11 Sep 2000
Overview
Commenting on the results, Chief Executive John Poulter said:
"These results demonstrate the underlying strength of our businesses. We are confident that 2000 will be a year of considerable advancement, augmented by the opportunities presented with the acquisition of the Spectris companies."
As projected in statements earlier in the year, the first half of 2000 showed a decisive upturn in sales and profits as the group benefited from strongly improving market conditions and demand for semiconductor and optical fibre equipment and as Asia Pacific and US industrial markets recovered from the downturn of 1998/9.
Results
Compared with the equivalent period in the prior year group sales, profits and earnings all rose strongly. Although the headline sales were augmented by the inclusion of Servomex, acquired in mid-1999, the underlying rate of organic sales growth was 18%. On the same basis operating profit was 31% ahead. Asian markets recovered strongly and there was substantial improvement in North America. Continental Europe showed more modest progress and the UK remained uninspiring.
The group invested in enhanced sales and marketing activity ahead of anticipated sales growth, which had an effect on profits, although gross margins were maintained at the overall level of the prior year.
Euro weakness against the main operating currencies of the group (the dollar and the pound) impacted disadvantageously on gross margins, but dollar strength towards the end of the period was helpful in the translation of profits into sterling.
Net borrowings at the half year were £8.5m which were significantly reduced by the rights issue proceeds of £55.6m utilised in early July to part fund the acquisition of Spectris AG.
Conversion of operating profit into operating cash was disappointing as a result of an £11m increase in trade working capital owing to a strong second quarter sales performance and an inventory build to accommodate the rising sales trend. Cash conversion for the full year is anticipated to be much closer to the 100% target level achieved in 1999.
The Board intends to pay an interim dividend of 3.55p, a 6% increase on the previous year. The dividend will be paid on 15 November, 2000 to shareholders on the register at 20 October 2000.
Operating Review
In the electronic controls segment, the businesses saw sales ahead by 23%. All companies made positive progress. Arcom increased sales by over 50% compared with the prior year, successfully converting prospects for remote data communications products, referred to in previous reports, into sales. Microscan and Red Lion Controls took advantage of recovery in the market for factory automation and together grew sales by 11%.
In the process instrumentation segment, organic growth was 21%. The semiconductor equipment units experienced rising order intake through the period as the recovery in the semiconductor industry impacted on the relatively late cycle products of Luxtron and Particle Measuring Systems. Order books increased substantially during the second quarter. With strong activity continuing and launches of new products resulting from the development investments made during the downturn, the portents for the remainder of the year are good.
Fusion and Beta LaserMike enjoyed the resurgence in the optical fibre market and although this growth rate may slacken in the second half as a result of phasing of customer projects into 2001, their other markets are also growing. The other instrumentation businesses, with one exception, made good progress and moved back to the levels of growth seen before the Asian crisis. At Loma, downward cost pressures in the food industry and ownership changes at several competitors have caused profits to be eroded in an environment of falling prices. Some recovery from this erosion is based on pending new product introductions and closer customer service relationships globally as well as internal cost reduction.
Servomex incurred one-off costs associated with outsourcing much of its basic manufacturing. The oil and gas equipment market has been slow to recover but enquiry levels and activity are encouraging as the company benefits from an improved structure, market clarity and new product introductions.
We expect margins in the process instrumentation segment to increase significantly in the second half.
In the filtration systems segment, Fairey Arlon increased sales and profits despite competitive markets for construction equipment and Fairey Microfiltrex gained important industrial business, especially in the United States, which compensated for softer demand from its aerospace customers. The same softness was felt at Fairey Industrial Ceramics in requirements for aerospace casting cores. There was a sharp reduction in sales at Fairey Nuclear where the decline of recent years is accelerating. This was the primary cause of the reversal in the segment. Nevertheless, we expect the companies (with the exception of Fairey Nuclear) to make progress in the second half.
Acquisitions and Disposals
At the end of June, Imaging Technology was sold for just under £10m. Although profitable, the company - the group´s smallest in the electronics and instrumentation segments - is exposed to a market where technological advances are driving ever higher product performance at reducing unit prices. The need for continuing high levels of development investment pointed to a more difficult environment for a minor participant in the industry.
Immediately after the half year end the group completed the acquisition of Spectris AG in Germany for approximately £171m, funded to the extent of £55.6m by a rights issue. With 1999 sales of £220m, this is the largest acquisition in the group´s history and consists of four main companies based in Denmark, Germany and Sweden. Disposal of certain peripheral businesses amounting to about 10% of the acquired sales is progressing well. The Spectris head office has been eliminated but for a few support staff and a complex and inefficient sales matrix structure is being replaced by direct alignment of sales activities to the operating companies. The savings that flow from these and other actions will be realised progressively during the next eighteen months, but the group target is for cost savings of £6-£8m from reorganisation costs estimated at £12-£15m. The trading in these businesses has historically been weighted towards the latter part of the year and the group expects the acquisition to be earnings enhancing, before amortisation of goodwill and exceptional costs, in the second half. The businesses are strongly positioned and order intakes are running ahead of 1999.
The cash requirements for reorganisation and exceptional capital expenditure amounting to £8m are expected to be covered by the Spectris disposals.
Until the end of 2001, it is the intention to show Spectris companies´ results separately from the rest of the group.
Outlook
Given the overall strength of demand and the expectation of an earnings enhancing contribution from the Spectris businesses, Fairey is taking a positive view of the second half and, subject always to the proviso surrounding economic events, the group is well positioned to deliver further encouraging performance.
A table of results can be found in the Financial section
