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Edited Transcript of SXS.L earnings conference call or presentation 24-Jul-18 7:30am GMT

Half Year 2018 Spectris PLC Earnings Presentation

London Dec 13, 2018 (Thomson StreetEvents) -- Edited Transcript of Spectris PLC earnings conference call or presentation Tuesday, July 24, 2018 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Clive Graeme Watson

Spectris plc - Group Finance Director & Executive Director

* John E. O'Higgins

Spectris plc - CEO & Executive Director

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Conference Call Participants

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* Andrew Douglas

Jefferies LLC, Research Division - Equity Analyst

* Andrew Francis Caldwell

Barclays Bank PLC, Research Division - Research Analyst

* Jack O'Brien

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Jonathan Hurn

Deutsche Bank AG, Research Division - Research Analyst

* Mark Davies Jones

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

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Presentation

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John E. O'Higgins, Spectris plc - CEO & Executive Director [1]

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Good morning, ladies and gentlemen. Welcome to the Spectris 2018 Half Year Results. My name is John O'Higgins. I'm Chief Executive. I'm joined this morning by Clive Watson, our Finance Director. And I'd like to welcome you all here in the room present as well as those who are joining on the webcast. And if I could just ask you here in the room to make sure your phones are on silent. We'll go through the presentation in the normal way, and then we will have time for Q&A at the end of that presentation.

Just to start off with on our opening slide here. A couple of pictures of highlights from the half year. From left to right, our Malvern Panalytical business, which is our big business in the Materials Analysis space. In the hardware side, a picture of their new Zetasizer, which, you all know, over the years, which is been a real core product for that business with applications in pharmaceutical, in life sciences as well as in nanomaterials and new material development.

Second picture over highlighting an acquisition, which we're announcing today, a company called VI-grade, in the vehicle simulation area, a very exciting development. I'll come back and talk a little bit more about that in the presentation later on.

From Servomex, you see one of their new products which is their Multigas system used. Here the example being highlighted around flue gas monitoring, which is obviously key for a number of industrial products -- industrial processes as well as combustion efficiency.

And finally, a little example from our Red Lion business in Industrial Controls, who increasingly -- Red Lion along with Omega are playing a more important role in the whole capture of data for industrial analytics applications, large data and large digitization of manufacturing processes, which I'll also talk to you about in the course of the presentation.

So the usual agenda, I will go through the highlights. Clive will give you an update on the numbers and the financial performance, and then I'll be back to talk about some of the developments in the business, strategic progress in the business, followed by a summary and outlook.

So in terms of highlights for the half year, with good sales growth, 5% organic like-for-like increase in sales with a further net 1% contribution from acquisitions, which was actually 4% from the acquisitions, minus 3% coming from the divestiture of the Microscan business last year. So overall, a very strong top line.

Very good progress on the strategic front. We've added a number of key acquisitions which build out our software, our services and our testing capability; the Concept Life Sciences business, which we talked about at the full year results. Revolutionary Engineering was a small bolt-on, which we've added to our Millbrook business here in the U.K. which gives them a U.S.-based testing facility and testing capability, very interesting addition to that. We talked -- I just mentioned the VI-grade acquisition which we're announcing this morning which we signed last week, which is a leading Europe-based but global provider of vehicle simulation for the automotive industry.

And then finally, the joint venture with Macquarie Capital, which we announced at the time of the full year but is now closed and is now established and up and running for about a month, which positions us very nicely to take advantage of some of the growing opportunities in the broader industrial, digital analytics space.

Our Project Uplift continues to do well and is on track to deliver the benefits that we forecasted at the beginning of the year. We are also making very good progress on the shared service project validation and the design study is progressing very well.

We've announced profit for the half year of GBP 70.5 million, which is a 15% like-for-like increase on a year ago. We continue to have a very strong balance sheet; and dividend per share, announced this morning, up 8% for the half year.

With that, I will hand you over to Clive.

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Clive Graeme Watson, Spectris plc - Group Finance Director & Executive Director [2]

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Thank you, John, and good morning, ladies and gentlemen. Thank you, John.

I'll skip over the top half of the P&L on Slide 5, because I'll be covering that in a lot more detail as I run through the slide deck.

Like-for-like sales growth of 5% was a continuation of what we saw at the time of the trading update in May. At that time, we talked about 6%, that was actually 5.5% rounded up. This time, it's 5.2%. So they're pretty close to each other.

Adjusted operating profit before Uplift costs was up 9%, and operating margins up 0.4 percentage points. Project Uplift costs were GBP 2 million lower this year compared to last year, notwithstanding the inclusion of the GBP 2 million of shared service center discovery cost. This is where we're going through the feasibility study and pretty far advanced. I'll talk a bit more about that later. After Uplift costs, operating profit was GBP 70.5 million, up 15% or equivalent to an 80 basis points margin expansion.

Difference between operating profit and PBT is interest expense which, at GBP 3.1 million, is pretty close to last year. The difference is purely driven by average net debt being a bit higher on the back of the acquisition, principally of Concept Life Sciences.

Effective tax rate for the first half was 18.7%, 2.3 percentage points lower than last year. That's really a little bit distorted by a prior year adjustment, which reached in the first half and because the weighting profits in the second half is overly represented, but it also reflects the U.S. tax reduction, which contributed about 1.5 percentage points. Guidance for the full year still remains at 20% effective tax rate. So you'll see about a 21% tax rate in the second half.

EPS up 9%. That benefited from increased profitability and a little bit from the share buyback. That's about GBP 0.001 and as well as the reduction in the effective tax rate. Dividends per share up 8% in line with our stated policy of basing the dividend increase on affordability and sustainability.

Operating cash flow, last figure on here, was at 69%, was impacted by a ramp-up of CapEx, especially in Millbrook, our growth CapEx. CapEx is now ahead of depreciation by some GBP 24 million. Without that and previously -- we're always having CapEx about the same level of depreciation. Without that, operating cash flow conversion would have been 103%, so it's still pretty much in line with what we'd except to see for the group.

Moving on to Slide 6, the sales figures. Here, you see the overall 2.5% GBP 18 million growth. To arrive at a comparable baseline figure, we've reduced our 2017 reported sales by 6 months' worth of sales from Microscan, which we sold in October last year and 1 month's worth of sales from EMS, which was deconsolidated following the creation of that joint venture with Macquarie at the end of May. So this reduces the starting point for 2017 to GBP 685 million.

Acquisitions contributed GBP 31 million. Almost 2/3 of that coming from Concept Life Sciences, acquired at the end of January, and the balance from 3 small bolt-on acquisitions made in 2017: Setpoint, Leyland and Omnicom; and Revolutionary Engineering, which was acquired in April 2018. We're expecting a second half contribution from acquisitions of GBP 40 million to GBP 50 million, and I'll come back to that in the wrap-up.

Foreign exchange, sterling weakened a little more against the euro but strengthened by more than 9% against the U.S. dollar, it may surprise you, which together account for around 70% of the translation loss. Like -- that leaves us with like-for-like growth of GBP 35 million or 5%. Pricing is at GBP 5 million, just under 1%, and we have a volume mix increase of GBP 31 million with growth evenly spread across all 3 of our main regions and in most of our end markets, led by automotive and pharmaceutical.

Turning now to Slide 7, adjusted operating profit. Similar sort of walk starting with last year's figures, then adjusting for disposals. So as you can see, on a reported basis, operating profit up GBP 1.4 million. But once adjusted for acquisitions, disposals and foreign exchange, up GBP 6.6 million or 9% on a like-for-like basis.

I'll walk you through the various components then. Disposals net of acquisition, all of this adjustment relates to the effects of rebaselining the 2017 H1 arising from the disposals of Microscan and EMS. So the net contribution from acquisitions for this half was 0, mainly due to a slow start by Concept Life Sciences compounded by the loss of business from one major customer which took a commercial decision to slash their R&D budget. Notwithstanding the lack of any contribution, the first half was still holding our guidance for the full year for around GBP 8 million to GBP 9 million of operating profit from our acquisitions.

Foreign exchange. As with sales, the bulk of it comes from the U.S. dollar and the euro. And also as with sales, if rates stay as they are today, we expect to see very little in the second half, maybe GBP 0.5 million to GBP 1.5 million.

Like-for-like, we've broken that GBP 6.6 million, down into a margin increase -- gross margin increase and overheads increase. Gross margin percent drop-through is around 2/3, 66%, so it's accretive, 0.5 percentage points higher than last year with pricing and procurement savings more than offsetting the material, labor, and overhead increase of GBP 6.1 million, and the volume mix drop-through of 60% is also marginally accretive to our gross margin. So -- an accretion in our gross margin.

Like-for-like net overheads increased by GBP 17 million or 5.6%, in line with the previous guidance given in relation to execution of our strategy whilst we continue to invest in the future. The bulk of this GBP 17 million is employee-related and can be split roughly 50-50 inflation and additional heads, including upscaling for delivery of our strategy. The GBP 6.9 million of other includes marketing, consulting costs and depreciation are the primary drivers here.

And as you'll hear from John a little bit later, we are really ramping up delivery on our strategy. And to this end, have incurred incremental cost on implementation of a number of initiatives, including preparatory work for the merger of HBM and Brüel & Kjær, rolling out of our Lean program, developing our industrial Internet of Things offering. You may -- some of you may have seen our website, Spectris Advance; the strengthening of our global key account management functions across the group; and upgrading e-commerce capability, again throughout the group, led by Omega.

Sorry, moving back, staying on Slide 6 (sic - see slide 7, "Project Uplift costs"). Project Uplift costs are here at GBP 6.7 million, GBP 2 million lower, as I mentioned before, than last year. We spent GBP 4.7 million on the original phase of Uplift, which you'll recall was to do with IT. It was procurement and footprint consolidation, and GBP 2 million on the discovery phase for the shared service center. That GBP 4.7 million is generating recurring benefits of GBP 3.2 million, so we're well on track to what we said we're going to deliver for this year, a net benefit from the original phase of about GBP 3 million, with shared service center cost costing somewhere in the GBP 3 million to GBP 4 million.

And if you think about Uplift as really being about reducing complexity, increasing efficiency and a strategic enabler, that's what all of these activities were involved with. So if last year 2017 was about preparatory work for all of those, 2018 is really delivery and moving and ramping up the momentum created last year from Project Uplift. So adjusted operating profit after Uplift cost at GBP 70.5 million, up 15% or 80 basis points in terms of margin delivery.

Cash flow, Slide 8. Net debt has increased by GBP 181 million in the first 6 months from GBP 51 million at the end of last year to GBP 232 million. EBIT is GBP 70.5 million. You can see a slight increase of depreciation, up to GBP 16.3 million. Point in time working capital, we saw our usual seasonal movements here, seasonal inflow from collecting receivables from large sales last year, and a net inventory build to support the second half growth.

With respect to working capital management, it's worth noting that our 12 months average working capital continues to improve. And at this point in time, at the end of June, it's 11.4% of sales. That's a recent low, 1.2 percentage points below last year's -- last June's 12.6% and 0.4 percentage points lower than the 11.8% we closed last year with. This is better than our expected through-cycle average, which we've previously guided as 12% to 13%, but we think something around this level is sustainable.

CapEx, as I mentioned before, came in at GBP 40 million, GBP 24 million higher than depreciation. Most of this is explained by increased CapEx in Test and Measurement, where both HBM and Millbrook are investing in CapEx at a rate faster than their depreciation rate. In the case of HBM, it was to do with infrastructure build, and in the case of Millbrook, growth CapEx.

Omega also falls into this category. You may remember, we talked about an ERP remediation plan and active upgrade of their e-commerce capability, and they're spending a little bit more than depreciation.

Acquisition spend of GBP 175 million, principally relates to the acquisition of CLS. And the creation of joint venture for our EMS business with Macquarie Capital was completed on 31 May, and post-tax cash proceeds of GBP 44 million were received.

The share buyback program is well underway. It was launched on March 6. It's a 15-month program, buying back up to GBP 100 million worth of shares. And through the first half, 960,000 shares have been bought back with average daily dealings around 6.97% of daily volume.

Dividend, tax, interest, pretty much self-explanatory, GBP 69 million; and the net debt of GBP 232 million at the end of June is predominantly denominated in euros. Hence, the GBP 3.7 million of foreign exchange loss. And at the close, represents about 0.9x trailing 12 months EBITDA.

Moving on to Slide #9, sales by destination. Nothing really much to say here other than to note that the 5% growth was evenly spread across our 3 regions. But within 2 of those regions, Europe and Asia, there were quite some quite differences. In the case of Europe, you can see that Germany is down compared to the average, at 1%; and U.K. well ahead. The main reason for Germany's low growth rate is last year's tough comp, underlying trading conditions were good when Germany grew by 11% last year. The U.K. benefited from strong double-digit growth in its largest end market, which is automotive. But they also saw growth in environmental noise monitoring, energy and utilities and in academic.

There's a similar story in Asia with Japan suffering from a tough comp whilst we're seeing very good growth in China, in pharma, automotive, electronics, semi and telecoms and energy and utilities.

Summarizing on moving on to Slide 10, the segment performance. John will be providing the detailed commentary, so I'll confine my comments to a couple of -- to illustrate a couple of points.

Starting on the right-hand side, where you can see I've ringed 3 numbers here, is the group's sales growth of 5%, operating profit pre-Uplift growing by 9%, and we expanded our operating margins by 40 basis points. This is respectable, but the out-turn could could've been so much better if the 25% plus growth in operating profit and 170 basis points in operating margin expansion recorded by Materials Analysis, In-line Instrumentation, Industrial Controls hadn't been dampened somewhat by Test and Measurement recording a 30% drop in operating profit and 3.6 percentage point drop in margins, so on 6% top line growth, and that's what this illustrates.

It's not all bad news actually, because if you look at the composition within here, I think Test and Measurement is the one which is really investing heavily in its strategic initiatives. There's a lot of preparatory work required for its merger. They've got to consolidate some of their platforms. They need to start hiring people. They're starting to hire software developers. They're pressing ahead with e-marketing and workshop initiatives. So there's a lot of front-end loading of costs in the first half for Test and Measurement.

We also saw a phenomenon, which we haven't seen for a while, which is that the 2 smallest companies within this segment were growing the fastest. They also happened to carry the lowest margins whereas the 2 largest ones, HBM and S&V were somewhat subdued in their sales, and that's really down to delays. We expect a big second half pickup. So it somewhat belies the numbers you see here, their underlying performance which is all about delivery of their strategy and seeing the smaller companies starting to actually flex their muscles and starting to deliver some things.

So front-end loading of cost will disappear. Some of the cost that we've invested in accelerating development in anticipation of the merger will continue into the second half, but this is all included in the 6% guidance we gave for the group as a whole. Just happens to be more heavily weighted in Test and Measurement.

The other one I'd highlight here is In-line Instrumentation, where you see sales down 3% but operating margin is up 25%. You may recall that this time last year, In-line Instrumentation sales were up 11% and operating profit down 21%. So this year's 3% sales decline is mainly down to a tough comp. We're also able to grow our operating profit notwithstanding a lower top line due to a non-repeat of some of the one-offs we experienced last year as well as some self-help measures. We were restructuring our NDCT business and that was moving from California down to Dayton, and we're starting to realize the full year benefits of that restructuring type activity. So all in all, a pretty good performance by the group across the piece.

Turning to Slide 11, full year guidance. This is pretty much -- well, not pretty much -- it is a repeat of what I actually shared with you at the time of the prelims. Nothing's really changed from the guidance given at that time, so I'll restrict my comments to just 3 areas. H1, H2 phasing. At the prelims, we indicated -- or I indicated that H1, H2 sales phasing would be 45-55 and operating profit would be 30% to 35% in the first half and 65% to 70% in the second half. Whilst we're still expecting sales to be 45-55, the operating profit is going to be more heavily weighted to the second half. So along the 30-70 split as opposed to anything else.

Acquisitions at the time of the prelims, we said would contribute GBP 60 million to GBP 70 million in sales for the full year and GBP 7 million to GBP 8 million in operating profit. We increased that guidance at the time of the acquisition of Revolutionary Engineering by GBP 10 million and GBP 1 million, respectively, to the figures you see here. The acquisition of VI-grade won't move the needle much, so we're going to keep the guidance pretty much as it is, as we do the same with VI-grade as we've done with other acquisitions which is invest in it.

FX sensitivity is pretty much the same as it was. I think for the second half, with somewhere, if the rates stay as they are right now, you'll see maybe GBP 15 million worth of a continued hit to the top line, and as I mentioned before, GBP 500,000 to GBP 1.5 million in terms of operating profit in the second half.

Finally, with respect to planned CapEx, last bullet on this page. As previously noted and we talked about, there is upwards pressure on this GBP 80 million. The more so following the acquisitions of Revolutionary Engineering and VI-grade, which again is a positive because these will be growth investments. And that GBP 80 million will probably be exceeded and probably be closer to GBP 90 million.

With that, over to John.

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John E. O'Higgins, Spectris plc - CEO & Executive Director [3]

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Thank you, Clive.

Well, maybe just to move straight on where Clive left off, the final sort of breakdown of sales there on Slide 13 is the view by end market and really the 2 standout numbers here are the 2 first ones, pharma and fine chemicals and automotive, both up double digit on a like-for-like basis versus actually some pretty good numbers last year as well. So you see here, we continue to make very good progress in those 2 core strategic end markets, and you also take into account that the acquisitions that we've been making this year as well as last year have largely been in the Materials Analysis and Test and Measurement segments as well. So there is further inorganic growth coming on top of the like-for-like numbers that you see here.

I think elsewhere, probably not much to say. Metals and mining continues to do well. You see on top of 8% growth last year, further 9%. So a nice steady return there that we're seeing in that sector. And energy up nicely as well, again on the back of some good numbers last year. And we are seeing recovery on the upstream side.

Academic, which had been quite a turbulent market for us over the last couple of years, you see has sort of stabilized, not at a particularly high level but at least has stabilized at roughly flat year-on-year.

Moving on, and I'll just go quickly and hit the highlights here by segments. Clive has covered most of the numbers in terms of the P&L by segment. But Materials Analysis, the highlights here, clearly very good growth in the key end markets, pharma up and that's obviously been driven by Life Sciences and the regulation and the role that we play also on some of the quality control areas of the pharma industry. Metals and mining are also doing very well, and semiconductor electronics continuing to do well although we have seen some lumpiness in the electronic side, which is not unusual, we have seen that over the years. Actually, the semiconductor side there are continuing to do very well.

In terms of the acquisitions here, Concept Life Sciences probably a little bit behind where we'd like it to have been by the half year. I would say 2 underlying causes. First of all, as we've mentioned at the time of the trading update in May, they did lose a large contract from one of their big customers, which was no fault of their own. A customer who had some financial difficulty and cut back on a lot of external spending, which unfortunately impacted Concept Life Sciences.

At the same time, the ramp-up in the drug discovery services of Concept Life Sciences is going well. They've got a very good pipeline, but we haven't seen those pipeline converting yet into contracts. But we're very hopeful and optimistic that we'll start to see that come through in the second half and thereafter.

Test and Measurement. Again, a solid top line. Sales up 6% on a like-for-like basis and then also some acquisitions helping them there, less the disposal of the EMS joint venture which came out of this segment.

Automotive continues to be very strong. Our Millbrook business is performing very well; very good growth there on the back of the additional capacity, as you know, that we've been putting in over the past couple of years there. There is some phasing, and Clive, I think, gave a very good exposé of the mismatch here between maybe some of the cost and the strategic growth initiative cost coming in ahead of the revenue curve. But otherwise, I would say the end markets here, the strategic positioning of the business here in very good shape.

We've also taken the decision -- I'll come back and talk about that in more detail later -- to merge the 2 largest businesses in this segment, similar to what we did with Malvern Panalytical 1.5 years ago. So Brüel & Kjær Sound & Vibration and HBM will merge activities in the course of next year. And then as Clive mentioned, the Macquarie joint venture is now open for business.

In-line Instrumentation, a solid performance even though some of the lumpiness coming through on the top line there in the first half with sales off 3% on a like-for-like basis. But here, the comps are working very much in our favor on the bottom line. So a good recovery in gross margins and good recovery in operating profit.

In terms of end markets, pulp and paper continues to be a challenging area but still some good growth there as we diversify into tissue and packaging and pulp. And also, as we saw on the first slide, growth in the energy market; even though we had some tough comparator here in the wind business, we had some very big orders in sales in the first half of 2017, but despite that, a growth in energy.

Industrial Controls, not a whole lot to say here. The top line is, for the most part -- is dropping because of the Microscan disposal. Behind that actually, the core business, Red Lion Controls and Omega continue to show solid growth, very good growth in Asia, particularly in China. And Omega continues to make good performance in improving the operations there and also investing in their digital marketing campaigns. And I'll talk in a minute to some of the opportunities we're seeing here, and indeed across the In-line Instrumentation around industrial connectivity.

So to talk to strategy just very briefly, you'll recognize by now our strategy wheel and the key elements of our strategy, focusing on solutions by which we mean broadening our hardware to add software, to add services to our capability, focusing on some of the key markets like pharma, like automotive that I talked to. Expanding the business globally, continues to be a big driver of top line growth. And then on the operational side, we have good progress from Uplift. We also have made very good progress in the half year on expanding our Lean capability and our Lean initiatives across all of the organization. We have established also a Lean group at center, which has been established to help and to drive some of those initiatives across the group.

Also some of the activities in Uplift which were sort of temporary in nature and being assisted by outside advisers we've taken in-house.

So for example, we have now established a purchasing group in -- at center, whose role it is as well to drive that purchasing consolidation across all of the operating companies. And finally, deploying capital for M&A. We continue to do that. We closed the half year, as Clive mentioned, with an underleveraged balance sheet under 1x EBITDA to debt -- or debt to EBITDA. So plenty of room continues to make further acquisitions.

In terms of some of the highlights there. We had 3 acquisitions as I'll talk about, merging the activities of Brüel & Kjær and HBM. We continue to drive through those merger activities and more general activities collaboration across the group. I'll talk to a couple of the examples there. And finally, on our industrial Internet of Things, a lot of activity there around our In-line Instrumentation and Industrial Controls businesses.

So in terms of M&A, as I mentioned at the outset, too, 2 acquisitions here on the Test and Measurement side; VI-grade which we just announced last week and signed last week, it will close within the next few weeks. A very interesting business which provides a full-scale vehicle simulation for the automotive industry, essentially creates a physical simulator which is driven by a hardware virtual design of the vehicle, along with a digitized version of a track or route or terrain that the vehicle is to be tested on. So it allows customers to model the product, allows customers to driver over a known physical track and allows them, obviously, then to look at their design, speed up the development time and reduce the cost of that process as well as the risk of that process. So this will be a new operating company within the Test and Measurement segment, but obviously with very strong connections into some of the existing software and simulation capability that we have within Brüel & Kjær Sound & Vibration as well as within HBM.

And secondly, the acquisition of Revolutionary Engineering, which we acquired in April. This is located in the Detroit area and will be and is already the North American platform for Millbrook. The interesting thing is that Revolutionary not only brings services and supplies, test services to the industry in the United States but they have also, over their lifetime, developed hardware as well as software solutions which they use for that testing. So they're in a position to sell their test hardware as well as their test software, which will be very interesting for Millbrook as a whole to be able to integrate that hardware and software into their test labs.

Moving on to pharma solutions. The Concept Life Sciences acquisition which we made in January. We're moving very well there in terms of integrating that within the Malvern Panalytical business as well. So we do have established cross-technical synergy, cross-technical advisory so that we're able to work across that segment on customer problems and on technical solutions and technical offerings. We have joint key account management being put in place across the entire platform and a very strong focus on the pharmaceutical market, helping us to leverage on those relationships across all 2 businesses -- or all 3 businesses as well, if you include the Particle Measuring Systems business.

And Particle Measuring Systems itself doing very well in its -- expanding its technical consulting services. They sell hardware and software, but they are increasingly working for customers to consult on solutions to quality control issues within the pharmaceutical manufacturing, which, as you know, is heavily driven by the regulatory compliance framework.

The merger of Brüel & Kjær Sound & Vibration and HBM, which we announced in the half year, will begin next year. So we have put in place the structure at the leadership level. We have 1 management team today who are working and putting together the plan for the merger, [right down] through the organization and the various activities of the business; brings together all of the hardware and all of the software, which obviously will have opportunities in terms of optimizing design, eliminating duplication of product or design applications, but also offering a much bigger portfolio to the customers who -- many of whom are common across the 2 organizations.

We have a name for the new company which will be HBK, which takes a little bit out of both. And actually, in terms of size, this business will be somewhere between 25% and 30% of group turnover, which on top of the merger of Malvern Panalytical, which is somewhere between 20% and 25% of group turnover. That means that actually 2 operating companies will form 50% of the group's turnover, barring any further acquisitions or divestitures.

And finally, our industrial Internet of Things. So the whole digitization and large data analytics within the industrial market, which is really starting to take off and really starting to move very quickly, we think we're very well positioned in that area and have made that a particular focus of our strategy. We have some very interesting products, hardware, which we can bring to bear in terms of the sensing capability of Omega as well as the connectivity and data translation capability of the Red Lion portfolio, which brings data from the sensor, if you will, up into the cloud, up into the platform where it gets analyzed.

And then we have, within our In-line Instrumentation business, a couple of segments or a couple of operating companies who have particular capability around data analytics as well as the joint venture which we've just established with Macquarie Capital which will focus on environmental applications, bringing from Macquarie Capital their know-how as well as their very large installed base of assets and the capability and the cloud-based solution that the EMS business has established over the year. So a very exciting opportunity there, we think, on the services and on the front end of the IIoT opportunity.

And as Clive mentioned, we have also invested, in the half year, to launch Spectris Advance as a brand for our digital solutions, and we have been investing in R&D there to develop some and refine some of our capability and some of our solutions, particularly in the wind business, but we intend to pursue several other verticals as well in due course.

So in summary and looking to the second half of the year, very good performance, really tied to the execution of our strategic plan, along with strong end market and regional demand in our markets. Uplift, Project Uplift on track as we had forecast for the net benefit for the year. And then shared service progress also on track with details to follow in the second half. In terms of the strategic project -- progress, good acquisitions adding to our software services and testing capability. And then finally, our expectations for the year remaining unchanged.

And with that, we've come to the end of the formal presentation. And we'd be happy to take any questions which you might have. We have one up here from Mark. If you wouldn't mind just to introduce yourself and your institution before you ask the question, please.

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Questions and Answers

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Mark Davies Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [1]

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It's Mark Davies Jones from Stifel. First Clive, just a clarification, that 30-70 profit split. Just remind me, is that before or after the Uplift cost that you were looking at those numbers?

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Clive Graeme Watson, Spectris plc - Group Finance Director & Executive Director [2]

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Actually both. Project Uplift is going to be roughly a net 0 for the full year.

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Mark Davies Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [3]

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Okay, cool. And on Test and Measurement, you're talking about mismatch between those costs and benefits for the full year. Would you expect profitability to be broadly similar to last year? Can you make up that ground or should we sort of expect a headwind?

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Clive Graeme Watson, Spectris plc - Group Finance Director & Executive Director [4]

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No. We're not going to make up the whole of the miss in the first half. I think there will be -- margins should be at least as good as we saw in the second half of last year, so we'll make a good fist of it. But I don't think we'll make it all the way there.

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Mark Davies Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [5]

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And can you break down those costs any more? You just talked a lot of it being premerger costs rather than acceleration, depreciation on the Millbrook spend or whatever it might be. Can you give us an absolute number for what you're spending on the merger?

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Clive Graeme Watson, Spectris plc - Group Finance Director & Executive Director [6]

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Well, after the -- on the merger itself, it's probably going to be similar in cost. We know roughly what we spent on the merger of Malvern and Panalytical, which is about GBP 4.5 million. So I think it'd be something of that order, and that's what we look at as we're ramping up towards.

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Mark Davies Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [7]

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Great. And one slightly broader question on auto. Obviously, volume-wise, you're trailing very strongly at the moment, and you're sounding very bullish about it, but the broader industry is obviously facing its challenges and there have been some indications of R&D budgets coming under pressure from some of the big OEMs. Are you seeing that in any of your business? Or is it all seeing strong demand growth?

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John E. O'Higgins, Spectris plc - CEO & Executive Director [8]

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Well, you see in our numbers that we're seeing very strong demand growth. We're obviously focused on the R&D end of the market and so independent of production and location decisions. But driving the R&D, we have some very big spending going into new drivetrain into electric. And we are adding capability and capacity, both within the hardware, software as well as the test services area for that.

We're also seeing very strong growth in all manner of software within the vehicles. So autonomous but also related -- autonomous-related activity, which is software-driven. And again, we are investing and gearing up for that. And then there's no let-up in the regulatory control around emissions and around safety, which all needs to be tested as well from an R&D perspective. So I would say from our point of view, it all continues to look quite solid.

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Jonathan Hurn, Deutsche Bank AG, Research Division - Research Analyst [9]

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It's Jonathan Hurn from Deutsche Bank. Just 2 questions, please. Just firstly coming back to Project Uplift. Just looking at, sort of, shared service project, it seems to be running a little bit behind schedule. If we look at Project Uplift going forward, when do you think is the first clean year we get for Spectris with no cost? Is it going to be 2020 or is it going to be pushed out more to 2021?

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Clive Graeme Watson, Spectris plc - Group Finance Director & Executive Director [10]

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We haven't finalized the shared service center study yet, but I think it'll be more likely 2021. But I think the bulk of it will have been done through 2019.

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Jonathan Hurn, Deutsche Bank AG, Research Division - Research Analyst [11]

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And the second question, just coming back to end markets. Obviously, semicon is a big end market for you guys. If you look at what some of the other people in industry are saying, they are expecting probably a weaker second half in terms of spending [in] that. What is your outlook for that market for the second half, please?

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John E. O'Higgins, Spectris plc - CEO & Executive Director [12]

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Well, it surprised us up to now, Jonathan, in that we had already flagged, I think, about this time last year, that we thought numbers were getting ahead of themselves. In terms of what we report there in that 10%, only a portion of that is semiconductor. So it's not -- semiconductor is not 10% of group turnover. We have telecoms and we have electronics in there as well. So I think the semi part of that is probably only 3% or 4%.

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Clive Graeme Watson, Spectris plc - Group Finance Director & Executive Director [13]

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Yes.

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John E. O'Higgins, Spectris plc - CEO & Executive Director [14]

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And the other point I would make on that is that it's also not all hardware. We do also provide services to those customers as well. So again, there's a bit of resilience.

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [15]

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It's Andrew Douglas from Jefferies. Two questions, please, if I can. One for John. On the metals and mining, good growth on the back of good growth. Is that still aftermarket and OE? Yes. Sorry, is it aftermarket and then is OE coming through yet?

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John E. O'Higgins, Spectris plc - CEO & Executive Director [16]

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It's growth in OE which is driving the top line or the growth that you see. Services, there have been pretty good actually all the way through the downturn. We are still seeing some nice steady recovery in projects, nothing major yet, but just a nice steady growth.

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [17]

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Okay. And then one for Clive. Just on tariffs and the challenges we may face going forward. Can you just give us a rough update as to, kind of, what you're seeing? I think it's largely in HBM if I'm not mistaken.

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Clive Graeme Watson, Spectris plc - Group Finance Director & Executive Director [18]

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It's largely in HBM but there are other companies which are being affected. We've taken a first cut at -- to the extent we can on these things. And it looks like it's about $3 million to $5 million exposure for the group right now. But within that is the capability for us to actually resupply and ship supply to more favorable. And in fact, one of our operating companies is already talking to an existing incumbent supplier to shift supply from China to either Taiwan or India. So there are plans afoot to try and mitigate to the extent we can.

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [19]

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So that $3 million to $5 million is a gross number and hopefully, you can get it as price rises?

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Clive Graeme Watson, Spectris plc - Group Finance Director & Executive Director [20]

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It's a gross number, yes. As things stand right now, I mean, we've yet to assess the retaliatory measures from the...

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Jack O'Brien, Goldman Sachs Group Inc., Research Division - Equity Analyst [21]

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It's Jack O'Brien from Goldman Sachs. Just wanted to follow up on the end market and geographic outlook. You've mentioned that Germany has slowed against the tough comp; so too Japan. I guess, those will be 2 of the most, sort of, cyclically advanced economies. So does that make you nervous when you look at China growing double digit? Have you seen anything there yet or does it still remain very strong?

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Clive Graeme Watson, Spectris plc - Group Finance Director & Executive Director [22]

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China is -- the underlying trading conditions in China are very strong. And the shift towards some of the advanced areas that they are looking at, particularly in pharmaceutical, advanced research type activities is looking very positive for China in the longer run. Japan has had a history of being a little bit more lumpy than China. China has been fairly consistent.

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Jack O'Brien, Goldman Sachs Group Inc., Research Division - Equity Analyst [23]

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And perhaps just on one of the end markets, you mentioned pulp and paper still being a bit challenging. Can you just remind me...

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John E. O'Higgins, Spectris plc - CEO & Executive Director [24]

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Well, it's the paper part of pulp and paper which is challenging and has been for 30 years.

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Jack O'Brien, Goldman Sachs Group Inc., Research Division - Equity Analyst [25]

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Given the structural (multiple speakers)?

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John E. O'Higgins, Spectris plc - CEO & Executive Director [26]

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Yes, exactly.

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Jack O'Brien, Goldman Sachs Group Inc., Research Division - Equity Analyst [27]

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Just wanted to clarify on the Project Uplift. You talked about a GBP 3 million net benefit for this year. And I'm thinking about the sort of EBIT bridge in the model. Obviously, we had quite a lot of cost in 2017. Can we assume that that's one-off and therefore sort of added back into our net benefit, if you get me?

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Clive Graeme Watson, Spectris plc - Group Finance Director & Executive Director [28]

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Yes, yes.

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Jack O'Brien, Goldman Sachs Group Inc., Research Division - Equity Analyst [29]

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Okay, great. And just one final thing. Obviously, through time, as a business, you've made lots of acquisitions. It's been part of the strategy. As you look at your sort of portfolio today, are there any obvious sort of disposal candidates? You've talked about academic research being a laggard for some time, or other various businesses that do well at various points in cycle. Are there opportunities there?

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John E. O'Higgins, Spectris plc - CEO & Executive Director [30]

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Well, there's always opportunities, Jack. We keep the portfolio under constant surveillance or examination for selling opportunities. We obviously, would only sell with a view to maximizing value -- maximizing shareholder value, so selling at the right time, the right point in the cycle is absolutely key. But certainly, as we continue to drive the strategy and focus more around these platform businesses and these industries which they serve, there may well be in the future, I would say, things which will no longer be strategic. But nothing that we're actively involved in.

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Andrew Francis Caldwell, Barclays Bank PLC, Research Division - Research Analyst [31]

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It's Andrew Caldwell from Barclays. Just 2 questions. On the auto, have you seen any impact from the new emissions regulations in September? As we've heard a lot of automakers can't get stuff tested in time. Have you seen a big push-through of that which could then drop off as they get everything tested?

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John E. O'Higgins, Spectris plc - CEO & Executive Director [32]

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We haven't seen the drop-off yet. We've certainly seen the demand. And as we mentioned going through the presentation, Millbrook's business is running in a very high growth levels, and certainly that demand is -- that particular emissions testing, real-world emission testing is part of the demand. And as far as I know, we're totally out of capacity at Millbrook in that area.

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Andrew Francis Caldwell, Barclays Bank PLC, Research Division - Research Analyst [33]

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Is there risk then as we move past those deadlines into October, November as things are then tested, that then sees a very steep deceleration?

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John E. O'Higgins, Spectris plc - CEO & Executive Director [34]

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No, not particularly. I mean, certainly some of the OEs today are delaying and not actually going to meet the deadline, so they're having to delay delivery. But that becomes part of the ongoing test cycle and part of the underlying test environment now that is in place. So there will continue to be going-forward demand for those real-world testing cycles.

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Andrew Francis Caldwell, Barclays Bank PLC, Research Division - Research Analyst [35]

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And then secondly, in the Test and Measurement margin, we talked about the mix effect. Is there a service versus hardware element to that mix effect as well the smaller [fastware] companies are more service-heavy?

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Clive Graeme Watson, Spectris plc - Group Finance Director & Executive Director [36]

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Yes. Both of those companies, Millbrook and ESG are very service-heavy.

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Andrew Francis Caldwell, Barclays Bank PLC, Research Division - Research Analyst [37]

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Is there sort of a forward-looking element to that as you move towards more of a solutions business, the margins structurally trend...

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Clive Graeme Watson, Spectris plc - Group Finance Director & Executive Director [38]

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Well, actually 2 different dynamics there. In the case of ESG, they just need volume. They're a high fixed cost business, so if they can get the volumes through ESG, then it just drops straight through to the bottom line. So they were subscale and now they're starting to ramp up as the price of oil stays high.

In the case of Millbrook, you've got a depreciation charge ahead of revenue generation. So it's depressing at the EBIT level but accretive at the EBITDA level. So you'll see that starting to ramp up and again, you'll start to see margins expand throughout that. But whilst we're going through this early phase, then it is dilutive because both of those businesses carry margins which are substantially below those of the 2 major businesses.

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John E. O'Higgins, Spectris plc - CEO & Executive Director [39]

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Well, if there are no further questions, I'd like to thank you all for your attendance today. And we'll see you next time. Thank you. Bye-bye.

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Clive Graeme Watson, Spectris plc - Group Finance Director & Executive Director [40]

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Thank you.