Logo
Log in Sign up


← Back to Stock Analysis

Earnings Transcript for SXS.L - Q4 Fiscal Year 2018

Andrew Heath: All right. Good morning. Sorry. I understand the lifts were causing some challenges to get everybody upstairs. Welcome to this Spectris 2018 Full Year Results Presentation. I'm Andrew Heath, the Chief Executive. And I'm joined today by Clive Watson, our Group Finance Director. I'm absolutely delighted to be standing here and having the opportunity to talk to you today. Spectris is a very exciting portfolio of high-quality businesses with a great deal of potential. And we've been very busy since I joined in September, so we've got quite a lot to get through in the 90 minutes or so that we have this morning. In terms of format of the presentation, I'll quickly cover the highlights of last year before passing over to Clive, who'll take you through the numbers. I'll then come back and talk about our strategy for profitable growth before summarizing and throwing the forum open to questions. So in terms of 2018, we delivered good organic sales growth, building on the progress that we made in 2017. Sales increased by 5% to just over £1.6 billion on a like-for-like basis, helped by a supportive macroeconomic environment in a number of the geographies we serve and also strong demand in many of our key end markets. Adjusted operating profit of £248.3 million was up 7%, again, on a consistent basis. Likewise, adjusted earnings per share were up 7%, and we increased the dividend by 8%. Despite good sales growth, however, adjusted operating margins were only up 30 basis points. And so to address this, we announced, as you know, back in November of last year that we have now embarked on a strategy for profitable growth. And this is made up of a profit improvement program focused on delivering benefits in the near term while, at the same time, we're conducting a comprehensive strategic review of the whole business. And as far as the profit improvement program is concerned, I'm pleased to say that we have so far identified annualized benefits of more than £30 million, with £15 million to £20 million of that flowing to the bottom line in 2019. And as I've gotten to know Spectris better, my initial views that I shared in November have only been further confirmed as I've traveled around the business, and that is that we will benefit from being a more focused business. The strategic review has been assessing which of our operating companies will be the platforms off which we'll drive greater shareholder value, and particularly those businesses which are scalable, serve attractive high-growth markets which have the strongest capabilities and also have the strongest performance potential. And so far, we've identified three platform businesses
Clive Watson: Thank you, Andrew. Good morning, everybody. Lovely day. I'm going to take you through the numbers. This is going to be a bit longer than usual. We're departing from the normal structure whereby the CEO will cover all the segments. I'm just going to focus a lot on strategy, so I guess that's what most of you come to listen to, but the numbers are pretty good, too. So I'll kick off with the numbers. Reported and like-for-like sales growth are the same, 5% up, with the net contribution from acquisitions and disposals being canceled out by FX. You'll see all the detail a little bit later on. And the like-for-like numbers here are prepared on a constant-currency comparable-period basis, so we strip out disposals for the corresponding period last year and, as usual, don't build in the acquisitions until 12 consecutive months of ownership. We've also changed alternative performance measures. What we're doing now is trying to show you the underlying trading performance, so we're showing you the results before uplift costs and major project costs, including the profit improvement program. Hence, you're getting greater clarity in terms of direction and how we're improving trading year in, year out, and that will provide a much more meaningful basis for you to make your comparisons. So on that basis, adjusted operating profit for 2018 is 248.3 million. However, consensus was built on a post-uplift basis. So for this transitional year only, we're also showing you the adjusted operating profit after uplift costs, which is 237.5 million. That's the figure which is directly comparable to the consensus figure which you prepared on the sell side and which is also on our website as consensus at 233.5 million. So hopefully, I haven't confused you too much on that. But from this point onwards and throughout the rest of this presentation, all references to adjusted measures will be based on that 248.3 million. And you'll see a detailed reconciliation in the prelims, in the footnotes and at the back of the account. So with that out of the way, I'll go -- just go back to the beginning. As I said, like-for-like sales and reported sales up 5%. Adjusted operating profit is up 4% on a reported basis and 7% up on a like-for-like basis. Now return on sales of 15.5%, down 20 basis points on a reported basis and up 30 basis points on a like-for-like, with both gross margin and overheads contributing to that small operating margin expansion. The difference between the adjusted operating profit of 248.3 million and profit before tax of 241.4 million is interest. So it's up from last year at 6.9 million this year compared to 5.1 million. That's purely down to the higher average volume of debt; attributable to the share buyback, 100 million; and 200 million -- 207 million spent on acquisitions. Tax rate came down on the back of the U.S. tax reduction this year from 21.5% to -- or 21.3% to 19.7%. We expect it to go up again in 2019. That's because we got quite a tax-efficient finance structure which we're going to have to unwind this year, and the tax rate will therefore go up a little bit, somewhere in the 21% to 22%. So for modeling purposes, if you use 21.5% that should be pretty good. Earnings per share up 7%, and on the back of that, we grew our dividend 8%, which is the 29th consecutive year of dividend growth at a compound annual growth rate, since we floated back in '88, of over 10% and is in line with our stated policy of a progressive dividend based on affordability and sustainability. And the cover of 2.7x is consistent with our long-term average, which has been about 2.5x. Operating cash flow is lower at 59% than the 70s that I indicated at the interims, and that should be expected for the year. And that's principally down to a higher working capital outflow. So we have the usual seasonal outflow for higher receivables but we also had higher inventory. And the higher inventory is down to a couple of things. It's advanced purchases and was also a result of IFRS 15, the revenue recognition, which means that it takes a little bit longer to recognize sales. And that is expected to reverse during 2019, principally in the first half. We'll come back to that a little bit later. So let's see the headlines for the group. In terms of the individual walks on the sales front, you can see the 5% growth from £1,526 million to £1,604 million, up £179 million. And to arrive at a comparable basis, we've reduced our 2017 reported sales by £49 million, reflecting the nine-month sales from Microscan, which was sold October 1 -- 2, 2017; and seven months of sales from EMS, which were sold into the joint venture with Macquarie on 31 May 2018. We had six acquisitions contributing to that £72 million
Andrew Heath: Thank you, Clive, and thank you for the billing. Before I take you through our strategy for profitable growth, I think it may be best if I start by giving you some reflections since I've joined Spectris last September. So it's clear to me that we absolutely serve a diverse set of end markets, but we have absolutely a high number of high-quality businesses which have highly -- strongly recognized brands in the target markets that they serve. We have leading technologies, strong market positions and strong customer relationships as well as some very talented people. Now the group has high-growth margins, good cash flow generation and a robust balance sheet, and we will continue to reinforce and build on those trends as we go forward. It's absolutely pleasing to me that we continue to deliver good organic growth through 2018. So I said earlier building on the momentum that we saw in 2017. However, to be clear, operational gearing has disappointed. And in my view, there are a number of areas for improvement. So in the near term, we are very much focused on margin improvement. The cost-reduction program we announced back in November has been broadened into a comprehensive profit improvement program across all our operating companies because, frankly, we are targeting short-term growth initiatives as well as enhanced operational efficiency to drive that margin expansion as we grow. We're also strengthening our deployments of Lean consistently across the business, again, to have a relentless focus on improving productivity. And as I said when we launched the strategic review back in November, it's clear that the group will benefit from being a more focused and simplified business. And as such, we were going to be focused on attractive end markets where we're best placed to drive growth and profitability, focusing on asset optimization, supported by active portfolio management but also, to be clear, synergistic acquisitions and be more focused on a more rigorous approach to capital allocation. And I'll update you on progress against all those things today. But we will also come back in June at the Capital Markets Day and give you a further update then as well. So moving on to the profit improvement program itself. As we have said already, one of things that is very attractive about Spectris is that we have high -- strong gross margin businesses, mainly in the high 50% range, which compares extremely well against our peers. But our operating margin performance, as I said, has disappointed over the past few years. It remains both below our historic highs of 18% and also below that of our peers, who typically are enjoying margins north of 20%. And clearly, as I said back in November, we've been spending far more than I'd like to see. So Project Uplift addressed some of these costs by harmonizing procurement spend, for example. However, that's not enough going forward. So as a consequence of that, we have tasked the operating companies to identify or, frankly, to classify a number of self-help measures to deliver margin expansion. That is now absolutely firmly owned by the operating company presidents, and they have already started the process of delivering against their plans. In addition, we are also reducing the size of the center, very much going back to sort of the previous Spectris model of having sort of highly deployed, accountable operating companies. And going forward, as I already said, we'll also be strengthening our continuous improvement culture to drive our year-over-year improvement. And our aim, to be absolutely clear, in the near term is to reach operating margins in line with our historic highs, but that should not be seen as a ceiling. So we continue to invest to grow the business, as I said, but we are also, at the same time, going to make sure we control overheads and headcount far more closely, and any headcount growth will be highly dependent upon our sales growth and our margin performance. And therefore, the profit improvement program covers initiatives to improve both our gross margin as well as reducing costs and constraining overheads as we grow. As you can see on the chart, the initiatives fall broadly into four categories
Q - Michael Blogg: This is Michael Blogg from Investec. The savings that you projected, the amount you expect to see drop through in the current year, it sounds to me as if the majority of that has come from bottom-up assessments by the operating companies. Is that right?
Andrew Heath: I think, yes, fundamentally, that is correct. So uplift took quite a centralist approach, looking at sort of where we could do cost-cutting, improve initiatives across the group. What -- as I've traveled around the group and looked at the individual operating companies and the plans they submitted for this year's budget, back in the sort of September, October time frame, we really sort of assessed what self-help they could deliver themselves. Clive and I sent them a number of targets, which they have duly gone away and assessed and come back with a range of initiatives owned by them to then deliver that margin expansion as well as targeted growth this year.
Michael Blogg: Is there any change in the way the business presidents are remunerated to help drive that process?
Andrew Heath: So for this year, we have changed their annual remuneration, such that there is a much stronger focus on margin expansion. So a good part of their short-term incentives is around margin expansion.
Michael Blogg: Okay. And out of the payback you're expecting, does that include the payback from the merger of S&V and HBM?
Andrew Heath: So yes. So the HBK integration is now included in that. For the financial niceties, integration costs weren't taken below the line in last year's results, in the numbers that Clive gave you. But going forward, all of those integration costs are now incorporated, as are the benefits into how we're reporting.
Michael Blogg: Two other questions, if I may. I'll keep them short. The first one, CLS obviously underperformed last year. Is there any part of that business which doesn't fit the model? In other words, is there any routine testing that really doesn't fit the sort of pharma R&D model?
Andrew Heath: So CLS covers -- I mean, covers -- does a lot in pharma, life sciences, but we also do some environmental. But typically, we're using -- they use quite a lot of the equipments that Malvern Panalytical produces in all of those areas in terms of characterization of what's in the samples. And as we go forward, clearly, from what I said in terms of the platform for Malvern Panalytical, we have the opportunity to expand into other products, other sensors, other instruments, both organically and through M&A, which would further expand that capability. But I think, just to be clear on Concept Life Sciences, I mean, the first three priorities for that business is to fix it, fix it and fix it. I mean, last year was very disappointing. We had made a number of changes, and as Clive had said, we've refocused the business and continue to do so. The pipeline of sales opportunity has improved significantly over the past few months. They built up some good momentum, and the sales are starting to improve. And we have also put quite a bit of attention in terms of the operational improvements in the business to make sure those areas that were failing, that we put Lean resource into, drive their on-time delivery and their service levels to customers, which is also bearing fruit. But in the near term, really, the focus around Concept Life Sciences is to make sure we fix the business operationally, but we're putting it into the platform with Malvern Panalytical because it's overlapping in terms of its end markets, but also to get the support from that wider group in terms of helping it back on its feet.
Michael Blogg: Okay. And then finally, did I understand significant labor cost inflation in S&V, and what was behind that?
Clive Watson: HBM, mainly. It was the German settlement agreement for the unions resulted in higher than we expected, close to 4%.
Mark Jones: It's Mark Davies Jones of Stifel. Can I ask a question about the selection of the platforms and some of the issues around that? When you say you're still reviewing other businesses, is the point then that there could be another business which is a platform, or is that more a question of things that could potentially be platforms if you invested? So is it the discovery process or the investment that...
Andrew Heath: Well, so we are still going through the evaluation process for those remaining businesses. I think if you look -- if you were to look at any of them, their starting point in terms of scale is significantly less than certainly Malvern Panalytical and HBK, so that what we're really evaluating is, are there some other combinations within the group that would make sense, and equally, are there steps that we could take in the near term that would bulk them up significantly as well. So that's really what we're going through. But the three platforms we have identified we're excited about, and certainly, we'll be putting a lot of the focus on those in the coming months.
Mark Jones: That was what -- the other part of my question is about Omega. I mean, the first two are fairly obvious, I think, in terms of selection. Omega is a relatively new arrival in the group. It relatively recently had a fair number of operational problems and a rather disappointing performance. So in selecting that, it's a very different sort of business. It is more of a distribution model, less obviously got unique technology or value-add. So can you give us a bit more color about why it made it?
Andrew Heath: Yes. Okay. So I guess sort of my starting hypothesis would have been Omega wouldn't have made it. But the more we looked at it, the more exciting actually Omega is as an opportunity for us. I think where it is similar to the rest of the group is that it has a very high domain knowledge and very high application engineering in the instrument space, and that is really at sort of USP. But also, what makes it exciting is there aren't many people who are doing what Omega's doing in terms of the way it provides the offering. So Omega, historically, was a catalog business, a very strong presence in the U.S., still has a very strong presence in the U.S., and a lot of process engineers grew up with the Omega catalogs on their desks. So it has a very well-recognized brand, but also, from that position, as it's gone online, Omega has -- went into that market space earlier than a lot of the other people who were trying to do catalogs. So it has a very strong online offering now, and we're seeing an increasing trend of process engineers starting their buying experience online. Certainly, from -- in Omega, I think the statistics are over 90% of engineers start their journey online. At the moment, only 30% finish it online, they then pick up the phone for the other 60% and talk to our application engineers who then give them over-the-phone guidance. So we are building, with our new ecommerce platform, capability to configure products and provide a lot more of that configurability and intelligence around that into the platform itself to make it even stickier or more user-friendly to drive more sales for that. The telephonic capabilities we have is also very valuable as well. And so Omega's starting in a very strong position. And the amount of investment you have to put in to get your e-commerce platforms to be that effective is quite sizable, which also gives it quite a significant advantage. So really, in the round, actually, Omega, to me, is a very exciting proposition, one where we can deliver -- we should be able to deliver significant value from it, should be able to grow it strongly, both in its existing market in North America, which is still very fragmented, and then replicate that model internationally. So there's huge value improvement potential out of that as a platform.
Andrew Douglas: It's Andrew Douglas from Jefferies. Just a couple, please. With respect to Brexit and tariffs, you previously guided a couple million from Brexit, I think 6 million from tariffs, if you take the midpoint. I'm assuming that's still the same guidance as you've previously given. Is that fair?
Clive Watson: Yes, so the guidance for trade tariffs was 4 million to 8 million. We just pitched it right bang in the middle. Now that hasn't changed. Brexit has moved up a little bit as we've evaluated. So there's -- that has gone up to 2 million to 3 million. But that's all included in what we think of in terms of inflationary cost for next year.
Andrew Douglas: And then, just secondly, on kind of growth CapEx or growth OpEx, depending on -- I guess it's two questions. We're going to have 90 million of CapEx this year, probably have 95 million next year. Without wish to give too much away from what you'll say in June, what do you think is the appropriate CapEx number for Spectris going forward? I mean, do we come back to the kind of 50 million, 60 million? Or is it going to be 90 million going forward, but maybe with a higher hurdle rate or with a different focus? And I guess, the same really goes to the curve ball, the OpEx question. You were going to have, what, 2% or 3% cost inflation with some growth on top of that. I'm just trying to figure out when we get through a clean year, if I can.
Andrew Heath : Right. Okay. So I could have -- Andy, let's take your sort of CapEx question first. I mean, clearly, Millbrook is part of us and is absorbing the lion's share or a good part of that growth CapEx. The business has grown very strongly under our ownership. I mean, it doubled in size through investing inorganically, but also through the acquisition of Revolutionary Engineering and Leyland. So the business is facing off to some quite strong growth markets and some good opportunities, but it does have quite a different profile from the one I've described. So we are asking further questions. Obviously, I'm asking further questions about Millbrook and its continuing role in the group. We haven't landed on a decision for that yet, and that will then determine really whether our -- where our CapEx falls out. But if you were to take it absent Millbrook, then clearly, you'd get back to where we would be with a brand having asset-light businesses and really, just more of a maintenance CapEx sort of overall level. But then, in terms of sort of your question around sort of operating expense, clearly, in November, I was determined that we would absolutely focus on margin expansion. I mean, yes, we are doing so. But as we looked further at the plans for this year, whilst we see some of our end markets moderating, there are still plenty of opportunities for growth out there. In China, we can see maybe some clouds on the horizon, but it's certainly not raining or even spitting for us. So we're sort of somewhat bucking the trend a bit. So we're not taking our sort of foot -- we don't take our foot off the gas in terms of trying to drive those growth opportunities. So hence, we have incorporated a cost reduction program with those targeted growth initiatives because I think it's more appropriate to describe actually what we're doing around sort of an overall profit improvement program. So it's targeted growth, but making sure we get the margin expansion as we grow. In terms of the sort of actuals, so therefore, the operating costs, as I said, we're going to constrain our overhead growth to be less than our sales growth and using the cost reduction program very much to offset the labor inflation that we're seeing and certain other cost inflation. But we're not -- as I said, so far, we've identified 30 million of opportunity. I'm sure there's more to go at.
Jonathan Hurn: It's Jonathan at Deutsche Bank. Just going back on the overhead cost inflation, can you just give us a feel for what you think that number would be in 2019?
Clive Watson: So the inflation we're talking about roughly matches what Andrew's talking about in terms of profit improvement program benefits. So about 3% on a cost base -- overhead cost base of around 600 million gets you to 18 million, 19 million.
Jonathan Hurn: Okay. And in terms of that sort of 30 million, I mean, obviously, that's the initial number. As you go through 2019, you'll work in the [certain] areas like R&D. Is there potential for that number to be raised as we go through the year, do you feel?
Andrew Heath: Certainly, that will be the intention. I'm not going to make any commitments, but that will be the intention. We are continuing to focus on how we can make the business more productive and more efficient.
Jonathan Hurn: Yes. And the third question is just in terms of M&A. I mean, historically, you guys have been very acquisitive. Does that now take a break, or do you still look for deals in 2019 even though you are trying to redefine the company?
Andrew Heath: No. I'm going to be absolutely clear. We will continue to focus on acquisitions. It's been part of the Spectris model for some time, and it will be -- continue to be part of the model going forward. But certainly, as we go through the whole strategic review, we are looking at what is the landscape of M&A opportunities, what might be the near-term pipeline, what could we possibly execute, and we will absolutely think about that in terms of how much capital that would require. But to be absolutely clear, we're looking for synergistic acquisitions where there are some strong cost synergies as well as revenue synergies.
Robert Davies: It's Robert from Morgan Stanley. A couple of questions for me. I guess the first one was just around margins and your sort of long-term vision. You mentioned just sort of getting back to previous peak. What stops Spectris doing 20% margins?
Andrew Heath: I don't think anything stops us doing 20% margins. It's just the time it will take us to get there. Our sort of near-term aspiration is to get back to those 18% range, where we were back in 2012. And with the -- what -- the actions we're taking this year and the flow-through into next year moves us a good way in that direction. But as we look at the overall strategy, we will be -- our aspiration will be to get sort of north of 20%.
Robert Davies: Do you think you need more additional kind of internal measures to get to over 20%, or is it a marked improvement? What do you see as sort of the bridge to get it?
Andrew Heath: Well, I mean, it's always helped by good end-market growth and as long as you're getting that operational leverage coming through, which is very much what we're focused on, so we will still be targeting to sort of grow the business strongly. But we are going to be very disciplined around where we put growth investments, whether that's CapEx or headcount, into the business.
Robert Davies: And then the other question I had was around software and when you're looking at the platform businesses and thinking about, I guess, the list of, I don't know, one third of your company or whatever, that you're kind of on the watch list of trying to figure out where to take it. How do you think about software integration? Are you looking to sort of match sort of new acquisitions with businesses you've got that could boost out your software offering? Are you kind of comfortable and you're just sort of fitting them together as you go along, and if it's got software, it's got software? How would you kind of think about just sort of percentage of software within your sales? Is that an important part of your platform business, or is that something that will just happen if it happens?
Andrew Heath: Right. Okay. I'll try to explain it in a slightly different way. I think, to be clear, we are focusing on being a precision instrument, high-tech equipment business at our heart. The software and services will then be absolutely associated in supporting those hardware businesses, the hardware -- the products. So we're not looking to get into software for software's sake. But as you look at the platforms, the platform strategy will really determine where we need to focus and put the investment around software. So if I look at Malvern Panalytical, it's much -- what's important there is really the analytics. We generate a huge amount of data for our customers, and being able to provide greater diagnostics and predictive capability around our instruments allows us to provide greater value to our customers, which is what they are seeking. And that's something -- and it gives us an opportunity to go and then monetize that as well. So we're looking at our diagnostics, prognostics and then also, actually, spending some money on artificial intelligence as well in terms of having really sort of something to think about in true predictives. If you look at HBK, the HBK offering, we've got a very broad range of sensors measuring various physical characteristics, and we've been looking to expand those sensors. But to support that is quite a lot of software, both in terms of the data acquisition from the sensors and the analysis of that. But also, we have quite a broad capability in HBK in terms of simulation and modeling tools. And actually, VI-grade is very much a simulation modeling software business as well as physical simulators, so that's very complementary. But again, it's also we have some design tools as well. So for HBK, the opportunity to be able to model noise, vibration, harshness, durability, robustness within a software package, run simulations against that and then actually take that into the physical lab, a quality control department, measure those characteristics, compare it back against your performance models and close-loop that and provide the design tools around it is a very powerful offering. And we have a lot of that today, and that's where we'll be looking, as part of the HBK platform strategy, is how do we then grow our software there. And from an Omega perspective, it is really around more of e-commerce, and for us, it's not just about sort of having a pretty Web page with a nice user interface. What -- the heart of our Web offering or e-commerce offering is the ability to characterize the products and then configure them for engineers. So if an engineer comes in and says, "Look, I've got a temperature problem I'm trying to solve. I need a thermocouple that needs to operate in this temperature range, with this level of sensitivity, have this sort of certain characteristics of impedance, et cetera," we can then say, right here is your choice. Out of the many, many that we can offer, here's the top 10. If you want, there's actually a special, we can configure that. And we have a fast-make capability to configure it, that backs it up. And then we'll also then look at how we can then provide control systems and actuators, because pretty much every sensor then links to a control system and an actuator. So that's another opportunity for us. So yes, for Omega, the digital software strategy is very much around that e-commerce configuration capability. So the -- it's going to be horses for courses, but very much, I'd say, associated with the hardware business.
Robert Davies: And then just a final one was just on Millbrook. I heard you sort of mention you were going to consider your options on Millbrook. When you look at those types of businesses, what do you think are the kind of main strengths and weaknesses? I guess you obviously got additional CapEx going into that type of business, but what -- you mentioned you're sort of focused on instrumentation, primarily. Does that then sort of put that business as not the type of business you would want going forward?
Andrew Heath: Well, I think you can know that we are still assessing it, but it has very different characteristics from the ones that I typically went through during the presentation. But on the other hand, Millbrook operates in a fast-growing market with lots of opportunity. So when we look at Millbrook from a value lens, then clearly, we are thinking about, okay, what should be the right -- what right level of CapEx investment, what should the hurdle rates be, the returns be, and can we make sense of that within the broader Spectris portfolio as we go forward. I'll say we continue to evaluate that and work at how we can best derive value ourselves or indeed, whether someone else will be a better owner. But it's a very attractive asset for someone who is already in the space or wants to be in the space. There aren't many of them, candidly. They are very sort of geographically aligned to customers, so if you want to be in a geography with certain customers, then you have to go and look at certain businesses. So Millbrook is a good business, a very good business with a very good management team, and certainly, our sort of assessment is really around value and what's -- whether we're going to be the better owner for it or whether someone else will be.
Jack O'Brien: It's Jack O'Brien from Goldman Sachs. I guess if we think about Spectris' fairly complicated business, clearly, plenty of opportunity, but can you share with us your sort of relevant experience that you can draw on through your career, the first time we've met today, on the sort of programs you may have run in the past and what gives you that confidence you can...
Andrew Heath: Right, okay. A quick résumé. So, well, I am 30 some years in basically engineering businesses, of being around engineers, R&D programs, technology, products and platform development programs all my career through Rolls Royce, and then into sort of specialty chemicals, semiconductors and now into Spectris. In terms of sort of the profit improvement program, I think you'll know from sort of my background, being in turnaround situations more recently, this is definitely not one of those, but I'm very focused on how do we make sure we're driving a business to deliver on its maximum potential so that it's in the strongest position. And that's why we're very much focused on that. But I've also, through my career, been through a significant amount of sort of strategy work and M&A in particular, so the framework we're going through is very familiar to me. And a business like Spectris, very similar in some ways to Alent, when I went into Alent. It's made up of many, many parts, which, actually, you need to sort of get into quite a lot of granularity and detail to understand if you -- what all those parts are, what -- their individual merits, but in particular, their merits as a collective. And so it would -- that's what we're doing at the moment. And we're spending quite a lot of time, energy and effort doing so, but making really good progress. And I'm hugely excited by what I see and the opportunities by simplifying and focusing.
Jack O'Brien: Just to touch on that simplification point. Obviously, the shared service center idea, you've sort of put it to one side. What was your thinking behind that?
Andrew Heath: Well, that's because it wasn't going to be very simple, frankly. We have 14 operating companies; 20, 24 ERP systems; numerous data structures on top of that. So to do a shared service model in that environment is very complicated. It takes time, it's expensive, and it will take a long time for the benefits to come through, and frankly, not that it wasn't a good idea, there are benefits to be had for the payback periods. There's other things we can spend the capital on to deliver better returns in a shorter time.
Jack O'Brien: And perhaps, just finally on automotive. Obviously, you're more exposed to the auto sort of R&D testing side, with all the structural opportunities that offers. Just interested in what you saw through North America. I think you mentioned it was down 11% in the fourth quarter or second half. Clearly, sort of autos companies going into a more difficult time, perhaps conserving their cash. What are you seeing today to -- that can perhaps assure us? Because 2019, at the moment, looks like it could be quite tough.
Andrew Heath: Yes. So it's a difficult question to answer because it depends very much on the mix of customers you are facing off to. So in North America, certainly, some of the customers from our industrial control perspective, their largest customers decided to -- some of them decided -- were moving plants from Mexico back to America, so that delayed their capital expenditures, delayed their order placing on us. Another customer had a particular -- challenges around a product launch, so they sort of pulled their horns in a bit. I don't want to get into specific customers, but -- so I think it depends on where you are and who you are facing off to, which is one complication. But generally speaking, if you stand back and look at the R&D applications and opportunities for us, they are very strong because, as I said, there's a proliferation of new platforms, there is still development on the internal combustion engine, emissions testing is absolutely a key topic, electric vehicles, batteries, a lot of focus on actually the materials going into batteries, the manufacturing of batteries, the performance of batteries to make sure they are -- the consistency is there. I mean, these automotive companies are putting significant warranties around a relatively new product, and so they really want to understand it, characterize it, test it. And also, we're sort of -- with electric vehicles, they're much quieter. So in-cabin noise, vibration is also an opportunity for us in our Brüel & Kjær S&V business, believe it or not, and that companies actually want to understand what the noise levels are, the vibrations, then actually actively think about, a, the design of the vehicle to reduce it, but also about how they could actually put noise back into the car through white noise or whatever else to make the -- it's a more pleasing experience because if you're driving a very quiet car and it creaks and rattles, you sit -- you hear absolutely everything. So there's a lot of work going on in terms of really understanding just the sort of the NVH side of automotive. So we see lots of opportunities, and so it's still an important sector, even though, clearly, I think from a production side, it's much tougher. And at what point that rolls through in terms of maybe some of the OEMs deciding that they will pull their R&D budgets in, we'll see.
Sandeep Gandhi: This is Sandeep Gandhi from Exane BNP Paribas. Just a couple of questions from me. So firstly, could you give an indication of how Q1 '19 has started for you in terms of end-market demand and organic sales growth? And then secondly, on the 2019 outlook, you talk about margin expansion in 2019 when you include the 15 million to 20 million of cost savings. Excluding this, would you still expect margins to expand in '19 versus '18?
Andrew Heath: Well, I'll take the second question first, which is, I think, the sort of answer is yes. We're still very much focused on driving our margin expansion and, as I said, sort of controlling any overhead growth, headcount growth relative to what we're actually seeing. So we are very much goal-seeking against that to make sure that we put a real focus on it. The first point, I'll pass over to Clive, but I think, generally, sort of it's too early to say, really. That's the problem.
Clive Watson: And we don't comment on individual months or quarters. The next trading update will be in May, and that's when we'll update you on the first 4 months. Apart from anything else, with the Chinese New Year, where that falls has a big impact, so it'll be fairly meaningless to talk about January or February in isolation.
Andrew Heath: Maybe we've got time for one or two last questions. I've got something I need to move on to fairly shortly.
Tom Fraine: It's Tom Fraine from Shore Capital. Just a kind of extension to the last question on 2019 margins. A 15 million to 20 million benefit would indicate a whole percentage point for operating margins. So do you think it is possible that adjusted operating margins could be as high as 16.5% next year?
Andrew Heath: Well, we clearly -- clearly, that is the direction of travel, yes. And that's what, again, what we are -- we want to see a meaningful improvement in our operating margin this year.
Andrew Heath : Any final question? No? Well, we're on 90 minutes, so perfect timing. Thank you very much for attending. Hopefully, you found this morning very useful. As I said, Spectris is an exciting opportunity with bags of potential, and we're very much now focused on delivering the potential for the business, very much focused on delivering our shareholder value and hope that came across clearly this morning. So thank you very much for your time. We look forward to meeting you all over the coming weeks and months. Thank you.