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All right. Good morning. Sorry. I understand the lifts were causing some challenges to get everybody upstairs. Welcome to this Spectris 2018 Full Year Results Presentation. I'm Andrew Heath, the Chief Executive. And I'm joined today by Clive Watson, our Group Finance Director. I'm absolutely delighted to be standing here and having the opportunity to talk to you today. Spectris is a very exciting portfolio of high-quality businesses with a great deal of potential. And we've been very busy since I joined in September, so we've got quite a lot to get through in the 90 minutes or so that we have this morning. In terms of format of the presentation, I'll quickly cover the highlights of last year before passing over to Clive, who'll take you through the numbers. I'll then come back and talk about our strategy for profitable growth before summarizing and throwing the forum open to questions. So in terms of 2018, we delivered good organic sales growth, building on the progress that we made in 2017. Sales increased by 5% to just over GBP 1.6 billion on a like-for-like basis, helped by a supportive macroeconomic environment in a number of the geographies we serve and also strong demand in many of our key end markets. Adjusted operating profit of GBP 248.3 million was up 7%, again, on a consistent basis. Likewise, adjusted earnings per share were up 7%, and we increased the dividend by 8%. Despite good sales growth, however, adjusted operating margins were only up 30 basis points. And so to address this, we announced, as you know, back in November of last year that we have now embarked on a strategy for profitable growth. And this is made up of a profit improvement program focused on delivering benefits in the near term while, at the same time, we're conducting a comprehensive strategic review of the whole business. And as far as the profit improvement program is concerned, I'm pleased to say that we have so far identified annualized benefits of more than GBP 30 million, with GBP 15 million to GBP 20 million of that flowing to the bottom line in 2019. And as I've gotten to know Spectris better, my initial views that I shared in November have only been further confirmed as I've traveled around the business, and that is that we will benefit from being a more focused business. The strategic review has been assessing which of our operating companies will be the platforms off which we'll drive greater shareholder value, and particularly those businesses which are scalable, serve attractive high-growth markets which have the strongest capabilities and also have the strongest performance potential. And so far, we've identified 3 platform businesses: Malvern Panalytical, HBK and Omega. So we're moving apace and taking decisive action, and this will continue as we execute our strategy for profitable growth, very much focused on driving a significant and sustainable improvement in shareholder value as we do so. And as a consequence of that, we're very much focused on asset optimization, managing the portfolio, and having a very disciplined approach to our allocation of capital. But I'll talk more about this later. So with that, I'll pass you over to Clive, who will take you through the numbers, and then I will conclude coming back and talking to you.
Thank you, Andrew. Good morning, everybody. Lovely day. I'm going to take you through the numbers. This is going to be a bit longer than usual. We're departing from the normal structure whereby the CEO will cover all the segments. I'm just going to focus a lot on strategy, so I guess that's what most of you come to listen to, but the numbers are pretty good, too. So I'll kick off with the numbers. Reported and like-for-like sales growth are the same, 5% up, with the net contribution from acquisitions and disposals being canceled out by FX. You'll see all the detail a little bit later on. And the like-for-like numbers here are prepared on a constant-currency comparable-period basis, so we strip out disposals for the corresponding period last year and, as usual, don't build in the acquisitions until 12 consecutive months of ownership. We've also changed alternative performance measures. What we're doing now is trying to show you the underlying trading performance, so we're showing you the results before uplift costs and major project costs, including the profit improvement program. Hence, you're getting greater clarity in terms of direction and how we're improving trading year in, year out, and that will provide a much more meaningful basis for you to make your comparisons. So on that basis, adjusted operating profit for 2018 is GBP 248.3 million. However, consensus was built on a post-uplift basis. So for this transitional year only, we're also showing you the adjusted operating profit after uplift costs, which is GBP 237.5 million. That's the figure which is directly comparable to the consensus figure which you prepared on the sell side and which is also on our website as consensus at GBP 233.5 million. So hopefully, I haven't confused you too much on that. But from this point onwards and throughout the rest of this presentation, all references to adjusted measures will be based on that GBP 248.3 million. And you'll see a detailed reconciliation in the prelims, in the footnotes and at the back of the account. So with that out of the way, I'll go -- just go back to the beginning. As I said, like-for-like sales and reported sales up 5%. Adjusted operating profit is up 4% on a reported basis and 7% up on a like-for-like basis. Now return on sales of 15.5%, down 20 basis points on a reported basis and up 30 basis points on a like-for-like, with both gross margin and overheads contributing to that small operating margin expansion. The difference between the adjusted operating profit of GBP 248.3 million and profit before tax of GBP 241.4 million is interest. So it's up from last year at GBP 6.9 million this year compared to GBP 5.1 million. That's purely down to the higher average volume of debt; attributable to the share buyback, GBP 100 million; and GBP 200 million -- GBP 207 million spent on acquisitions. Tax rate came down on the back of the U.S. tax reduction this year from 21.5% to -- or 21.3% to 19.7%. We expect it to go up again in 2019. That's because we got quite a tax-efficient finance structure which we're going to have to unwind this year, and the tax rate will therefore go up a little bit, somewhere in the 21% to 22%. So for modeling purposes, if you use 21.5%, that should be pretty good. Earnings per share up 7%, and on the back of that, we grew our dividend 8%, which is the 29th consecutive year of dividend growth at a compound annual growth rate, since we floated back in '88, of over 10% and is in line with our stated policy of a progressive dividend based on affordability and sustainability. And the cover of 2.7x is consistent with our long-term average, which has been about 2.5x. Operating cash flow is lower at 59% than the 70s that I indicated at the interims, and that should be expected for the year. And that's principally down to a higher working capital outflow. So we have the usual seasonal outflow for higher receivables but we also had higher inventory. And the higher inventory is down to a couple of things. It's advanced purchases and was also a result of IFRS 15, the revenue recognition, which means that it takes a little bit longer to recognize sales. And that is expected to reverse during 2019, principally in the first half. We'll come back to that a little bit later. So let's see the headlines for the group. In terms of the individual walks on the sales front, you can see the 5% growth from GBP 1,526 million to GBP 1,604 million, up GBP 179 million. And to arrive at a comparable basis, we've reduced our 2017 reported sales by GBP 49 million, reflecting the 9-month sales from Microscan, which was sold October 1 -- 2, 2017; and 7 months of sales from EMS, which were sold into the joint venture with Macquarie on 31 May 2018. We had 6 acquisitions contributing to that GBP 72 million: 3 were made -- 3 acquisitions in 2018, Concept Life Sciences in January, Revolutionary Engineering in April and VI-grade in July; and 3 carrying over from last year. Translation FX reduced reported sales by GBP 22 million. Most of that -- well, actually, more than all of that was in the first half. So it's GBP 24 million in the first half and a small recovery in the second half as the U.K. -- as sterling strengthened against the U.S. dollar and weakened against the euro, very small movements.Like-for-like sales growth of GBP 77 million or 5.2% includes GBP 16 million from pricing or just over 1%. And the 5.2% like-for-like growth was very even in H1 and H2 at the group level and continued the positive growth trend we've seen since Q4 2016. So we've had constant growth since then. However, regionally, it was quite a story of 2 halves. We saw good strong growth in Asia in the second half and tougher comps impacting growth in the U.S., with a bit of a slowdown in Europe. So much more heavily weighted to Asia in the second half than we saw in the first half in terms of the sales growth. Adjusted operating profit, Slide 7, up to GBP 248.3 million, up GBP 9 million compared to 2017 on a reported sales increase of GBP 179 million. Acquisitions net of disposals, you can see that acquisitions contributed just GBP 1.2 million on a sales contribution of GBP 72 million, and that's principally down to a weak performance by Concept Life Sciences, which reported a loss of GBP 1.2 million on sales of GBP 45 million. So that's the drag on the acquisition side of things. So all the others combined contributed GBP 2.4 million on sales of GBP 27 million. In the case of Concept Life Sciences, it was down to internal factors, all of which have been and are being addressed, and we're onto a strong footing and start to 2019. Now disposals, that's just to eliminate from the like-for-like comp, and that's down to the environmental noise monitoring services business and Microscan, which we talked about on the sales context. GBP 1.5 million translation gain in the second half almost completely offset the GBP 1.6 million loss in the first half, to leave the full year at a small loss. On the gross margin side of things, we saw a gross margin drop-through of GBP 45 million or 58% of sales, which means that the like-for-like gross margin marginally improved. We had very healthy operating margin contributions and expansions from 3 of our segments, held back by weaker performance in Test and Measurement, which you saw in the first half. And although it got better in the second half, not enough to recover what we saw. Breaking it down. Pricing is up GBP 16 million, as you saw from the previous slide. Volume and mix contributed GBP 44 million. Material labor and overheads increase was GBP 25 million. That also includes some extra depreciation from the CapEx incurred by Millbrook, in particular. So there's about GBP 2 million of extra depreciation in there, partly mitigated by procurement actions worth around GBP 11 million, the bulk of which arose from the uplift activities and initiatives. Like-for-like SG&A expenses were GBP 29 million, higher than last year, most of which relates to people, as you'd expect, with 60% of our overhead costs being salary and salary related. So about GBP 10 million of that GBP 19 million relates to increases for existing staff and then GBP 9 million from new hires in 2017 and 2018. Like-for-like depreciation has been spread between gross margin I talked about before, GBP 2 million, but there's also GBP 1.6 million reading through SG&A because of the ramp-up in growth CapEx. Other includes a number of different things. We spent some money on the premerger activity between HBM and S&V -- Brüel & Kjær, as well as some restructuring charges in Omega and a sizable one-off charge relating to an increase in pension cost following the decision in the Lloyds Bank case on guaranteed minimum pension benefit equalization. Giving us an operating profit for the year of GBP 248.3 million; return on sales of 15.5%, down 20 basis points on a reported basis, up 30 on a like-for-like basis. Cash flow. This breaks out the story for -- with the operating cash flow conversion. So we started the year with net debt of GBP 50 million, and it increased by GBP 247 million to close the year at GBP 297 million, just over 1x EBITDA on a trailing basis. We've also put down here average working capital figure, which I'll come back to. As you see, point-in-time working capital, which drives cash flow -- sorry, cash outflow of GBP 43 million. It's pretty normal to have receivables. We have a year-end sales effect, so it's pretty normal to have that kind of outflow for receivables. Inventory was a little bit higher. You wouldn't normally expect to see an inventory increase as large as this. But it's mainly down to timing in our 2 larger segments, Materials Analysis and Test and Measurement, which is a function of prebuying for faster fulfillment; revenue recognition under IFRS 15 for large projects and complex installations, which really fall within Materials Analysis; and advanced purchases of limited-supply components. So you should see this reverse progressively throughout 2019, mostly in the first half, but as we exit the year, we'll come back to normal. More importantly, as you see at the bottom here, average trade working capital, which looks at working capital on a 12-month average basis, finished the year at 11.4%, down from 11.9% last year and close to our record low of 10.9% in 2012. Just 4 years ago, this figure was 15.4%, so it's come down 4 percentage points from 4 years ago, and we see that progressively declining. CapEx, capital expenditure, GBP 94 million, of which around GBP 55 million was growth CapEx. So this will be shoring up growth for the future years. GBP 37 million of that GBP 55 million roughly was in Millbrook, which are invested in growth projects, not just in the U.K. but also in Finland and in the U.S. following its acquisition of Revolutionary Engineering, the company headquartered in Detroit, in April. So those projects will help boost Millbrook's revenue and profitability in 2019. Omega also invested in growth CapEx, spending around a further GBP 9 million on its new e-commerce platform, which again will drive sales growth this year and in 2020 and beyond. Restructuring spend of GBP 8.6 million, this largely relates to uplift costs, with a small amount relating to the profit improvement program launched in November. Acquisitions, GBP 207 million. The bulk of that, GBP 163 million, was spent on Concept Life Sciences, with the balance spent on Revolutionary Engineering and VI-grade later in the year. The disposal proceeds of GBP 44 million represent the net proceeds from the sale of Environmental Monitoring Services since the joint venture with Macquarie as well as some deferred consideration on the sale of Microscan. Share buyback, GBP 100 million plus the stamp duty of GBP 500,000. We bought back 3.8 million shares at an average price of around 20 -- just over GBP 26. Other outflow of GBP 115 million, self-explanatory, dividends, tax and cash interest paid. So closing the year with net debt of GBP 297 million after a small adverse currency. Just over 1x EBITDA, which is the first time we've been above 1x since 2013, which is a nice place to be. Sales by destination. When you saw this at the first half, you would have seen pretty even growth throughout the -- all of our regions. North America -- so the growth in the first half was 5%. You saw 5%, North America; Europe, 5% -- 6%; Asia 6%. It's now much more heavily weighted towards Asia. We saw Asia up 14% in the second half. North America slowed a bit to 2% and Europe to 1%, and I'll come back to all of those things. So starting with North America. We had good growth in some of the main markets out there. Pharmaceutical and academic both up double digit. And trade distributors, very active trade, are also up double digit. It was flattish in electronics, semicon, telecoms, energy and utilities, mineral mining and metals; and down in aerospace and defense, which is quite a lumpy business, underlying trends are good; and in automotive, which is down 11%, which is really down to delays as customers rejig their investment schedules. The reason why the second half was slower than the first half was really down to a tough comparative. We had a big Q4 last year, which was up 9%, and that led to second half growth of 7%, so distorted a little bit by the comparison. Europe up 3%. Similar sort of thing in Europe as we saw in North America but for different reasons. First half up 6%, second half up 1%, giving us a full year of 3%. Good growth in automotive, up 10%, both in the U.K. and in Germany. We also see -- saw strength in electronics and semi, with reasonable contributions from machine manufacturing, OEM, pharma and pulp and paper. It was flattish in its mineral mining and metals; academic, which is very strong in the U.K., up over 20% in the U.K., weaker in Germany and the rest of Europe; and down in Europe for energy and utilities. The reason for the disparity between the first half and the second half was mainly down to the U.K., which swung from very strong growth in the first half to a small decline in the second half, with good growth in automotive and R&D offset by weakness elsewhere. So there has been a softness we're seeing throughout Europe, particularly as the second half progressed. Asia was a different story altogether, 10% growth, up 6% in the first half and up 14% in the second half, really driven by China but also very good strong contribution from Japan, which switched from a small decline in the first half to 8% growth in the second half, to close the year at 3% up. There, in Asia, we saw very good growth in all of our, actually, main markets, particularly automotive energy and utilities, electronics, semicon. And academic was up by 35%, so very strong growth in academic, and we saw that particularly in China. China's growth was widespread. It wasn't just semi, it was strong in 8 of its 9 -- top 9 end markets, which together account for more than 85% of its revenue. It was only mineral mining and metals which was down, and actually, it was really just metals. Mineral mining was still pretty strong and robust. So it was metals which brought it down, but otherwise good growth across the piece. And Japan's growth, as I mentioned, picked up in the second half, having gone backwards in the first half, with good contributions, again, from automotive in particular, partly offset by weaker performance in pharmaceutical. And all the other end markets were pretty good, including academia, which although the smallest market in Japan, actually was the largest single contribution to its growth. So very good growth in academic there. And Rest of the World, second year in a row where just a little bit flattish, 1% up, as we saw last year. Moving on to segmental performance. Really, this is just a placeholder. Actually, I'm going to go through the -- each of the individual segments. There, on the right-hand side, you can see the group's results, up 5% on sales. And then, you can see the breakdown by individual operating point[Audio Gap]basis points like-for-like margin expansion, and that was held back by Test and Measurement. Very good contributions by In-line and Industrial Controls. Ex Test and Measurement, that figure would have been up 140 basis points. So good underlying growth from operating margin expansion in all 3 of those segments. Looking at them one by one. In the case of Materials Analysis, good reported growth, up 16%; like-for-like sales, 8% up; and acquisitions contributing 10% to the top line, with currency a little bit adverse at 2% backwards. Good high single-digit like-for-like growth to pharma customers, which is Materials Analysis' largest end market. And you'll see at the back of the book the breakdown, but that's around 37%. And that was on the back of investment in biopharma, generics and also a benefiting from increasing regulation. Reasonable growth in its second-largest end market, the mineral mining and metals, again, with good growth in minerals and mining offset by weakness in the metals market, which is a much smaller part of it. Nice to see a return to strong growth in academia, especially in North America and Asia. In general, government funding has been pretty good across the globe, and this plays very well to the China 5-year plan and what Japan is doing in terms of its R&D investments as well. Strong growth in electronics and semicon continues for Particle Measuring Systems, especially in Asia and China in particular. Operating profit margin, you'll see, is down from 18.8% to 17.6% on a reported basis. That was as a result of Concept Life Sciences' weak operational performance, turning in a loss of, you can see it here, GBP 1.2 million on GBP 44.5 million of sales. It wasn't market related, but caused in part by the distraction generated from the fact of the acquisition. We were quite early and preemptive in terms of our bidding for Concept Life Sciences, particularly during the due diligence phase, which takes a lot of management time. But we also saw a reduction in demand, which we reported on before, from a customer which was having its own performance issues and delays in obtaining various accreditations, which held back the ability to grow the integrated drug discovery services division. There are other internal factors also holding back performance, but all of these issues are now largely behind Concept Life Sciences, and even the demand curtailment from that customer was reinstated later in the year. So you can expect to see a strong recovery from Concept Life Sciences in 2019. And once you strip out the dilutive effect of Concept Life Sciences, Materials Analysis continued to strengthen on a like-for-like basis, reaching record-high margins for both Malvern Panalytical and Particle Measuring Systems as they continue to benefit from the merger and some of the synergies they're generating as well as realizing benefits from the uplift program. The market outlook for these companies we still think is very pretty good for this segment for pharma, mineral and mining and academic research. It's still dependent on government funding, but -- so who knows. But overall, I think that looks like a continuing trend in Asia, in particular. Test and Measurement, sales growth of 7%. That was -- like-for-like sales up 6%, pretty even throughout the year, first half 6%, second half 6%. And good growth across all the regions: North America up 7%, Europe up 6% and Asia up 7%. So very evenly spread both phasing-wise and regionally-wise. End market. All key end markets were up, except academia, which for them was flat; and aerospace and defense, which was down 9%. And aerospace and defense, I think mentioned before, is prone to lumpiness in project spend. There's some delays into 2019. We're seeing a lot of investment in Asia. The pipeline's good, and pipeline development activities are underway. Automotive up 10%. It could have been a little better, but we're pleased with that 10%. But there were some delays due to customers rearranging investment schedules to accommodate accelerated programs, particularly for electronic vehicles and advanced driver assistance systems, which are becoming very popular. But underlying good demand still remains strong, and we expect that to continue into 2019. The acquisition of Revolutionary Engineering in April by Millbrook and VI-grade into this segment will also strengthen our automotive exposure, in the case of VI-grade, providing software services -- software products and services for advanced simulation applications in transport; and in the case of Revolutionary Engineering, which, although headquartered in Detroit, does have a presence in both Germany and China and specializes in sophisticated driveline testing services and is, in particular, a recognized leader in the testing of electronic motors and hybrid drivelines. The rest of their end markets, as I said, were pretty good. Just going back to the margin. At the half year, operating margins were down 3.6 percentage points or 30%. And so there was some recovery in the second half with the margins in the second half being pretty close to those recorded in the second half of last year. So we ended the year with like-for-like margins down 2 percentage points, with both the gross margin and the -- declining and overheads growing pretty much at the same rate. The gross margin decline was partly down to weak growth in volume in Brüel & Kjær Sound & Vibration business due to some internal sales force issues, which have now been resolved; and partly due to an operating company mix effect. 40% of the sales growth came from our 2 smallest businesses in this segment: ESG, the fracking business environment; and Millbrook, which together make up 15% of the segment but contributed 40% of the sales growth. And they carry lower gross margins than HBM and Brüel & Kjær. The overhead increase, on the other hand, was just reportedly higher in Brüel & Kjær and HBM, reflecting an increase in headcount, higher-than-expected wage inflation and HBK premerger related costs. Millbrook also, we've talked about, incurred a higher depreciation during the year, over GBP 3 million. And as you know, from January 2019, so from last month, the merger of S&V -- Brüel & Kjær and HBM is underway, merging their activities into a new company called HBK, leveraging their respective strengths and complementary domain expertise. The outlook for this segment is positive. Demand in the automotive sector is expected to continue to grow, benefiting from the rapid growth we've seen in electrical and hybrid vehicles. Stricter emissions testing, battery development in particular, which we're invested in, and the growth in connected and autonomous vehicles is all positive. Growth in the machine manufacturing sector is a function of the growth in emerging markets. So it will be volatile, but underlying trends are good as they are in consumer electronics and telecoms. The market is healthy. That's Test and Measurement. Then, on to In-line Instrumentation. Sales growth of -- well, flat, like-for-like sales up 1%. We were down 3% at the first half, so good recovery in the second half, up 5% in this segment. Pulp and paper was up 4% across all regions, so a good recovery there because, normally, you'd expect this to be plus or minus 1%. So that is good growth. We saw good strong growth in pulping and packaging offsetting the long-term structural decline in the coating segment. But we've also seen process solutions starting to take off with more widespread use of automation and real-time monitoring in paper and other process industries. Energy and utilities were the real strong point, which is up 10%. And web print converting was down 13%. All regions experienced that decline. So from a regional standpoint, the bulk of the growth there came from Asia, up 14%, bolstered by the very strong growth in energy and utilities, offset by declines in North America and Europe. And you'll see margins continue to improve in the year, recovering most of the 2.6 percentage points lost in 2017. End markets were reasonably positive about -- the end markets pulp and paper, because of what we're seeing particularly on the software piece. Difficult to predict oil and gas and the film extrusion, and converting market is also likely -- the softness there is likely to persist into 2019. Industrial Controls, like-for-like sales increase of 3%, first half up 4%, second half up 1%. Good sales growth in Asia and followed by North America and a decline in Europe. So a solid year for both operating companies in this segment. And even with the modest top line growth, still managed to grow the segments' gross margin and hold overheads at last year's levels, resulting in another year of operating margin expansion, this year's 2.6 percentage points on top of last year's 7.4 percentage points. So that's a 10 percentage points improvement from 2016. The outlook is going to be highly dependent on your views on North America, U.S. in particular. 74% of the sales -- 3/4 of the sales is coming from North American market, so it will be heavily influenced by that. But there's some self-help in there with Omega's enhanced e-commerce platform, which was launched in Canada in November and will be launched around the rest of the world throughout 2019. And that will really help drive top line growth, conversion rates and therefore, growth. So just before I hand over to the main attraction, I'll cover the full year guidance for 2019. Phasing -- H1, H2 phasing, we expect to be in line with our long-term norms, which has been 47-53 in terms of top line H1, H2; 35-65 on operating profit. Acquisitions and disposals, we expect a net contribution from acquisitions, net of disposals, of GBP 10 million in sales and operating profit of about GBP 1 million. On the profit improvement project, we expect to spend around GBP 35 million on restructuring, most of which would be spent this year. We booked about GBP 5 million in 2018. And that will generate benefits of GBP 10 million to GBP 15 million in 2019 but exit the year at a run rate of at least GBP 13 million. Uplift is still on track to deliver more in terms of benefits. Throughout -- through 2018, those benefits were GBP 17 million. So we're well on track to deliver GBP 25 million. And the costs are running quite a bit below the run rate to hit the GBP 35 million. So if anything, we expect to be -- deliver better than the annual benefits of GBP 25 million on uplift, and we expect the cost to be lower than the GBP 35 million that we signaled just at the interims. Tax rate, I've mentioned before, is going to up a little bit. So 21.5% is probably a good one to model on. CapEx, we're going to spend around GBP 90 million in 2019, similar levels to 2018. The main driver is going to be growth CapEx, which is going to cost -- estimated around GBP 45 million in 2019. Foreign exchange sensitivity, the little table down there, hasn't moved much. It just bumped up a little bit for both the euro and the U.S. dollar. Each 1 cent will result in those figures, GBP 4 million in euros and GBP 4 million in U.S. dollars. So if today's rates remains, then we'll have a small tailwind in the top line, GBP 15 million to GBP 20 million; and a small tailwind also in the operating profit, GBP 1 million to GBP 2 million. Cash conversion, think of the 59% as a bit of an aberration. We expect to be back to the high 70s, low 80s in 2019, offsetting the high CapEx with a much lower working capital outflow. And that's about it. So over to you, Andrew.
Thank you, Clive, and thank you for the billing. Before I take you through our strategy for profitable growth, I think it may be best if I start by giving you some reflections since I've joined Spectris last September. So it's clear to me that we absolutely serve a diverse set of end markets, but we have absolutely a high number of high-quality businesses which have highly -- strongly recognized brands in the target markets that they serve. We have leading technologies, strong market positions and strong customer relationships as well as some very talented people. Now the group has high-growth margins, good cash flow generation and a robust balance sheet, and we will continue to reinforce and build on those trends as we go forward. It's absolutely pleasing to me that we continue to deliver good organic growth through 2018. So I said earlier building on the momentum that we saw in 2017. However, to be clear, operational gearing has disappointed. And in my view, there are a number of areas for improvement. So in the near term, we are very much focused on margin improvement. The cost-reduction program we announced back in November has been broadened into a comprehensive profit improvement program across all our operating companies because, frankly, we are targeting short-term growth initiatives as well as enhanced operational efficiency to drive that margin expansion as we grow. We're also strengthening our deployments of Lean consistently across the business, again, to have a relentless focus on improving productivity. And as I said when we launched the strategic review back in November, it's clear that the group will benefit from being a more focused and simplified business. And as such, we were going to be focused on attractive end markets where we're best placed to drive growth and profitability, focusing on asset optimization, supported by active portfolio management but also, to be clear, synergistic acquisitions and be more focused on a more rigorous approach to capital allocation. And I'll update you on progress against all those things today. But we will also come back in June at the Capital Markets Day and give you a further update then as well. So moving on to the profit improvement program itself. As we have said already, one of things that is very attractive about Spectris is that we have high -- strong gross margin businesses, mainly in the high 50% range, which compares extremely well against our peers. But our operating margin performance, as I said, has disappointed over the past few years. It remains both below our historic highs of 18% and also below that of our peers, who typically are enjoying margins north of 20%. And clearly, as I said back in November, we've been spending far more than I'd like to see. So Project Uplift addressed some of these costs by harmonizing procurement spend, for example. However, that's not enough going forward. So as a consequence of that, we have tasked the operating companies to identify or, frankly, to classify a number of self-help measures to deliver margin expansion. That is now absolutely firmly owned by the operating company presidents, and they have already started the process of delivering against their plans. In addition, we are also reducing the size of the center, very much going back to sort of the previous Spectris model of having sort of highly deployed, accountable operating companies. And going forward, as I already said, we'll also be strengthening our continuous improvement culture to drive our year-over-year improvement. And our aim, to be absolutely clear, in the near term is to reach operating margins in line with our historic highs, but that should not be seen as a ceiling. So we continue to invest to grow the business, as I said, but we are also, at the same time, going to make sure we control overheads and headcount far more closely, and any headcount growth will be highly dependent upon our sales growth and our margin performance. And therefore, the profit improvement program covers initiatives to improve both our gross margin as well as reducing costs and constraining overheads as we grow. As you can see on the chart, the initiatives fall broadly into 4 categories: people, product, property and process. Our gross margins are being improved by rationalizing the product portfolios in a number of our operating companies and also exiting some lower-margin products. The costs are being reduced by being more productive. We're in the process of rightsizing the organization, reducing headcount in a number of functions and also relocating activities to low-cost geographies. Additional site closures are also being pursued, and we've announced 2 further site closures already since the start of the year. The operating companies are also working on improving operational efficiency by simplifying processes, and again, this is particularly where we are deploying our Lean resources. You'll remember from Project Uplift that we had some work being done on the effectiveness of our R&D and commercial activities, but in my opinion, there's more work to do here given the high cost to serve that we have and also our continuing commitment to R&D. So that's going to be a continued focus for us through 2019. The program to date, as I said right at the outset, has identified annualized benefits of more than GBP 30 million, of which GBP 15 million to GBP 20 million of that will be delivered this year. The cost to achieve will be in the region of GBP 35 million, mostly incurred this year. And as Clive has said, we'll be booking that as restructuring, i.e. below the line. So moving on to the strategic review itself. As I said, we serve a diverse and wide range end of -- set of end markets. And whilst that diversity offers us some protection from weakness in any particular industry, it has also brought complexity and a lack of clarity. In essence, we're looking to simplify the -- and focus the group around a number of scaled platforms. Those platforms will be durable through the cycle and will deliver increased shareholder value. The desired characteristics of the group going forward will be consistent with operating companies that are scalable, are operating in attractive end markets with high gross margins, are asset-light, with the strongest capabilities and greatest value-creation potential. We got to be very much a precision instrument-focused business going forward with high-tech instruments, test equipment and, what I would say, associated aftermarket service at our hearts. We will need to continue to build our capability in both software and service. To be absolutely clear, this will be targets where Spectris has a right to play and also a right to win and where they are highly complementary to our hardware offering. And we'll clearly be targeting global growth, focused on higher-growth markets where we have a competitive position and where we can maintain or build defendable positions. As I've said repeatedly, there will be a clearer focus on capital allocation and asset optimization as we hone in one those businesses and market segments where we can add further value to both our customers and to our shareholders. But given the diverse starting point that we have, it will take some time to simplify and refocus the group. But going forward, to be clear, our financial goals will be sales growth, operating margin expansion, cash conversion and free cash flow growth as well as the customary other stakeholder metrics around customer satisfaction, employee engagement, ethics and health and safety. So just turning to the end markets of interest. A number of our existing addressable markets have very attractive structural demand drivers, underpinning long-term growth and growing in excess of GDP. For example, in pharma, we see continued growth in R&D investment as customers face the challenges of more sophisticated drugs to address ever more complex diseases and a wider use of more personalized medicines; also, the need to reduce both the time and cost of bringing new drugs to market and evermore stringent requirements in terms of efficacy and safety. In automotive, the pace of change continues, very much driven by the proliferation of new car platforms, the introduction of new technologies around electrification and connected and autonomous vehicles. And we've been seeing the increasing use of simulation and software, driven again by the desire to reduce development time and cost. And for us, we are very much focused sort of on the R&D part of automotive. In semiconductor and electronics, the continued advances in technology is absolutely proliferating the rising presence of electronic components across multiple products and applications. In minerals and mining, increasing demand for the analysis of materials to enable a more efficient and effective conversion of those input ingredients into end products. And in industrial -- technology-led industrials, there's an increasing focus on optionalizing production processes through the Industrial Internet of Things, process automation and additive manufacturing.So again, with sort of that strong market backdrop, we have established a framework by which to assess the portfolio and assess all of our operating companies and I said, really looking at the portfolio through a number of lenses. First lens being, really, so what does the operating company offer in terms of scale, both in terms of the markets they operate in and their financial performance. So we're asking questions like is the market growing apace, is there headroom to expand by gaining market share, how does our product and technology map across the customer needs? We're also evaluating the share gain potential relative to our competitive position and our degree of differentiation as well as the opportunity to move into adjacent markets. The positioning of the operating companies is also important. We are asking questions about their potential to enhance sales growth, deliver margin expansion and also generate higher cash flows. Then having assessed each of the operating companies against these set of criteria, the next step is to -- is for certain requirements to be met. And they are: do we see a clear strategic direction ahead; with milestones and priorities set, does the business have scale and the ability to be a platform for future profitable growth; how has the company performed historically versus its financial objectives; and does it have identifiable initiatives to drive future performance; and does the company have sufficient resources, capabilities, to deliver on this plan in terms of both the right skills and capability set; what are the capital demands of the business; and what are the execution risks? So we've effectively been assessing all of our operating companies against a consistent rigorous framework, and from that framework, we've already identified the 3 businesses that are going to be forming platforms for future growth of the business. And to be clear, we are still running the strategic review and the remaining operating companies are still going through evaluation. So as I said, we've identified 3 operating companies to be platforms. They are Malvern Panalytical, HBK and Omega. Together, they account for over 60% of group sales and over 60% of adjusted operating profit. Each business has those characteristics I spoke about. They're scalable, aligned to attractive high-growth markets as I referred to earlier, have high gross margins, asset-light, strong free cash flows and have very strong capabilities and strong performance potential. So our future capital investment, and in particular acquisition-led growth, will be focused on these platform businesses, and I'll take you through each of the businesses in turn in a moment. So as it relates to the other operating companies, to be clear, the remaining portfolio is made up of a number of high-quality businesses, and we are still evaluating and taking each of those through that framework. Work is underway to determine which of these businesses will remain key to the group and those where Spectris may not be the best future owner. But it would be premature, certainly today, to speculate on their future at this stage. So we're really looking at sort of 2 categories, I guess. One is sort of looking at those companies that could become future platforms for growth, ones with strong market positions, good growth prospects and margins, but may as yet not be of the right scale. So there, we will look at targeted investments, but only invest if we can see that they generate the required level of returns. The remaining businesses will then be managed to optimize their performance, run for value and likely divested over time. And in that scenario, proceeds would be reinvested in the group's platform operations or returned to shareholders if attractive reinvestment opportunities are not identified. And again, I'm just not going to differentiate today which of the operating companies fall into which categories. But in the event that we do identify potential disposal candidates, it would not be commercially astute for us to do so until we've executed on a process. So then sort of just turning to each of the platforms and to elaborate why they've been selected, and I'll take Malvern Panalytical first. Malvern Panalytical is a very strong business with a great reputation for high-quality instruments, and has market-leading customer support in a served market of around GBP 3 billion, which is growing between 4% to 5% per year. And that growth is underpinned by fundamental customer needs, high demand growth in a number of industries, and in particular, pharma, advanced materials, minerals and mining. The business is growing strongly and above the market in recent years. As Clive has just taken you through, it actually grew 7% in 2018. The integration of Malvern and PANalytical brought together a highly complementary portfolio of products that are all sold into the same R&D or manufacturing quality labs around the world. Now we are bringing Concept Life Sciences into the platform. This makes absolute sense given a complementary offering in the pharma R&D space, and it provides extra sort of capability to Concept Life Sciences by building it into the platform, getting support from Malvern Panalytical to help that business on its recovery plan. As a platform, Malvern Panalytical is able to combine deep instrument knowledge with end market and customer domain knowledge, allowing it to offer additional products and instruments that labs require, but also to support labs in getting the most value out of their instruments and increasingly generate valuable insights, rather than just data, that allows the customer to make better decisions and be more productive. The business model is also highly scalable as we're able to add additional products into the same sales force basket, if you like. Also, we are increasingly able to sell value rather than a specific product, where we can monetize our expertise. And there's plenty of potential to broaden the platforms and market offering through acquisition. So we're convinced there's a broad range of opportunities to accelerate revenue growth and further expand margins, building on Malvern Panalytical's existing strong track record. Moving on to HBK. I think as you're all aware, we're in the process of merging HBM with Brüel & Kjær Sound & Vibration into one entity. In the same way as we did with Malvern Panalytical, this creates a leading business with a highly complementary portfolio of products. VI-grade simulation and software offerings are also highly complementary to HBK and as such, the VI-grade will become part of this platform. HBK operates in a large GBP 3 billion-plus end market, typically for technically differentiated testing equipment in the load, strain, torque, noise, vibration and harshness sensing areas, primarily used by R&D applications across, again, a diverse range of end markets such as automotive, aerospace, off-highway vehicles, telecoms and industrial manufacturing. The business has a very strong reputation for technical expertise and is really well positioned to pursue a range of organic and inorganic growth opportunities, where it can build on its core capabilities such as taking further share in sensors, but also addressing key growth trends, for example, electric powertrain testing and the growth in simulation and modeling tools in engineering R&D departments. The addressable market is growing above GDP, with long-run underlying growth across a diverse set of those end markets, and this is being driven by new R&D applications requiring a greater level of sophistication, both testing equipment, but also the associated software, particularly for automotive and aerospace programs. And the business presents several areas, I think, for significant performance improvement and value creation through greater customer intimacy and joint product solutions and design, being able to broaden our product physics offer, effectively broadening the range of sensors we have, but also in terms of having common data handling capabilities. And then finally, on Omega. Omega is a specialist distributor of temperature, pressure, flow and level sensors and the associated instrumentation that goes with all of that. It's a highly differentiated business model, providing its domain knowledge and application to customers both online and over the phone, enabling our customers, the engineers, to easily configure their product selections. Omega is the leader in North America, with international presence and growth opportunities, particularly in Asia. The served market is almost GBP 2 billion, growing above GDP, driven by increasing demand for process optimization, preventative maintenance and increasingly, Industrial IoT applications. Again, the business has a highly scalable business model, readily able to expand both its online and telephonic sales channels. It's extremely well positioned to benefit from the growing trend of purchasing shifting towards online channels as well as sourcing products from third parties, allowing Omega to capture key technology trends, for example, the shift towards MEMS. These are the Micro Electro-Mechanical Systems. Omega is also well positioned to capture further growth in North America. We've recently launched a new e-commerce platform and which brings in a lot of enhancements in user interface capabilities, and we're also going through a fairly significant refresh of the product portfolio at Omega as well. But it's also a targeted opportunity for international expansion in -- both organically and via M&A. And that will be part of the strategy for Omega going forward. And we're also evaluating the creation of a curated marketplace for third-party products to significantly expand the range of offerings that Omega provides to customers. So in summary then, since I joined Spectris, we've taken decisive action. In the near term, we are focusing on what we can control, increasing productivity and operational efficiency to improve our profitability, whilst continuing to drive sales growth. Services and software will still be a key part of our strategy, but they will be much more closely linked to our existing instrumentation businesses. And over the medium term, we'll be moving to simplified Spectris with a smaller number of platform business, with a more focused end-market structure. We've identified 3 platforms so far, and the rest of the portfolio will be managed to optimize value for the group, be it either as a potential platform for the future, retained or divested, and we will therefore become a more active portfolio manager over the coming months and years. We are taking a more disciplined approach to deploying capital in those areas that will generate the best returns, focusing our investment really on our platform businesses, first and foremost, but with highly targeted projects elsewhere. Our capital allocation policy will be tightened to ensure the spend drives the necessary threshold returns, and we'll talk more about that when we come back at the Capital Markets Day that's being scheduled for early June. So in summary, our strategy for profitable growth is focused on delivering a significant and sustainable increase in shareholder value, underpinned by improved financial performance, delivering sustainable organic revenue growth and enhanced margins, stronger free cash flow generation and higher returns on capital employed. And with that, I'll open up for questions. Yes?
This is Michael Blogg from Investec. The savings that you projected, the amount you expect to see drop through in the current year, it sounds to me as if the majority of that has come from bottom-up assessments by the operating companies. Is that right?
I think, yes, fundamentally, that is correct. So uplift took quite a centralist approach, looking at sort of where we could do cost-cutting, improve initiatives across the group. What -- as I've traveled around the group and looked at the individual operating companies and the plans they submitted for this year's budget, back in the sort of September, October time frame, we really sort of assessed what self-help they could deliver themselves. Clive and I sent them a number of targets, which they have duly gone away and assessed and come back with a range of initiatives owned by them to then deliver that margin expansion as well as targeted growth this year.
Is there any change in the way the business presidents are remunerated to help drive that process?
So for this year, we have changed their annual remuneration, such that there is a much stronger focus on margin expansion. So a good part of their short-term incentives is around margin expansion.
Okay. And out of the payback you're expecting, does that include the payback from the merger of S&V and HBM?
So yes. So the HBK integration is now included in that. For the financial niceties, integration costs weren't taken below the line in last year's results, in the numbers that Clive gave you. But going forward, all of those integration costs are now incorporated, as are the benefits into how we're reporting.
Two other questions, if I may. I'll keep them short. The first one, CLS obviously underperformed last year. Is there any part of that business which doesn't fit the model? In other words, is there any routine testing that really doesn't fit the sort of pharma R&D model?
So CLS covers -- I mean, covers -- does a lot in pharma, life sciences, but we also do some environmental. But typically, we're using -- they use quite a lot of the equipments that Malvern Panalytical produces in all of those areas in terms of characterization of what's in the samples. And as we go forward, clearly, from what I said in terms of the platform for Malvern Panalytical, we have the opportunity to expand into other products, other sensors, other instruments, both organically and through M&A, which would further expand that capability. But I think, just to be clear on Concept Life Sciences, I mean, the first 3 priorities for that business is to fix it, fix it and fix it. I mean, last year was very disappointing. We had made a number of changes, and as Clive had said, we've refocused the business and continue to do so. The pipeline of sales opportunity has improved significantly over the past few months. They built up some good momentum, and the sales are starting to improve. And we have also put quite a bit of attention in terms of the operational improvements in the business to make sure those areas that were failing, that we put Lean resource into, drive their on-time delivery and their service levels to customers, which is also bearing fruit. But in the near term, really, the focus around Concept Life Sciences is to make sure we fix the business operationally, but we're putting it into the platform with Malvern Panalytical because it's overlapping in terms of its end markets, but also to get the support from that wider group in terms of helping it back on its feet.
Okay. And then finally, did I understand significant labor cost inflation in S&V, and what was behind that?
HBM, mainly. It was the German settlement agreement for the unions resulted in higher than we expected, close to 4%.
It's Mark Davies Jones of Stifel. Can I ask a question about the selection of the platforms and some of the issues around that? When you say you're still reviewing other businesses, is the point then that there could be another business which is a platform, or is that more a question of things that could potentially be platforms if you invested? So is it the discovery process or the investment that...
Well, so we are still going through the evaluation process for those remaining businesses. I think if you look -- if you were to look at any of them, their starting point in terms of scale is significantly less than certainly Malvern Panalytical and HBK, so that what we're really evaluating is, are there some other combinations within the group that would make sense, and equally, are there steps that we could take in the near term that would bulk them up significantly as well. So that's really what we're going through. But the 3 platforms we have identified we're excited about, and certainly, we'll be putting a lot of the focus on those in the coming months.
That was what -- the other part of my question is about Omega. I mean, the first 2 are fairly obvious, I think, in terms of selection. Omega is a relatively new arrival in the group. It relatively recently had a fair number of operational problems and a rather disappointing performance. So in selecting that, it's a very different sort of business. It is more of a distribution model, less obviously got unique technology or value add. So can you give us a bit more color about why it made it?
Yes. Okay. So I guess sort of my starting hypothesis would have been Omega wouldn't have made it. But the more we looked at it, the more exciting actually Omega is as an opportunity for us. I think where it is similar to the rest of the group is that it has a very high domain knowledge and very high application engineering in the instrument space, and that is really at sort of USP. But also, what makes it exciting is there aren't many people who are doing what Omega's doing in terms of the way it provides the offering. So Omega, historically, was a catalog business, a very strong presence in the U.S., still has a very strong presence in the U.S., and a lot of process engineers grew up with the Omega catalogs on their desks. So it has a very well-recognized brand, but also, from that position, as it's gone online, Omega has -- went into that market space earlier than a lot of the other people who were trying to do catalogs. So it has a very strong online offering now, and we're seeing an increasing trend of process engineers starting their buying experience online. Certainly, from -- in Omega, I think the statistics are over 90% of engineers start their journey online. At the moment, only 30% finish it online, they then pick up the phone for the other 60% and talk to our application engineers who then give them over-the-phone guidance. So we are building, with our new e-commerce platform, capability to configure products and provide a lot more of that configurability and intelligence around that into the platform itself to make it even stickier or more user-friendly to drive more sales for that. The telephonic capabilities we have is also very valuable as well. And so Omega's starting in a very strong position. And the amount of investment you have to put in to get your e-commerce platforms to be that effective is quite sizable, which also gives it quite a significant advantage. So really, in the round, actually, Omega, to me, is a very exciting proposition, one where we can deliver -- we should be able to deliver significant value from it, should be able to grow it strongly, both in its existing market in North America, which is still very fragmented, and then replicate that model internationally. So there's huge value improvement potential out of that as a platform.
It's Andrew Douglas from Jefferies. Just a couple, please. With respect to Brexit and tariffs, you previously guided a couple million from Brexit, I think GBP 6 million from tariffs, if you take the midpoint. I'm assuming that's still the same guidance as you've previously given. Is that fair?
Yes, yes. So the guidance for trade tariffs was GBP 4 million to GBP 8 million. We just pitched it right bang in the middle. Now that hasn't changed. Brexit has moved up a little bit as we've evaluated. So there's -- that has gone up to GBP 2 million to GBP 3 million. But that's all included in what we think of in terms of inflationary cost for next year.
And then, just secondly, on kind of growth CapEx or growth OpEx, depending on -- I guess it's 2 questions. We're going to have GBP 90 million of CapEx this year, probably have GBP 95 million next year. [ Without wish ] to give too much away from what you'll say in June, what do you think is the appropriate CapEx number for Spectris going forward? I mean, do we come back to the kind of GBP 50 million, GBP 60 million? Or is it going to be GBP 90 million going forward, but maybe with a higher hurdle rate or with a different focus? And I guess, the same really goes to the [ curve ball ], the OpEx question. You were going to have, what, 2% or 3% cost inflation with some growth on top of that. I'm just trying to figure out when we get through a clean year, if I can.
Right. Okay. So I could have -- Andy, let's take your sort of CapEx question first. I mean, clearly, Millbrook is part of us and is absorbing the lion's share or a good part of that growth CapEx. The business has grown very strongly under our ownership. I mean, it doubled in size through investing inorganically, but also through the acquisition of Revolutionary Engineering and Leyland. So the business is facing off to some quite strong growth markets and some good opportunities, but it does have quite a different profile from the one I've described. So we are asking further questions. Obviously, I'm asking further questions about Millbrook and its continuing role in the group. We haven't landed on a decision for that yet, and that will then determine really whether our -- where our CapEx falls out. But if you were to take it absent Millbrook, then clearly, you'd get back to where we would be with a brand having asset-light businesses and really, just more of a maintenance CapEx sort of overall level. But then, in terms of sort of your question around sort of operating expense, clearly, in November, I was determined that we would absolutely focus on margin expansion. I mean, yes, we are doing so. But as we looked further at the plans for this year, whilst we see some of our end markets moderating, there are still plenty of opportunities for growth out there. In China, we can see maybe some clouds on the horizon, but it's certainly not raining or even spitting for us. So we're sort of somewhat bucking the trend a bit. So we're not taking our sort of foot -- we don't take our foot off the gas in terms of trying to drive those growth opportunities. So hence, we have incorporated a cost reduction program with those targeted growth initiatives because I think it's more appropriate to describe actually what we're doing around sort of an overall profit improvement program. So it's targeted growth, but making sure we get the margin expansion as we grow. In terms of the sort of actuals, so therefore, the operating costs, as I said, we're going to constrain our overhead growth to be less than our sales growth and using the cost reduction program very much to offset the labor inflation that we're seeing and certain other cost inflation. But we're not -- as I said, so far, we've identified GBP 30 million of opportunity. I'm sure there's more to go at.
It's Jonathan at Deutsche Bank. Just going back on the overhead cost inflation, can you just give us a feel for what you think that number would be in 2019?
So the inflation we're talking about roughly matches what Andrew's talking about in terms of profit improvement program benefits. So about 3% on a cost base -- overhead cost base of around GBP 600 million gets you to GBP 18 million, GBP 19 million.
Okay. And in terms of that sort of GBP 30 million, I mean, obviously, that's the initial number. As you go through 2019, you'll work in the [ certain ] areas like R&D. Is there potential for that number to be raised as we go through the year, do you feel?
Certainly, that will be the intention. I'm not going to make any commitments, but that will be the intention. We are continuing to focus on how we can make the business more productive and more efficient.
Yes. And the third question is just in terms of M&A. I mean, historically, you guys have been very acquisitive. Does that now take a break, or do you still look for deals in 2019 even though you are trying to redefine the company?
No. I'm going to be absolutely clear. We will continue to focus on acquisitions. It's been part of the Spectris model for some time, and it will be -- continue to be part of the model going forward. But certainly, as we go through the whole strategic review, we are looking at what is the landscape of M&A opportunities, what might be the near-term pipeline, what could we possibly execute, and we will absolutely think about that in terms of how much capital that would require. But to be absolutely clear, we're looking for synergistic acquisitions where there are some strong cost synergies as well as revenue synergies.
It's Robert from Morgan Stanley. A couple of questions for me. I guess the first one was just around margins and your sort of long-term vision. You mentioned just sort of getting back to previous peak. What stops Spectris doing 20% margins?
I don't think anything stops us doing 20% margins. It's just the time it will take us to get there. Our sort of near-term aspiration is to get back to those 18% range, where we were back in 2012. And with the -- what -- the actions we're taking this year and the flow-through into next year moves us a good way in that direction. But as we look at the overall strategy, we will be -- our aspiration will be to get sort of north of 20%.
Do you think you need more additional kind of internal measures to get to over 20%, or is it a marked improvement? What do you see as sort of the bridge to get it?
Well, I mean, it's always helped by good end-market growth and as long as you're getting that operational leverage coming through, which is very much what we're focused on, so we will still be targeting to sort of grow the business strongly. But we are going to be very disciplined around where we put growth investments, whether that's CapEx or headcount, into the business.
And then the other question I had was around software and when you're looking at the platform businesses and thinking about, I guess, the list of, I don't know, 1/3 of your company or whatever, that you're kind of on the watch list of trying to figure out where to take it. How do you think about software integration? Are you looking to sort of match sort of new acquisitions with businesses you've got that could boost out your software offering? Are you kind of comfortable and you're just sort of fitting them together as you go along, and if it's got software, it's got software? How would you kind of think about just sort of percentage of software within your sales? Is that an important part of your platform business, or is that something that will just happen if it happens?
Right. Okay. I'll try to explain it in a slightly different way. I think, to be clear, we are focusing on being a precision instrument, high-tech equipment business at our heart. The software and services will then be absolutely associated in supporting those hardware businesses, the hardware -- the products. So we're not looking to get into software for software's sake. But as you look at the platforms, the platform strategy will really determine where we need to focus and put the investment around software. So if I look at Malvern Panalytical, it's much -- what's important there is really the analytics. We generate a huge amount of data for our customers, and being able to provide greater diagnostics and predictive capability around our instruments allows us to provide greater value to our customers, which is what they are seeking. And that's something -- and it gives us an opportunity to go and then monetize that as well. So we're looking at our diagnostics, prognostics and then also, actually, spending some money on artificial intelligence as well in terms of having really sort of something to think about in true predictives. If you look at HBK, the HBK offering, we've got a very broad range of sensors measuring various physical characteristics, and we've been looking to expand those sensors. But to support that is quite a lot of software, both in terms of the data acquisition from the sensors and the analysis of that. But also, we have quite a broad capability in HBK in terms of simulation and modeling tools. And actually, VI-grade is very much a simulation modeling software business as well as physical simulators, so that's very complementary. But again, it's also we have some design tools as well. So for HBK, the opportunity to be able to model noise, vibration, harshness, durability, robustness within a software package, run simulations against that and then actually take that into the physical lab, a quality control department, measure those characteristics, compare it back against your performance models and close-loop that and provide the design tools around it is a very powerful offering. And we have a lot of that today, and that's where we'll be looking, as part of the HBK platform strategy, is how do we then grow our software there. And from an Omega perspective, it is really around more of e-commerce, and for us, it's not just about sort of having a pretty Web page with a nice user interface. What -- the heart of our Web offering or e-commerce offering is the ability to characterize the products and then configure them for engineers. So if an engineer comes in and says, "Look, I've got a temperature problem I'm trying to solve. I need a thermocouple that needs to operate in this temperature range, with this level of sensitivity, have this sort of certain characteristics of impedance, et cetera," we can then say, right here is your choice. Out of the many, many that we can offer, here's the top 10. If you want, there's actually a special, we can configure that. And we have a fast-make capability to configure it, that backs it up. And then we'll also then look at how we can then provide control systems and actuators, because pretty much every sensor then links to a control system and an actuator. So that's another opportunity for us. So yes, for Omega, the digital software strategy is very much around that e-commerce configuration capability. So the -- it's going to be horses for courses, but very much, I'd say, associated with the hardware business.
And then just a final one was just on Millbrook. I heard you sort of mention you were going to consider your options on Millbrook. When you look at those types of businesses, what do you think are the kind of main strengths and weaknesses? I guess you obviously got additional CapEx going into that type of business, but what -- you mentioned you're sort of focused on instrumentation, primarily. Does that then sort of put that business as not the type of business you would want going forward?
Well, I think you can know that we are still assessing it, but it has very different characteristics from the ones that I typically went through during the presentation. But on the other hand, Millbrook operates in a fast-growing market with lots of opportunity. So when we look at Millbrook from a value lens, then clearly, we are thinking about, okay, what should be the right -- what right level of CapEx investment, what should the hurdle rates be, the returns be, and can we make sense of that within the broader Spectris portfolio as we go forward. I'll say we continue to evaluate that and work at how we can best derive value ourselves or indeed, whether someone else will be a better owner. But it's a very attractive asset for someone who is already in the space or wants to be in the space. There aren't many of them, candidly. They are very sort of geographically aligned to customers, so if you want to be in a geography with certain customers, then you have to go and look at certain businesses. So Millbrook is a good business, a very good business with a very good management team, and certainly, our sort of assessment is really around value and what's -- whether we're going to be the better owner for it or whether someone else will be.
It's Jack O'Brien from Goldman Sachs. I guess if we think about Spectris' fairly complicated business, clearly, plenty of opportunity, but can you share with us your sort of relevant experience that you can draw on through your career, the first time we've met today, on the sort of programs you may have run in the past and what gives you that confidence you can...
Right, okay. A quick r?sum?. So, well, I am [ 30-some ] years in basically engineering businesses, of being around engineers, R&D programs, technology, products and platform development programs all my career through Rolls Royce, and then into sort of specialty chemicals, semiconductors and now into Spectris. In terms of sort of the profit improvement program, I think you'll know from sort of my background, being in turnaround situations more recently, this is definitely not one of those, but I'm very focused on how do we make sure we're driving a business to deliver on its maximum potential so that it's in the strongest position. And that's why we're very much focused on that. But I've also, through my career, been through a significant amount of sort of strategy work and M&A in particular, so the framework we're going through is very familiar to me. And a business like Spectris, very similar in some ways to Alent, when I went into Alent. It's made up of many, many parts, which, actually, you need to sort of get into quite a lot of granularity and detail to understand if you -- what all those parts are, what -- their individual merits, but in particular, their merits as a collective. And so it would -- that's what we're doing at the moment. And we're spending quite a lot of time, energy and effort doing so, but making really good progress. And I'm hugely excited by what I see and the opportunities by simplifying and focusing.
Just to touch on that simplification point. Obviously, the shared service center idea, you've sort of put it to one side. What was your thinking behind that?
Well, that's because it wasn't going to be very simple, frankly. We have 14 operating companies; 20, 24 ERP systems; numerous data structures on top of that. So to do a shared service model in that environment is very complicated. It takes time, it's expensive, and it will take a long time for the benefits to come through, and frankly, not that it wasn't a good idea, there are benefits to be had for the payback periods. There's other things we can spend the capital on to deliver better returns in a shorter time.
And perhaps, just finally on automotive. Obviously, you're more exposed to the auto sort of R&D testing side, with all the structural opportunities that offers. Just interested in what you saw through North America. I think you mentioned it was down 11% in the fourth quarter or second half. Clearly, sort of autos companies going into a more difficult time, perhaps conserving their cash. What are you seeing today to -- that can perhaps assure us? Because 2019, at the moment, looks like it could be quite tough.
Yes. So it's a difficult question to answer because it depends very much on the mix of customers you are facing off to. So in North America, certainly, some of the customers from our industrial control perspective, their largest customers decided to -- some of them decided -- were moving plants from Mexico back to America, so that delayed their capital expenditures, delayed their order placing on us. Another customer had a particular -- challenges around a product launch, so they sort of pulled their horns in a bit. I don't want to get into specific customers, but -- so I think it depends on where you are and who you are facing off to, which is one complication. But generally speaking, if you stand back and look at the R&D applications and opportunities for us, they are very strong because, as I said, there's a proliferation of new platforms, there is still development on the internal combustion engine, emissions testing is absolutely a key topic, electric vehicles, batteries, a lot of focus on actually the materials going into batteries, the manufacturing of batteries, the performance of batteries to make sure they are -- the consistency is there. I mean, these automotive companies are putting significant warranties around a relatively new product, and so they really want to understand it, characterize it, test it. And also, we're sort of -- with electric vehicles, they're much quieter. So in-cabin noise, vibration is also an opportunity for us in our Brüel & Kjær S&V business, believe it or not, and that companies actually want to understand what the noise levels are, the vibrations, then actually actively think about, a, the design of the vehicle to reduce it, but also about how they could actually put noise back into the car through white noise or whatever else to make the -- it's a more pleasing experience because if you're driving a very quiet car and it creaks and rattles, you sit -- you hear absolutely everything. So there's a lot of work going on in terms of really understanding just the sort of the NVH side of automotive. So we see lots of opportunities, and so it's still an important sector, even though, clearly, I think from a production side, it's much tougher. And at what point that rolls through in terms of maybe some of the OEMs deciding that they will pull their R&D budgets in, we'll see.
This is Sandeep Gandhi from Exane BNP Paribas. Just a couple of questions from me. So firstly, could you give an indication of how Q1 '19 has started for you in terms of end-market demand and organic sales growth? And then secondly, on the 2019 outlook, you talk about margin expansion in 2019 when you include the GBP 15 million to GBP 20 million of cost savings. Excluding this, would you still expect margins to expand in '19 versus '18?
Well, I'll take the second question first, which is, I think, the sort of answer is yes. We're still very much focused on driving our margin expansion and, as I said, sort of controlling any overhead growth, headcount growth relative to what we're actually seeing. So we are very much goal-seeking against that to make sure that we put a real focus on it. The first point, I'll pass over to Clive, but I think, generally, sort of it's too early to say, really. That's the problem.
And we don't comment on individual months or quarters. The next trading update will be in May, and that's when we'll update you on the first 4 months. Apart from anything else, with the Chinese New Year, where that falls has a big impact, so it'll be fairly meaningless to talk about January or February in isolation.
Maybe we've got time for 1 or 2 last questions. I've got something I need to move on to fairly shortly.
It's Tom Fraine from Shore Capital. Just a kind of extension to the last question on 2019 margins. A GBP 15 million to GBP 20 million benefit would indicate a whole percentage point for operating margins. So do you think it is possible that adjusted operating margins could be as high as 16.5% next year?
Well, we clearly -- clearly, that is the direction of travel, yes. And that's what, again, what we are -- we want to see a meaningful improvement in our operating margin this year. Any final question? No? Well, we're on 90 minutes, so perfect timing. Thank you very much for attending. Hopefully, you found this morning very useful. As I said, Spectris is an exciting opportunity with bags of potential, and we're very much now focused on delivering the potential for the business, very much focused on delivering our shareholder value and hope that came across clearly this morning. So thank you very much for your time. We look forward to meeting you all over the coming weeks and months. Thank you.