Spectris : Financial Reporting Document

Spectris 2021 Full Year

Results

Thursday, 24th February 2022

Spectris 2021 Full Year Results

Thursday, 24th February 2022

Strategy for Profitable Growth

Andrew Heath

Chief Executive, Spectris

Welcome

Good morning everyone. Welcome to Spectris's full year results for 2021. Thank you all for your continued interest in our business. I am Andrew Heath, I am the Chief Executive. I would like to start this morning by saying thank you to all of my Spectris colleagues for their hard work and support again over the past year. Together we have continued to face the challenges from COVID and the well-publicised global supply chain issues head on. Our teams have worked tirelessly and I could not be more grateful for their commitment and support. Thank you.

In many ways 2021 was a challenging but also a very good year for Spectris. Not only did our end markets recover strongly but on top of this we saw equally strong demand for our products and services. There has been yet another year in which we have continued to execute on our strategy for profitable growth. We set out this strategy in 2019 and through consistent focus and execution the Spectris we have today has been significantly strengthened, as we will come to discuss.

Our Strategy for Profitable Growth is Delivering

Defined by our purpose and built on our values

One of the reasons execution against the strategy has been so effective has been because my colleagues right across our businesses believe in it, own it and they aim high, consistent with our core values. This underscores the importance of being purpose-led. Right across Spectris we are aligned behind our purpose to deliver value beyond measure and this means harnessing the power of precision measurement to equip our customers to make the world cleaner, healthier and more productive.

This is echoed across the Group. We know our purpose, why we are here and where we want to get to. We also know and live our values which speak to the culture of the business and how we conduct ourselves along the way. We know our strategy which is our guidebook and the roadmap to get us where we want to be, bringing our purpose to life.

Good results; order book provides momentum into 2022

Strong demand for our products and services

As I have said, we saw strong demand for our products and services. We entered 2022 with good momentum and a record order book right across the Group. We are creating a Spectris that is a more focused, higher quality, more profitable and a more resilient business, supported by a very strong balance sheet. We have demonstrated our ability to reduce costs responsibly, drive organic growth, expand margins, allocate capital with discipline for attractive returns and we have made several synergistic acquisitions to enhance our customer offering.

Delivered a good financial performance

In 2021 on a like-for-like basis orders were up 19% with sales up 10%. This means we have outperformed buoyant end markets with market share gains supported by new product and service launches. We delivered good financial performance. Our adjusted operating profit

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improved 29% on a like-for-like basis to £209.4 million with an operating margin of 16.2%, reflecting the growth in sales and the operational improvements we have made supported by the Spectris Business System.

Having returned the business to an asset-light model adjusted cash flow conversion was 96% and we further strengthened the balance sheet with net cash of £167.8 million at the year- end. We want to retain this position given our pipeline of M&A opportunities so have elected not to do a special capital return this time. We have announced a final dividend of 71.8 pence per share and that is a growth of 5% in line with our policy. In the fourth quarter supply chain challenges and the onset of Omicron constrained our ability to convert our strong order book to revenue, resulting in some order fulfilment being pushed into 2022. Now, this was clearly frustrating as we could have delivered an even better performance last year but this revenue is not lost and will be realised in 2022.

Committed to being a leading sustainable business

As we look forward I have many reasons to be optimistic. We are committed to being a leading sustainable business. We have set ambitious net zero targets and have started to deliver our programmes to achieve them. We are also looking beyond our own operations to support the communities we operate in. The Spectris Foundation has been established to promote STEM education and we have expanded our broader STEM outreach programme. We are also aligning our strategy with key sustainability themes that will underpin future growth.

2021 scorecard - executing our strategy

Turning to our strategy scorecard the message here is one of strong execution. I am very pleased with how e have continued to execute strategically. Our strategy is working. We have demonstrated our ability to reduce cost responsibly, drive organic growth, expand margins, allocate capital with discipline for attractive returns and have made several synergistic acquisitions over the past year to enhance our customer offering. This gives us a much stronger business today than we started with in 2018. We maintained our investment in R&D and capex in 2021 and we will be progressively increasing expenditure to fuel future growth and efficiency through this and following years.

When compared to 2019 revenue has recovered to within 2% of pre-pandemic levels with margins ahead. That reflects the enhanced quality of the Group. We are making good progress in returning Spectris back to its previous margin highs of over 18% and ultimately exceeding them over the longer-term. Also during the course of 2022 we will move into the next phase of our strategy for Profitable Growth and we will talk more about this as the year progresses. You should not expect the big themes of our scorecard to change and we will retain our discipline and focus when it comes to driving our organic growth initiatives, growing margins and balancing cost discipline with investment in growth.

However, the work of the past 2-3 years means that we are now well positioned to go after numerous opportunities we see in front of us. We are aligned to end markets with attractive growth trajectories and sustainability trends, providing the opportunity to accelerate our ambitions and I will talk about this a little more later on.

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Committed to being a leading sustainable business

Implementation of our sustainable strategy progressing well

In 2021 we committed to being a leading sustainable business, both in the sustainability of our own operations and our wider contribution to addressing the global environmental challenge. I am very pleased by the progress we have made so far to embed our sustainability strategy. Across the Group there is renewed energy and innovation all aimed at making the world cleaner, healthier and more productive. At the time of our first-half results we published our net zero targets which will see us work to minimise the emissions footprint of our own activity and also the activity across our value chain. These targets though ambitious have been subsequently validated by the Science Based Targets Initiative against a 1.5oC climate warming scenario.

Making a difference - addressing the global environmental challenge

This year we also undertook a detailed climate scenario analysis in support of TCFD reporting to gain a clear understanding of the potential risks and opportunities from climate change. We have published a detailed report on this on our website. We recognise that the greatest difference Spectris can make to a net zero world is through our products and solutions, increasing our focus on product efficiency and circularity. We are already playing an important role in many sectors that are transforming rapidly, such as pharmaceuticals, energy, transportation and where customers with partners that have the capabilities and the capacity for innovation, helping them address these new challenges and accelerating their own journeys to net zero. As we refresh our strategy this year sustainability will be central to how we will make a difference for our customers and the planet, very much aligned with our purpose.

Supporting our employees and communities

Supporting employee health, wellbeing and development

An important part of being a sustainable business is being able to look beyond the day-to-day operations of the Group and consider the broader factors that contribute to our longer-term business success. Key to this is safeguarding the physical and mental wellbeing of our employees and ensuring Spectris is a great place to work. We remained fully committed to the continuous support of our mental health, wellbeing and resilience activities. We also want to ensure that everyone feels they belong here. Our work on building a greater diversity and inclusion continues and we will be strengthening our approach to this and to talent development, through a number of initiatives in 2022.

Global STEM strategy launched

This year we were proud to launch our global STEM strategy. It is focused on ensuring that the Group is both an employer and partner of choice. For example, supporting Young Professionals, building partnerships with universities and enhancing our apprentice programme to attract young talent into Spectris.

Launch of Spectris Foundation

This is consistent with the rationale for establishing the Spectris Foundation which we have set up to support education in STEM subjects. The Foundation recently made its first awards for a two-year STEM education project in UK schools in association with STEM ENTHUSE Partnership and also an employee-nominated donation to the Sheffield UTC Academy to fund

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a project for students to design and build an environmentally friendly racing car. These will be the first of many more projects that the Foundation will help to fund in the months and years to come. I would now like to hand over to Derek who will run through the financials in more detail before I come back to talk to you about the businesses and our future opportunities.

2021 Financial Results

Derek Harding

Chief Financial Officer, Spectris

2021 scorecard

Strong performance compared to 2020 & 2019

Good morning everyone. For consistency I am once again starting with our scorecard slide. As you would have expected we are showing a very positive performance compared to 2020 with ticks across the board. As we did at half-year, given the nature of 2020 we have also included a comparison on this slide to 2019 to assess howe we are performing compared to pre-COVID. I will cover the specific numbers during my presentation but overall we have demonstrated a strong performance in 2021 and continue to make progress compared to the pre-COVID performance of 2019. Let me now take you through the specific details.

Strong financial performance

Reported sales decreased 3% to £1,292 million. Adjusting for the impact of disposals net of acquisitions which reduced sales by £107.5 million or 8%, and foreign exchange movements reducing sales by £54.6 million or 5%, you see 10% growth on a like-for-like basis compared to 2020. Adjusted operating profit increased by 21% to £209.4 million on a reported basis and by 29% like-for-like. Adjusted operating margins increased by 320 basis points with like- for-like adjusted operating margins up 240 basis points compared to 2020. Adjusted profit before tax was £204.3 million, up 23%. Our tax rate came in at 22% in line with guidance.

Adjusted earnings per share were 140.7 pence, a 26% increase over the prior year and the final dividend per share of 71.8 pence represents a 5% increase over the prior year, consistent with the growth in dividend for 2020. We remain committed to paying a progressive dividend. While adjusted cash conversion was lower than the 141% achieved in 2020 which was unusually high, we were pleased to achieve 96% in 2021. Our net cash at the year-end was £167.8 million. Finally on this slide the trend on our return on gross capital employed has now switched and increased by 330 basis points from 9.9% to 13.2%.

Strong operating leverage improves operating margin

This slide provides a graphical view of the main P&L movements in the year, sales as shown across the top with adjusted operating profit at the bottom. First of all I have adjusted 2020 to remove the sales and operating profit relating to the disposals of Millbrook, B&K Vibro, ESG and NDC Technologies in order to provide an organic baseline. Foreign exchange translation movements reduced sales by £54.6 million and operating profit by £10.9 million. We saw a good like-for-like growth in revenue, up 10%, as well as a 50 basis points increase in like-for- like gross margins to 57.1% reflecting the incremental volume and favourable pricing offsetting inflationary cost pressures.

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