Spectris plc (LON:SXS), the expert in providing insight through precision measurement, has announced half year results for the six months ended 30 June 2023.
Strong first half performance and upgrade to full year guidance
- Strong financial performance driven by continued execution of our strategy
o Sales up 23% (LFL1: 19%) from volume growth, market share gains and pricing
o Adjusted operating margin increased 180bps to 14.5% (2022: 12.7%)
o Record adjusted operating profit for the half year up 41% to £102.1 million (2022: £72.3 million)
o Adjusted earnings per share increased by 55% to 77.2p (2022: 49.8p)
o Strong order book with book to bill of c.1x with order intake normalising as anticipated
o Strong cash performance with adjusted cash conversion of 117% (2022: 39%)
o Dividend per share increase of 5%
- Great businesses delivering market share gains in structural growth markets
o Spectris Scientific: sales up 21% (LFL: 22%); adj. operating margin 17.5% (2022: 16.2%)
o Spectris Dynamics: sales up 23% (LFL: 13%); adj. operating margin 13.5% (2022: 12.7%)
o Other: sales up 33% (LFL: 27%); adj. operating margin 19.6% (2022: 11.0%)
- Investing in organic growth and targeted M&A supported by a strong balance sheet
o New product launches in all businesses underpinned by investment in R&D
o In Spectris Dynamics, agreement to acquire MicroStrain Sensing Systems Business
o Strong balance sheet with net cash of £214.3 million (2022: net debt of £98.3 million) and active M&A pipeline
o Continuation of share buyback with £83 million of £300 million programme remaining at 30 June 2023
o Return on Gross Capital Employed (‘ROGCE’) increased to 16.7% (2022: 13.8%)
- Upgrade to guidance for the full year
o As a result of our strong first half performance, we now expect organic sales growth for the full year to be ahead of our previous guidance of 6-7%
o We continue to expect strong progress on margins and expect full year adjusted operating profit to be in the range of £250 million to £265 million, representing strong double-digit year on year growth
| Continuing operations | H1 2023 | H1 2022 | Change | Like-for-like change1 | |
| Adjusted1 | |||||
| Sales (£m) | 702.5 | 570.2 | 23% | 19% | |
| Operating profit (£m) | 102.1 | 72.3 | 41% | 35% | |
| Operating margin (%) | 14.5% | 12.7% | 180bps | 170bps | |
| Profit before tax (£m) | 103.4 | 70.3 | 47% | ||
| Earnings per share (pence) | 77.2p | 49.8p | 55% | ||
| Adjusted cash flow conversion (%) | 117% | 39% | 78pp | ||
| Return on gross capital employed (%) | 16.7% | 13.8% | 290bps | ||
| Statutory | |||||
| Sales (£m) | 702.5 | 570.2 | 23% | ||
| Operating profit (£m) | 70.5 | 54.3 | 30% | ||
| Operating margin (%) | 10.0% | 9.5% | 50bps | ||
| Profit before tax (£m) | 68.5 | 41.8 | 64% | ||
| Cash generated from operations | 108.9 | 43.4 | 151% | ||
| Basic earnings per share (pence) | 50.0p | 26.5p | 89% | ||
| Dividend per share (pence) | 25.3p | 24.1p | 5% |
1. Alternative performance measures (‘APMs’) are used consistently throughout this press release and are referred to as ‘adjusted’ or ‘like-for-like’ (‘LFL’). These are defined in full and reconciled to the reported statutory measures in the appendix.
Commenting on the results, Andrew Heath, Spectris plc Chief Executive, said:
“We have good momentum in the business and I am delighted to see the progress we are making with our Strategy for Sustainable growth. The strong financial performance in the first half reflects continued strategic execution and the brilliant contribution of my colleagues across the Group.
In Spectris Dynamics and Spectris Scientific, we have two great premium precision measurement businesses on attractive growth trajectories, more aligned than ever to markets with a strong sustainability focus. Demand for our solutions is being amplified by new products and services addressing these trends. Having repositioned Spectris over the past three years, we are now a higher quality, more customer-focused and resilient business.
While we remain vigilant and alert to the broader macro environment, the strong first half performance and strength of our order book means we are upgrading our guidance for the full year. We continue to drive operational excellence to reduce emissions, improve productivity and efficiency in-line with our ambition to be a leading sustainable, compound-growth business.“
Chief Executive’s review
A strong performance in the first half and continued execution of our strategy
We have made excellent progress during the first half underpinned by the continued strong execution of our strategy and demonstrating our credentials as a leading sustainable, compound growth business. We have maintained strong sales growth momentum, delivering growth well ahead of our markets and record profitability. I would like to thank all my colleagues across Spectris for their support and the high-performance culture we are collectively building.
Our performance in the period is consistent with the medium-term targets laid out at our Capital Markets Day last October as part of our new Strategy for Sustainable Growth. We continue to improve the quality and resilience of our business, giving us confidence in our strategy to compound growth through the cycle, while continuing to expand operating margins.
During the first half, reported sales grew 23%, 19% on a LFL basis, reflecting the strong conversion of our order book, supported by easing supply chains. Reported growth includes 250 bps contribution from acquisitions consistent with our strategy of compounding growth through M&A. LFL sales growth of 19% comprises 11% volume and 8% price consistent with our growth profile in 2022.
Our order book at the end of June remains strong. Despite the strong sales growth in the first half, the order book is equivalent in size to the position at the end of December (after adjusting for foreign exchange), with our book-to-bill c.1x. We continue to expect the order book to settle at around 4-5 months of cover over the medium-term.
As expected, against a strong comparative in 2022 where LFL orders grew by 20%, demand has continued to normalise as supply chains have eased and lead times reduced. Consequently, order intake was down slightly in the first half by 2% (down 5% LFL). On a LFL basis, North America was up 1%, Europe down 5% and Asia down 11%.
We continue to deliver higher quality, more profitable growth reflecting the work we have done to strengthen the business, our focus on operational efficiency and tight cost control. Strong sales growth, alongside positive net pricing, resulted in 140bps increase in adjusted gross margins. Adjusted operating margin of 14.5%, was 180 bps higher than the comparative period (2022: 12.7%) resulting in adjusted operating profit of £102.1 million (2022: £72.3 million) an increase of 41% (35% on a LFL basis).
Adjusted earnings per share grew by 55% to 77.2 pence. Statutory operating profit of £70.5 million (H1 2022: £54.3 million) increased by 30%. This gave a 10.0% statutory operating margin, 50bps higher than 9.5% reported at June 2022.
We continue to generate strong cash flow, with cash conversion of 117% on an adjusted basis in the first half, enabling us to maintain a very strong balance sheet and providing the Group with significant flexibility.
The Spectris Business System (‘SBS’) is central in improving productivity, with LFL adjusted overheads 30bps lower as a percentage of LFL sales. These savings have contributed to the Group delivering an increased operating margin for the period and we expect to deliver further progress on margins in the second half.
Our performance in the first half demonstrates continued momentum and provides us confidence in delivering our raised guidance for the full year.
Strategy for Sustainable Growth
Our Strategy for Sustainable Growth is delivering compound growth and increased profitability, along with strong cash flow and strong, consistent returns on invested capital. This is reflected in our medium-term performance framework for the Group, to deliver organic sales growth of 6-7% through the cycle and adjusted operating margin of 20%+. The Group’s strategy and business model is aligned to delivering this framework, through six key elements:
1. Great businesses
Asset-light, high-quality businesses focused on premium, precision measurement solutions and industry-leading domain expertise, aligned with our Purpose.
2. Structural growth markets
Aligned with attractive, sustainable, structural growth markets with high barriers to entry.
3. Customer centricity
Solving our customers’ challenges with leading, differentiated solutions, equipping them to make the world cleaner, healthier and more productive.
4. Investing in growth
Disciplined capital allocation for the benefit of all stakeholders – investment in growth through R&D and M&A.
5. Operational excellence
Leveraging the Spectris Business System improvement projects, process simplification and our high-performance culture.
6. Leading sustainable business
Sustainability is at the heart of our Purpose to deliver Value Beyond Measure for all our stakeholders.
Great businesses focused on premium, precision measurement solutions
Spectris is built around Spectris Scientific and Spectris Dynamics, two world class, asset-light businesses focused on premium, precision measurement solutions with industry-leading domain expertise which together, represented 85% of Group revenue in the first half.
Spectris Scientific is focused on the high growth end markets of life sciences & pharmaceutical, metals, minerals, mining, semiconductors, and academic research. We are well positioned in high value areas where our domain expertise and analytics are valued by customers throughout the workflow. Our customers need the best measurement, and can’t, and won’t, compromise.
In the first half, the Division delivered very strong growth in both sales and adjusted operating profit, up 22% and 30% on a LFL basis respectively, with 130bps improvement in adjusted operating margins.
Spectris Dynamics is focused on four premium product lines (Virtual Test, Software, Data Acquisition and high-precision Sensors) with high growth prospects, where we have leading positions. The products are complementary for customers and combine to offer the broadest test and measurement solutions in the market. Spectris Dynamics supports customers in the growth markets of automotive (including electric vehicles), aerospace and defence, machine manufacturing and personal audio. These end markets require greater test and measurement functionality and fidelity to accelerate the time to market for new products and manage increasingly sophisticated measurements for automated manufacturing and in-process applications.
During the period, sales were up 23%, 13% on a LFL basis, with an expansion in adjusted operating margins of 80bps generating strong growth in operating profit of 31% and 20%, on an adjusted and LFL basis respectively.
Aligned with attractive, sustainable, structural growth markets
We are more a resilient business today resulting from our focus on attractive markets with strong fundamentals and selectively targeting those segments that are delivering above market growth with leading, differentiated offerings.
In the first half, LFL sales exceeded the expected medium-term market growth rates in each of our major end markets with the exception of Life sciences/Pharmaceutical, where sales grew by 1%. This reflects the earlier normalisation of demand after strong growth in 2022.
Growth across our other major end markets is set out in the table below: Technology-led industrials was up 15%; Automotive up 10%; Electronics and semiconductor up 15%; Metals, minerals, mining up 29%; and Academic research up 45%.
| Industry | Sales H1 2023 (£m) | Sales H1 2023 % of total Group | LFL sales Growth | Expected medium-term market growth |
| Life sciences / pharmaceutical | 139 | 20% | 1% | 5-7% |
| Technology-led industrials | 103 | 15% | 15% | 5-7% |
| Automotive | 81 | 12% | 10% | 4-6% |
| Electronics and semiconductor | 74 | 11% | 15% | 6-8% |
| Metals, minerals, mining | 66 | 9% | 29% | 5-6% |
| Academic research | 67 | 9% | 45% | 5-6% |
Customer centricity: leading solutions to make the world cleaner, healthier and more productive
During the half year, we continued to collaborate closely with our customers helping them solve some of their most difficult challenges.
In Spectris Scientific we have seen good demand for our X-ray systems, particularly in the areas of green metals, green mining and green construction. For instance, in the first half, we received a large order from a major global cement manufacturer in Asia for over 20 of our Zetium XRF and Aeris XRD systems to detect both the elemental and structural composition to ensure the integrity of the finished product. The customer will utilise our instruments to evaluate raw materials and final product as well as enable the transition to more sustainable manufacturing.
We are also strengthening customer relationships and broadening our aftermarket offering through the introduction of SMART Manager. SMART Manager enables connection to customers’ instruments in the field, facilitating early diagnosis, allowing us to service the instruments remotely or equip our engineers with better information thereby improving repair times and customer uptime. We are also exploring how we develop SMART Manager to include different levels of aftermarket service such as customer dashboards. While we are very much at the early stages, we are encouraged by the initial response from customers, with c.1,500 instruments already connected, and excited about its future potential including proactive monitoring, diagnosis and service.
In May, Spectris Dynamics hosted their Zero Prototypes Summit at our virtual test centre of excellence in Udine, Italy attracting over 280 engineering managers and design engineers from automotive OEMs, suppliers, motorsport teams, universities and research centres. The event provided attendees with valuable insights into how major players in the automotive industry use our simulation, driving simulators and Hardware-in-the-Loop technologies to accelerate new vehicle development at lower cost and risk.
The Automotive Testing EXPO in Stuttgart in June provided Spectris Dynamics with the opportunity to showcase our combined solution for automotive customers. We continue to generate strong interest in our overall automotive offering, as we support the customers’ drive to virtual innovation and the transition of their fleets to electric. We continue to see strong demand for our electric power testing solutions, software and for our premium data acquisition systems alongside our virtual test and in-process solutions. The combined portfolio of solutions demonstrates how both our virtual and physical test and measurement domain expertise is supporting our customers’ need to innovate through the multiple stages of their product lifecycle.
Investing in growth through R&D
We invested £52 million in R&D (2022: £47.6 million) representing 7.4% of sales in line with our stated guidance. We continue to see strong take up from customers and are having significant success in commercialising our technology with a number of new product launches in the periodSpectris Scientific, launched the NanoSight Pro for measuring the size and concentration of nanomaterials. Powered by machine learning, the NanoSight Pro automates customer workflows, reducing human error and enabling users to generate robust, high-quality nanomaterial characterisation data up to three times faster than previous versions. The instrument is designed to be used primarily in rapidly growing biopharmaceutical applications, providing insight to enable the development of vaccines, cell and gene therapies, and drug delivery systems.
Also during the period, Spectris Scientific launched the FORJTM fusion sample preparation instrument. Delivering robust and superior quality fused samples for X-ray fluorescence analysis, FORJTM is the fastest on the market, boosting productivity by up to 25%. Suitable for full-lab integration, it is easy to install and provides a safe and user-friendly interface.
In Spectris Dynamics, we expanded our simulator offering in virtual test with the launch of the COMPACT Full-Spectrum Simulator (FSS). The FSS provides highly accurate motion, vibration and sound effects in a small footprint enabling Human-in-the-Loop simulation allowing test drivers and engineers to closely replicate the experience of driving a real car. In addition, we implemented a number of upgrades to our leading product portfolio across Physical Test and In-Process including multiple software releases and enhanced functionality. We also delivered a significant number of prototypes to our global OEM sensor customers and continued to build the pipeline of growth opportunities in applying precision sensing to customers’ hardware.
We expect R&D spend to be at around 8% of sales for the full year, with all our R&D investments expected to return an IRR of at least 15%. In 2022, we introduced our vitality index for the first time. This measures current year revenue from products released over the previous five years as a percentage of total revenue in the current period. The index was 25% by the end of 2022 and we expect this to increase further over the next five years to over a third of total sales.
Investing in growth through M&A
We maintain an active pipeline of potential acquisition targets from early-stage technologies to bolt-on acquisitions of varying sizes, through to larger-scale opportunities. This is an important component of our strategy to compound growth.
In June, we signed an agreement to acquire MicroStrain Sensing Systems Business (MicroStrain), a leading developer of inertial and wireless sensing systems, serving the industrial and aerospace sensing systems market. When the deal completes, MicroStrain will be integrated into Spectris Dynamics, which has a long-established position in high-precision sensing solutions and where it will benefit from leveraging Spectris Dynamics’ global sales and service network. The acquisition strengthens our overall sensor offering, particularly in inertial sensors, helping further penetration into the rapidly growing automation and smart manufacturing markets, while also Increasing our North American presence.
The integration of Dytran, which we acquired in September 2022, continues to progress well. The acquisition has strengthened our piezo-electric sensor offering and our position in the US space, aerospace, defence and automotive industries.
In March, we sold the remaining part of Concept Life Sciences (CLS), a business acquired in January 2018, that was part of the Spectris Scientific Division (CLS contributed £11.8 million of sales and £0.2 million of profit in H1 2022).
The Group will continue to review divestment opportunities where appropriate and where such activity is aligned to the Group’s strategy.
At the end of June we had completed just over £215 million of the £300 million share buyback programme and had net cash of £214.3 million. This strong financial position provides the Group with significant flexibility and headroom to pursue further acquisitions.
Operational excellence: Spectris Business System driving productivity and competitiveness
Following the supply chain challenges experienced across many industries in 2022 and significant growth in customer demand, our focus during the first half has been to continue to meet our commitments to customers with increased production levelling and strong forecast to plan execution. This has meant expanding our capacity efficiently, to convert our strong order book into sales, while at the same time reducing costs and lead times. The improvements delivered have also driven customer satisfaction higher and improved competitiveness.
During the first half, the businesses have continued to further strengthen the deployment of the Spectris Business System (SBS) to deliver this result. Some of the highlights include:
· Significant improvement in productivity and throughput, in excess of 50% in some cases, by: eliminating bottlenecks; improved workflow management to eliminate material shortages; capacity expansion; and daily management by our self-directed work teams;
· A project to extend the life of a key component in one of our instruments has delivered just under £300k of benefits so far this year;
· Improved cleanroom capacity and layout at one of our sites has delivered close to £500k (year-to-date) of benefits by increasing productivity; and
· In Suzhou, we are deploying automation across multiple processes improving labour productivity and at the same site, we have delivered a nearly 30% reduction in lead-time as well as labour and inventory cost savings for a key product family.
The main objectives of SBS are to remove waste, drive efficiency and strengthen competitiveness as we grow the business and enhance margins. I am very pleased with how all the businesses are actively driving our SBS ‘Bronze, Silver, Gold’ certification programme, with a number of sites preparing for their Bronze certification by the end of the year. In H1 2023, the Group reduced LFL overheads by 30bps as a percentage of LFL sales, supporting our medium-term operating margin target of over 20%.
In addition to SBS, we are also making good progress with the implementation of our new SAP S/4HANA installation which is on track to go-live during the course of 2024. The new system will replace a number of legacy ERP systems and help standardise, simplify and automate processes to enhance our operations, enabling our businesses to become more efficient and scalable.
The reorganisation of Spectris Dynamics at the start of the year around three end-market verticals: Virtual Test, Physical Test and In-Process, to leverage growth and customer intimacy from our domain expertise has gone well. This has been made possible by the commitment of our people, a high-performance culture and our focus on making Spectris Dynamics a great place to work. The construction of our new manufacturing facility in Porto is well underway. This new site, which will be operational in 2024, will help balance our manufacturing footprint between Asia and Europe and strengthen the level of local production for our European customer base.
Leading sustainable business
Sustainability is at the heart of our Purpose to deliver Value Beyond Measure for all our stakeholders. We have a clear ambition to create a positive and lasting impact, for both the sustainability of our operations and for our opportunity to harness the power of precision measurement to make the world cleaner, healthier and more productive.
During the period we continued to make strong progress towards our ambition to become Net Zero across our Scope 1 and 2 emissions by 2030 and across our Scope 3 emissions by 2040 through our SBTi validated targets. We are making very good progress on meeting our Scope 1 and 2 targets and we continue to accelerate our adoption of EcoVadis to firstly understand and then reduce the carbon impact and wider ESG risk in our supply chain.
In April 2023, we worked with Young Professionals to deliver our second virtual STEM work experience event attended by over 700 school students from a range of diverse backgrounds. Students provided great feedback on the event, especially around the opportunity to learn more about the breadth of various STEM-related careers.
We remain a proud sponsor of International Women in Engineering Day which took place in June. This year the day was celebrated in conjunction with The Spectris Foundation, Young Professionals and Techgirlz involving over 275 young women from across the UK and the US exploring different career paths in technology and engineering. Attendees enjoyed an exploration of digital design and heard from colleagues across the Spectris Group who gave inspiring presentations on their personal experiences working in technology and engineering, as well as practical advice and expertise in their fields.
In support of our colleagues with family and friends in Turkey and Syria following the devasting earthquake in February, we made a donation of £100,000 to Care International as part of the Disasters Emergency Committee appeal and we also matched employee donations of over £2,000 to help provide humanitarian aid.
Investing in our people
We are making great progress building a values-based, healthy, high-performance culture across the Group.
We continue to invest in the development of our people. In the first half we graduated the first cohort of our new leadership development programme, called Ascend. Participant feedback has been extremely positive with 3600 feedback noting an improvement in leadership capabilities as a result of the training.
I am also delighted to report an increase in our engagement scores, with our annual Gallup engagement survey showing positive results in all areas and continuing the upward trend over the last three years. The overall average engagement score rose to 3.92 (out of 5.00), up from 3.86 last year and 3.72 in 2021 with strong levels of participation in the survey at 80% of the global population. While we still have work to do on our engagement journey, I am greatly encouraged that we are heading in the right direction.
Summary and outlook for the full year
I am delighted by our strong financial performance in the first half, reflecting the continued execution of our strategy, conversion of our strong order book and the continued support of my colleagues across the Group.
While we remain vigilant and alert to the broader macro environment, the strong first half performance and strength of our order book means we are upgrading our guidance for the full year. We continue to drive operational excellence to reduce emissions, improve productivity and efficiency in-line with our ambition to be a leading sustainable, compound-growth business.
Andrew Heath
Chief Executive
