wondering, if you kind of flash out what's going on there? The other one was just around, maybe you could give us a little bit more color on Concept Life Sciences and then just more I guess the 10,000 here on the portfolio? What is it about the portfolio that you look at, and you see? Is it that you'll have kind of below critical mass in certain segments in verticals or regions that you need to change? What is the most obvious Red Lion that you see from an initial look at the portfolio?

Andrew Heath: So, let's just talk about some of the end market trends. I have talked about even asked about pharmaceuticals and life sciences. I mean we still see very strong growth there. Automotive, by and large, we are facing off to the research and development side of automotive. And as a consequence of that, there are more new platforms around today than they have been for sometimes in terms of what's in development areas that we serve not just looking at conventional internal combustion engines, development but also electric vehicles, hybrid vehicles. There is a lot of work going in terms of looking at batteries and battery testing. The whole move to ADAS autonomous vehicles and assisted driving. Again it's giving us opportunity in that space. So, it's certainly on the R&D side, we are seeing continued strength and interest on further activity. Where is more production related? There is more uncertainty, but we have relatively little exposure there having in part sort of industrial control the growth in the U.S. being down at 2% in part that is of course sort of our Red Lion business has some exposure to automotive production particularly in the U.S. and depending on the mix of the customers you have got at the moment. Some are still investing in that, some are delaying and some are thinking about moving plants from Mexico back to the U.S. So that’s quite a little bit of a hiatus. But I mean in the overall scheme of things, that’s not to the future for us. And then on semiconductors, as I said, I was out in China across Asia three weeks ago, some of you from my team that, that remains strong with we are certainly seeing strong growth in the last four months. Orders maybe coming off a little bit with generally speaking, we still see that a strong. Do I see that carrying onto the luckiest [indiscernible]? No, frankly it can't, but I can't predict this to when that’s going to slowdown frankly. We are seeing the strong year there and there is still lots of activity going on. So, I think that covers your end market questions. In terms of Concept Life Science, what was -- can you just remind me of your question again?

Robert Davis: Yes, just wanted to get a little more detail on what was going wrong there, and just 10,000 book deal on the portfolio. What was that you wanted to change?

Andrew Heath: Yes, so our Concept Life Science, I think it's absolutely fair to tell you, we are being disappointed with the performance in the acquisitions at the beginning of the year. I get we were a little preemptive maybe on acquiring Concept Life Science. As a business, it was -- it's required a number of activities and businesses across the UK and the proceedings sort of 3 or 4 years that it was sort of -- its help so with the integrating and it's just sort of restructure itself into the sort of two divisions brands integrated drug developments and obviously services division. And I think frankly, there has been a bit of sort of burping pain of that integration model as we acquired it. But our primary focus is now is about getting it, getting it operating effectively. The end markets there are still very strong. Customers continue to look at outsourcing analysis services of former truck development. They want to be more have more flexibility once you restate cost base. So that market is growing well, so we certainly see the opportunity there, our priority is about fixing the effectiveness with the operations there and it is fixable. But then in terms of the portfolio look I mean, it's still early days to me since I sort of went -- well came me to post with the end of September is the sort period of time as I am sure, you can understand I'm stimulating most of the information. But as we look at the portfolio as I've said, it's really about sort of market attractiveness, our competitiveness where we can play and very much about how we are into drive profitable growth and deliver shareholder value from the portfolio. I would say, as you look at Spectris, we have made many more acquisitions in the last year than we have made divestments and different businesses, and the portfolios have different opportunities going forward frankly. So, we are going to work through that system dramatically and it's too early to sort of give you any indication of what the outcome of that might be, something as being ruled in our out of the moment, and particularly the coming outside sacred cows as I said. So, I think the time is right and appropriate for us to talk about that would be comeback in February, around our annual results.

Operator: Thank you. Our next question comes from the line of Glen Liddy at JP Morgan. Please go ahead. Your line is open.

Glen Liddy: [Indiscernible] and Millbrook, they have a big CapEx program running. Can you give us an update how that's progressing? And how much is the incremental capacity is already allocated to customers?

Clive Watson: It's Clive. The CapEx program is progressing very nicely and we've invested as you know about 40 million last, -- 35 million to 40 million last year and it's going to be a similar amount this year. All in growth CapEx and the capacity has actually -- the ramp-up of capacity has exceeded the business case and nearly all of these are investments. The one major one which and the reservoir was hesitating is in relation to Finland where we expanded our winds power testing facility and that's going to take a little longer to ramp up, but everything else is going according to plan.

Glen Liddy: And is much of the capacity basically pre-allocated as it was with the first wave of investment?

Clive Watson: Yes, it is it pre-allocated to the existing customers and in some cases new customers.

Glen Liddy: And the slowdown that you've seen in Europe, are there any areas that standout as particularly weak or particularly good?

Clive Watson: The slowdown is really on the sales side of things. Orders are still moving quite much ahead, so nothing really to be concerned about for this full month period.

Operator: Our next question comes from line of Jonathan Hurn of Deutsche Bank. Please go ahead. Your line is open.

Jonathan Hurn: Just a couple of questions for me, just on the strategic side please. First, I just wonder, if you could talk a little bit about obviously your focus on improving margins. I know it's very early days at this stage. But I mean, what are your kind of aspirations in terms of where you believe that the margin go? I think on the Phase 1 and 2 of uplift, I think the thoughts where you maybe out to get to around about sort of 20% margins on an operation level. Is that still your thought? Do you think that the ultimately the margin for Spectris can go above that 20% level on the back of your initiatives? That was the first question.

Andrew Heath: I think as I said historically, this business has achieved high teens margins. I think we are at 18.5% earlier in the decade. In my view this is absolutely achievable. And to be clear, my aspiration our aspirations do better than that. So in terms of maybe what was said at the in terms of getting to the 20% plus operating margins from the initial launch of uplift I know that has to remain our longer term objective.

Jonathan Hurn: And the second question is just in terms of time scale. I mean obviously you are introducing new plans. I think you had a couple of comments that you're about to get quite a quick payback on some of these plans. I mean how long do you think the execution phase is going to be for Spectris in terms of the turnaround phase?

Andrew Heath: So in terms of cost reduction that we were announcing this morning, the planning for that is already well advanced. We are in the process of starting to implement. And a lot of this will be announced internally between now and the end of the year, so that we will be moving on this quickly into the new year. We won't get a full year effect next year of course because it will take time to come through, but we will start to see the benefits of that flowing through into next year and then more fully into 2020. But as I have indicated, we are not just looking -- this as sort of a one-off but as a rolling program over the next two to three years in terms of how we can just drive our efficiency and focus on being more efficient to the set in relating our gross margin into operating profit.

Jonathan Hurn: And then maybe just one quick follow maybe just for Clive. Just in terms of that 8% that you saw in the period. Was most of that volume or you're starting to get little bit of price in there as well?

Clive Watson: Most of it is remains to be volume. There is a little bit of pricing in that, but no more than normal.

Operator: And our next question comes from the line of Tom Fraine of Shore Capital. Please go ahead. Your line is open.

Tom Fraine: I was wondering, if you could detail some of the expected benefits from Phase 1 of the project uplift? And I know that you've set back it's on course related to those benefits and but if you could please get details on that, that will be appreciated? Thank you.

Clive Watson: In terms of quantification of these benefits, what we said is, we are targeting 25 million of benefit for a spend of 35 million, as we exit 2019. So the project will effectively be completed in its current form in 2019. And as Andrew mentioned in this introductory comments, we're actually transitioning now into businesses as usual, a lot of the consultants we have working with this at transferred their knowledge to us and invested it in ours. And therefore, we can actually pick up and run with it. So, the phasing of those benefits as we exit this year, we said it's going to be benefits about 14 million this year, the cost to be 11 million. And then, there was some shared service center cost, which was about 3 million this year. And 25 million in benefits next year at a cost of around 7 million, and those benefits will continue into 2020 and beyond.

Operator: Thank you. Our next question comes from the line of Richard Page with Numis. Please go ahead. Your line is open.

Richard Page: Just two questions, if I may please. And back in the half year numbers, I think where you've given 8 million to 9 million of guidance from the contribution going by acquisitions in '17 and '18 of which Concept Life Sciences was a big part. Just wondering, how far short that fallen from that guidance and obviously where and offset has come from it and the profit that will bring into business? And then secondly coming back to automotive, I'm just wondering, what impact you've seen from them the increased initiatives regulations and obviously you have a lots of issues with automation coming in and start flow through and tested in times. So whether you've seen to benefit from that as well, please [indiscernible]?

Andrew Heath: On the first part of your question, so we've guided at the half years, you said 70 million to 80 million of sales and 8 million to 9 million of operating profit. We're still expecting a similar sales level probably close to the 70 and the 80. And the operating profit will be at about 2 million as opposed to the 8 to 9 previously guided. The differentiator, the makeup, if you like for how we can still hold up for the forecast is better growth across the piece right now and margin dropped through selectively in our organic business.

Richard Page: Is there any particular business that the profit level was down?

Andrew Heath: Materials analysis which has got the very nice growth is trading very strongly at all levels including profitability. And as you saw that was more than capable of offsetting the reduction -- the accepted reduction in CLS as we announced. So, that's really where we are and the offset is. And then what was the second part of your question?

Richard Page: The emission testing.

Andrew Heath: Yes, the emission testing, that's a small part of our overall business. You are probably referring to those real world testing conditions, and we have expanded format. It's about 3% to 5% of our revenue and how should we mention, we are absolutely full capacity there and more as a backup.

Richard Page: Is there any drop off from that of expected? I mean it seemed that there should some…

Andrew Heath: No, we're not seeing any at this point, Richard. Clearly, there won't be at some point, but I think the regulatory environment is such that there will be replacement something that and will adjust accordingly.

Operator: Thank you. Our next question comes from the line of Mark Troman of Bank of America of Merrill Lynch. Please go ahead. Your line is open.

Mark Troman: Couple of quick ones, maybe one for Clive just a very basic questions have going to crazy. Is the, when you put like-for-like here this is 8% for the period, that was organic growth, isn’t? So that's excluding impact of M&A and FX. Is that correct?

Andrew Heath: Absolutely, so the reported number was 9% and the moving parts, FX was a small headwind of 1%, disposals because we sold Microscan and we created the joint venture with Macquarie for EMS is another negative 4% and acquisitions added 6%. So, that’s how the 9%.

Mark Troman: Okay, perfect. Just in your statement, [indiscernible] at the bottom, you said like-for-like at [indiscernible] and including the impact for acquisitions. So, I think that’s what put me off within accounts. Maybe it's time in the morning just to test this. Onto more serious things, Andrew, only Spectris have terrific gross margins and very heavy overhead prices as you alluded to earlier. What's your philosophy for dealing with this? Is this about the divisional units getting more responsibility for that overhead and you holding them to accounts? Or do you need to manage this essentially within the board?

Andrew Heath: Look, I think you've sort of all known Spectris for a while. I mean we are a business of 14 operating companies that today are pretty much full function in what they do. I think in parts while some of the challenges that we had around uplift being as a consequence of the complexity and the structure that we have. And my initial view coming in is that we have to embrace the power of business model that we have fundamentally around the [indiscernible] impairments and entrepreneur as it relates in the operating companies. And as such going forward, we will be having a thinner center. And therefore, it is part of our cost reductions. We will be looking at reducing our central costs and really driving the operational performance of the individual companies, and making sure there's a clear framework for impairment and discipline around delivery of plans and financials.

Mark Troman: Is that why an effect uplift to is being scrapped in the shared service sort of concept and thinking perhaps sort of pushing the obligation, if you like to visit to the operating units?

Andrew Heath: Certainly, that was a significant contributory factor, not the only one, but it was a contributory factor. Because as I said, we are going to take a learning there to the work we did on shared services and certainly around where we think at labor arbitrage. So today, we have hosted service in Asia, some of the operating companies got back-office models in low cost countries like we have teams in Mexico for instance. And so, these opportunities to actually to lift and shift activity that of individual operating companies and leverage off some of those low cost centers we already frankly. It's not a big process improvement drive, but it certainly a labor arbitrage opportunity for us.

Mark Troman: And just one more for me quick one. In terms the full year results I guess in February, what should we expect more details obviously on what you are doing operationally? And also some decisions around the portfolio or not necessarily.

Andrew Heath: It clearly depends -- certainly, we will be giving you more details on both in terms of the cost reduction program albeit anticipate that would be able to clearly outline the benefits and the cost that will certainly relates to 2019 and beyond. And in terms of the sort of portfolio composition not really depends on what where we get to within the strategic review and the decisions and choices that we are looking to make at that point. So I think as certainly committed to so it will be coming back at February end giving you a detail briefing on the work that they through that review process.

Operator: Thank you. And the final question comes from Harry Philips of Peel Hunt. Please go ahead. Your line is open.

Harry Philips: Just a quick question on Industrial Controls plus two in the four months to seem a fraction week than some of your peers, I was just wondering, what was happening there now you're seeing more sort of broad brush short cycle weakness at the current time?

Andrew Heath: So, I've touched a little bit Harry on Industrial Controls and as I've talked about Automotive and Red Lion, so Red Lion has a quite a big exposure to sort of a number of large automotive customers in North America, and it happens as two of those customers that have decided for different reasons to delay or differ a capital expenditure. So that is sort of impacted Red Lion's results. And then Omega, there's a bigger part of that, I think I would sort of classify 2018 as a bit of consolidation year for Omega. Clearly, we changed management there 2 to 3 years ago that's being driving a big improvement program which is absolutely bearing fruits and you will see that comes through in the sort of full-year numbers. But as part of the sort of improvement program, there is also a need for some product refresh. So some of our product is getting a little bit old and tired, and we are in the process of refreshing that, but that we didn’t really started to buy until next year and we've also been investing quite a significantly in a new e-commerce platform for Omega. And that will go sort of live at the end of this year. So, this is just a number of contributory factors there, which sort of means that's, if you look at our industrial controls business, which is pretty exposed. In North America, you would expect us to grow stronger than it would then the result show, but I think it's really those factors that I just described that explain there.

Operator: [Operator Instructions] We have one further question on the line that's from [indiscernible] of Bloomberg Intelligence. Please go ahead. Your line is open.

Unidentified Analyst: Really quickly, you touched upon SG&A and the possibility looking at headcount reduction so on. In the past, we've talked about targeting overhead due to 3% of sales. Is that any just kind of sheds some light on that or provide some color on that please?

Andrew Heath: Yes, I think to the past couple of years, we've growing overheads at 5% to 6%. So it's in 2017 and 2018 and we've said that was really in relation to our strategic growth initiatives with what we are doing on linear operating excellence, some of the talent management activities and so on. And the chat was we're going to be switch off in 2019 and that's been still the case, very much the case, and we therefore expect overhead growth to be significantly below the 5% to 6% when we experience over the past couple of years. So, that's just on an ongoing basis. With respect to what we're doing, it's too early to give any guidance on the implications for overhead growth next year, but you can start with that kind of 3% growth and hopefully will 5% there.

Operator: And as that was the final question, I'll hand back to our speakers for the closing comments.

Andrew Heath: Alright, thank you very much and thank you everyone again for joining and I have to wrap up. I would like to say, I'm delighted to be here. As I said earlier there, is absolutely lot of positive attributes and strengths in the Spectris and a very firm foundation from which to build on. The opportunity absolutely exists for us to be more efficient, focus effective and to be able to deliver sustainable profitable growth. Hopefully, it's been clear from this call, so there is in my opinion a significant price we have here, but also that you got a sense of the direction of travel and also the intent and pace at which we are moving. And I look forward to coming back and speaking with you all again around our results presentation in February. So thank you very much.

Operator: This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.