Spectris have now released their final results for the year ended 2018.
Revenues increased when compared to last year as a £34.2M decline in industrial controls revenue was more than offset by a £76.2M growth in materials analysis revenue, a £35.3M increase in test and measurement revenue and a £1.3M growth in in-line instrumentation revenue. Depreciation was up £4.7M and other cost of sales grew by £34M to give a gross profit £39.9M higher. Indirect production and engineering expenses declined by £10M but sales and market expenses were up £15.7M, acquisition related costs increased by £11.8M and other admin costs also grew which meant that the operating profit was £6M lower. There was a £44.2M reduction in the profit on business disposals and an £8.5M increased loss on retranslation of intercompany loans arising from Sterling’s strengthening against the dollar, along with a £2.4M increase in interest payable on loans. Tax charges were down £10.8M, however, to give a profit for the year of £185.2M, a decline of £49.6M year on year.
When compared to the end point of last year, total assets increased by £294.3M driven by a £138.8M growth in goodwill, a £40.4M increase in inventories, a £38.9M receivable from a joint venture, a £42.6M growth in trade receivables, a £35.1M increase in the value of trade names, a £30.9M increase in freehold properties and a £23.8M growth in plant and equipment, partially offset by a £64.8M decline in cash and a £28.6M decrease in assets held for sale. Total liabilities also increased during the year due to a £177.2M growth in bank loans and a £36.7M increase in contract liabilities. The end result was a net asset level (excluding goodwill) of £277.5M, a decline of £155.9M year on year.
Before movements in working capital, cash profits increased by £12.2M to £267.2M. There was a cash outflow from working capital and after interest payments increased by £4.7M but tax payments reduced by £9.3M the net cash from operations declined by £17.2M to £168.7M. The group spent £97M on fixed assets and spent a net £152.6M on acquisitions to give a cash outflow of £72.7M before financing. The group also paid out £68.2M in dividends and £100.5M on share buy-backs and to finance this they took out new loans of £175.5M. The end result was a cash outflow of £65.2M and a cash level of £67.3M at the end of the year.
The operating profit in the Materials Analysis division was £72.1M, a growth of £3.5M year on year on sales that increased by 16% reflecting an 8% increase in like for like sales, a 10% contribution from acquisitions and a 2% negative impact from forex movements. Sales growth was driven by strong demand in Asia, particularly in China, South Korea and India with a notably stronger performance in the second half. In North America and Europe, like for like sales were also up with a stronger performance in the first half.
Sales at Malvern Panalytical have continued to benefit from the reorganised sales and marketing functions following the merger and are being aligned with three market sectors: advanced materials, pharma and food, and raw and bulk materials. Alongside a key account structure these are focused on value based selling in order to create differentiation from the competition. They have continued to generate orders from cross selling the Malvern and Panalytical branded product lines, with incremental sales into various universities and industrial customers recognising the benefits of the combined business.
Several new products were launched in the year including a new high performance benchtop analytical tool for determining the chemical composition of different materials. It is applicable to industries such as mining, pharmaceuticals and oils which need to comply with international regulations. Also launched were the Zetasizer Ultra and Pro systems which deliver significant improvements in the quality and speed of the characterisation of nanomaterials and proteins.
Particle Measuring Systems benefited from growth in the semiconductor industry as well as continued good demand for both its contamination monitoring hardware and high level consulting services into the pharma industry. Demand for these services is motivated by regulatory compliance, which is becoming more stringent, and the business is well placed in a growing market for aseptic processing and sterility assurance.
Performance at Concept Life Sciences was below expectations due to a range of factors including a reduction in project work from two major clients, delays in gaining new lab and manufacturing accreditations as well as a period of sub-optimal performance at one of its analytical labs. These issues largely reflected the state of the business on acquisition as well as disruption caused to the commercial organisation from the acquisition. Remedial action to improve effectiveness is already having an impact; the preparatory work for the manufacturing accreditations has progressed well and the funnel of opportunities has developed strongly.
Sales to the pharmaceuticals and fine chemicals industries rose notably on a like for like basis with North America seeing particularly strong growth. LFL sales also increased in Europe and Asia with growth in the latter driven by strong demand in China and India as rising disposable incomes in these countries bring increased demand for effective healthcare. This has led to a greater investment in generic pharmaceutical development and manufacturing.
The metals, minerals and mining sector saw an increase in like for like sales with North America and Europe broadly flat and growth in other regions. The improved investment climate has seen an increase in market activity as well as a focus on safety and productivity. The sector has focused on delivering improved yields, productivity, product quality and cost minimisation in the extraction and processing of raw materials fundamental to the manufacturing industry.
After a weak 2017, sales to academic research customers were much improved last year with good like for like growth across all key regions. The year started slowly but improved in the second half with a significant pick up in demand in North America and Asia as improving economic conditions and increased government funding led to greater market activity. In China the government has a number of initiatives and investments underway to help develop the country’s technology and pharmaceutical industries. In Japan, the government aims to increase spending on science and technology to support significant industry and academic partnerships in established research areas. In North America sales benefited from an increase in university funding and the group’s improving win-rate.
Sales to the semiconductor and electronics industries recorded another year of good like for like growth, particularly in Asia where they have seen strong demand from battery and electronics customers in China, Taiwan and Korea as Asian demand for consumer electronics has increased. Semiconductor capital spending has continued to rise as new fabrication plants are developed, although they have seen a slower pace of growth this year. Notable customer wins include a well-known semiconductor manufacturer and memory supplier.
Going forward, in the pharmaceuticals sector, the demand for effective healthcare has resulted in sustained investment in R&D and the board expect this trend to continue. Alongside this, an increasing awareness of total lifecycle cost awareness is pushing customers to reduce both development costs and time to market for new products, underpinning an increased need for new solutions and services. They expect steady growth in the mining and materials sector to continue.
With its dependence on government spending, they expect growth in the academic research market to be variable, although demand in Asia is benefiting from a number of government initiatives. Within the semiconductor industry, after another year of strong demand, they expect the pace of investment to be at more muted rates in 2019.
The operating profit in the Test and Measurement division was £42.8M, a decline of £12.8M when compared to last year despite sales increasing by 7% which included a 2% contribution from acquisitions and a 1% negative impact from forex movements. All key regions delivered similar levels of LFL sales growth with the UK, China and Japan being the key countries positing higher growth.
The decline in margins reflected the higher sales volumes in ESG and Millbrook which have higher overheads. The overheads increased from the HNK-related merger costs, higher employee costs and higher depreciation at Millbrook. At the end of May they completed the disposal of ESM Bruel & Kjaer into a joint venture with Macquarie Capital.
Preparatory work continued ahead of the merger of BKSV and HBM. The businesses are being combined in order to leverage the strengths and complementary expertise across the measurement chain. An integrated model for the joint sales organisation has been established and the development of joint products has started. During the year both businesses launched new software products which aim to streamline and simplify data acquisition and monitoring.
Overall sales growth was held back by supply shortages and constraints at HBM, by internal staffing issues at BKSV, which have now been resolved, and by some interruption from pre-merger related activity. Orders for their traditional hardware products have remained strong, however, particularly for BKSV’s shaker business and for HBM’s core torque, load sensor and strain applications and data acquisition products. OEM sensors have seen significant growth both with existing and new customers in applications like agriculture, medical devices, textile machines and spectrometry devices. HBM’s DAQ instrument business has grown significantly, a notable order being from ITER for their experimental fusion reactor project. Going forward, they see a solid pipeline of opportunities for ground vehicles, aircraft and other end markets.
At Millbrook they continued to expand their testing capability. They increased their capacity for testing driver assistance systems and CAV vehicle technologies via modifications to existing track infrastructure plus investment in instrumentation and soft targets that allow contact without damage. A new battery test facility started in January and all chambers will become operational during the first half of 2019. The refurbishment of the full scale crash lab has increased efficiency and enabled additional tests to be offered. At Test World in Finland, additional indoor tyre testing capacity has come into commercial use through the year. The acquisition of Revolutionary Engineering in Detroit in April expanded their position into a new region, market and services offering and they have seen good demand for its services.
In the automotive sector, sales grew strongly during the year with the UK, China and Japan being the main contributors to growth. Growth reflects robust demand for electric and hybrid vehicles globally and policy changes in certain markets such as China and Europe. They also had a year of strong growth in their eDrive applications.
In machine manufacturing, a significant proportion of which goes into the automotive supply chain, sales rose in Europe and Asia. Germany and China both saw good growth with a continued increase in exports from Germany. Sales of their weighing sensors benefited from a strong machine maker demand globally and customer wins.
In the aerospace and defence sector, sales declined in all regions, though sales can be lumpy. In addition the prior year was a tough comparison due to a sizeable one-off order and they have seen some projects being delayed into 2019. They continue to see good R&D investment in the industry, however, and have been building their pipeline of opportunities. They have been working with Mitsubishi Regional Jet on Japan’s first commercial jet aircraft during its certification phase to ensure exterior take-off and landing noise meets requirements. BKSV’s acoustic products were used to perform noise source id to help identify areas of the aircraft that need continued analysis or further design enhancements.
Sales to their consumer electronics and telecoms customers were slightly higher with growth lower than in previous years reflecting fewer new product launches by customers. Sales of the high frequency head and torso sim which was launched in 2017 have been above expectations, particularly into consumer electronics companies, and they have a strong pipeline. Underlying demand for their electro-acoustics products is still good as manufacturers strove to deliver higher sound quality.
Sales into academic research institutes were flat, with lower sales in Europe and North America. Sales were strong in Asia driven by very good growth in China, reflecting the increased government funding and continuing investment to move the country towards being a technology-driven economy.
Improved conditions in the oil and gas and mining markets continued into 2018 and sales growth was again strong, particularly in North America. A rising rig count and the launch of new oil and gas and mining projects saw demand for ESG’s microseismic monitoring solutions increase notably. Sales of the new microseismic data acquisition, processing and analysis product which was launched in the year have been good.
The board expect demand in the automotive sector to continue to grow and new capacity coming onstream at Millbrook will enable them to better access this sector. In aerospace demand will be driven by new development programmes and while their pipeline remains strong, the ability to convert these into orders will be key. The underlying trends in the consumer electronics and telecoms market remain healthy with continued consumer demand for phones with high quality audio. Market conditions in the oil and gas industry are harder to predict, with continued volatility in oil and gas prices.
The operating profit in the In-line Instrumentation division was £32.2M, an increase of £2.7M when compared to 2017. Sales were broadly flat with a like for like increase of 1%. Servomex and BTG performed well, with NDCT’s sales contracting and Bruel & Kjaer Vibro having a tough comparison against high one-off sales in 2017. A 1% negative forex impact was compensated by a 1% contribution from acquisitions. On a regional basis, sales rose strongly in Asia, particularly in China, but declined in North America and Europe.
In the pulp and paper markets, sales increased with similar growth in all the key regions and notably strong growth in China driven by robust capital project activity. BTG’s process solutions business unit has continued to gather momentum with several customers placing orders for integrated solutions. Orders were placed in the Americas and Europe for pulping solutions, including instrumentation and MACS advanced process control content. These solutions are designed to deliver sustainable gains in business performance for their customers, including cost savings and productivity enhancements.
In the energy and utilities market, sales rose with notably strong growth in Asia more than offsetting lower sales in North America and Europe, with the higher year on year oil price supporting steady project development. In addition, waste to energy projects in the Americas and combustion control in power plants in Asia continued to drive opportunities.
With the strengthened sales and marketing organisation at Servomex, they have continued to capitalise on this improved backdrop in the industrial gas and hydrocarbon processing sectors and benefited from sales of new products launched in recent years. Also sales of their analysers into the semiconductor market to ensure gas purity during the manufacturing process have been buoyant as activity there remains strong. They had a notable order in the year from a major player in semiconductor technology to deliver 135 analysers for their new semiconductor fabrication facility in South Korea.
In the wind energy sector, although market conditions continue to see growth, they have seen lower sales at Bruel & Kjaer Vibro dye to a tough comparator in 2017 when they had very high sales to wind turbine manufacturer Vestas. During the year they delivered their 20,000th wind turbine condition monitoring system and have further expanded the number of wind farm owners and operators to whom they provide remote turbine monitoring services. Early sales of a new condition monitoring unit included the selection as a preferred supplier with a large wind turbine manufacturer in China and new customers are also showing keen interest in their new third generation product.
At NDCT, sales to web and converting industries were down notably across all key regions. In the film extrusion and converting segment, they have seen demand softness in all regions, in particular in the Americas where they have seen fewer upgrades compared with last year, driven by industry consolidation and customers delaying projects to focus on consolidating production lines.
An important development opportunity has been their work on lithium-ion batteries and the business continued to progress activities to further penetrate this market. They have had a notable order with a battery manufacturer in Taiwan and are currently working on projects with American, Chinese, Japanese and Thai battery manufacturers. In the food and bulk materials segment, manufacturers continue to seek higher performing measurement solutions for example NDCT’s Infralab product introduced a degree of roast measurement that allows coffee manufacturers to perform moisture and degree of roast measurement at a single station.
Going forward the market environment in oil and gas is difficult to predict but in the wind energy sector, investment is expected to continue to grow and in the medium term there remains the potential for additional capabilities beyond vibration. The demand softness seen in the film extrusion and converting segment is likely to persist into 2019 and they continue to look at cost containment measures to offset this. In the food and bulk materials market, activity is expected to remain robust.
The operating profit in the Industrial Controls division was £29.3M, a growth of £600K year on year. Like for like sales were up 3% but there was a negative impact of 3% from forex moements and 13% due to the disposal of Microscan. North America recorded solid sales growth, Asia recorded good growth but in Europe sales were lower due to a tough comparative from good project sales in 2017. Profits improved due to better margins At Omega and Red Lion.
Operational performance improved at Omega with higher margins. This has been achived by a focus on lean operations, tighter inventory management and consolidation of its global distribution centres. During the year the business did experience some product availability and lead time issues, impacted by the tight US labour market and raw material availability. The business has been introducing newer products to offset the lower growth of its traditional thermocouple business.
In December a new e-commerce platform was introduced to enhance the digital experience for customers. It was initially launched in Canada and will be rolled out during 2019. It has supplemented this with more precisely targeted digital campaigns and enhanced organic search engine optimisation performance which are expected to translate into higher conversion of website traffic to sales.
Going forward, given the predominance of sales in the North American market, the performance of this segment will be influenced by industrial markets in that region where growth in 2019 is likely to be more subdued. The enhanced digital platform and refresh of their product portfolio is expected to drive enhanced medium term growth at Omega, however.
In January the group acquired Concept Life Sciences for a consideration of £166.9M. The business is a UK-based group providing integrated drug discovery, development, analytical testing and environmental consultancy services mainly in the pharmaceutical, biotechnology, agrochemical and environmental sectors. The acquisition generated goodwill of £105.5M. The business has not performed in line with management expectations but they have decided that none of the goodwill has been impaired.
In April the group acquired Revolutionary Engineering Inc for a consideration of £8.7M. The business is an automotive test system and service provider based in the US. And the acquisition generated goodwill of £3.3M. In August they completed the acquisition of VI Grade for a consideration of £28.3M. The business is a global provider of vehicle simulations and the acquisition generated goodwill of £12.8M. The above acquisitions generated operating profits of £1.5M during the year.
In May the group disposed of their environmental monitoring business, EMS Bruel and Kjaer into a joint venture with Macquarie Capital in exchange for a cash consideration of £45.1M and a 45% interest in the joint venture. This generated a profit on disposal of £56.3M.
The group spent £94.1M on capex compared to £73.1M last year, of which £43.1M related to spend by Millbrook on capacity expansion as the business invested to access high growth opportunities in support of customer project demand.
The implementation of phase one of project uplift continued as planned with savings derived predominantly from improvements in procurement as well as benefits from simplifying their property portfolio. During the year the gross recurring benefit was £17.3M and the one-off costs were £10.8M. They remain confident of saving £25M by the end of 2019. In addition they have identified more than £30M of annualised benefits, of which £15M are planned to be realised in 2019 which will help to offset inflationary pressures in the cost base. Delivering these savings will result in one-off restructuring costs of £35M.
Going forward, the board expect sales growth to moderate in 2019 given the more cautious macroeconomic outlook. Consequently they are focusing on increasing productivity and operational efficiency. Their profit improvement programme is expected to deliver benefits of £15M to £20M during the year, helping drive margin expansion.
At the year-end the group had a net debt position of £297.1M compared to £50.5M at the end of last year. At the current share price the shares are trading on a PE ratio of 17.6 which falls to 15.9 on next year’s consensus forecast. After an 8% increase in the dividend the shares are yielding 2.2% which increases to 2.3% on next year’s forecast.
Overall then this was a bit of a mixed year for the group. Profits were down, mainly due to higher acquisition costs, net tangible assets declined and the operating cash flow deteriorated, although this was due to working capital movements and cash profits increased. This did not cover the amount spent on acquisitions, however, so there was no free cash generated. Most divisions performed fairly well with Asia, particularly China showing good growth. The exception was in Test and Measurement where increased overheads and staff costs led to a reduction in profit.
Going forward the board believe that sales will moderate due to the tricky macroeconomic conditions but this should be offset by the acquisitions and increased efficiency. Still, I feel a forward PE of 15.9 and yield of 2.3% make these shares a bit pricey given the market conditions.