Earnings Transcript for SXS.L - Q4 Fiscal Year 2020

Andrew Heath: Good morning, everyone. I hope that you are all keeping safe and well at this time. Welcome to this, the Spectris Full Year Results Presentation for 2020. I am Andrew Heath, I am the Chief Executive. I will go through the headlines, and then we will hear from Derek Harding, our CFO, who will run through the numbers in more detail. I will then come back to talk about some of the operational and strategic developments in our businesses, before closing with our outlook and then moving into Q&A. At Spectris, we very much believe in being purpose-driven and also true to our values as we execute on our strategy. Our priority continues to be protecting the health and safety of our employees and supporting our customers as we balance the needs of all our stakeholders. I just wanted to start this presentation with an immense thank you to all of our people for their selfless dedication, flexibility and also their outstanding support in what has been a most challenging year. I truly could not be prouder of the entire Spectris team. I would also like to thank our shareholders for their understanding and support over the past year. As we have consistently said, we deliberately chose to take a socially responsible approach to navigating through this pandemic, very much keeping in mind all of our stakeholders, balancing their needs. It is very pleasing that this approach is working well for us. We delivered a resilient performance last year, which was better than we had expected. While sales decreased 11% on a like-for-like basis, the actions we took last year limited the drop through impact to only 38%. And this resulted in an adjusted operating margin of 13%, and this was after reversing temporary cost measures and repaying the salary sacrifice, which we did in December of last year. Overheads finished down 8% on a like-for-like basis year over year, and that saved us £50 million. On the other hand, order intake has held up well, being only 7% down on 2019, and I really feel that underlines the support we were able to provide our customers as well as, frankly, the strength of our product and service offering. Our cash flow generation in the year was also strong, such that we ended the year with a net cash position of £106 million, giving us a great deal of balance sheet optionality. And today, we’ve announced an increase in the dividend as well as a £200 million share buyback. But to be clear that still leaves us with a lot of firepower to undertake M&A. Last year, we also found new and innovative ways to support our customers. Equally importantly we also continued to execute on our strategic commitments

Derek Harding: Good morning, everyone. My first slide is a repeat of the scorecard slide that we used last year. On the face of it, there are more crosses on this page than we would like, not unexpected, given the impact of COVID-19, and I will dig into the detail over the coming slides. But first, I will highlight the positives. While our top line declined 11%, after a trough in Q2, the rate of decline slowed, and we saw some very resilient performances across the group with a stronger-than-expected finish to the year. Although sales were down notably, the cost actions taken that limited the group drop-through to 38%, slightly ahead of our guidance of 40% to 50%. I am pleased with our margin performance in the circumstances, a decline of 270 basis points, resulting in 2020's margin at 13%. We took a proactive approach to working capital management, resulting in a reduction in inventories and trade receivables. Average working capital of 14% was within our guidance range. Reflecting the above and a prudent approach to capital expenditure, our adjusted cash flow improved by £10.3 million to £244.5 million, resulting in an adjusted cash flow conversion rate of 141%, up 50 percentage points on 2019. So against a challenging market backdrop, we delivered a highly resilient and sustainable financial performance in 2020 ahead of our revised expectations. Let me now take you through the specific details. Reported sales decreased by 18% to £1336.2 million, 11% on a like-for-like basis. Adjusted operating profit decreased by 33% to £173.6 million, 26% down like-for-like. Despite an 18% sales reduction, our cost-saving program resulted in an adjusted operating margin decline of 280 basis points to 13%. Adjusted profit before tax was £166.4 million, down 33%. Our tax rate came in at 21.8%, which is in line with the guidance given during the year. And adjusted earnings per share were 112.1p. The full year dividend per share of 68.4p is a 5% increase over the prior year when you include the postponed final dividend, which we actually paid in October 2020, and demonstrates our continued commitment to paying a progressive dividend. Obviously, due to the impact of COVID on 2020, our dividend cover of 1.6x is lower than our long-term average, which is usually around 2.5x. But we are comfortable with this given the exceptional nature of the past year. Adjusted cash conversion was a pleasing 141% compared with 91% last year. We were particularly pleased to see net cash increase by £72.6 million in the year, resulting in a year-end position of £106.1 million. During the year, there was a net cash inflow from proceeds on disposals of £20.6 million and further income from Millbrook and B&K Vibro of around £220 million is expected in the first quarter of 2021. Our leverage is outside the target range of our long-term policy and reflecting this and in order to make the balance sheet more efficient the Board has approved a share buyback program of £200 million to take place during 2021, and this will commence as soon as possible. The Group still has considerable financial flexibility, and we will continue to target acquisitions in support of its strategy. Finally, on this slide, return on gross capital employed fell from 13.5% to 9.8%, mainly due to the COVID related reduction in trading volumes in 2020. This slide provides a graphical view of the main P&L movements in the year. Sales are shown across the top with adjusted operating profit at the bottom. First of all, I've adjusted 2019 to remove the sales and operating profit relating to disposals, primarily BTG to provide an organic baseline. Foreign exchange movements had a very limited impact in the year, reducing sales by £100,000, while improving operating profit by just under £1 million. The real story of the year is the £159.2 million like-for-like sales reduction resulting from the impact of COVID in 2020. This reduction created a £111.1 million reduction in our gross profit, which was then subsequently offset by £50.1 million of cost saves. Of the £50 million cost save achieved in the year, £10 million is temporary and is expected to come back in 2021. FY '20 adjusted operating profit was £173.6 million or 13% of sales. This slide shows how we generated cash in the year and illustrates what we have then done with that cash. Starting by adding back the £60.7 million of depreciation and amortization charge to the adjusted operating profit brings you to £234.3 million of EBITDA generated in the year. Partly driven by the reduced trading activity in 2020 and partly driven by an additional focus on working capital management, we released £53.1 million of working capital cash during the period. Capital expenditure, net of grants, was £42.9 million, and this includes investment at Millbrook of £11.2 million. This gives us an adjusted cash from operating activities of £244.5 million, which we divide into the adjusted operating profit to get our cash conversion metric of 141%. Interest and tax had a combined cash impact of £33.1 million, and the payment of dividends utilized £75.7 million. We spent £15.1 million of cash in relation to restructuring and a net of £19.1 million relating to transactions. Within the other items of £28.9 million, we had a lease payment of £21.6 million, which were offset by £3 million loan repayment from the EMS JV. And then there is a balance sheet FX adjustment of £10 million to enable a reconciliation back to the final year-end cash difference. This slide is included to help you understand the moving parts between our adjusted operating profit measures and our statutory profit measures. I'll take each one in turn. The group has incurred costs of £19.5 million relating to restructuring in 2020. These include

Andrew Heath: Thank you, Derek. I will now turn to the operational performance at our platform businesses and industrial solutions. I will also touch on a number of the strategic growth initiatives within the businesses. These continue to be implemented in 2020, and we will carry on investing in R&D. CapEx, ensuring that we continue to deliver the leading products and services that our customers require. But before I do, Derek shared our financial scorecard, and I would quickly like to start by summarizing the scorecard that we also use to measure strategic achievements. As I said in my opening, despite the challenges of 2020, we continue to execute on our strategy, driving growth and operating leverage as well as optimizing the portfolio and focusing on those businesses with growth and margin potential is as critical now as when we first set it. Our aim remains to return margins to at least previous highs. Overheads reduced by 8% last year and we will see £40 million of those savings coming through in 2021. We made further steps towards optimizing the portfolio. And on capital allocation, we reduced CapEx by 47%. We maintained spend on key projects, but we did materially reduce the spend at Millbrook, but that was planned. We ended the year in a strong net cash position, and we've increased the dividend. And having reviewed the balance sheet at the year-end and it very much in accordance with our capital allocation policy, we're proposing a share buyback program. Although we did participate in a number of M&A opportunities last year, we retained our financial discipline. So ultimately, we didn't transact on any of those. To be clear, M&A does, however, remain a key strategic game, and our balance sheet strength clearly puts us in a good position to pursue opportunities. So all in all, against this, it positions us well for the market recovery. So let's now turn to our business, and I will start with Malvern Panalytical. Here, sales declined 13% on a like-for-like basis with all regions down, although North America, less so than Europe and Asia. And as we've stated before, Malvern Panalytical was experiencing weakness in several of its end markets coming into 2020. And they were subsequently further impacted by COVID as all our other businesses were, particularly in the early days with extensive university and research institute closures and some customers delaying installations, particularly where there were access issues or social distancing requirements needed to be met. However, they were -- as a business able to deliver a much improved performance in the second half, all regions saw a very much improved performance with China posting 7% growth in the period. And there was a particularly strong recovery in pharmaceuticals. However, with the adverse volume impact, despite the lower overheads that were achieved, like-for-like adjusted operating profit did decrease 27%, and operating margins declined 280 basis points. Orders similarly had an improved performance in the second half. Our order book is stronger now than in prior years. And with customers having adapted to COVID-19 restrictions as, as we have very much based on our greater experience of remote working, we have a very positive outlook for 2021 for Malvern Panalytical. And there are a number of key trends that underpin future demand. In pharma, we're seeing an increase in on-shoring in the traditional small molecule area and a significant uplift across the industry, particularly in support of vaccine and viral vector manufacturing. In mining and building materials, activities, here we expect to be driven by general economic recovery. And in advanced materials, emerging back to technologies, greater environmental focus and a shift to digital solutions are all supporting growth. We are also driving numerous organic growth initiatives. And during 2020, Malvern Panalytical launched a number of new products to particularly enhance its customer offering around software services and analytics. And very much in line with that, Malvern Panalytical launched Amplify Analytics and OmniTrust last year. They are two new key product offerings, which in combination, actually provide a powerful partnership of both instrumentation on one hand at analytics know-how on the other hand on the other. And this enables our pharmaceutical customers to accelerate successful drug development. Malvern Panalytical also launched additions to their Zetasizer and XRD product ranges, both having improved attributes and functionality. And the business continues to expand its capabilities in data science, machine learning and AI, in particular, to support our movement into providing customers with greater solutions. In HBK, we saw a very resilient performance in 2020 with a strong first half. And for the full year, like-for-like sales were only down 9%. North America saw flat like-for-like sales, while Europe and Asia both declined materially. Sales to the automotive and aerospace and defense markets were down notably and in contrast, we actually did see a very buoyant machine manufacturing sector come back, particularly in the second half. And just looking forward in automotive, the technological advances in hybrids, electric vehicles, connected and autonomous vehicles, that market continues to remain a bright spot as we see OEMs maintain spend on R&D budgets in those areas. And in aerospace, investment in new carbon neutral propulsion concepts using hybrid or full electric concepts, or hydrogen or synthetic fuels, are all expected to support future demand. And I think just to be clear, HBK is more exposed to defense and the sort of satellite space markets, where there has been much less of an impact on spending, and we have seen growth in North America within the software and services area here. Unquestionably, the merger and restructuring activities at HBK are working. And along with the other sort of measures taken in 2020, have positioned the business to be much stronger. The management team is doing a great job in driving improvements in the performance of the business. Adjusted operating profit was only 20% lower on a like-for-like basis with adjusted -- adjusted operating margin decreasing just 170 basis points. The merger activities, to be clear, are continuing at HBK. We have a number of programs to enhance the sales and also the marketing efforts in order to drive further growth and better serve our customers. On the product side, simulator and simulation tools have been key areas of focus. Here, new products include WorldSim, a rich and immersive simulation software environment for testing ADAS and autonomous driving scenarios. And VI-grade also launched the new DiM400 platform. This is a new line of high-performance and highly scalable, cable-driven Driver-in-Motion simulators. And I encourage you to go and look at the VI-grade website where you can see the simulator in action. And during the year, we acquired IMTEC Engineering, a provider of vehicle driving simulators and machine automation systems, which will help bolster and strengthen our VI-grade activity. Additionally, in support of the trend towards electrification, HBK continues to expand its e-drive solution to provide a more complete e-powertrain testing and optimization offering as well as expanding into e-grid. And that's sort of engineering and distribution systems and the whole testing regime associated with that. HBK also increased their leadership in force measurement technology, introducing a new range of sensors, and they also expanded their software offering, launching B&K Tescia for acoustic testing and monitoring of rotating machinery. At Omega, sales decreased 13%, mainly driven by COVID-19 business disruption, that was both in North America and in Europe. However, we did achieve growth in Asia, driven by a very strong performance in South Korea due to high electronics and semiconductor demand as well as market share gains. Growth is expected to be modest in the first half of 2021, but we do expect recovery gaining pace in the second half. In Asia, however, demand looks more positive than maybe some of the other end markets, particularly helped by the outlook in semiconductors. Like-for-like adjusted operating profit declined 49%, and like-for-like operating margins fell 500 basis points, primarily resulting from the lower like-for-like sales. But also headwinds in overheads caused by the higher license and depreciation costs associated with the new digital platform that was launched in 2019 and those increased costs could only be partially offset by other cost reductions last year. Now to be clear, Omega's performance remains unsatisfactory and achieving greater scale through organic sales growth is a key requirement for recovery. Amit Agarwal joined us in Q4 as the new President to lead the required turnaround and brings with him a great experience set in order to help us do that. The business has four focus initiatives that have been enacted to drive above market growth and, in turn, recover that lost margin. They are enhancing the digital experience, expanding the sales channel, accelerating product development and improving operational performance. Progress was made on all fronts last year. But clearly, we need to see the pace accelerating, and in particular, the business starting to not just grow with the market but take share as the markets return. Turning now to Industrial Solutions. Like-for-like sales declined only 9%, and there was a 19% negative impact from the disposal of BTG on a strategy basis. Servomex and PMS were particularly resilient with only a 6% and 4% sales decline, respectively. Like-for-like sales fell in all regions, more so in Asia, which reflected a tough comparator in semiconductors. But looking at the end markets, there was strong growth in pharmaceuticals, and we also saw sales to electronics customers recover. Energy and utility sales did decline, and that really reflected the weaker sort of backdrop on in petrochemicals and industrial processing more generally. And again, due to the sales decline, like-for-like adjusted operating profit decreased 25%, and like-for-like adjusted operating margins decreased 290 basis points. But good progress was made in executing the strategy last year, improving the performance of the underlying businesses as well as executing on the divestment strategy. Overheads were lower from the successful implementation of the profit improvement program in 2019. And this was helped by other temporary cost measures taken last year. Additionally, with the disposal of Millbrook and B&K Vibro, we will see margins recover quickly in 2021. In semiconductors, the rising demand for chips is expected to drive an increasing global fabricated equipment spending this year. We also expect to see the sales pipeline strengthen across electronics, supported by LED demand in consumer products, cloud computing, 5G infrastructure rollout as well as increasing semiconductor demand. And demand for our products in pharma and life sciences continues to increase due to the large investment in vaccine manufacturing and the trend on -- around near-shoring of production. Increasingly, demanding levels of clean room monitoring and manufacturing requirements, will also drive up the demand for our instruments as well as our sensors which will help maintain the product quality, improve yield and reduce the risk of expensive product recalls for our customers. In other industrial markets the drive to reduce emissions and meet environmental standards remains, and it will only increase the demand for Servomex's solutions in the areas of process control, safety and quality. Also Red Lion launched its new FlexEdge Intelligent Edge Automation Platform that will help customers address their needs in simplifying the connectivity of their factories with data as they -- as our customers increasingly become more automated and are digitalizing their facilities to improve productivity. And this month, Mary Beth Siddons joined as the President for Industrial Solutions. She replaces Andy Cowan, who has returned to his role as Finance Director and after doing a great job in his interim capacity. Mary Beth was most recently sector president of Marmon Group, a Berkshire Hathaway Company responsible for the strategic direction of 15 global businesses, and she's previously also worked at ITW and Snap-on. Mary Beth brings extensive experience in leading and successfully developing global industrial businesses. So she will be a strong addition to the team as we continue the disposal program, but also increasingly shift our attention on to building platform businesses from within Industrial Solutions. And I would just like to end my presentation by bringing you back to our purpose and just sharing with you a few examples of just how our strategy is delivering value beyond measure, how it equips our customers to make the world cleaner, healthier and more productive. And then in line with that, let me start by Cleaner. The electrification of transportation is a critical component in the increasing use of fossil fuels, and also reducing carbon emissions and damaging particulates. The automotive industry is investing heavily in new hybrids and all-electric vehicles, as I've said previously. We are helping our customers in developing many of the new technologies required, be it in developing battery materials or testing batteries or powertrain testing, all the way through even to meeting the new dry by noise standards. And one such customer is Loccioni who produce everything from end-of-line and laboratory test benches to measurement instruments as well as offering outsourced testing services for hybrid and electric powertrains. And due to the industry's frequently changing testing requirements, Loccioni needed a measurement solution with a high degree of expandability and flexibility. And here, HBK's eDrive solution really helped them as it's easily integrated with their existing equipment. And its expandability and flexibility means it can be readily upgraded in response to future measuring requirements by the customer. As such, we are providing a future-proof test and measuring system very much helping the development of ever more efficient and durable powertrains that in turn helps drive -- helps support the drive to cleaner transportation. Moving on to healthier. In 2020, I guess, we will look back on 2020 as a year in so many ways as a terrible time. However, we did see the generosity of people, their compassion, their desire to serve come together with the ingenuity of science to help address the needs of society. I just wanted to highlight the team at Servomex who did a phenomenal job in ramping up the production of its oxygen sensors to meet the rapid increase in the need for ventilators. Servomex's Hummingbird Sensing Technologies produce high performance, paramagnetic oxygen sensors that are used in critical care ventilators to monitor the amount of oxygen administered to a patient. As we all know, there was a global shortage of ventilators as the pandemic struck. So to address the rapid increase in demand, GE Healthcare partnered with Servomex to rapidly ramp up the supply of the sensors. And this included not just a large expansion of the clean room operation where our sensors are produced, but also launching a new variant of the Paracube that is much faster to manufacture and at much greater volumes. And the team here rose to the challenge. They managed to condense 18 months of development time into under 3 months, very much directly helping in the fight against COVID-19. And then lastly, in mining, we are seeing mining companies needing to ensure ever more safe and efficient running of their operations. Improving yield reduces both the cost of mineral extraction, but also energy consumption. And last year, Malvern Panalytical was selected by SCOTT Technology Limited to supply a fully automated robotic material analytical system at Rio Tinto’s Koodaideri iron ore project in Australia. It involves the provision of complementary technologies from the two companies, including Malvern Panalytical's x-ray, spectrometry equipment. That's used for both sample preparation, all the way through to complete analysis. The frequent monitoring of the mineralogical and elemental composition during ore processing will help Rio really improve efficiency by enabling constant and optimal minimal processing conditions. This project is a major step forward in the combined offering of automated solutions from Malvern Panalytical and SCOTT. And it will enable this facility to be one of the safest, highest quality and most productive iron ore laboratories globally. And what's additionally good news for us is that this solution can be deployed in mining locations around the world. So in summary, look, I am extremely pleased with how we've reacted and also how we responded to the challenges presented last year, not just in terms of how we performed against that backdrop, but also in terms of how we went about it. We consciously took a balanced approach to managing our business. As a consequence, we've seen strong support from our people, our customers, our suppliers and also our shareholders. And although sales were down notably due to the consequence of COVID, by reacting swiftly as a business and by continuing to execute our profit improvement program last year, we limited the profit drop-through impact. I think our margin demonstrates the resilient performance of our businesses in the circumstances. Our cash generation was extremely strong, and the balance sheet was further strengthened, allowing us to return people to full pay, repay the salary sacrifice and today, increase the final dividend and announce a £200 million share buyback program. Our achievements in 2020 have absolutely positioned us well for a market recovery. And while the outlook is still uncertain in the short term, the stronger order intake in the last quarter of 2020 does provide momentum for the first quarter of this year. And we've entered 2021, very much in an enhanced position. We've continued to invest in the business, and we've retained capability. The cost base has been reduced, increasing the operating leverage opportunity and divestments will only further enhance margins. We will continue to deploy the Spectris business system to drive continuous improvement, and our balance sheet position gives us optionality to participate in M&A. So we will maintain this approach, acting with purpose being values-led to deliver long-term sustainable financial health. Thank you very much.

Operator: [Operator Instructions] Our first question today comes from Michael Tyndall from HSBC. Please go ahead, Michael.

Michael Tyndall: Yes. Good morning, gentlemen. It's Mike Tyndall from HSBC. Just a couple from me. I guess the first one, if we can talk maybe about the relationship between costs and growth. So if we talk about profitable growth, it feels, at least to me, from the cost front, we've done pretty much all the major work. And now it's a case of driving growth. So I'm just wondering how difficult it is to drive growth in the current environment, whether or not you're seeing a customer reticence to spend given the uncertainty? And what actions can you take to try and get that growth coming through from a top line perspective? And then the second question, I guess, slightly unfairly, but I guess there's the subliminal message in the share buyback is that your ability to buy companies, to actually make acquisitions, is challenged I guess, given where valuations are. I wonder if you can talk a bit about the pipeline. How that's been developing. Is valuation the main sticking point at the moment? And what can we -- without giving any specifics, but what sort of activity can we think about for the coming year? Thanks.

Andrew Heath: Mike, great to hear from you. Thanks for your questions. So let me just take the first one around sort of costs and growth. I mean, your points are in terms of are we sort of done on the major work around cost. I think the simple answer to that is yes. We have some restructuring left to sort of -- or cost -- restructuring costs that will be incurred this year. But all the heavy lifting has been done. And that's just a sort of finishing up of that activity. We -- the profit improvement program that we launched at the back end of 2018 has been very successful. That gave us good momentum and a tailwind coming into 2020, which is very fortunate. We started it then, and then the further actions we took last year on reducing discretionary costs and bringing the cost down overall certainly now put it in a strong position to -- with the right sort of cost base sized for the recovery. So going forward, our focus is very much about deploying the Spectris business system to drive sustainable continuous cost improvements and efficiency in the business. And then your point around how to drive growth. Well, through last year, we continued to invest in R&D. I mean, the absolute spend was down slightly on the year compared to '19. Sales was up. So as we said all the way through last year, we protected our R&D spend and investments in those strategic initiatives that -- growth initiatives that we launched off the back of all the strategy review in the first half of 2019. And I think I talked in the presentation just around some of the initiatives that we launched last year, a lot of new products got launched into the market last year with a good response. And we have a further pipeline of new product software services coming through from all of the businesses again this year. So we are clearly very much focused on driving organic top line growth through sustaining that R&D investment. Moving then on to your question around M&A. I mean, I think without a doubt, I mean, we've seen the M&A market take a very short temporary pause in the second quarter of last year. It then came back pretty much sort of June, July time and the ferocity of the activity has just continued to rise. And everyone I talk to is saying that the level of activity out there is as high as it's almost ever been with a lot of money being raised. And clearly, a lot of money out there to be spent on M&A, which is driving up valuations, as you said. So that is creating a more challenging environment. You have seen from what Derek said, and the gain we had on some shares we acquired as part of a target we looked to acquire last year that we are active, and that's not the only process we are active in. But we are determined to find good accretive acquisitions where, given current valuations that they're also highly synergistic, both in terms of cost and revenue ideally and very much aligned to our strategy about scaling up our platform or potential platform businesses. So that's where we're focused. Clearly, we need those synergies to justify valuations at the moment. The pipeline, you asked about the health of the pipeline. We've continued to build that. There are a number of good quality opportunities that we are considering. But through all this, we will attain our discipline. It is important that we -- that when we do an acquisition, that we can deliver appropriate levels of return of that investment.

Michael Tyndall: Perfect. Thank you.

Andrew Heath: Thanks for your question, Mike.

Operator: Our next question is from Jonathan Hurn at Barclays. Please go ahead.

Jonathan Hurn: Good morning, guys. Just a few questions from me. Firstly, can I just come back on the M&A side of things. Obviously, you've talked about deals not happening this morning. I wonder if you could just give us a little bit more color about those. Just maybe in terms of size and where those areas of the potential acquisition were? Thanks.

Andrew Heath: Okay, Jonathan. Again, good to hear from you. Trust you're well. In terms of sort of providing some color on deals, look, I mean, we will not be drawn on the specifics of any deal. I think that's neither appropriate and frequently, we are tied up by confidentiality agreements as well. But I think, certainly, let me talk around the one that clearly is a little bit more public, given that we had the gain on these shares. It was a U.S. business that very much fitted with one of our platform businesses. It would have required a Class I approval from shareholders. We would have been looking to raise equity. So I think from that, you can gain that we have appetite to do significant deals. I talked about this back in October around our Q3 results. But for the right acquisition, if it's a business that's even bigger than one of our platforms and it really helps to transform and scale one of our platform businesses, then -- it makes sense, then we would actively look at such a deal. And that's what we were involved with last year. It would have really helped us to scale up. One of the businesses would have been highly synergistic. But ultimately, I mean, I think you can see from the gain on the shares from when we identified the opportunity to when it was finally transacted, it would be -- the multiple that was achieved on that share gain and where the price ultimately ended up. The business was acquired in the end by a large U.S. corporate who had much deeper pockets than us. And as such, we retained our discipline. It's -- we end up with a consolation prize on the gain on the shares, at least covered the -- more than covered the transaction related costs. So we are active. It's part of our strategy, and we continue to search for good accretive synergistic acquisitions that fit with our strategy.

Jonathan Hurn: Second question was just on the order intake. Obviously, you say that in terms of Q4 orders, they were up slightly year-on-year. As we look to sort of Q1 2021, do you expect orders to pretty much go back to the level they were in sort of Q1 2019?

Andrew Heath: Yes. So Q4 clearly was a very strong quarter for us, certainly on the sales side, all the businesses made progress. I mean Malvern Panalytical went from a sort of 4% decline in Q3 to a 9% decline in Q4. But actually, in terms of absolute sales, delivered greater absolute sales in Q4 over Q3. I mean, they had a very strong comp in -- from Q4 of '19, but their sales continue to increase. And in reality the order intake in Malvern Panalytical, it came in really -- it continued to come in really strongly, and we didn't actually have the capacity to actually translate all [technical difficulty]. But all the businesses saw an increase in order intake, HBK, Omega and the IC businesses as well in Q4. And that's generally being sustained in Q1. We are certainly seeing customers -- there's quite a lot of pent-up demand out there. The issue is just the ability to -- with the social distancing requirements, access to customers mobility of our staff to be able to travel, where we need to go and install commission equipment and recognize revenue that is causing some immediate term disruption and has done, really sort of since the beginning of the year, again, more so than it was in Q4 so sort of -- we put in our outlook, sales in Q1, it's hard to absolutely predict where we're going to end up. But the underlying good news is that the order intake remains very strong.

Jonathan Hurn: Great. Thank you. And then maybe just final one. A quick one just for Derek. Just in terms of that sort of drop through as we go into 2021, obviously, like you say, stripping out the business that on the negative side, it came in probably better than the headline number. But obviously, flipping to the growth side, how do we think of the drop-through as we go into 2021, please?

Derek Harding: Yes. Good morning, Jonathan. I think we are of the view that the drop through is a useful, definitely a useful measure on the way down. So it was helpful to guide thoughts as we go through 2020 when it's a little uncertain. In terms of flipping it and kind of getting caught on drop-through metrics as guidance, it's not something we will be looking to do. So I think the way to think about it, Jonathan, is to look at the guidance we've given on the overheads. So as I said in my piece, we see £10 million of the cost saves coming back in 2021. We also anticipate about £10 million of cost inflation. And then I think you can get a sense of the overhead base. And then from there, apply your revenue and margin assumptions and you will get a sense of the drop through, but it's not something that we are going to guide on this year.

Jonathan Hurn: Okay. And then just following on that. I mean, just in terms of the inflation sizing, obviously, raw material prices are increasing. You normally have positive pricing. I mean, do you think you'll be able to recover any sort of inflation coming through in terms of maybe the input cost in '21?

Derek Harding: Yes, we will. I mean, that £10 million is a net number. So we are obviously deploying the Spectris business system, which continues to improve efficiency across the business. And as you say, we do have some pricing power. So we will look to cover certain materials. So it's really just a function of a pickup in activity plus price inflation coming through in salaries primarily as you head into 2021.

Jonathan Hurn: Thank you.

Operator: Our next question comes from William Turner at Goldman Sachs. Please go ahead.

William Turner: Good morning, everyone. Thanks for taking my questions. I have a handful of them; two quite specific ones and one more broad question. So I'm going to start with the two specific ones, and then I'll go on to the broader one. And the first one is, you mentioned about restructuring costs into 2021. Could you just give an outside there of the magnitude of potential for restructuring costs next year? And also where those activities are going to be targeting? And then secondly, on the specific question, you obviously had £19 million worth of transaction-related costs, which were actualized. Could you just break down the amount of that, which was related to the deal which didn't go through or the acquisitions didn't complete and relating to the ones that is completed, just because £19 million over the value of the disposal equates to about 7%, which is quite a lot. So that would be quite interesting to know.

Derek Harding: Yes, sure. Let me take both of those two specific ones. So in terms of restructuring, when we are finishing off activities and work that we've been doing in 2020, there's no new programs or no new schemes. It's just the completion of those projects. And given that they're in train and we accounted for the beginning of them as restructuring for consistency, we'll account for the end of them as restructuring, I think less than £10 million is a good number. And it could be a lot less. It just sort of depends on how -- when you look at say, headcount reductions, whether we've got specific redundancies to complete or whether there's voluntary on those projects to complete those. And as we're negotiating our way out of leases sometimes we can get slightly better deals than we'd assumed previously. So the number will become clearer as the year goes on, but it won't be more than £10 million. In terms of the restructuring -- sorry, the transaction costs, just under £12 million of those costs relate to the large U.S. transaction. And as Andrew has indicated, if that had gone ahead, it would have required an equity raise, obviously, it was a complicated transaction. So there's quite a lot of work focus that we undertook there. But equally, as we said, we were able to be offset that by the £23 million gain that we closed on the shares. So it's a decent hedge. And then the majority of the remaining costs -- actually to be fair, to spend probably another £2 million on potential acquisitions, and then the remainder is on the disposals.

William Turner: Great. Thanks. That was very clear. And then my broader question, it kind of links back to the first one that was asked and that's just on the organic sales growth outlook for 2021. Obviously, if we look back in 2020, there was something -- that was encouraging to see the sequential improvement and also the comments you made about the order intake above sales growth. But then like going into 2021, can you guys be a bit more specific on some of the initiatives you're taking for organic sales growth? Obviously, you're going to be comping some easy comparable periods. So like historically, when Spectris has been able to grow organically, it's also coincided with quite a lot of SG&A costs going back into the business. So I was just wondering is there any more specifics on what you're doing to develop new products how like -- if you have any like vitality kind of stats? Or is there any geographic expansion that we should be aware of, that would be really interesting.

Andrew Heath: Okay, William, Yes. So I mean it's much too long a list to go through everything, but - so I will just pick out some of the specifics by some of the businesses. But starting with your point on vitality, we do track vitality. Our vitality Index continues to improve over the last couple of years. When I came in, I said, I was surprised at how much of our engineering effort was spent on sort of maintaining and supporting older equipment. As part of the sort of portfolio moves within each of the businesses in terms of looking at product lines, either in terms of retiring them, end of life-ing them or selling them off. We have been tidying that piece up as well as fixing some of the legacy issues. And we continue to invest in more and more of a R&D spend in terms of new products and services and software offerings. So we take sort of Malvern Panalytical. I talked about sort of OmniTrust. I talked about sort of the Amplify Analytics. But here, they're very much sort of developing a digital platform and service offering for customers around connecting their -- the analytical instruments they provide through a common portal, and that's for both health monitoring, asset utilization, and progressively more and more around, material analysis and doing and then coupling that with sort of data analysis, artificial intelligence to do sort of prognostics and diagnostics and really sort of help to predict the outcome of some of the experiments and measurements that their customers are tracking The OmniTrust software, we're going to continue to expand that. That gets into sort of good manufacturing practice auditing in the likes of pharma and life sciences, as well as method development auditing. We've got further developments to our Zetasizer platforms on the x-ray side. We're doing bench-top solutions on both the XRD and XRF. So we have collectively, a broad range of sort of analytics software as well as hardware developments. HBK, we continue to invest around simulation and software offerings, basically sort of within VI-grade, expanding the simulation offering this year, we're combining the noise vibration harshness simulation software from the BK SMB business -- SMB business with Vibro to really grow and expand the whole simulation around noise vibration harshness. We are launching an even larger Driver-in-Motion, cable driven simulator the DiM500 this year. Within VI-grade within the software offering, again, expanding the software offering the clean design tools, again, expanding some of the noise vibration harshness as well as the stress modeling. And then we have some new range of sensors coming out in force and talk, both optical sensors and also in terms of sort of increasingly putting smart capability within the sensors. Within Omega, we are sort of shifting the product development there, really around sort of bigger ticket items that will deliver sort of larger incremental sales growth from a smaller range of new products to retargeting high-growth markets. And one particular one there is a clamp-on temperature measurement capability. So instead of having the temporary sensors having to be inserted into the flow, you can actually -- the design we’ve come up with, which is quite novel is a clamp-on capability. So you don't -- you don't have to -- there's no invasive cutting into pipes or anything to be able to measure the temperature. That's getting good reviews from customers, so we're very hopeful of that expanding this year. Within ISD, we've got new ranges of particle sensors coming out of PMS. Servomex continues to sort of modularize and rationalize its product portfolio around a much more modular approach, similar to what we've been doing at Red Lion with their FlexEdge products and Ethernet products. So, across all the businesses, we have specific initiatives that we are driving as well as looking at the effectiveness of our R&D activity in that Vitality Index that I spoke about.

William Turner: Great. Thanks. That was very clear.

Operator: The next question comes from Andrew Douglas at Jefferies. Please go ahead.

Andrew Douglas: Good morning. I’ve got three quick questions, hopefully. I appreciate that Omega isn't where you want it to be. You've got a new MD and you're pushing hard on driving the top line growth there. I was just wondering, do you still believe that is a 20% margin business? Or has anything changed over the last year, 18 months maybe a little bit longer that would change that view. Clearly, it's 7% now, so it's got a long way to go. Derek, you've given us 14% working capital to sales guidance this year. What's the -- through the cycle number for Spectris, do you believe is there more that you can be doing on working capital? And then slightly, maybe a slightly unfair question, but I will ask it anyway. With regard to Industrial Solutions, clearly a lot of change there over the last 12 to 18 months. Have you guys made any progress or thoughts with regards to making any of those businesses -- platform businesses going forward? Or is the strategy to how that business is managed just continuing as was?

Andrew Heath: Okay. Thanks, Andy. But if you can answer any of your questions that would be great as well.

Andrew Douglas: Yes, I will answer whatever you want.

Andrew Heath: So I will stay with Omega and IST, and I will ask Derek to talk about working capital. But -- so look, as I said earlier, we're very disappointed with the performance at Omega. We've not delivered on the platform thesis that we developed as part of the strategic review. The performance is unsatisfactory. We've now got a change of president. Amit brings with him a lot of good industry experience and specific experience from his time at Thermo Fisher, with plenty of development he had there. But while he was at Thermo, he ran Cole-Parmer, which is a very similar business to Omega based around laboratory supplies, so he has direct experience of a very similar business. Your question about margin performance. I mean how its assessment is, yes, we can get it back to previous margins, but we need to be more focused in terms of the execution of the strategy from the four points I mentioned earlier around. Better customer experience, improving our channel strategy, clearer focus on the products, as well as driving the operational performance of the business, and he has clear plans to do that. But it will take obviously some time to respond to treatment. But particularly, I mean, per Omega, the answer is all about scale. We need to be able to scale up the Omega business and driving the organic growth when the market returns, not just in terms in line with the market, but ahead of market is the objective, and that's very much the plan. And then at ISD, yes, clearly, we've been busy in terms of executing the strategy with the portfolio changes. We will continue to do that this year and we pretty much hope and expect to have concluded that sort of portfolio rationalization within ISD this year, obviously subject to being able to complete on those deals. But going forward from there, the remaining businesses are businesses where we do see they have platform potential and going back to my earlier comments around sort of M&A pipeline, we have been developing the pipeline around those businesses for ISD for some time. We have clear targets. That would -- is both bolt-on products and technologies, but also potentially larger deals that could help scale them up into the platform businesses. And that’s very much the plan. I'm delighted to have Mary Beth on board to help lead the charge now.

Derek Harding: And on the working capital, Andy, I mean, I've said throughout my time at Spectris, sort of 11% to 15% is the right range. Now that's -- I appreciate a wide range. And if you go back 12, 18 months, the reason for that was to help support better customer service, on-time delivery, et cetera. So I was happy to carry a bit more working capital, so that we could see better, but was happy to carry more. When you actually look at how the Group has performed through 2020, as revenues come off 11% like-for-like, we've managed to take the working capital down in proportion to EBITDA at 14% of sales. So the guys have worked hard this year and have done a good job in improving the underlying working capital so that we can actually bring it down. I think we will hold on to that benefit as we then head out of 2020 into 2021. We need to make sure that we are poised and ready if a recovery is faster than we expect. We need to make sure we've got inventory available, stock available. There are stocking challenges around the world, as we all understand, with COVID lockdown. So we are carrying a little bit more inventory for that, we carried a bit more inventory going into Brexit. I think when you look at the balance sheet overall, the working capital tied up in the group relative to the size of the group, it's not a lot. We're not like a distribution business, for example, where the working capital metric is absolutely critical to the group surviving, and you can see it in our cash conversion that I think it's reasonably well under control. So it's a long-winded way of saying I'm sticking with the 11% to 15% range. We're near the top end of that range this year. I expect we'll stay at the top end during 2021, and then I expect we'll sort of drift back down again beyond that. But when you actually go below the simple metric, there's an increasing focus on inventory days, debt days, creditor days, and people are managing those. It's also one of the key incentive targets for all of the leadership in terms of managing their working capital. So I think in that range is fine. And I’m confident that our cash conversion will remain high as a result.

Andrew Douglas: Lovely. Thank you, guys.

Operator: Next question comes from Mark Davies Jones from Stifel. Please go ahead.

Mark Davies Jones: Good morning, both.. Two for me, please. Firstly, could you talk a little bit more about some of the moving parts in terms of the end market mix? Because you've been understandably cautious on sort of calling the volume picture from here. But it seems to me that something like Malvern Panalytical, we're seeing big cyclical recovery in mining and construction markets. We're seeing very strong momentum, obviously, in pharma, by pharma. Is there a potential in those areas that we actually see a much bigger recovery in activity and sales this year. And you were saying Q4, there were some capacity issues dealing with that. If we do see such a ramp up, can you meet that demand? And are those temporary issues due to the pandemic? Or is there something more structural in terms of your capacity and ability to ramp up in order. That was the first. And then the second one is slightly mixed messages on Industrial Solutions, obviously, a new CEO who has got experience building platforms. But on the other side, you're clearly indicating more disposals. So can you give us any kind of sense, a lot has already gone from that portfolio? What kind of proportion of the remaining Industrial Solutions business might be a potential exit candidate? How much of it might be ongoing? Any sort of indication would be helpful there.

Andrew Heath: All right, Mark. Thanks for your questions. Nice to hear from you. I think just in terms of sort of end market mix of Malvern Panalytical, what you said is absolutely what we are seeing. I mean, the pharma life sciences has recovered strongly. We actually saw year-over-year growth in pharma, collectively as a group. Malvern Panalytical drove that trend in the second half of the year extremely well. Minding, we absolutely anticipate that the activity levels will come back with overall GDP and the overall economy. And certainly in Asia, it's been stronger than other parts of the world. So as the Asian economy has picked up and it's held up better, we've seen mining likewise hold up better out there within Malvern Panalytical. And a lot of the sort of fine chemicals, material characterization work they do in things like semiconductors, for battery technologies, for additive layer manufacturing. Again, we see good long-term and pent-up demand there. So certainly for Malvern Panalytical, as I said, we have a very positive outlook for the business this year. And just on the capacity issue point, I should maybe clarify that. I mean, it was very much short term. I mean, we -- as we sort of planned the capacity back in sort of July, August time frame and sort of anticipate order intake for the back end of last year, the orders just came in much stronger than we anticipated. So we have not placed as much material orders. And we had some constraints in some of our facilities. But that was very much a short-term one-off effect. And the business is -- has adjusted, and we continue to keep a very agile approach and watch on the markets to make sure that we can respond as the markets come back, and -- so that we don't miss out. So you shouldn't read anything into that, that was just a one-off impact. But I mentioned it as much as anything to say, the demand is clearly there and has come back stronger than we anticipated and continues to maintain. So it's all good news. And then -- yes, on ISD, the -- again, we've been sort of consistent all the way through that we are not going to disclose the businesses we are looking to sell. I've sort of -- I think I've sort of -- been sort of clear that we were looking to sell sort of four to five of the businesses. We've clearly concluded on three of them. That intent still remains in place and the remaining businesses at the end of this year will be those that we see having good long-term prospects within the group that I think you can see in terms of just sort of the growth rate and the ISD achieved and then sort of with the pro forma analysis that Derek did. The underlying quality of some of those businesses in ISD is very strong, and we would like to scale them up as we’ve talked about previously.

Mark Davies Jones: Okay. Thank you.

Operator: Our next question is from Andrew Wilson at JPMorgan. Please go ahead.

Andrew Wilson: Hi. Good morning, everyone. Just probably two, I guess, relatively quick ones from my side. Thinking about the portfolio in terms of how it performed in 2020, just interested as to how it either, I guess, confirms what you're thinking in terms of the -- maybe the bolt-on M&A is required for the platform or whether it's shifted your focus a little bit just in terms of seeing how those businesses either managed the downturn or sort of provide the opportunities going through the downturn?

Andrew Heath: Yes. Thanks for the question, Andy. So I mean, I think overall, that certainly sort of Malvern Panalytical, HBK and a number of the ISD businesses, particularly Servomex and PMS, their performance was pretty resilient under the circumstances. And I think you can see that come through in the numbers we've disclosed today. In terms of the -- our M&A strategy, it still remains the same. We still very much want to target M&A around bulking up and scaling up our platform, potential platform businesses, as I've said. I think the earlier question that we had from Mike around -- is it a more challenging environment? Yes, it is. But that just puts more focus on making sure that we find the right acquisitions where we can drive the right synergies and returns out of out of those acquisitions. Now it may be a little bit more expensive. But as long as we're convinced and compelled that it's the right thing to do, and we can get those returns on the capital we invest there, then we are still motivated to do that. Does that answer your question?

Andrew Wilson: And then -- yes, absolutely. Yes, I was more kind of, I guess, interested if there were any big changes, but it doesn't sound as if that's been the reality in terms of sort of how you assess the requirements?

Andrew Heath: No, no, I think our assessment on our platform, potential platform businesses around their end markets, prospects, and aligning with our purpose and the underpins of those markets remains the same, yes.

Andrew Wilson: Yes. And then the second one, slightly different. It's really to, I guess, clarify some of the comments that you've made on -- it sounds that momentum has basically continued kind of from the Q4 into, obviously, the early part of the Q1 and sales similarly. I guess it's just -- I just wanted to sort of clarify that there hasn't really been any meaningful divergence or change in terms of the underlying themes because I appreciate you're not going to sort of put a number on January sales for us, but recognizing there's the seasonality in the business kind of Q4 going into Q1, but in terms of the trajectory, just trying to get a sense of, I guess, there's nothing we should be thinking about in terms of particular areas slowing or kind of further accelerating?

Andrew Heath: No, I don't think there's any areas that we see there's a slowing. I mean, as I said, the orders continue to flow in well. I mean, orders for the year, we were only down 7% last year versus 10.7% on the top line. And that sort of overall trend continues. Pharma, life sciences, machine building has been particularly strong. We see semicon electronics coming back, that some of our businesses are earlier cycle exposure to electronics and semicon. So we're seeing that coming through and orders are building in some of those sort of later cycle exposed businesses. In that arena, our aerospace activities are predominantly sort of defense and space related. And that's held up a lot better. We have relatively little exposure to civil aerospace. Auto, again, was later cycle, but has sort of flattened out. As I said, a lot of our OEM customers continue to invest heavily in terms of electrification of their product range, which is helping demand and sort of machine building has been really strong all the way through last year. And then as we look at sort of GDP forecast, 3.7% to 4.7% global growth. So Goldman Sachs, I think one of bankers is up in the 6% range. Industrial production forecasted to sort of be up 6%, 7% globally this year. All the trends point to -- as the vaccination program rolls out and is successful, we all hope and pray. And as lockdowns are eased, the pent-up demand, I think, will flow through well for us in the second half. And the Q4 order intake, I mean, coming into January, I would say we have the potential to get fairly close to getting back to sort of Q1 levels from 2020. Now with the lockdown restrictions, particularly in Europe and disruptions in North America and elsewhere, I think that's less likely, but it does underpin the fact that the fundamental demand is flowing through.

Andrew Wilson: Perfect. Thanks, Andrew. I appreciate the detail.

Operator: Our next question is from Xing Lu at UBS. Please go ahead.

Xing Lu: Hi. Good morning. Thank you for taking my questions. I have two, please. Firstly, on HBK, could you maybe quantify your current exposure to kind of EVs versus traditional ICEs? And how you see that developing in the next 3 to 5 years? So I just want to get a sense of opportunities here given that, obviously, R&D into new tech is increasing, but traditional ICEs definitely on the decline. So the mix shift and impacting your business, that will be interesting? And secondly, on Omega, just noting your modest recovery comments in first half 2021 because obviously, given the U.S. IP is actually recovering quite strongly, particularly in 2Q. So just interested in how you're tracking to U.S. IP and if you've actually seen any internal issues that could slow your recovery relative to the market there? Thank you.

Andrew Heath: Yes, Xing, good to hear from you as well. So just quickly on HBK, I'm conscious of the time. I'm trying to be concise. So I mean, generally speaking, we're not hugely exposed in terms of HBK's offering in terms of internal combustion engines. We don't do sort of sensors around the engines, the combustion process itself and measuring that. We are much more sort of focused on all of the sort of talk, dynamics, noise, vibration, harshness, testing arrangements, and all of those hold true for electric vehicles. And if anything, talk is even more important for electric motors in terms of the performance, but also in terms of battery life, which is becoming ever increasingly more important for the auto OEMS. We are doing noise assessments on drive by noise. We have an offering for outdoor. Noise is measuring. That's actually quite difficult to achieve on a reliable basis. So we're developing also solutions for indoor noise measurements to pass the certification tests. And equally here, the dynamics of the vehicle change quite considerably between having a sort of a large internal combustion engine sitting over the front axle versus four electric motors at each wheel hub and batteries lined along the chassis. So that changes the whole dynamic. So the simulation testing, the dynamic modeling and the measuring of that is also opportunities for us. So we see the development of electrification, electric vehicles, hybrids as a real positive. And then on Omega, generally, Omega absolutely tracks the North American IP, which is why we sort of said a modest H1. The forecast that we're looking at does see a pickup coming more in Q2, but more strongly in the second half of the year, which I think is consistent really with what you're seeing.

Xing Lu: Thank you.

Operator: Our next question comes from Robert Davies from Morgan Stanley. Please go ahead.

Robert Davies: Yes. Thanks for taking my questions. I just have a few. One was just on machine manufacturing, which is one of the, I guess, notable end markets that was up year-on-year. Just wondered from a regional perspective, can you give us any color what's driving that 12% growth, is my first one. The second one was just on China. I notice that is still down in negative territory for the full year. Just wondered if you could give us a little bit more color on the ground because obviously, that was coming out of COVID restrictions, as to why the growth wasn't a bit stronger over China? I mean maybe just if you could give us some idea what the cadence of growth was through China through the back half of '20? And then the remaining two questions I had was just on the aerospace side, you mentioned your higher exposure to defense. Do you have any sort of backlog there? I guess, should we be thinking about a step down on that Aerospace & Defense business into 2021? And then the final question I had was just around customer inventory. You mentioned your sort of working capital management. But do you have any idea what or where a customer increase is getting right now? Do they feel depressed in terms of your conversations with customers?

Andrew Heath: Yes. Sorry, I missed the -- your first question, it broke up slightly.

Robert Davies: It was on the regional drivers behind the 12% growth trend in machine manufacturing, which is obviously the strongest group you had. Just wondered what was driving that segment?

Andrew Heath: Yes. Okay. So again, I will try and just rattle through them quickly. But I mean machine manufacturing, a lot of that was within HBK, and we -- a lot of it was around sort of our measurement technologies, weighing technologies, and sensors for production lines. Particularly helped within sort of, pharma and also within sort of food manufacturing and production through last year. So we saw quite a lot of investment -- capital investment going in there, which drove demand, particularly in North America. And to some extent, propped up by some auto investment as well. In China, through the year, we actually delivered -- well, the China decline just came in as low single digits collectively for the group. So China, we saw the earliest impact of the pandemic in China and then it quickly recovered and continued to do so through the year. So say, for the full year, we only were slightly off where we were in 2019. On the aero side, on defense, at the moment, the -- certainly, the sort of defense spending, space spending continues to hold up. So I don't have any particular concerns that, that's sort of going to tail off as a later cycle market, if that's really where the question was coming from. And on the customer inventory side, again, we don't see a huge amount -- customer inventory build having lot of inventory around as a major problem. I mean, you can see just in terms of the response to the pandemic and where the businesses sat relative to the cycle, a lot of our businesses are still relatively short cycle. And as such, as demand comes back, typically, the inventory isn't sitting there that would then cause that problem. So again, it points to some sort of good pent-up demand, we think, which is consistent with what we are seeing.

Robert Davies: That’s great. Thank you very much.

Operator: Our next question is from Harry Philips at Peel Hunt. Please go ahead.

Harry Philips: Good morning, everyone. Two very quick ones. This time last year, we had a special bid. Now we have a buyback. I’m just curious as to the change of strategy around that. And then secondly, in terms of your own supply chain, are you seeing any product availability issues at the current time in any particular area?

Derek Harding: Yes, let me take the first one and then Andrew take the second one. So in terms of methodology of capital return, we've always said that we would look at specialty or buy back if you recall, there was a share consolidation with the special bid last year as well. But it sort of horses for courses at different times. But the main driver of the buyback this year is to retain a little bit of flexibility. As we said right at the outset, there are M&A opportunities out there. We think that -- well, we know that we can fund a number of them and do the buyback but if they all came in really positively at the end of the year, then we might want to just retain a bit of flexibility. So that's the logic for the buyback. So it will be a gradual buyback of the £200 million through the course of the next 12 months.

Andrew Heath: And Harry, just on the supply chain, side. I mean, there's clearly some shortage sort of globally around semiconductors in certain markets at the moment. There's nothing that's causing us any particular pain at the moment. But it's something that we continue to watch carefully. I mean, I think generally, I do have a concern around the speed of which the demand comes back at the capacity that's in place sort of more generally. But it's something that we are actively monitoring and tracking across all our businesses to make sure that we've got a robust supply chain in place to support the growth as it comes back.

Harry Philips: Great. Thanks very much, indeed.

Andrew Heath: Okay.

Operator: Our next question is from Richard Paige at Numis. Please go ahead.

Richard Paige: Good morning, all. I will try and get this [indiscernible]. Two questions, if I may. One is the more general one about, you've given a lot of detail around the cost out in the business. And I guess what I've asked is just the longer-term potential you perceive in terms of operating margins for the group as a whole, is 18.4% that you've done before? Are you achievable would be a sort of staging post at a higher playing. And then a more specific one on Omega. Just a bit more detail on that Avnet partnership because it looks as though it might be a definitional change, but you've had a decent step-up in the distribution sales in that business. Is that something that's starting to show some decent growth? Thank you.

Andrew Heath: Yes. Okay. Richard, thanks for questions. So in terms of the cost out and where we were sort of targeting to get the cost base, clearly, the profit improvement program has been very successful, and we took further steps last year. We're confident that we have now sort of resized the cost base to an appropriate level for -- to sustain a lot of the business into a market recovery. As Derek said, inevitably, we will have to bring some costs back in, depending on the level of growth. But our intention absolutely is that costs come back in at a much lower rate than we see from a top line growth perspective. And then from the pro forma analysis that Derek showed and where overheads are now sitting versus the growth projections you might want to build in, you can absolutely see the strong operating leverage opportunity that we have. And therefore, that 18.4% previous high from a margin perspective, still remains our sort of nearer-term target. As the growth comes back this year, I'm absolutely confident we will make good progress towards that. And as we've said before that, no one should see that as a ceiling. Our peers are operating with margins typically sort of north of 20%, and that's our sort of longer term objective. And that's where we will deploy the Spectris business system to drive efficiency, but also growth that we see the organic growth coming through and then the operating leverage continuing to build off the back of that. And then on Omega, yes, the Avnet Newark partnership has been very successful. I actually spoke to the Newark CEO earlier in the week and he's delighted with the performance of Omega in supporting them, and it's a great partnership. This is part of sort of our omni-channel approach and really looking at how can we take Omega to market through, not just our own channels and distribution and e-commerce, but also through other distributors that we can't reach as well. Because often, you've got sort of large OEM accounts or often a person to part of consolidate their spend into one large sort of MRO type distributor like Avnet, the Newarks of this world. So we are building relationships appropriate there. And we obviously hope to continue to build off the Newark partnership but also develop other partnerships in parallel, that’s part of Amit’s strategy.

Richard Paige: Okay. Thank you very much. Now all my webcast questions are up. Thanks.

Andrew Heath: Yes.

Operator: Our last question from the audio conference comes from George Featherstone of Bank of America. Please go ahead.

George Featherstone: Morning. Thanks for taking the question. Just a quick one for you. On the outlook for academic research, as it relates to government funding availability coming out of the COVID crisis. Could you give us some color on what you're seeing here in the different regions?

Andrew Heath: So, I mean, generally speaking, academia is coming back in line with sort of the sort of general liberation of the population in various regions. So we've seen certainly sort of within sort of China, Asia, an uptick. And then in Europe and America, the lockdown these last summer progressively orders are returning within academia, albeit it's still quite muted.

George Featherstone: Okay. Thank you very much.

Operator: We have no further questions on the phone line. So I will hand back to the team to address any webcast questions.

Unidentified Company Representative: Hi, Andrew. I’ve got one from the webcast here. Can you talk about the impact of Brexit effectively and whether that would impact any of your product specifications?

Andrew Heath: So Brexit for us, fortunately, is not really a very material issue. I think we've said all along, the Brexit impacts from a hard Brexit would only be sort of £2 million to £4 million on profit. Clearly, the -- what's been negotiated and agreed with the EU and the U.K., we're very much at the sort of bottom end of that range in terms of impact. And then our businesses are having to adjust to a country of origin certification requirements. And that's -- that's been sort of the biggest demand on our teams, but they've risen to the challenge, and generally speaking, responded very well. So we’ve not really seen much of -- if anything, of a Brexit impact over the last few weeks. We have had to use more air freight when ports have got a bit congested in the first few days and weeks, but that seems to have calmed down as well now. So, generally, it's not really a primary issue for us.

Unidentified Company Representative: Okay. Thank you. That’s all from the webcast. So Andrew, do you want to close? I think we've got all the other questions from the phone line as well.

Andrew Heath: So I think we're done, and I'm conscious of the time. So, look, thanks, everyone, for joining today. As I said, I'm very pleased with our performance last year. The way in which we responded, the manner in which we responded, I think is absolutely testament to just the culture and values of the whole Spectris team. And that delivered a very resilient performance. So we will continue to carry on with our socially responsible balanced approach looking after all the interest of our stakeholders as we drive a sustainable financial health in the business and continue to execute on our strategy for profitable growth. So thanks very much for joining, and I look forward to talking to you all again in April, if not before. Thanks very much.

Derek Harding: Thank you.