Spectris Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 28, 2025

There are 18 speakers on the call.

Operator

Well, good morning, and hello, everyone, and thank you very much for joining us today, be that in the room or on the webcast, as we present our results for 2024 and also our outlook for 2025. I'm very pleased today to be joined by Angela Noon, who became our CFO on the first September and who has made a very quick impression, a very positive impact in the business. So when I stood here a year ago, I have to say I expected 2024 to be another year of progress for Spectris. We delivered three years of double digit growth And despite all the normalization through 2023, which was very much in line with the market, we expected demand to pick up in the second half of last year. Markets, though, in 2024, remain subdued.

Operator

And this prolonged weakness that we have seen is largely unprecedented in its alignment across multiple end markets, as customers right across the board held back investment in CapEx and in R and D in what was a challenging macroeconomic environment, where an elevated cost of capital really bore down on our customers' CapEx and R and D expenditures. In the end, our like for like order intake was 3% lower, with demand though improving back to flat in the second half versus the prior year. While it's too early to say that we are seeing a sustained recovery, overall demand has stabilized and like for like order growth of 6% in the final quarter is really encouraging. With a book to bill of nearly one, the order book finished the year broadly in line with the opening position, representing four to five months of cover. Sales for the full year were down 7% on a like for like basis, reflecting the weakness across end markets, and this impacted our financial performance, particularly in the first half.

Operator

However, following the actions that we took through 2024, we finished the year strongly. We delivered our second half broadly in line with the second half of twenty twenty three with orders in line and sales down 4%, and that's against quite a tough comp. We also delivered another good cash performance with cash conversion of 88%. And we have maintained our strong track record on the dividend, this being the thirty fifth year of successive growth. Now I'd just like to thank all of my Spectris colleagues for their hard work and delivering such a strong finish to the year with our full year profit slightly ahead of our revised guidance.

Operator

Now in a tougher market, we focused on strong strategic execution, and the decisions we took last year will very much shape the future of Spectris, not just in 2025, but well beyond. Collectively, the big decisions that we took accelerate the delivery of our strategy and they position us strongly to deliver sustainable, profitable growth and material shareholder value creation. That's firstly through the decisive action that we've taken on cost. We've got in place an accelerated value enhancement plan that we call our profit improvement program, and that leverages the strategic operational actions that we have taken to drive profitability and it positions us to further capitalize as markets recover. Secondly, on M and A, as you know, we acquired three high quality businesses in 2024, And that significantly strengthens our two divisions and the acquisitions are strongly aligned with our ambition to make both Spectra Scientific and Spectra Dynamics global leaders in their fields.

Operator

And since completing these acquisitions, we are even more excited about the progress that we can make on both cost and on revenue synergies. Thirdly, we've continued to prioritize R and D. We've invested through the downturn. As we highlighted at our previous half year results, 2024 was a record year for new product launches with our vitality index rising from 22% to 29. And we also have a strong pipeline with some really exciting digital innovations, which will not only compound sales, but also increase recurring revenue over time.

Operator

Then fourthly, on ERP, we took a big step forward this year, and we can already see how transformative the new system will be. Importantly, we were able to work through the short term disruption that impacted the first half. Our teams did an excellent job, and we took on some useful learnings that served us well with the second implementation last October. And as a reminder, the new ERP system will deliver 150 basis points of margin improvement and as such is an important building block towards our 20% plus adjusted operating margins for the group. And finally, the Spectris business system, again generated tangible cost savings, delivering over million in 2024 with at least the same amount expected for 2025.

Operator

And I'm really pleased to say we are making great progress on our go for gold program with 10 sites now at bronze and one at silver at the end of twenty twenty four, and we have the aim to get all our operational sites at Bronze by the end of this year. So as you can see, we have a strong grip on areas that are very much under our control, improving productivity and efficiency as we drive towards our margin goal. In 2024, we also further enhanced our credentials as a leading sustainable business. Employee engagement improved again, and we also continue to make strong progress towards our net zero goals with a 22% reduction in our Scope one and two emissions last year. Overall, I'll have to say 2024 was a test.

Operator

We have emerged strongly on the other side, and I'm very encouraged by the response of my colleagues and the strength of our culture. The significant strategic and operational progress we have made positions us even more strongly in 2025 and beyond. In 2024, we continued the transformation journey that we've been on for the past five years. In 2018, Spectris was very much a disparate collection of businesses. Now with the sale of Red Lion concluding our portfolio rationalization, we have simplified and refocused the group.

Operator

And through the divestment of eight businesses at attractive valuations, generating billion in proceeds. And this program has underpinned return to shareholders. Since 2019, we have returned over billion, including million through share buybacks alone. It's also allowed us to reinvest in our future, both in R and D to drive organic growth and in high quality M and A. We invested million in R and D and over billion in acquisitions over the same period.

Operator

So as you can see, we have and continue to take a very disciplined and also a balanced approach to capital allocation. And last year, we took the decision to deploy our balance sheet on three highly synergistic and highly accretive businesses, they being Micromeritics, SCIAPS and PiezoCrist. All three businesses have been at the top of our M and A target list for some time, and that's because we've always had high conviction on both the strategic fit and the synergistic opportunities. In Scientific, the combination of Micrometix and SciAps along with Malvern Panatol creates the world's leading material characterization business for advanced materials analysis, both in the lab and in the field. And in Dynamics, PiezoCrys builds on the successful acquisitions of Ditron and MicroStrain over the past two years and creates the leading premium pressure and vibration sensor offering in the market for the most advanced applications.

Operator

The incremental contribution from these high growth, high margin acquisitions really underpins a significant increase in profit, but also earnings in 2025 and 2026. And we've always said that we would temporarily go beyond our target leverage range of between one to two times for the right deals, and we're a little above the top end of the range at the end of twenty twenty four. But our highly cash generative model plus the benefits from our profit improvement program give us a clear pathway to reducing leverage to back within the range this year. So moving on to the outlook. We entered 2025 in a strong position.

Operator

After a year of strong strategic execution, I'm even more confident about our business. However, we will, of course, remain cautious on the macro environment until there is more certainty and evidence of a sustained recovery. But what is more certain in 2025 though is the significant uplift in earnings. And underpinning our confidence is our profit improvement program. This is significant and will deliver circa million of benefits, of which million is expected this year in 2025 with an additional million in 2026.

Operator

And Angelo will cover more about this later on in the presentation. Our commitment to R and D is supporting our organic growth, and ERP and SBS are driving operational excellence as we focus on reducing overheads and in driving efficiency. And in combination with the benefits of the profit improvement program, we are on track to deliver strong progress with margins of at least 20% by 2027. Following the high quality acquisitions that we have made, we really do have great businesses with leading market positions, two world class divisions providing premium offerings in attractive niches with market leading technologies and really strong IP. And having got to know Micromeritics, Syapse and PiezoCRIS better since the acquisition, it is clearer than ever that the combination is compelling and the synergies are very real.

Operator

Additionally, we are significantly better positioned today to benefit strongly from market recovery and deliver on the operating leverage opportunity as sales improve. So while it's still early in the year, we are comfortable with the current market expectations for 2025. And looking forward to 2026, it's hard for me to not to feel even more confident in our prospects. And this confidence is rooted in our focused portfolio of high quality premium precision measurement businesses, along with a market that's rich with opportunity and with a clear value enhancement plan in place. Consequently, we have a fantastic opportunity to deliver outsized value creation at Spectris.

Operator

And we have the people to do it. The resilience and determination that our teams showed in 2024 really demonstrates the depth of our healthy high performance culture, and we're well placed, therefore, to deliver on our ambitions. And with that, I'll hand you over to Angela.

Speaker 1

Thank you, Andrew, and good morning, colleagues, ladies and gentlemen. I'm delighted to be here for my first results presentation at Spectris. As you know, I joined last September shortly before we announced our third acquisition in 2024. Since then, I've spent time learning about our businesses, meeting customers to understand their challenges, and getting to know our people. I've been impressed by what I've seen, especially the strength of technology and depth of talent within the group.

Speaker 1

Spectris is a great business with huge potential, and I believe we are now an important point in our strategy. With three new acquisitions, I'm fully energized about the future. So let's jump into the numbers. I'd like to start with the key highlights of our profit performance. Orders for the full year were 3% lower on a like for like basis.

Speaker 1

As you heard from Andrew, demand in the second half was stable. We ended the year with robust order growth in the fourth quarter. Our book to bill ratio was just under one. Sales were down 7% on a like for like basis given prolonged softness across a number of our end markets. And you can see the impact of this on both profit and margin where our direct costs are sensitive to volume changes.

Speaker 1

In order to mitigate this impact, we worked hard to reduce overheads, and I'd like to touch on that a little bit later. Adjusted operating profit was $2.00 £2 £2,600,000 with operating margin of 15.6%. Moving on to cash, adjusted cash flow of £177,600,000 resulted in cash conversion of 88%, which is fully in line with our framework. On return on gross capital employed, it was 11.6% for the year, mainly as a result of assets from our acquisitions and, of course, the reduced profit. Net debt at the end of the year was £549,000,000 with leverage of 2.3 times on a covenant basis.

Speaker 1

Staying with debt, one of my

Operator

first responsibilities was to secure

Speaker 1

long term financing to fund the acquisitions. Secure long term financing to fund the acquisitions. We achieved this through a $400,000,000 US private placement at favorable rates and at the right time, and I'm pleased to see the issuance was heavily overscribed was heavily overscribed oversubscribed and on investment grade terms. To help you, this next table provides a bridge between adjusted and statutory operating profit and also PBT. In 2024, we incurred £18,300,000 of restructuring costs in support of our profit improvement program.

Speaker 1

Additionally, our M and A activity resulted in net transaction related costs and fair value adjustments of 16,200,000.0. Software implementation costs were 45,000,000 that relate primarily to our SAP4HANA projects and sales force, which are seen as key enablers in our roads to 20% operating margin. Further down the table, the other significant item I'd like to mention is the $210,000,000 gain on the disposal of Red Lion that reflects the consideration received of £281,000,000 net of tax. Net finance costs of £2,800,000 compares with finance income last year. As a result, statutory profit before tax was £302,700,000 This next slide shows the main P and L movements during the year, including the impact of FX and M and A.

Speaker 1

You can clearly see the drop through impact on operating profit from lower volume of almost £70,000,000 together with higher production costs of 23,500,000 You could also see that we were able to partially mitigate the impact of lower sales by restructuring in both divisions during the second half, reducing overheads by £43,000,000 Now turning to cash and net debt. We finished with a slightly higher net outflow in working capital, including higher receivables and inventories, which reflects the momentum that we saw in the last quarter. Higher capital expenditure was a result of investment in our new PMS stream gauge facility in Porto. As a result, adjusted cash flow was £178,000,000 As previously mentioned, the restructuring costs incurred for our various initiatives resulted in a cash outflow of £8,000,000 Tax payments were £45,000,000 The larger bar is the cash outflow from our for our three acquisitions, which include transaction related costs of £34,000,000, and the proceeds from the disposal of Red Lion of £226,000,000 is net of capital gains tax of £48,000,000 The foreign exchange translation of £26,000,000 mainly reflects the group's new debt facilities, which are US dollar and euro denominated. Sterling has, of course, weakened against both currencies since the facilities were put in place.

Speaker 1

Taking all of these movements together, net debt at the end of the year was £549,000,000 Let me now move to our divisional performance, and I'd like to start with Spectris Scientific. Orders for the year were 2% lower on a like for like basis. Book to bill for the scientific division was marginally below one. Again, scientific had a much more positive second half where orders were actually up 6%. On the bottom right, I've shown the quarterly order growth for 2024 that highlights the momentum in the second half, especially in the last quarter.

Speaker 1

Moving to sales, after a strong year in 2023, when like for like sales grew 13%, sales in 2024 were 6% lower at 776,700,000 Scientific experienced decreases across all end markets and regions, in particular, academia and Asia. Adjusted operating margin decreased to 17.7%, which was particularly hard hit in h one due to the lower sales volumes. Looking now at Spectris Dynamics. After the strong performance in 2023, order intake in Spectris Dynamics was 4% lower on a like for like basis. The book to bill ratio in the division was one.

Speaker 1

Staying with orders, we saw double digit growth in machine manufacturing and good growth in aerospace and defense, which was more than offset by lower demand in automotive and other end markets. Again, on the bottom right, you can see the order growth trajectory in 2024 by quarter, where Q3 was particularly impacted by softness in the automotive sector. Demand recovered, however, in quarter four with modest growth as we closed the year. In respect to sales after a good year in 2023, where sales grew 6%, like for like sales were 7%, lower at 501,700,000.0. Finally, adjusted operating margin for the division was 14.4.

Speaker 1

I'd like to talk about my four key priorities for the year ahead, which are primarily focused on value creation, efficiency, and deleverage. Firstly, delivering the benefits of our profit improvement program. As you know, this identifies clear actions to drive margin expansion, including the delivery of substantial cost synergies, the new ERP system, and restructuring in both divisions. Second is the successful integration of our acquisitions. I am really satisfied with the progress we've made so far, and this is a topic that's very much on my personal radar.

Speaker 1

I have overseen the integration of several businesses during my career, and I know only too well how critical it is to have a firm grip of the integration process. Third is ERP. The implementation of SAP four HANA was indeed complex, but I'm pleased to say that the new system is working well. In 02/2025, we will focus on the delivery of the financial benefits as well as harnessing the opportunities that come with greater efficiency, transparency, and control. Finally, working capital optimization is key for both deleveraging and for operation excellence throughout the group.

Speaker 1

We are targeting a £20,000,000 improvement in 2025, especially in inventory. Our new ERP system will play an important role enhancing both collections and billing with a focus of reducing debtor days. I'd like to get into more detail on the profit improvement program now and also share with you the building blocks to 20% operating margin. As we said in October, we expect to deliver £50,000,000 of benefits over the next two years from three main areas. First, savings derived from our focus on operational excellence, in particular from our new ERP system, which is expected to improve margins by a 50 basis points second, significant cost synergies from integrating the three acquisitions And third, restructuring and cost reduction savings across the entire group as a result of action taken in the second half of twenty twenty four.

Speaker 1

As Andrew said, £30,000,000 of savings will be made in 2025 and the remaining £20,000,000 to come in '26. I expect to see £10,000,000 of savings in the first half of twenty five and then building to deliver 20,000,000 in the second half. Now what does all this mean for our margin journey? We've announced 20% plus targets in 2022. And as you can see here, we made great strides in 2023 reaching 18.1% margin.

Speaker 1

This was then followed by the reduction we saw last year of 250 basis points as a result of the operational leverage impact from lower sales. So let me start with that lower base. The bridge to 20% plus comes from the three elements of our profit improvement program that I've already explained. In addition, we will drive further margin expansion from operational leverage and organic growth as markets do recover, growth for our new acquisitions and business plans, importantly continued savings from the Spectra's business system. As we have highlighted several times, our operational leverage means we bounce back very quickly as the volume returns.

Speaker 1

Now turning to capital allocation, Andrew has talked about our balanced and disciplined approach to capital allocation. Having reviewed the framework, I believe this is the right approach for the group. After the significant year for M and A and a sustained period of shareholder returns through share buybacks in 2025, our capital allocation focus will be on investing in the business and the ordinary dividend. We expect CapEx to be in the region of £40,000,000 as we complete the move to our new PMS building. We will continue to allocate capital to innovation.

Speaker 1

On M and A, we will concentrate our efforts on integration and rebuilding our pipeline. And then finally, while buybacks remain a core part of our policy, we have decided not to proceed with the final £50,000,000 tranche of the 150,000,000 buyback program, which was announced in December 2023 alongside the sale of Red Lion. Moving on to leverage, where our aim is to bring it in within the target range of one to two times achieved through a combination of what I've just described, plus the following clearly unexpected recovery in EBITDA. Second comes significant reduction in working capital. And you can see at the bottom of this slide, the outflow in working capital between 2021 and 2024, which includes the years of COVID and the subsequent supply chain disruption, this chart highlights a real opportunity to improve our cash position.

Speaker 1

As I've already said, we will also drive cash through the tight management of our major programs. Investment in ERP peaked in 2024, so cash costs associated with this are expected to reduce. In addition, we expect tax payments and CapEx to return to more normal levels. To con conclude, while it's still an early time in the year, we are encouraged by the momentum from the fourth quarter. In today's economic environment, building resilience is key.

Speaker 1

In that regard, we remain vigilant and will focus on those things we can control, namely delivering our profit improvement program, driving it, integrating the acquisitions, realizing the full potential and benefits of our new ERP, continuous improvement in working capital. With that, thank you very much, and I will hand back to Andrew.

Operator

Thank you, Angela. With the launch of the strategy for sustainable growth, we took the decision to focus Spectris on great businesses in two focus divisions to provide each with the attention and resources that they require to scale and be global leaders in their fields. Both divisions benefit from the strengths of the group's capital, the group's balance sheet, our ability to execute and integrate M and A, the deployment of SBS and also from common systems and capability. We remain committed to deliver at least 6% to 7% through cycle growth by 2027. Also, we're committed to delivery of our 20% plus operating margin target and mid teens return on gross capital employed in the same time horizon.

Operator

And as I said earlier, our confidence is based very much on the increased strength and quality of both divisions. So let me start with Scientific, which as you know is focused on long term high growth end markets in Life Sciences, Material Sciences, Semiconductors and Academia, with our exposure to clean tech also having increased following the addition of Micromeritics. We are strongly positioned in high value, critical to quality areas where precision measurement, domain expertise and analytics are highly valued by our customers throughout their workflow and where our customers won't and can't compromise. Our businesses are leaders in their field and are seen as being the benchmark in the markets which they operate. And the addition of Micromeritics and SCIAPS, both of which are being fully integrated, as you know, into Mobile Panatical, creates the leading material characterization business for advanced materials analysis in the world.

Operator

So let's hear from them now in this short video to really drive home what we are creating.

Speaker 2

The companies for Micromeritics, SCIAPS and Malvern Panalytical will drive growth with Micromeritics growing by 19%, Malvern Panalytical ten % and SCIAPS fifty percent since 2021. We've now got the ability to provide more measurements and the skills and the capabilities of our staff coming together combined with the power of the Spectra support makes us unbeatable in

Speaker 3

the market. Micromeritics, SCIAPS, and Malvern Panalytical, we will always win with performance. We have really intelligent customers, and they have demanding and challenging applications because customers and scientists and innovators will see the difference with Malvern Panalytical technology, and they will feel the difference when they deal with Malvern Panalytical people.

Speaker 4

The advantage that we have around customer access and offering a complete portfolio gives us an advantage against the competition that will inevitably translate into commercial outcomes.

Speaker 2

At the end of the day, we win with the best product, The ability to bring new products and new innovations to our existing customers and new customers gives us massive opportunities.

Operator

We

Speaker 5

work closely with customers, and together with them, we try to find new solutions, new possibilities to help them create new materials resulting in improved medicines or electronic technology or better cars.

Speaker 2

Looking at one example further, let's take batteries. We can now deliver a combination of over 20 different products, and particle size analysis with our master sizer technology, surface area measurement with our TriStar instruments and structural analysis via our Imperium XRD, helping develop batteries with faster charging and longer life. So the combination with micro meritics and SIOPS gives our customers much more choice and they trust our applications, scientists and our expertise. It's a one stop shop for our customers.

Speaker 4

As material scientists working in the laboratory, you'll typically work with five, six or more different technologies and switching between them can be difficult. We have the opportunity to improve the workflow in two ways. One is by introducing commonality in that user experience. We'll make it easier to move from one technology to the other. And two, as we bring the data from our measurements together, we'll be able to deliver deeper insights than any individual data analysis or outcome could to give our customers a more clear understanding of the material.

Speaker 2

The complementary technology we have acquired will strengthen our innovative digital solutions.

Speaker 6

Saip's business benefited from being part of Malvern Panalytical because now not only can we offer you these great handheld analyzers, but we could patch you into a great network of benchtop analyzers, particle sides, laboratory equipment. And I think this whole digital platform where you can start using cloud analytics and handhelds combined to do complex analysis in the field, it's a great match.

Speaker 4

We're really excited about it. I'm excited about the growth opportunities that we have across our markets from food and pharma to primary and advanced materials. But I'm especially excited about the opportunity that's in front of us in the clean technology space. From advanced batteries to carbon capture and utilization, new chemistries are shaping the future of the world and we've got an opportunity to be an important tool in that process.

Speaker 3

We're building right now a very efficient and scalable organization. The future means more customers, more industry leading technologies, a larger global footprint and profitable growth.

Speaker 2

Together, we're building a world leading business, helping our customers solve their biggest challenges. It's a fantastic combination.

Operator

Similarly, in Spectres Dynamics, we have built a global leader in advanced virtual and physical testing and also high precision sensing solutions. Again, as one division of scale, it's uniquely placed, offering the broadest premium customer solution with the ability to integrate both the physical and virtual worlds of test and measurement. Its breadth of technical solutions really enables customers to innovate across the whole product lifecycle, from empowering engineers that want to design in the virtual world using our leading simulators and simulation software to validating in the physical world using data acquisition software and sensors. And we're very pleased with what we have built in Dynamics, where our buy and build approach has had great success. I have to say, I'm delighted to welcome Piazza Chris into the group, who have been a key partner of ours for some time.

Operator

So again, to really illustrate what we are doing here, let's take a look at another video.

Speaker 7

We've acquired some really great assets over the last five years. This has accelerated our growth, but more importantly, has helped the customer to solve many of their biggest challenges.

Speaker 8

We have to push the boundaries of technology and products that are available today for our customers.

Speaker 9

We are in this transformation. We will be more sustainable. We can bring more productivity that will better the world.

Speaker 10

Our virtual testing tools help customers have their time to market and reduce the cost of innovation by as much as 20%. From a financial standpoint, it's allowed us to grow from 15,000,000 in 2020 to 80,000,000 in 2024. Combining the most comprehensive simulation experience with precision physics from desktop to full scale immersion, we are at the cutting edge of our customers' innovation.

Speaker 8

We have also built the leading vibration and pressure sensor offering through the acquisitions of Ditran and Pietzerkoyst, in addition to our existing offering from Broodenkier, providing customers with unrivaled precision in the most extreme operating environments.

Speaker 11

What is most exciting in the combination of HBK and pizza crust really is that we have the market access and we have the technology now in one hand. With HBK, we have the complete portfolio to support our customers in an ideal way and a very complete way.

Speaker 12

Daichuan is in a very better position as far as capital investments and technology investments go. Taking full advantage of the group's brand strength, over the last two years, the business has grown by 33%. We are really excited for our future.

Speaker 8

From commercial space to industrial power, our technology is maximizing performance, whether delivering the latest communication satellites, for the safety and usage monitoring of rotary aircraft, or optimizing the efficiency of gas turbines. This business is growing by 6% to 8% and is expected to exceed €100,000,000 in sales in 02/1930.

Speaker 13

Robotics growth is also propelling our progress. The acquisition of MicroStrane in 2023 complemented our existing strain gauge based OEM sensors with precision positioning sensing.

Speaker 14

As part of HBK, we can offer a myriad of different solutions to our customers, not only addressing stability and control, but also addressing cost effective torque sensing solutions and also load sensing.

Speaker 13

This technology enables our customers to increase automation and enhance productivity, whether in agriculture for the latest autonomous farming equipment, in precision robotics, or to accurately position satellite receivers to connect passengers in flight. We expect to grow 6% to 8% through the cycle.

Speaker 9

And key to our growth is our software, from the latest generation of our leading reliability and durability tools through modeling and simulation to incorporating AI tools to provide actionable insights our customers can trust at the point of measure and in real time. We are now rapidly approaching 20% of our revenue in software, and we're well on track with the innovations and the new products we're going to bring to the market to be at 25% in 2027.

Speaker 7

The future is so bright. All of these acquisitions, coupled with bringing industry leading technologists together, has accelerated our growth. We have seen our overall revenue increase by twenty two percent over the last five years. The value proposition for Spectris Dynamics has huge potential to continue to enable and empower

Operator

the innovators for the future. So bringing this all together, you can see here on the left of this chart that as a result of the investment we have made in three acquisitions, we have a group that would have generated just under billion of sales and operating profit in 2024. And we had we'd own the business values for the whole year. On the left hand side of this chart, we've included the compound annual sales growth rates for the two divisions and the group since 2021, and exclude the impact from the three businesses. As you can see, we've delivered growth in line with our 6% to 7% framework over this period.

Operator

And as you have heard, we remain firmly on track and committed to delivering this along with our other targets through the rest of the cycle to 2027. So in finishing, I thought it would be helpful to also provide you with some more color on our end markets. As I've already mentioned, in 2024, orders ended the year down 3% on a like for like basis, but with strong order growth in the final quarter across a number of end markets. It is encouraging to see orders recovering in Pharmaceuticals and Life Sciences, where we continue to see strong demand in Biologics and positive growth in aseptic manufacture, which offset some softness in Small Molecule. Within Tech led Industrials, we saw continued demand growth in Aerospace and Defense, and we're reassured to finally see strong growth returning in Machine Manufacturing, notably in China and also in Europe.

Operator

Order intake in semiconductors did end the year slightly down, but returned to growth in Q4. And in Materials, we saw strong order growth in the second half, particularly in Building Materials. Academia returned to strong growth in Q4 with some stimulus support from China. And finally, during a more challenging period for the automotive industry, we experienced a decline in demand in the second half. This followed essentially a strong first half and despite the strong year for our virtual test business, where sales grew actually in the high teens.

Operator

But we did see a pullback in demand in Europe with continuing weakness in North America, particularly in physical test. On a regional basis, order intake was flat in Europe, down 6% in North America, which was driven primarily by Dynamics and Automotive. And we were down 4% in Asia, primarily Scientific in Academia and Battery Materials. Asia was held back by China, and that's despite growth that we saw in both Japan and Korea. Now one of the key indicators that I look at is the momentum in our quarterly growth as well as on an annualized basis.

Operator

And as you can see in the two graphs, the indicators suggest that we are entering a recovery phase with a positive trajectory of both orders and sales in the final quarter and also a closing of the gap through 2024, albeit not yet back to accelerating growth on an annualized basis. So encouraging signs, yes. But as I said at the start, we will remain cautious on the macro environment until there is more evidence that the recovery is sustained. And to reiterate, we are not relying on end markets to drive our earnings growth this year. So in summary, 2024 was a strong year for strategic execution, a significant year for capital deployment and another important step forward for the group.

Operator

We have put in place a clear executable value enhancement plan. We took decisive actions on costs, the benefits of which we will see come across in 2025 and in 2026. It was a record year for innovation as we look to maintain our leading market positions, helping customers solve their most complex challenges. And we may continue progress across our sites as we strive towards world class operational performance. 2025 will be a year to consolidate the actions that we took in 2024 and also to deliver on the returns on the investments that we have made, with a particular focus on integrating the three acquisitions, setting them up for growth and long term success and realizing the value from our profit improvement program.

Operator

And after a significant year of capital deployment, our focus, as we said, is very much on cash generation and deleveraging while continuing to execute on our strategy. Looking at the outlook and guidance for 2025, we expect to deliver significant profit growth with adjusted operating profit to be in line with market expectations. As a result of the work we have done, we are well placed to return to delivering against our committed performance framework with additional support as markets recover. And historically, we have always outperformed when markets do return. And finally, to reiterate, I firmly believe we have a fantastic opportunity to deliver outsized value creation here at Spectris.

Operator

And in ending, I'd just like to thank all of my colleagues for their dedication and for their support. And for you in the room, thank you for listening. Andrew and I will now be very happy to take your questions.

Speaker 15

Thank you. Good to go. Andrew, can I start on Micromerix, which is the biggest of the acquisitions? How has trading gone there, particularly around the clean tech end of that? Because obviously, there have been some political changes in The U.

Speaker 15

S. How do you think that plays out? And I think we've heard from some people that Q1 has been a bit slower as people try and digest what's going on in The States. Have you seen some of that in terms of just decision making being

Speaker 5

pushed out?

Operator

So let me thank you for questions, Mark. So firstly, on Micromeritics. I mean, we're very pleased with the performance since they've been part of the group. They met their acquisition business plan for the first four months post acquisition. China has softened, but we knew that when we were going through the acquisition.

Operator

So we always expected China and sort of like clean tech to come off. They've got a big exposure in clean tech. But at the same time, there are some quite positive signs still in terms of the R and D side around clean tech and battery materials. Whilst there's been an oversupply in the actual delivery of batteries themselves, there's a lot of development going on in terms of looking at next generation batteries, new materials, new ions to drive better battery performance, better range, better life, better durability. And the Micromeritics tools alongside, as you saw in the video, inside a lot of our modern Panascale tools, we have over 20 different products now that's focused on that market.

Operator

So we're still very excited about that and its long term growth projections. Your second question just about sort of Q1, I mean in terms of order intake, is the order intake in January and certainly indications in February are very much in line with our expectations. It is I would say I'd just characterize it as we've said through the presentation really is that I think we are in a recovery phase, but it's going to be progressive. And as we said at the Q3 trading update, we're expecting some of that softness that we saw through last year pervade through the first half of this year. And I think in terms of your specific question about North America and some of the uncertainties, inevitably it is causing some customers to think about where they're going to place investments and what they're going to do.

Operator

We're certainly seeing that in the academia side in North America because funding to a lot of institutions has been cut back as part of the DOGE initiative. And so it will cause some short term issues, I'm sure, which again just sort of I think comes back to us being sort of very cautious in terms of the market developments for this year. But as I said and reiterate, we aren't relying on the markets to deliver the progress that we're committed to this year. Yes. Rich?

Speaker 12

Good morning. It's Richard Page from Deutsche Eunice. Just a couple for me as well. Firstly, how does the order improvement translate into the '25 sort of first half, second half waiting and how we should look at the year given I think most of the consents and expectations seem assume quite light organic growth at present. And then, secondly, that dynamics like for like order profile q three minus 16, I know also has been wait it's been wait quite a while.

Speaker 12

Was there any specific customer impact in there, that you could describe? Sorry if I actually, I said two, but I'm gonna sneak in a third if possible. Just could you give us any update on where you are on the ERP system rolled out? Because you said you're peak through peak, but any guidance on Saskos going forward as well, please?

Operator

Yes. Let me take the first one, Angela. I'll ask to talk about ERP because Angela is sort of now sort of sponsoring all the ERP initiatives across the group. So just on the orders, I mean, I think it's consistent with what I said to Mark, Rich. I mean, I think we see a progressive recovery in the order intake from here on in.

Operator

So the H1, whether we get back into sort of what I call accelerate e. The annualized TM orders exceeding potentially, I think that's where we could be. But I think it's going to be more sort of H2 weighted. But there is a lot of uncertainty out there. And I think it's going to be quite a lumpy sort of recovery phase in reality, where we'll see certain markets move, others not.

Operator

And then everything is going to move in unison. And specifically on your Dynamics question, Q3 was predominantly automotive and predominantly Europe. I think we all saw a lot of news flow come out of automotive OEMs in Europe in the third quarter. And we saw a big pullback, particularly, as I said, in the physical test side of the automotive industry that clearly impacted Dynamics. But good to see that they got back into positive order growth again in the fourth quarter.

Operator

And I think just on the automotive, clearly, Dynamics, about a third of its business is exposed to automotive. But increasingly, our virtual test is becoming a bigger and bigger part of that. As you saw in the video, it's sort of million, million of sales at the end of last year. It grew high teens last year and certainly exceeded a number of its peers, competitors. So we absolutely feel we've got leading offerings and taking share and becoming really the number one offering in that sort of real immersive dynamic ride and handling side of simulation.

Speaker 1

Thank you for your question on ERP. We did give some color on this at the half year. And as we got into H2, we managed to get through the stabilization phase. And, of course, it costs slightly more than we expected at 45,000,000. I think the the good news is after that, you know, we we we've now got a blueprint of how we want to roll this out through the company.

Speaker 1

We're still expecting to go ahead with the cluster two in our Dynamics division in q three. But we do see the cost of ERP coming down now. I think what I I would also share with you is we've just actually taken part company wide for the for the users of MP and and Dynamics, a large survey for end users together with lessons learned with a third party. And there's a lot of stuff came out of that that highlights this is good for the company. It's changing people's lives, and it's making the business more efficient.

Speaker 1

But for sure there's things we now need to push into the next phase. So yes, it's going well and it's on track.

Operator

Yes, Mark. We may have some questions online as well. The Mark and Rich show.

Speaker 15

We can pan them back and forth. Just a couple more for Angela, if I can. Firstly, coming in, I think one of the noticeable things about Spectris has always been the huge seasonality and profitability in that big q four dependency. Do you think there's anything that can be done to moderate that? Because it always sort of increases risk profile through the first half of the year.

Speaker 1

I'm certainly gonna try. You're absolutely right. I think the drop through that we and you saw this on this chart that that I put up, the the drop through is is is also because we've obviously got these larger direct fixed costs, so it's very difficult to to navigate. We we are looking again at the same split of 35% in h 65% in h two. But for sure, I am looking at is there anything we can do to change the direct fixed cost to more variable in nature.

Speaker 1

So that is something something that we're looking at at the moment. What I would say about that drop through, however, this year, especially in the second half, and it's interesting, is we also had a mix effect, which, you know, our our virtual virtual test business grew double digits. Maybe, Andre could speak to it as well, but it is at lower margin. But it's it's growing exactly as we expect and we're very excited about it. But of course, it changes the blend as as we come into the year.

Speaker 1

But, yeah, it's there's a lot to do.

Speaker 15

My other slightly cheeky question is around the integration within Scientific, just in terms of who's running that process because clearly you're heavily involved in that. That's a lot of Derek's role and presumably there's a lot of Terry Kelly's role as well coming in from the from the equity. So how does that work in terms of lines of responsibility?

Operator

Yes. So Derek is responsible for it. I mean, that was one of the key reasons we asked Derek to move to run the scientific division. We could see what was coming or potentially coming from an M and A perspective in scientific. We wanted to increase sort of the strength of the leadership there.

Operator

So that was the reason we made the move for Derek and bringing Angela in. So Derek is leading that and he has Terry's directly on the ground responsible for the program and he has a full team supporting him, but they're getting plenty of support from Angela, from myself, from our HR director and all the members of the team around the group. So look, it is a big program, it's a big priority, but there's huge value to be delivered. And as I said, Mark, briefly in my comments, I mean, since we've acquired the business, they've been under our ownership, we're just even more excited about the potential there. And the teams are, which is the really encouraging piece of this.

Operator

Our people are very excited. They can see the combination. They can see bringing together is super complementary what it does for customers. So the cost synergies are very real. We're very confident on that.

Operator

And on the revenue synergies, I think we're even more confident than we said in terms of when we announced the acquisition back in July. Yes, I do. Go on, Rich.

Speaker 12

We just keep playing there. We've got to come up with another one, Mark. Just on there just a point of clarification on that. The like for like orders that you've shown, how have you dealt with the acquisitions? Have you pro form a the performance?

Operator

So our like for like is as we've always reported, so we adjust for FX and we strip out we strip out any disposals and strip out any acquisitions out of that twelve month period. So they are true to that so it excludes Redline, for instance, was gone and then it excludes the acquisitions. So the CAGRs I showed on the chart, you know, exclude both sides of that. So we are growing.

Speaker 12

And then the natural question on that is then the acquisitions themselves. So you're seeing a very similar pattern in their order growth.

Operator

Well, yes. So yes. So on so on their order growth, I mean, they've they've both done very well on on orders, through last year. I mean, they and they, you know, they grew higher than the group through last year.

Speaker 2

Great. Thanks.

Operator

Are there any questions online in the webcast? There are?

Speaker 16

We have a question from Stephen Klepp from HSBC.

Speaker 17

Please go ahead. Yes. Hi, good morning. I hope you can hear me. Apologies that I can't be there and apologies that I'm Stefan still and not Stephen.

Speaker 17

I wanted to ask a couple of things. So first of all, yes, it's all add ons to what has been asked before. ERP, I mean, I get it, million this year. You did three acquisitions. So the entire program will be longer running because you want to move to one ERP and that will be cost involved.

Speaker 17

Can you update us on the time line? Are we now looking into finalization for in 2027? And how much will that cost in total per annum, please? Second question is deleveraging. Can you please I have a view.

Speaker 17

Can you please, from your perspective, talk through the deleveraging bridge from 2.3 times leverage to in your target corridor one to two times? And particularly, bearing in mind the earn out next year as well the ERP costs, which are still significant? And then coming back as well to the organic growth, Honey, that on Slide 25, you showed 6.9% organic growth. Can you split that into volume and pricing, please? Because I think we have to bear in mind that 2021, '20 '20 '2, we had significant years in terms of demand as well as in terms of pricing changes.

Speaker 17

So dissecting those two would be quite good.

Speaker 1

Yes. And so Stefan, maybe starting with the ERP, I don't know when when you joined the call, but, we have given guidance, of '25 to 30,000,000 in 02/2025. We're looking at another 20,000,000, 15 to 20 million in 2026. You're quite right, there's a small delay, but it's certainly not into 2027. But, yeah, so we we we are basically on track with the program.

Speaker 1

We've simply added micromeritics and SIOPS. The rest of the program is is back as we presented at the half year. In terms of leverage, setting today at 2.3 times, there's a number of factors that get us back into the corridor. Obviously, the working capital targets that I presented today, we are gonna push and drive very, very hard, the working capital, and I see clear line of sight to do that. The other thing I would mention is you talked about air notes.

Speaker 1

I'm expecting to pay minimal cash for air notes in 02/2025, not because, we're far behind. We're actually bang on the business plan. If you look, we we talked about 10,000,000 profit for '24, and we've hit exactly 10,000,000 profit for '24. It's more that the, the businesses we were acquiring had very stretchy targets. We stuck to our our targets, and the the business, the air notes have been on the on the acquired company stretch.

Speaker 1

So I will get an upside from that. I've also got my tax and returning back to normal levels, so we can give you more color on that through the IR team. And then I'm reducing CapEx as as well by by another sort of 15,000,000 to 20,000,000. So I think overall, that coupled with earnings momentum from our organic business and from the acquisitions as much as we're looking at very modest growth in 2025 should get me back in under two times or even slightly lower.

Operator

Thank you, Angela. And just your point, Stefan, on the 69% growth. I mean, yes, clearly, we've come through a quite a turbulent time with inflation, etcetera, But that is our aggregate number. When we stood up in October of twenty twenty two, we said it would be 6% to 7% organic with all those factors in place, and we are bang in line with what we expected to deliver. Are there any other questions?

Speaker 17

So you can't split the number.

Operator

Are there any other questions from the webcast? Yes, one more.

Speaker 16

Yes. We now have a question from Jonathan Hurn from Barclays. Please go

Operator

ahead.

Speaker 16

Hey guys, good morning. Likewise, very sorry that I'm not there. I just have a couple of questions. You may have already answered these. The first one was just in terms of that outlook for growth in FY 2025.

Speaker 16

I don't know if you made any comments about how much growth you think you may be able to get from pricing in 2025. Just some color there would be good. And then the second one was just in terms of the order book and particularly the marginal order book as it stands right now. If you kind of look at Q4, obviously, we've had a recovery in some of those sort of, I would say, higher margin segments, stuff like Life Technology. So as we sort of look at that, I suppose, order book, is the margin of that pretty much due to mix higher than it has been for a while?

Speaker 16

That was the second one. Thank you.

Operator

Okay. I think I got all that, Jonathan. So I think your first point on sort of 2025 and growth, I mean, I think in terms of what's sort of out there in terms of the market in general is a fair estimate. As we talked earlier, we see through this year a progressive recovery through the year, but the rate at which that happens obviously is going to be determined by a number of market factors, and it's difficult early on in the year to call exactly how that's going to play out certainly with all the uncertainty that's out there at the moment. I think you asked specifically around pricing.

Operator

I mean pricing for us is sort of, I'd just say, is back sort of business as usual, pretty much there to sort of offset the rate of inflation through the year plus with our sort of Spectris business system helping to then defray input cost inflation as well. And on the order book, if you actually look at the order book as it stands today, it's broadly in line with where we were twelve months ago. So you saw the order profiling, hopefully, the graphs that we included in the presentation have been quite helpful just to show what the shape and progression of the orders have been and sales have been. And you can see the orders are coming back, getting close back to sort of one on a book to bill basis for the end of the year. So the order book is pretty much back to where it was.

Operator

And that sort of, I think, supports this progressive recovery through the year. And from a mix perspective, I think you said right at the end, I don't think there's anything from a mix point of view that you should have to worry about. I mean, we're the mix across the business generally speaking is pretty consistent from what we've seen. So I think there's no more questions on the webcast. Any final questions, Rima?

Operator

I know some of you got to go. So look, I'm very conscious that we're at the hour mark, so I want to be respectful of your time. So thank you everyone for attending and for joining online as well as in the room. Clearly, 2024 was impacted by what we described in terms of the overall markets, but we took decisive actions through last year. Our performance in the second half, I think, just demonstrates on the lines just how those actions are coming to bear fruit inside the business.

Operator

Our second half is quite a contrast to our first half from our financial performance. And as we enter 2025 with that order momentum we saw in Q4, that is encouraging. We expect to see some progressive growth through the year. And with the actions we've taken on the profit improvement program with the tailwinds from the acquisitions, we are well placed to deliver significant improvement in earnings through the year. So with that, thank you very much.

Remove Ads
Powered by Quartr
Earnings Conference Call
Spectris Q4 2024
00:00 / 00:00
Remove Ads