Spectris PLC

LSE:SXS

Earnings Call Transcript 2022-Q2

[Andrew Heath, CEO]

Good morning, everyone. And welcome to Spectris' Half Year Results for 2022. I am Andrew Heath, Chief Executive; and I'm joined our CFO, Derek Harding. I'd like to start this morning by saying a big thank you to all my Spectris colleagues for their hard work again this year. 2022 has presented new challenges, but our teams have worked hard, as hard as ever to deliver the continued progress we have made so far this year. And I'm always grateful for their commitments, and can do aim high approach, delivering on our purpose, harnessing the power of precision measurement to equip our customers to make the world cleaner, healthier, and more productive. Thank you.

We are delivering on all elements of our strategy for profitable growth, which continues to position as strongly as we navigate the macro backdrop, supply disruptions and further COVID related lockdowns in China. Our focus on working closely with our customers is underpinning demand and driving growth. We provide premium differentiated technologies, equipping them to improve the drugs that heal us, the food we eat, the materials we build with, the cars we drive, the semiconductors that power our devices, or the air that we breathe. And this is clearly translating into strong growth in orders and sales.

Over the past three years, we've transformed the group into a more focused, more profitable and more resilient business with the ability to compound growth at a higher rate through the cycle. Today, Spectris is in a position of strength with a robust balance sheet, well positioned in attractive in markets with strong fundamentals, supported by key sustainability themes to deliver structural growth, and the successful sale of Omega delivered significant shareholder value, demonstrating our continued portfolio discipline as we further improve the quality of the group.

We have fabulous engaged people all contributing to a purpose-led high performance growth culture. While vigilant to the macro environment and alert to signs of changes in demand, we have confidence in our business and have increased our investment for growth in R&D to innovate and enhance our customer offerings. With our current audit visibility, we expect to deliver high-single-digit organic sales growth and margin expansion for the full-year supported by the pricing already in the order book and SBS, the Spectris Business System.

And SBS is central to our strategy for profitable growth, tightening our processes and improving the efficiency and effectiveness of our operations. Launched three years ago, it is now delivering tangible benefits right across the group. And for those who attended our Investor Day at Malvern Panalytical they saw in person. The results of improvements made the manufacturing line for one of our highest volume products, the Mastersizer, where we doubled throughput in a smaller footprint with fewer people. And also the team of almost halved overall lead times creating a real competitive advantage, supporting the significant order and sales growth we've achieved this year.

And a Kaizen event run by the HBK [Suzio] production team analyzed how they could use work in progress by value stream mapping and use of Heijunka flow leveling tools. The team achieved close to 30% lead-time improvement, significant labor cost savings, as well as inventory reduction. Following a Kaizen at PMS, the service room for the 20-nanometer particle counters, was relayed out to provide a faster response time than competitors.

Turnaround time was almost half and capacity quadrupled, generating £1.6 million worth of extra revenue. The HBK talk center design team applied value analysis and value engineering to the analysis and value engineering to deliver a 40% reduction in unit cost for one of their key product lines. This also came with a significant reduction in disposed plastic.

And at Red Lion at PMS we also ran Kaizen to reduce packaging and the use of plastics, saving cost and reducing our environmental impact. These are just a small snapshot of SPS in action, and the greater engagement of our people, driving continuous improvement to deliver business success, enhancing our productivity, increasing our competitiveness, and making our operations more sustainable.

We entered 2022 with good momentum and a record order book right across the group. We've continued to see healthy demand for our products and services with orders of 20% on a like for like basis further extending our order book. As expected, this resulted in like for like sales increasing 11% in the first six months, reflecting the recent introduction of new products and services, as well as market share gains.

With our current audit visibility, we expect to deliver high single digit organic sales growth for the full year as we previously guided, adjusted operating profit increased to £72.3 million, with operating margin maintained at 12.7%. This reflects higher sales, partly offset by a lower gross margin and higher planned spend in R&D as we increase investment for growth.

Gross margins are temporarily being impacted by the phasing in recognizing increased prices that are already in the order book while we deal with the elevated input cost inflation and supply chain disruption costs prioritizing delivering for our customers. Pricing in our order book, the application with Spectris Business System, and our high quality more focused portfolio with continued pricing power gives us confidence that we will see margin expansion for the full year.

Our near-term target remains to return the group to its previously adjusted operating margin highs of 18% and longer term to drive margin expansion beyond this level. We have further simplified the group with the sale of Omega, which completed in July, with £410 million of proceeds adding to our balance sheet strength. We are deploying the balance sheet in line with our capital allocation policy, investing organically in the business to compound growth at a higher rate through the cycle and to accelerate this growth for our M&A.

In the first half, we announced the number of high quality bolt-on acquisitions, further enhancing our customer offering. For our shareholders, we continue to look to drive attractive returns and reflecting this we have increased the interim dividend 5% and returned £150 million to shareholders via share buyback in the first half with another £150 million to go. Sustainability is at the core of our strategy. And I'm pleased and proud that we have joined the UN Global Compact as a demonstration of our commitment.

Turning to our strategy scorecard the message here is one of the continued strong execution. Our strategy is working for us and for our stakeholders. Spectris today is more focused, high quality more profitable and more resilient. We're also a less cyclical business, concentrating on attractive growth markets with the ability to compound growth at a higher rate through the cycle. We have demonstrated our ability to improve the quality of the group drive organic growth and margin and allocate capital with discipline for attractive returns, including several synergistic acquisitions. This gives us a much stronger business today.

As I've said we maintained our adjusted operating margin and have confidence in delivering margin expansion the second half. This confidence underpins our planned increase in investment in the business, our R&D spend is up 18% year-on-year on a like for like basis that 8.3% of sales to fuel for future growth. We're investing in new ERP systems to further improve operating effectiveness and a new facility for PMS expanding capacity to meet demand. It also supports the 5% increase

It also supports the 5% increase in the dividend and the share buyback program. The strength in our balance sheet still leaves plenty of capacity for M&A, and we have announced around £100 million worth of acquisitions in the first half. And I'll talk more on these later. We are now moving into the next phase of our strategy for profitable growth, which we will be discussing later in the year in more detail.

I'd 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 future opportunities.

[Derek Harding, CFO]

Good morning, everyone. As with previous presentations, my first slide today is our scorecard for the first half. I will cover the specific details shown here on the following slides. But overall, we are very pleased with our performance in the first half of 2022, with continuing demand for our products and services and strong like-for-like growth in both orders and sales. Let me now take you through the specific details.

Before I go into the detailed numbers, it is important to note that, all the figures presented today exclude Omega, which was classified as a discontinued operation at the 30th of June and subsequently sold on the 1st of July. Reported sales increased by 6% to £570.2 million. If you adjust for the impact of disposals, net of acquisitions, which reduce sales by £30.5 million or 6% and foreign exchange movements, which increased sales by £10.7 million or 2%, you see a growth of 11% on a like-for-like basis compared to 2021.

Adjusted operating profit increased by 6% to £72.3 million on both a reported and like-for-like basis. Adjusted operating margins were flat at 12.7% with like-for-like adjusted operating margin down 60 basis points, compared to H1 2021. And this reflected higher sales partly offset by a lower gross margin and higher investment in like-for-like R&D, being 18% higher year-on-year, as we increased the investment for growth.

Adjusted profit before tax was £70.3 million, up 8% and our tax rate came in at 22%, which is in line with guidance. Adjusted earnings per share were 49.8p. The interim dividend per share of 24.1p represents a 5% increase over the prior year, consistent with the growth and dividend for 2021. And we remain committed to paying a progressive dividend. Adjusted cash conversion was 39% lower than we would normally expect due to higher working capital, particularly inventory, to ensure customer orders are met in the second half and higher capital expenditure as a result of a £20 million investment in a new production facility and headquarters for PMS in Colorado.

We expect our cash conversion percentage to recover to more normal levels in the second half. Our net debt at the end of June was £98.3 million following the completion of £150 million of share buyback. It is worth noting that £410 million headline proceeds for Omega was received in early July. And finally, on this slide, our return on gross capital employed continues to improve, increasing from 12.4% to 13.8%. I should also note that this measure is an average measure and does include Omega in both enumerator and a denominator for the full period in question.

This slide provides a graphical view of the main P&L movements that I've just discussed. And therefore, I will not go over them again. I would, however, like to highlight two points of note. The gross margin is temporarily impacted by the timing lag in recognizing increased prices and supply disruption costs in executing the order book to support our customers. We expect this to recover progressively in the second half as price increases implemented earlier in the year, start to be reflected in sales. Also it is worth noting that off the £13.9 million of increased overhead shown in the slide almost half relates to like-for-like R&D investment, which we have purposely increased in the first half.

Moving on to cash, this slide shows how we generated cash in the period and illustrates what we have then done with that cash. Starting by adding back the £18.8 million of depreciation and amortization charged to the adjusted operating profit brings you to £91.1 million of EBITDA. The group has utilized its strong balance sheet to ensure continued customer deliveries and where necessary has held additional inventory to adjust supply chain disruptions. This is required a cash outflow of £31.6 million relating to working capital during the period. And we spent £31.6 million on CapEx, The largest element of which was the new building for PMS previously mentioned.

This gives us our adjusted cash from operating activities of £27.9 million, which we divide into the adjusted operating profit to get our cash conversion metric of 39% transaction related costs and acquisitions resulted in a £68.8 million cash outflow. And in the first half we spent £150 million of the £300 million share buyback announced in April and paid £53.3 million final dividends. We spent £2.6 million of cash in relation to previously provided restructuring. Interest and tax had a combined cash impact of £20.8 million with other movements of 2£.3 million bringing us to the net decrease in cash for H1 of £266.1 million.

As I stated previously, the £410 million of cash proceeds for Omega were received just after the balance sheet date. This schedule reconciles, our adjusted operating profit measures and our statutory profit measure down to statutory profit before tax. There are no asset impairments to report or restructuring costs in the period. Transaction related costs were £6.8 million and we spent £2.3 million on the new ERP project for Malvern Panalytical and HBK.

Amortization and acquisition related intangible of £8.8 million brings us down to the statutory operating profit of £54.3 million pounds. Finance costs primarily a £10.7 million FX loss on intercompany balances brings you down to a statutory profit before tax of £41.8 million pounds for the period. During the period, the group has continued to follow its approach to capital allocation set out in 2019. The balance sheet remains strong with a net debt to EBITDA of 0.6x at the period end.

Within the year, we have used the cash generated from operations and disposals to invest in the business to position it for stronger through the cycle growth via an 18% like-for-like increase in R&D to drive further innovation and through selective acquisitions. We continue to look to drive attractive shareholder returns through a combination of growth and income and reflecting this have increased the interim dividend by 5%, and use the excess capital following the sale of Omega to return £150 million to shareholders via share buyback in the first half.

Looking ahead to the second half, this slide updates our view of things to consider when looking at 2022 on a full year basis. Starting with the headwinds, we believe that things are starting to improve with are starting to improve with respect to the global supply chain. However, we still anticipate that there, we will experience some disruption, but cannot predict exactly which components or the absolute impact this could have.

We will continue to find engineering solutions to these issues and make alternative supply arrangements were ever possible. We expect continued inflation for the remainder of this year. However, our premium products provide us with good pricing power to continue to offset the higher inflation than expected at the time of setting the budget.

On the positive side, we have several tailwinds. Our order book remains strong and supports our continued organic growth confidence for the remainder of the year. We expect gross margins to recover progressively in the second half as price increases implemented earlier in the year, start to be reflected in sales. And additionally, we are working hard to offset inflationary pressures through the application of the Spectris Business System, SBS to drive cost efficiencies.

In terms of other guidance, I've included our usual table for FX movements. CapEx will be around £50 million to £60 million, and we anticipate incurring around £20 million of software as a service cost as we roll out the new ERP system, Malvern Panalytical. Primarily as a result of acquisitions we now believe our additional R&D spend in 2022 will be £15 million compared to the £10 million previously guided. And we expect our tax rate to be 22%, working capital will stay within our previously guided range of 11% to 15%.

And with that, I'll hand you back to Andrew.

[Andrew Heath, CEO]

Thank you, Derek. So, now let's take a quick look at our end markets and then turn to our businesses. We have seen good demand in our end markets with all of them now return to growth. In pharma, higher sales have been driven by investment in biologics and on-shoring of manufacturing capacity. Growth has been further driven by the success of our new products like the Zetasizer and OmniTrust software at Malvern Panalytical, and for our complete sterility assurance solutions at PMS. The on-shoring trend is also supporting growth in semicon as is the rising demand for chips driving an increase in investment programs from major manufacturers.

Sales were naturally stronger to Asia with robust demand for PMS' liquids instruments and Servomex’s gas purity range. Sales growth in machine manufacturing continued albeit against a tough comparator supported by strong demand for HBK's wearing technologies and OEM sensors. Energy and utilities and automotive really stand out as the strongest performers in the first half in part reflecting their later cycle nature and the easier comp against last year.

Sales to engine utilities continued and improving trend following the growth we saw in the second half of 2021 as the hydrocarbon sector recovers. Sales to energy customers at Servomex saw strong growth in Asia, especially in China. And automotive is now back into growth territory with a robust demand from customers, especially for electric vehicle projects including simulators and production, and higher sales at Red Lion reflects recent high demand for its automation products.

Turning now to our businesses, there are a number of common themes. All the businesses ended the half with record order books and good like for likes sales growth. We have experienced higher than expected input cost inflation and production costs from supply disruption, which has impacted our gross margin in the first half. But pricing power has been maintained and we will see the full impact of increased prices coming through in the second half, helping to underpin margin expansion for the full-year.

At Malvern Panalytical, we continue to see buoyant customer demand, particularly in pharma and advanced materials with market share gains supported by the positive impact from new products. Order intake was up 12% leaned to a 14% increase in sales. And there was a 24% increase in adjusted operating profit and 100 basis points rising operating margin, even after higher R&D investment. This also includes investment to accelerate the growth of the recent Creoptix acquisition.

Turning to HBK orders grew 23% like-for-like with organic sales 7% higher, reflecting longer lead times and longer dated orders from a planned increase in OEM business. Automotive saw strong demand with significant order and sales growth, especially for electric vehicle projects and for our range of simulation offerings like-for-like sales were also up strongly in aerospace and defense.

And demand from machine manufacturers continues to be elevated, driven by demand for our weighing technologies and for our smart OEM sensor solutions in medical and healthcare applications. Adjusted operating profit rose 11%, there was 8% on a like-for-like basis with operating margins 160 basis points lower. The highest sales plus positive mix and pricing effects were more than offset by higher input and production costs.

Turning now to Industrial Solutions, like-for-like orders grew 28% with like-for-like sales increasing 11% driven by strong demand from semiconductor and pharmaceutical customers, as well as the favorable impact of recent product launches across each of our businesses. On a like-for-like basis, adjusted operating profit increased 1%, while operating margins decreased 160 basis points.

Again, the sales increase was more than offset by lower gross margins and higher investment. It also reflected the impact of the disposals, which enhanced the underlying margin, but was offset by a high burden of central costs. We've decided to continue to run ISD three businesses on a standalone basis to drive efficiency and effectiveness. To take out additional cost, the three businesses will now report directly to me and the ISD management layer has been removed.

We're now more aligned than ever to markets with attractive growth trajectories positioned in technology driven markets with strong fundamentals increasingly supported by sustainability thematics. Back in February, we highlighted a number of sustainability growth trends, which we see as providing new growth opportunities as detailed on this slide.

We've continued to refine our approach and future strategic direction around these trends, given our strong positions in many of these areas today. We see exciting opportunities to accelerate our growth aligned to these trends over the coming years, both in our organic development and via M&A compounded growth at a higher rate through the cycle.

So let's look at each in more detail. In Health, both Malvern Panalytical and PMS have leading positions across the pharma development and production workflow. Sales into the sector now account for 25% of the group's revenue and the success of our new product launches, such as Zetasizer and OmniTrust, LaserAir Pro and IsoAir Pro-Plus have helped strengthen our customer proposition. The transformation mobility and energy transition is driving significant investment in new battery materials and new greener technologies and fuels. Both Malvern Panalytical and HBK are very much benefiting from this trend.

Sales from HBK electric powertrain offering have more than doubled in the past three years, and Malvern Panalytical has seen £11 million worth of new sales into battery and new energy technologies in the first half. We're also playing a key role in environmental protection. Our gas analysis solutions of Servomex are already helping better monitor and control emissions. And then more generally across our business, our products help customers become more productive in their processes, from saving time and cost in bringing new automotive models to market to ensuring yield maximization in semicon manufacturing.

We have seen rapidly growing demand for our products and services at HBK Servomex and PMS here. These themes are very much aligned with our purpose. We continue to invest more in R&D to better position us to take advantage of these trends and opportunities, accelerating growth as we move into the next phase of our strategy. We said in February we would be increasing our R&D spend this year. In the first half of the year our R&D spend totaled with £47.6 million, up 18% on a like for like basis, and £3 million of this increases due to the acquisition of Creoptix and CCRT.

The increase in organic investment includes product extensions across all our businesses as detailed on this slide including Malvern Panalytical expanding its range of X-ray spectrometers and particle analyzers, including robot driven sample automation for the Mastersizer as well as next generation colorimeters and analytic software. HBKs are developing its new data acquisition hardware and software platform advantage and fusion. And the release of seven new products at PMS, including several that use novel IP as well as product refreshes that Red Lion and Servomex.

We've also incurred extra capital expenditure with £31.6 million spent in the first half up from £18.3 million last year. The key project is a new facility for PMS in Colorado, more than doubling its capacity to support its rapidly expanding order book and long-term growth. We're also investing in new ERP systems are both Malvern Panalytical and HBK over the next three years. This will simplify and automate processes, enabling us to become leaner and more agile and also more scalable and flexible for growth.

They will drive long-term structure improvements to our operating model, supporting both our growth and margin expansion ambitions, while also driving efficiency and working capital improvements. M&A remains a key aspect of our strategy and we've announced around £100 million worth of acquisitions in the first half. We acquired Creoptix in January to further strengthen our position and expand Malvern Panalytical is offering in the affinity area within drug development.

Creoptix provide industry leading instruments and software for measuring real-time biological and molecular interactions. For HBK, we announced the acquisition of Dytran Instruments in May. They're based in California. Dytran is a leading designer and manufacturer of piezo-electric and MEMS-based accelerometers and sensors for measuring dynamic force pressure and vibration with its largest market in North America. The acquisition will enhance HBKs customer offering and solutions to enable accelerated product development in the space aerospace and automotive industries. We expect the transition to complete in the second half.

HBK has also established a joint venture with DEWESoft, a leading manufacturer of data acquisition hardware. The JV to be known as Blueberry has employees from both companies working together to create a new open industry standard for data acquisition products. The JV will also help accelerate the development of HBKs new Fusion data acquisition platform. And to expand its industrial IoT portfolio, Red Lion acquired MB connect line. It has a full complement of products in industrial cybersecurity and provides customers with a portal for remote monitoring and configuration, providing customers with secure remote access solutions.

As his usual, app selected a customer case study to show how we are bringing our purpose to life, and in this case, equipping our customer to be more productive and competitive. HBK's virtual test division has grown materially over the past three years with £60 million of incremental revenue over this period. We've been working closely with Ford for a while, who earlier this year installed a turnkey VI-grade DiM 250 simulator solution at its facility in Michigan. Automotive OEMs are continually looking at ways to speed up and reduce the cost of their development process.

Our simulation offering helps Ford reduce the number of physical prototypes needed in its development program, allowing test scenarios to be run, which will be too expensive or too radical to be built. The presence of a driver in the loop, also brings the essential human element to the testing, allowing the development team to quickly try out different configurations and fix elements in situ. Ford will be investigating vehicle dynamics as well as ride and comfort on the same simulator, saving time, cost, risk and environmental impact, all real and quantifying benefits for Ford.

So in summary, we have made good progress in the first half with continued strong demand for our products and services. We have confidence in delivering high single-digit organic growth and margin expansion for the full year. By executing our strategy for profitable growth, we have delivered a Specters that today is purpose led, more focused, more profitable, high-quality and more resilient with sustainability at the heart.

We are in a position of strength with a robust balance sheet, well-positioned in attractive end markets with strong fundamentals supported by key sustainability themes, with the ability to compound growth at a higher rate through the cycle. This gives us confidence in our ability to return the Group to its previous margin highs and ultimately exceed them over the longer-term. We have a very strong platform to meet our ambition as a leading sustainable business, investing in our businesses to take advantage of new growth opportunities, strongly align to our purpose and to our focus on sustainability.

[Andrew Heath, CEO]

Thank you everyone for joining us this morning. You will have seen our release that went out this morning as well as our webcast presentation, which I hope you've had a chance to read. Before we just get into the questions and the Q&A session maybe I'll just make a few opening remarks.

Maybe firstly, I'd like to say that I'm very pleased with the execution of our strategy for profitable growth. It is working strongly for us. Over the past three years, we have transformed the group into a more focused, more profitable and more resilient business with the ability to compound growth at the higher rates of the cycle.

So today, Spectris is in a position of strength with a robust balance sheet. We're well positioned in attractive end markets with strong fundamentals, and we're also supported by key sustainability teams to deliver structural growth. During the first half, we continued to make good progress, achieving strong growth really through our focus on premium precision measurements as well as our focus on growth markets, global our priority markets growing well for us at the moment.

And we're also delivering on a consistent basis, even in the face of continued supply chain challenges, and so I'm very proud of the team for all the work they've done over the last six months in delivering the results we posted this morning. I think our results also demonstrate the value of our customer focus and connectivity where we're solving customers' challenges, whether that be in pharma, semiconductors, automotive, advanced materials or in a variety of technology-led industrial markets, particularly in smart manufacturing.

We've increased investment in R&D, as you've seen, and the improvements we've made to our internal R&D processes as well as our focus on driving our strategic initiatives against the key drivers we see in our end markets over the last three years is really coming through in strength and demand and market share gains. We've increased investments as said this year, and that's very much based on our confidence and the outlook we see for our business through the cycle.

And you'll also see we continue to apply self-help driving operational excellence through the deployment of the Spectris Business System, reducing waste, improving throughput and improving our competitiveness. And clearly, we look to accelerate and compound that growth through attractive M&A, and we've made or announced £100 million worth of acquisitions year-to-date. We're now moving into the next phase of our strategy, delivering on our ambition to be a leading sustainable business, and I look forward to updating you later in the year on that in more detail.

So thank you again for joining, very happy to take your questions.

[Operator]

[Operator Instructions] Our first question comes from George Featherstone from Bank of America. George, please go ahead.

[George Featherstone, Bank of America]

A few questions for me. I'll go one at a time. Firstly, I'd like to start on the quite a big step-up in R&D year-on-year. I just want to know if you structurally expect now to be above 8% of revenues in terms of R&D spend going forward. And if there are any parts of the portfolio where you feel there's been underinvestment hence the increase? Or conversely, are there any particular areas where you see an opportunity to gain further market share through new product launch innovation.

[Andrew Heath, CEO]

Okay. So let me get to ask more questions or sorry. So yes, I mean, we've stepped up investment in R&D, as I said so in my brief opening remarks, I mean that's really as a consequence of the strategic initiatives that we've been running over the last two years focusing on sort of core parts of our end markets where we see we have the biggest opportunity for structural growth, whether that be in sort of drug development, life science applications, whether that's been really helping to support the capacity build-out in semicon all the way through to smart manufacturing, using our sensors, high-precision sensors to enable our customers to make smarter devices.

So we -- going forward, to your point, we certainly anticipate sort of increasing our range. I mean, historically, we've sort of been at sort of 6% to 7% guidance in terms of R&D. We've clearly gone through that. But I think that's consistent with what we have been saying is we've been looking forward to increase progressively our R&D spend.

So as we look forward now with the sale of Omega, which had relatively small amounts of R&D in it, the mix there has helped a bit, and that's put us over the 8% threshold. So we are incrementally investing as well. Your question about is there any underinvestment areas, no. We are spending a bit more of our engineering time on supporting all the supply chain challenges at the moment than we'd have liked to have done.

So in part, that's also increased the R&D bill a little bit because inevitably, our engineers are having to support operations in terms of finding alternative suppliers or redesigning printed circuit boards, et cetera, to make sure we can deliver for our customers. So we are having spent a little bit more there, but that's our hope to sort of unwind progressively from sort of here on in.

And in terms of market share gains, absolutely, we're confident that we are seeing gains in market share as a consequence of the initiatives that we've launched over the past two to three years. You'll have seen in our various press releases that we've made in that period. We're progressively increasing commentary in terms of new product launches and the impact they're having in the market and the problems they're solving to customers, that gives us the confidence to continue to sort of progressively increase our spending and invest in R&D.

[George Featherstone, Bank of America]

Okay. Andrew. Turning to the next question. In the first half, revenues. You mentioned that there's been some extended lead times in delivering from the order book. So I just wondered what portion of your order book that you delivered in that period had price increases that reflected the new pricing that you'd have liked to put through given the current cost inflation environment?

[Andrew Heath, CEO]

Yes. So if you sort of breakdown the orders versus revenue, we're certainly looking at the visibility we have and that visibility has increased progressively over the last 12, 18 months. We've now got sort of 5.5 to 6 months of sort of aggregate order cover or baked into the order book. And within that, the sort of 4% to 5% sort of price increase, it just depends a little bit on mix by business and products.

But the phasing that we talked about in the press release, we put our prices up in the first quarter of last year than the middle of last year again. Put prices up again in Q1 of this year, and we're just in the process of putting prices up again given inflation has been running at a much -- in a more elevated level for longer than we anticipated.

But effectively, the prices that were in the order book coming into the beginning of the year was set to the middle of last year. So that's really been -- that's really dictated the price going into the revenue through the first half. Is there an incremental uplift on price that's in the order book to say to tune of 4% to 5%, which will then start -- we started to progressively come through for really sort of late May into June, we will build as we go forward now to the second half. So we're certainly anticipating a 45% pricing benefit in the second half.

[George Featherstone, Bank of America]

Maybe one for Derek on cash flow. Clearly, cash conversion below your normal typical levels, which is understandable given what you said on working capital requirements for some of the investments you've made, should we expect the cash conversion to return to normal levels by the end of the year?

[Derek Harding, CFO]

That's certainly plan, George. There are common specifics in the first half through these same numbers [indiscernible]. We did finally build a pretty much double the capacity of our PMS operation with $20 million spend in the first half on that. And then the remainder is supporting working capital to facilitate deliveries. It is our expectation as we get back to our normal range of 80% to 90% conversion going forward.

[Operator]

Our next question comes from Andrew Wilson from JPMorgan. Andrew, please go ahead.

[Andrew Wilson, JPMorgan]

It's two, I think, and somewhat clarification, I guess. Just to talk about the price cost dynamics and I appreciate the detail you've given Andrew, in terms of the backlog pricing and how it's obviously set to improve second half. Should we think about price cost being positive for the full year? I'm just trying to sort of understand how much catching up you need to do in the second half. And if we look on a full year basis, yes, quite where that's going to come out?

[Andrew Heath, CEO]

Well, I mean, as we said before, I mean, we're not looking for prices to get ahead of inflation. We're certainly looking for our pricing to maintain our gross margins, and that's certainly our expectation for the full year. So if you consider our usual sort of first half, second half weighting in terms of revenue growth, plus the 4% to 5% pricing that's coming through that's already in the order book, and we can see it. The operating leverage, therefore, in the second half will be very strong.

[Andrew Wilson, JPMorgan]

That's helpful. And second is slightly, I guess, linked to George's questions earlier. Just on the market shares. And clearly, some of the growth in some of the markets has been super strong, even in supportive markets. I guess, just interested if there's any particular markets where you would single out where you think you're sort of definitively taking share?

[Andrew Heath, CEO]

Yes. So I mean you just look sort of our sort of key target markets and start with pharma. I mean, we were up 12% in the first half in Pharma & Life Sciences. And that's been with a strong performance in both Malvern Panalytical and PMS. And we have seen a sort of reduction clearly in sort of vaccine development work, but that's been replaced by continued investment in both conventional drug development as well as large molecules, protein-based drugs in RMNA treatments -- mRNA treatment, sorry, that's driving demand for more palatable products.

And our sort of aseptic monitoring solution, PMS is doing particularly well also. So we're seeing strong growth there. In automotive, I mean, we're up 15% in the first half, very strong growth, particularly in North America, but also in Europe. I mean Asia was a little bit softer, China was softer really because of Q2 with the lockdowns, which meant we weren't able to recover all of our sales within HBK into China in the second quarter.

But I think the fact that we are very much helping to drive the electrification trends in automotive, our electrical powertrain testing or battery testing solutions are selling particularly well.

And if you look at our simulation virtual test offering, and we put the numbers made in the press release and in the webcast. But if you look over the last three years, sales have grown incrementally there by £60 million. So we are seeing very strong growth there. It is still a sort of relatively new market, but growing -- one that's growing very strongly, and we have a very strong offering.

So there's never been a better time certainly to help our automotive customers with customers at large to drive their own productivity in the face of all this inflation. So that is certainly helping to accelerate time to market for our auto OEM customers, reducing risk reducing costs as well. And then within semi, I mean, we have some very strong offerings in semi that are certainly benefiting from the very large CapEx cycle that's going on at the moment.

And whilst year there was talk about some production volumes may start to come down or given some of the commentary from some of the larger semi producers in terms of inventory levels, but we certainly see that CapEx cycle continuing as they need to continue to both build out capacity. The onshoring trend continues as well as the investment in the next-generation nodes. And again, our offerings across Malvern Panalytical and PMS in particular around Servomex are doing very well.

[Andrew Wilson, JPMorgan]

And maybe if I can just -- sorry, just one clarification as well, I mean to ask on the pricing. Apologies if I've missed this, but did you split out the organic growth in the first half in sales between price and volume?

[Andrew Heath, CEO]

So yes, so the 11% revenue growth in the first half, 4% ramp in enterprise 7% down to volume.

[Operator]

Our next question comes from Andrew Douglas from Jefferies. Andrew, please go ahead.

[Andrew Douglas, Jefferies]

I've got three quick questions, please. Just going back to R&D, I understand the increase of 8%. Are we happy that we're getting bang for book on that 8%. I think when you joined Andrew, one of the issues that you faced was actually you weren't getting necessarily full bang for book from that kind of 6%, 7%, and that was a key bit. So going up to 8%, we're confident that, that is now still coming through?

Secondly, on going back to the kind of cost and price increases, are we still confident or how confident are you that the price rises that you're putting to now will stick, particularly if we get into a slightly more challenging macro backdrop, and it seems that most raw material prices are now kind of rolling over a bit. So just understanding the confidence there. And if you can give us please an update on the M&A pipeline size of deals, things you're looking at and whether you think that pricing is at an appropriate level?

[Andrew Heath, CEO]

Okay. Thank you, Andy. So firstly, just in terms of R&D, I mean you're absolutely right to characterize it when I can into the business 3.5 years ago, I was concerned that the amount of, I would say, local sustaining and maintenance engineering effort that was going in at the time and then sort of over half of our R&D spend is going into sort of this maintained sustaining of the products.

As a consequence of both tiding up the portfolio at the group level and really concentrating on the core businesses we're going to retain and investing in the engineering capability in the processes there. That has certainly helped in terms of giving us better bang for the buck to your expression, but also within the retained businesses.

We've worked through the portfolio of products and services within each of those businesses as well. And either discontinued or end-of-life the number of products. We've sold a number of products as well over the last three years, some older products that were taking a lot more maintenance for them.

So that has all helped to improve the vitality. And as I said, we've timed our processes, and we've also replaced the engineering leadership within those businesses as well over that period. So I have a lot more confidence in our capability. Equally, the strategic issues that I've spoken about market share gains, we are seeing the products we're launching and getting good traction with customers and solving problems. So then that has been driving greater sales.

And in terms of sort of our vitality index, that is now starting to progressively improve. So we're all pleased on that front, and we'll talk more about this when we get to the Capital Markets Day later in the year.

In terms of cost versus price, yes, still very confident we have pricing power. All of the pricing increases that I talked about on the previous question was sticking. We are getting good realization of those price increases. And in some instances, we are also going back retrospectively with customers, and we've had to increase in prices, and that's worked.

I mean I don't think that wouldn't make too much of that, but it just demonstrates that even when we have to go back retrospectively we've been able to. And we've also within our contracts built in terms of such that we can charge for surcharges around sort of excess freight costs, excess energy costs as well as needed.

So both of your question, how are you confident in pricing power, [in plants of ATS]. And then in terms of the M&A pipeline, clearly, we've done a number of acquisitions over the last 12, 18 months, I think four acquisitions and one announced. So we've been executing a number of those bolt-ons.

In terms of the pipeline, I think say we're sort of now in a little bit of a -- sort of a refresh state as well, and we've got a number of opportunities that we are currently considering as we always do. But given the sheer number of transactions that we have completed, we are in a slight refresh phase. And then I think it was the other part of the question around pricing or...

[Andrew Douglas, Jefferies]

Yes, just -- well, pricing and valuation of assets and kind of where that sits now given the slightly more dark clouds on the horizon?

[Andrew Heath, CEO]

Yes. I mean we've not seen, I would say, any sort of evidence of pricing valuation shifting at the moment, albeit clearly debt markets are a lot tighter, and that's putting some downward pressure on prices. So I think it's a bit too early to say you would expect hopefully that some of that valuation expectation price expectation is starting to come up.

[Operator]

Our next question comes from Andre Kukhnin from Credit Suisse. Andre, please go ahead.

[Andre Kukhnin, Credit Suisse]

I'll go one at a time. And first, I just wanted to look a bit more into the H1, H2 margin cadence. And I really think kind of the reasons behind the implied margin improvement in the second half in the guidance. So firstly, on the acquisition-related expenses and I think fair value adjustments of £6.8 million. Am I right to think that most of that is of one-off nature and in absence of another large deal in the second half, now assuming that, that £6.8 million should not reoccur.

[Derek Harding, CFO]

Yes. So Andre. This is Derek. So that is -- I mean it's one-off in the sense that it relates to acquisition activity that we've undertaken in the first half. It's also an amount that we excluded from our adjusted operating profit. So in that sense, it's below our final APM.

So it doesn't impact the reported operating profit or adjusted operating profit is more of the statutory method. Clearly, if we have some M&A activity, it can be big or small, there could be other costs going through that, but you're right, it's one-off in nature.

[Andre Kukhnin, Credit Suisse]

And on the China lockdown's impact, given that you've got 16 sort of sales there, could you help us quantify the impact in the first half?

[Andrew Heath, CEO]

So, I mean, our team actually did an excellent job in terms of recovery in China sort of towards the back end of May through June, that the backlog hasn't fully unwound. So in particular, within HBK, as I spoke about, to they're automotive. And so that will give us a little bit of an extra coming into the second half.

[Andre Kukhnin, Credit Suisse]

Should we think about a couple of million or so? Or is that...

[Andrew Heath, CEO]

Yes. I mean it's not -- It's not I would say it's hugely material.

[Andre Kukhnin, Credit Suisse]

Okay. Great. And I have a couple of broader questions. One is on Industrial Solutions. Given the change in the management structure there and noting some differentiation in terms of level of investments across a couple of businesses versus others, should that signal more openness to maybe further portfolio changes there? And is there a kind of time scale on that?

[Andrew Heath, CEO]

So in terms of Industrial Solutions, back in December, we talked about looking at how we could integrate the three businesses, PMS, Servomex, Red Lion into a more integrated division and that was very much we do -- that was the work we undertook. As we went through that work the thesis didn't really prove itself back to the extent that we anticipated.

And as we look at sort of the frictional costs from the sale of Omega and just looking at management costs overall retail, we took the decision to effectively not continue to go down that path with Industrial Solutions and instead, keep the three businesses, there's three sort of independent operating companies they were reporting to myself, and that allows us to effectively take out mid-level management structure that we've had in place over the last two, three years or so to manage ISD when it was a portfolio of late business is going through a disposal program. So that's really the logic and it also gives us a bit more flexibility going forward.

[Andre Kukhnin, Credit Suisse]

Great. And if I may, just very last one to take this opportunity. If we go back to the Oxford deal and just think about the fundamental attractions that you saw in that deal at the time and kind of set everything aside and kind of think about kind of hypothetical scenario. Have those attractions fundamentally changed for you in the current world with the events that have happened since or not?

[Andrew Heath, CEO]

I mean, I think, I wonder, I would just say I repeat, I talked at the time really. I mean it was a very sensible transaction for us to consider the combination with Malvern Panalytical would have been very powerful it would have created significant value for shareholders in our opinion. That said, it was the right transaction, but at the wrong time, the world changed, just to the point we were looking to try and consummate a deal with Russia, maybe Ukraine and all the macro uncertainty.

So it was right for us to put our hands down. But in terms of the logic for the transaction and that logic still remains. Clearly, there's a number of things that need to come together to make that sort of a financially attractive proposition. So we remain disciplined in our approach to M&A and our focus on how we create shareholder value. And the avoidance of that, we continue to explore other acquisition opportunities.

[Operator]

Our next question comes from Mark Davies Jones from Stifel. Mark, please go ahead.

[Mark Davies Jones, Stifel]

Andrew. I was also going to just follow up on the Industrial Solutions thing because it looks as though there is quite a big change of mind. It was anywhere back in December we had Mary Beth setting out the sort of strategy there and that seems to have gone to reverse. I'm assuming, firstly, that she's left the group, is that right?

[Andrew Heath, CEO]

Yes, she has, yes, that's correct.

[Mark Davies Jones, Stifel]

And then thinking about what happens to those three businesses. I mean they are three quite attractive but sort of unrelated businesses. Is there any scope for sort of further group reorganization, PMS, for instance, seems to have a fair amount of overlap with parts of Malvern Panalytical. Is that something we can think about? Or do you think these are to be seen as three stand-alone units that may in time get built out to platforms, but we'll have to wait and see what's the outlook now?

[Andrew Heath, CEO]

Look, Mark, thanks for your question. I mean, as I said, it sort of provides flexibility going forward. You rightly say there are overlaps within Industrial Solutions between and particularly sort of between sort of Servomex, PMS equally. PMS serves the same end markets as Malvern Panalytical.

So as we look forward, when it comes to the Capital Markets Day, we'll give you more color and insight into our thinking around all of that. But clearly, we -- as I said part of the rationale for decision with not just cost but also about providing some sort of flexibility on how we proceed with the group.

[Mark Davies Jones, Stifel]

Okay. Understood. The risk of flogging a dead horse on the price cost thing, I just wanted to ask it sounds as though prices or costs -- sorry, cost input costs rose more than you're anticipating or more than you budgeted for in the first half, hence, the lack of margin leverage that you delivered. But is there any particular area where those costs have come through higher? Is it labor costs beginning to rise on here? Or is it just the same sort of materials and logistics things we've been dealing with for some time?

[Andrew Heath, CEO]

Well, yes, I mean it's -- when we put the budget together sort of November last year, I mean, we were certainly anticipating inflation to be peaking around sort of 6% to 7% to the first half and then declining down to the 3% to 4% in line with looking how everyone else saw the situation back in. Clearly, as I said earlier, inflation has been running much hotter, higher and more prolonged than was anticipated then.

So when we put our prices up, certainly sort of in the middle of last year, given our stronger order book and increased visibility. The flip side of that clearly is that it takes longer for pricing changes to come into effect as the order book unwinds itself.

So yes, we did see a higher input cost than we anticipated when we put the budget together. Key areas, electronics, semiconductors are the standout areas I would say it's not getting any worse, and there are some signs that it may be starting to ease, but I think it's going to take some time still to fully unwind.

And then on the labor side, yes, we have had to increase some of our own labor costs as a consequence of both inflation type of labor markets in some areas of the world and just sort of the cost-of-living squeeze, and we're taking an appropriate and responsible approach and making sure our employees suitably remunerated.

[Operator]

[Operator Instructions] Our next question comes from Jonathan Hurn from Barclays. Jonathan, please go ahead.

[Jonathan Hurn, Barclays]

Just a few questions for me, please. Can I just come back firstly to the supply chain and obviously looking forward into the second half? I wonder if you could just give us a little bit of detail about where the biggest supply chain issues are by division, please? Thank you.

[Andrew Heath, CEO]

So from a supply chain perspective, you said really, it comes down primarily to electronics. Semiconductor availability has been the biggest issue that we've had to face over the last six months. Equally, as I said, I mean we are starting to see maybe some signs that things are easing, chip availability is getting a bit better. Whereas go back two or three months times on to the critical shortages, we're having to scour the market and we will get commitments. It is easier to get commitments from the manufacturers now than it was.

Now whether that's the start of the trend, it's maybe too early to say, but I'm hopeful that we are starting to see the signs of things easing up. But I think the -- at the beginning, our teams have done a really good job in terms of being able to deal with the situation, being more flexible in terms of how we schedule, how we prioritize, how we resequenced the manufacturing lines, how we build modules, part inventory, waiting for shortages such that when the parts do arrive, we can quickly assemble them and get them shipped to customers.

And so we're being much more agile in how we manage all of that. But clearly, that comes -- there is a cost associated with it, and that's in part has also impacted our gross margin in the first half. So with all this unwinds with the pricing that we've got in the order book plus the extra volume, the higher level of production efficiency we're getting that also with some supply pressures start to unwind because that should certainly help and that gives us confidence in terms of our outlook as we said.

And I think you can't rule out the fact that there will be some surprises is the known unknowns. We know that there will be some things that our supply chain isn't aware of that may hit us and put some stop shift on certain product lines. But as it stands at the moment, we're managing it reasonably well.

[Jonathan Hurn, Barclays]

Okay. And what I was saying is just in terms of the risk by division, does one division stand out as potentially having more risk in H2 than others? Or would it be sort of quite equal among the 3?

[Andrew Heath, CEO]

No. I mean I think the bigger area of -- the biggest area come back to electronics and semi supply chains. And the two businesses that are most exposed to that are HBK and Red Lion. They have the biggest content, I would say, in terms of electronics going into their products. And equally, that's where we've also seen us putting up the prices most significantly to address that.

[Jonathan Hurn, Barclays]

Great. Second question just on PMS. Obviously, great business. You've spent £15 million on -- of £50 million on the new facility. Can you just talk us through sort of the time line here when that capacity comes online, how ultimately fast it ramps? And from this, obviously, this exit facility, what do you think is the potential sort of revenue opportunity or PMS, please?

[Andrew Heath, CEO]

Well, I'm not going to give a revenue guidance for PMS directly, but I will say that PMS has been growing double digits for the last three, four years. And clearly, half its revenue comes from semiconductor manufacturing, where we provide class-leading particle counters to measure the impurities in air and liquids. And go into the manufacturing process for semi. We have the highest accuracy sensors on the market, which makes it very attractive for the semi guys who are developing smaller and smaller nodes in terms of the semiconductors. And as such, they need higher and higher levels of quality.

So in fact, the major driver to PMS is success on that front. But equally, their aseptic monitoring solution where we provide, again, particle counters for clean rooms to make sure our customers can measure the effectiveness of their clean rooms but we also provide a full sort of software and monitoring suite, whereby customers not only can ensure that the quality of the air going into the clean rooms, but equally, when the regulator comes in, they have all of the monitoring in place such that they can meet the certification requirements to say they've been operating at the right levels of cleanliness. And that, again, has been hugely successful.

[Jonathan Hurn, Barclays]

That's very clear. And then just maybe last one, very quick one. Just in terms of order book, obviously, good growth in the first half. But have there been any cancellations of orders within the order book during the period? Any signs of cancellations?

[Andrew Heath, CEO]

No, I mean in terms of sort of customer behavior, we are not seeing any signs at all, but customers are starting to get anxious about what's in the order book. We've repeatedly said on these calls over the last 18 months is something that we track routinely on a month-to-month basis, and we've seen no change in behavior from our customers in relation to sort of cancellations or delays.

[Operator]

Our next question comes from Bruno Gjani from BNP Paribas. Bruno, please go ahead.

[Bruno Gjani, BNP Paribas]

Just on orders, if I could just follow up, could you provide some color on how orders trended sequentially if we exclude that pre-buy impact in Q1? And would you expect the current run rate of orders to be sustained if we look out to Q3? Or do you expect things to slow, I guess, can you take anything away from July trading so far?

[Andrew Heath, CEO]

Yes. Bruno thanks for the question. I want to question related to the reorder points you made?

[Bruno Gjani, BNP Paribas]

Just I remember from the Q1 IMS you talked of certain division benefiting from a prebuy effect in terms of the strong order growth that you saw on Q1. Some orders have been brought forward. So if we just strip away that from the Q1 base sequentially, what did you see on your orders?

[Andrew Heath, CEO]

Well, okay. So yes, I mean, I wouldn't say it was sort of intake. I wouldn't characterize that preorder and maybe it's just language. I mean, we certainly as we came through the beginning of the year, we extended lead times coming out last year due to pricing pressures. So we did get some benefits in terms of that in Q1.

But if you look at order growth and you compare it to last year -- in Q1 last year, orders were up 5%, nearly 31% this year. Last year, orders were up 28%, and we did 11% this year in Q2. So we are still seeing very strong order intake despite some real -- much tougher comps. And we've had the flat results for July, and we're still seeing strong order flow in July. So as I said, we have no evidence as yet to suggest that customers are pulling back on late in August.

[Bruno Gjani, BNP Paribas]

Okay. Got it. And just in terms of the lead times on current orders that you're booking, are the lead times European customers coming down somewhat? Or is there no change really?

[Andrew Heath, CEO]

No, it's really -- it's stabilized. As a consequence, the demand we're seeing. And again, supply chain ability to satisfy it. We are keeping our lead times broadly where they were. Having said that, I mean, we are using the Spectris Business System extensively to look at how we can reduce not only on the throughput inside or in facilities and those of you who came to the Malvern site earlier in the year when we did the Malvern Panalytical Investor Day, we showcased the Mastersizer line.

Malvern Panalytical does similar exercise the Zetasizer. So if you add the Mastersizer and Zetasizer that's about a quarter of Malvern Panalytical's revenue. And there, we have -- we've doubled the throughput in a smaller footprint with less -- needing less people, and also the operations and supply chain person teams we work with suppliers as we put in the press release.

I mean we've actually almost half of the order lead time there. So in that case, we are -- we've actually reduced our order lead time, and that's allowing us to gain incremental demand from customers because we can meet their needs faster the competition. So we're very much using Spectris Business System as a self-help to reduce cost weight but also make us more competitive as well.

[Bruno Gjani, BNP Paribas]

And if I could just touch upon guidance. So high single-digit like-for-like sales growth, to my mind, implies 8% growth for the full year, which is what consensus models. Now given that pricing is expected to be 5%, this implies H2 volume growth is close to 1%, which in the context of stellar order growth seems a bit cautious in my view. So I guess -- would it be fair to characterize a like-for-like sales guide for this year as being a tad cautious? Was it reflecting uncertainties in relation to supply chain? Or, yes, any color on that?

[Andrew Heath, CEO]

Well, I'll let Derek get into some of the details. But I think as we look forward, we have confidence in our outlook and maintaining the guidance that we've talked about back at the beginning of the year. I mean there are still some uncertainties in the supply chain are broken to us. We clearly increased [indiscernible] to provide more inventory to [indiscernible] deliveries to customers, which is exactly the right thing we could be doing.

And it's more, I would say, it's more about the sort of known, known for things that we know are going to happen. We don't get to know where they're going to come from. And therefore, we've got to be prognostic in the pace of that. But relative to the visibility that we now have in the order book, that gives us a very high degree of confidence to go about high single-digit growth. Derek gives this in little detail.

[Derek Harding, CFO]

Yes. I mean, I would add. If you look in that there is a lot on then there is opportunity currently on the volume side [indiscernible]. I mean as we just talk about guidance, this is where looking at inventory volumes picked up on page [indiscernible] this is where we stepped out the impact of [indiscernible].

I know there's a little bit of confusion and noise this morning around the first half profit number. And I don't think that everyone quite appreciate the announcement put out at the beginning of July that set out the impact of the disposal of Millbrook. So there were a number of sort of range of ideas to where the profit number should be.

But I just want to make sure on spots that with Omega removed the prior year profit number was £68 million for the first half and our growth was 6% on that I think there was a consensus on the value of 17.5 which percent growth, which I don't think anybody actually would have believed.

So the growth in the first half was 6% and £68 million and this points out for the full year last year, there's £189 million of profit, excluding Omega just to make sure as you guys update your numbers, you can capture that. But in terms of our broad guidance, we're not expecting expectations for the full year to change off the back of the statement.

[Operator]

Our next question comes from Mark Henderson [ph]. Mark, please go ahead.

[Unidentified Analyst]

Thank you. I'm a private shareholder not often seen at these meetings. But I'm a little bit concerned about the -- not your company but many companies, the impact of inflation. And to the extent to which we're seeing growth in profits being illusory our profit growth rather than real crop product growth, and that's manifest in your figures by the amount that's going into increased inventories. I think over half year to half year, they're 30% up and the reduction or the lack of cash flow conversion. This is typically what we see in inflationary times. But I wonder to what extent you would envisage reduction in those inventories in other words, an unwinding of this inflationary pressure?

[Derek Harding, CFO]

Mark, it's Derek Harding here. Our finest approach to expect is you're absolutely right that were the increase in inventories simply down its price as opposed to volume that, that risk of inflation coming through would be a sort of warning sign certainly against the cash flow. I think in our case, the predominant reason for the increase in inventory is to combat the supply chain issues that we've been well documented.

So throughout the first half of this year, where we have had opportunities to obtain input materials, we have taken those opportunities. And in certain cases, that's involved us buying more inventory than we would normally hold with the purpose of making sure we can hit customer demand. That also results in us as well, having a number of parts and products that are part built sitting on the balance sheet at the half year particularly if they're awaiting the final component in order to get them completely built and then ship.

So there are a couple of sort of specific volume-related issues that new inventory is higher than we would normally have. Notwithstanding that, our working capital sits within the range that we typically guide towards the 11% to 15% sales. So we're broadly comfortable with the position, and it's entirely intentional for customer service.

To move on to your next question, will that unwind? Our expectation is that it will. We have significant orders coming through in the second half. And as Andrew talked about, we expect to see that volume pick up in the second half and as a result of that factor and hopefully, reductions in supply chain issues over time, we ought to see that inventory unwind.

And as I said earlier on the call, we expect our cash conversion for the full year to be back in our normal range of 80% to 90%. But there's also a cash impact in our conversion in the first half through the purchase of the building for PMS in Colorado, which again is a one-off in some ways when you look at our typical cash conversion. The net effect is we anticipate strong cash generation this year backing on normal range.

[Operator]

Our final question comes from Michael Tyndall from HSBC. Michael, please go ahead.

[Michael Tyndall, HSBC]

Just a quick couple from me. The first one, just in relation to post the Omega disposal, we had reallocation of overheads to the other divisions. To what degree can you bring them down? I mean, effectively, you're a smaller-sized business now. I wonder to what degree there's a variability in some of those overheads that we can expect to kind of try and drive that down.

And the second one is really a clarification. I'm not sure I heard you correctly, but was there an element of the R&D uptick that related to redesign because of the supply chain issues? And if so, can you give us some sort of quantification of how much that was?

[Andrew Heath, CEO]

Let me answer your second part of your question first, Mike, I'll pass it to Derek. I mean I wouldn't get carried away in terms of the amount of engineering time that we're having to spend on supply chain. I mean it's an irritant, but it's not that material. So in the scheme of things, the growth to 8.4% of revenue and R&D spend. The vast majority of that is a really meaningful increase in our investments for future growth.

[Derek Harding, CFO]

And on the overhead cost, Mike, it's fair point. If you actually look at the H1, we said in the prior year, you'll see there was £2.2 million cost left over [indiscernible] everything deleted, the profit is £4.8 million for the full year last year. We'll be slightly careful. But if you categorize that all this is part of head office costs, if you like, because a lot of it relates to shared services and shared capability about sort of IT cybersecurity, some of those sorts of skill sets where we hold stronger skill set at the center and then allocate it to the platform in businesses so we don't end up duplicating the cost.

Nevertheless, there is opportunity to reduce that central cost and we would aim to do it. But what we -- as I say, what we need to do is look at the cost base across the entire group, and it's a question of where it fits best and through the Spectris Business System through some of the investments that we're making in terms of our ERP improvement and some of our sort of process improvements over time, we'll see that come down. But it will all get captured in the overall margin of the group, which, of course, we still believe we can improve year-on-year, and that remains the case for the remainder of this year.

[Operator]

We have no further questions. I'll now hand back over to Andrew Heath for closing remarks.

[Andrew Heath, CEO]

All right. Thank you very much. And again, thank you, everyone, for joining the call and for your questions. By way of closing, I just want to make a few points. As I said, I'm very pleased that we did a good financial performance in the first half of this year. We absolutely are confident in delivering high single-digit organic growth and margin expansion for the full year.

I'm looking forward to talking to you at our Capital Markets Day in October and talk about really the next phase of our development. We are a business that has a clear purpose with sustainability at its core. As I've said earlier, we're a more focused, higher quality, more profitable, less cyclical, more resilient business as a consequence of all the work we've done through executing our strategy for profitable growth.

We're now very much positioned in diverse, attractive markets with structural and sustainable growth drivers. We've got an excellent balance sheet that supports both our ambitions to invest organically, improving our internal efficiency as well as investing in growth through accelerating our spend in R&D as well as alongside that being to compound growth through disciplined M&A. And as such, I think we're in a strong position to drive our ambition to be a leading sustainable business.

So with that, thank you very much, again, for joining and look forward to catching up with you all soon. Thank you very much.