Spectris PLC Acquisition of Engineering Seismology Group Call
Dec 11, 2014 AM EST
SXS.L - Spectris PLC
Spectris PLC Acquisition of Engineering Seismology Group Call
Dec 11, 2014 / 08:00AM GMT
==============================
Corporate Participants
==============================
* John O'Higgins
Spectris plc - Chief Executive
* Clive Watson
Spectris plc - Group Finance Director
==============================
Conference Call Participants
==============================
* Stephen Swanton
Redburn Partners - Analyst
* Michael Blogg
Investec - Analyst
* Harry Philips
Canaccord Genuity - Analyst
* Will Wyman
Goldman Sachs - Analyst
==============================
Presentation
------------------------------
Operator [1]
------------------------------
Hello and welcome to today's Spectris announcement of the acquisition of Engineering Seismology Group. (Operator Instructions). Just to remind you, this call is being recorded. Today I'm pleased to present John O'Higgins, Chief Executive, and Clive Watson, Group Finance Director. Gentlemen, please begin.
------------------------------
John O'Higgins, Spectris plc - Chief Executive [2]
------------------------------
Yes, thank you Hugh. Good morning ladies and gentlemen. John O'Higgins here and Clive is with me. Thanks very much for joining us today to discuss this morning's announcement of Engineering Seismology Group, or ESG, as we now affectionately call it. You'll have seen a copy of our release already and Clive and I will take your questions afterwards. I'd just like to make a couple of opening comments by way of background around the deal.
So, as you know, one of our strategic priorities has always been to increase our presence in key strategic growth areas, organically as well as via acquisitions, and we're very pleased to announce today an important new growth area that Spectris will now be participating in.
The acquisition gains us access to the market for the provision of microseismic monitoring equipment and analysis solutions, a market that's primarily serving oil and gas and mining sectors as well as other industrial markets.
ESG is involved in oil and gas and mining production activity; they're not involved at the exploration stage. The deployment of their new productivity-enhancing technology is growing rapidly in these sectors as customers seek to improve their ROI. And microseismic monitoring plays an important role here, helping the operators to optimize production, to decrease cost, to improve safety and to mitigate risks. It's a relatively new technology and has yet to be fully adapted across the various sectors.
ESG is well-known for its technology leadership in the market, with a highly qualified and experienced management and professional staff. It has some excellent customer relationships and has been growing very rapidly.
ESG will be a standalone platform within our test and measurement segment due to the specific nature of its target industries. However, it will benefit considerably from sharing technologies in core sensors, data acquisition hardware and analytical software with the two other businesses in the segment. So the core technologies across the test and measurement segment are identical.
It gives us access to a new high-growth productivity-enhancing technology and has the potential for additional bolt-on acquisitions to strengthen its market position and accelerate growth.
We're delighted that three founders of the company have elected to remain with ESG and they will play an important role in the next stage of the Company's growth.
So, with that, I'd like to pass over the floor to you for any questions you might have. Thank you.
==============================
Questions and Answers
------------------------------
Operator [1]
------------------------------
(Operator Instructions). Stephen Swanton, Redburn Partners.
------------------------------
Stephen Swanton, Redburn Partners - Analyst [2]
------------------------------
Morning John. Morning Clive.
------------------------------
John O'Higgins, Spectris plc - Chief Executive [3]
------------------------------
Morning Stephen.
------------------------------
Stephen Swanton, Redburn Partners - Analyst [4]
------------------------------
I guess my obvious question is just what you can tell us around the financials of the company in terms of the revenue and margins.
And I guess related to that, to get a sense of how new the business is or how the technology is developing, some sort of sense of the recent growth rates and also the contingent or potential size and contingent consideration related to that. I've got one other question after that, if that's okay.
------------------------------
Clive Watson, Spectris plc - Group Finance Director [5]
------------------------------
I'll accept that. Thank you. We're bound by confidentiality in terms of what we can disclose. What we can say in relation to the multiples is that the multiple in the top line is in line with our normal, so about 2 times is roughly what we've been paying in the past. And the multiples on the EBITDA are at the low end of the normal range that we pay. So you can expect a return on sales in the mid 20s, so it should be quite accretive to our test and measurement segment.
With regard to growth rate, on a through-cycle basis it's been growing very strongly. It's got a long history of trading and has been double-digit. Looking forward, it's very difficult to predict the growth rate given the current environment and so on. But, as John said, it is dependent on production. There's lots of technology, which John will talk to you about a bit later, no doubt, which gives us some confidence that it should be able to grow. And certainly through the longer term we expect some growth.
------------------------------
Stephen Swanton, Redburn Partners - Analyst [6]
------------------------------
Great. Thank you. And, sorry, just the follow-up question was why this going into the test and measurement business? Because I looked at it first off and thought -- I know it's very different to Servomex, for example, but just some of the end markets are maybe a little bit similar, and the sensing technology as well. And I guess because it's a standalone business, is the -- presumably -- do you see at the moment other things gathered into it to give it more scale or --
------------------------------
John O'Higgins, Spectris plc - Chief Executive [7]
------------------------------
Yes. Yes, that's a very good question, Stephen, and I think it wasn't obvious to us either which segment it really fit in. From a technology, product and software point of view, it looks very similar to our two test and measurement businesses, as I said in my opening remarks.
They have some very rugged sensors, accelerometers and pressure sensors which are used for seismic detection and so they have a portfolio of sensors. They have data acquisition hardware, which both of our existing companies in test and measurement are experts in. So high channel count, high -- not necessarily high frequency, but certainly high data transfer and capture. And then they -- really the know-how is captured in their analytical software, so they've got quite a suite of software products, which they sell standalone, but they also sell as a service depending on the customer requirement.
So from that point of view it looks very similar to our test and measurement companies. It also very much fits in with the strategy in test and management, which, as you know, has been R&D-bound historically. But actually both of the companies in test and measurement have been making inroads into non-R&D markets of late into the environmental monitoring, into the consumer electronics, into the power train and electric market. So this, in a way you can look on it as another such strand into the production area, into process monitoring and process productivity.
But having said that, you're absolutely right. It could equally have been put into something like inline instrumentation. But I don't think that's really, for us, the point. The point is more it's an exciting new technology. It's a fairly low adoption rate still across its end markets. It does have, certainly through cycle, terrific growth potential. And as you rightly hinted, Stephen, we do see acquisition growth potential as well. And that's very much our intention here, and also the reason why we thought it sensible to make ESG, although it's relatively small, a standalone business, so I think to give our, a sense that our ambition here is to grow this into a sizable platform.
------------------------------
Stephen Swanton, Redburn Partners - Analyst [8]
------------------------------
Great. Thank you very much.
------------------------------
John O'Higgins, Spectris plc - Chief Executive [9]
------------------------------
Thanks Stephen.
------------------------------
Operator [10]
------------------------------
Michael Blogg, Investec.
------------------------------
Michael Blogg, Investec - Analyst [11]
------------------------------
Good morning gentlemen.
------------------------------
John O'Higgins, Spectris plc - Chief Executive [12]
------------------------------
Hi Mike.
------------------------------
Michael Blogg, Investec - Analyst [13]
------------------------------
I presume you're preparing for the fracking protesters lining up outside. Can I ask you a couple of questions? The first is about the timing. Have the changes in the end markets and the uncertainties made the vendors more willing to sell, the first question?
Secondly, can you tell us a little bit about the business model in the sense of how much aftermarket revenue you expect as compared with original fit? I presume once the sensors are down the hole, you don't get them back. And that includes some commentary about the analytical solutions as well as the sensors, please.
------------------------------
John O'Higgins, Spectris plc - Chief Executive [14]
------------------------------
So the first question, Michael, is that we've been engaged with the owners of this business for some time and certainly prior to the current oil price fluctuations. So certainly their sales decision was in no way driven by the current oil price weakness.
And when I answer I'm not going to speculate here on an oil price this morning with you, but we're taking a long-term view on this. It's an exciting technology. It's a technology which has, as I said, relatively low penetration in the market, both in the oil and gas market as well as in the mining market. And so looking through current weakness, which I think we've got to do in all of our businesses, we think it represents a great opportunity and a good investment.
In terms of the service content, so they don't -- it is a service business, Michael. It's probably most similar to our environmental monitoring business in Bruel & Kjaer Sound & Vibration in the sense that the equipment is reusable. The equipment is not always sold to the customer. The customer might buy them and in some cases they do, but more commonly, particularly in the production side of oil and gas, the customer buys the result. The customer is buying the analytics and buying the output of the analysis rather than the sensors, the hardware, the software etc. And so from that point of view you can see it as really a service business as opposed to an equipment business.
And you wanted some commentary on the hardware itself. And these are down-hole sensors and they're ruggedized accelerometers and pressure transducers, so they're measuring microseismic activity underground. Typically there will be an array of sensors used in a mine or in an oil and gas development. And then they have their own in-house-developed data acquisition hardware and a very ruggedized and, again, well-accepted product in their market. And then their software and application expertise is all in house.
------------------------------
Michael Blogg, Investec - Analyst [15]
------------------------------
I see. I'm intrigued by the comment that the technology is not widely adopted at this stage. I'm not quite sure what oil service companies do at the moment, but presumably -- can you quantify its market position, market share or anything like that?
------------------------------
John O'Higgins, Spectris plc - Chief Executive [16]
------------------------------
I'm not sure that we're in a position to do that. But it's one of two or three major players in the microseismic area.
------------------------------
Michael Blogg, Investec - Analyst [17]
------------------------------
Okay, which brings me to my final question, I guess, which is have you already identified potential bolt-ons to it?
------------------------------
John O'Higgins, Spectris plc - Chief Executive [18]
------------------------------
I think that again would be premature, Michael, to give you the impression that we're already moving on other things. But we certainly have done our homework on the market and I think understand where the opportunities are. But that will be something that we will refine as we go along.
------------------------------
Michael Blogg, Investec - Analyst [19]
------------------------------
Okay. Thanks very much.
------------------------------
John O'Higgins, Spectris plc - Chief Executive [20]
------------------------------
Thanks Michael.
------------------------------
Operator [21]
------------------------------
Harry Philips, Canaccord.
------------------------------
Harry Philips, Canaccord Genuity - Analyst [22]
------------------------------
Good morning everyone. A couple of questions please. In terms of following on from Michael's question about where you might go next, would you want to do more of the same in terms of acquisition and concentrate its market position or would you want a broader bundle of products?
And then secondly, in the context of your broader M&A pipeline, we've seen a nice pick up in the last few months. Can you just update us on the further opportunities and where they might be, please?
------------------------------
John O'Higgins, Spectris plc - Chief Executive [23]
------------------------------
Yes, hi Harry. So the first question again, I wouldn't speculate at this stage. We simply don't know. But certainly our view, as you know, Harry, is generally to go broader in these markets, that we'd like to look for applications that build a portfolio of services and solutions rather than rolling up markets. So in terms of our current view, it's very much the former.
You're absolutely right that we've had a relatively busy year this year on the acquisition front, certainly compared to 2012 and 2013, something that we're very happy about. Our pipeline is still in reasonably good shape. And this is now acquisition number six so far this year. But again, I wouldn't speculate on timing of further deals at this stage. But the portfolio -- the pipeline is still in reasonably good shape.
I would say that we have seen some interesting multiples being paid recently on some larger assets out there in the market. So I certainly have some concerns around pricing at the larger end of the spectrum we look at, whereas the smaller acquisitions, the bolt-on acquisitions are certainly more actionable.
------------------------------
Harry Philips, Canaccord Genuity - Analyst [24]
------------------------------
Fantastic. Thanks a lot.
------------------------------
John O'Higgins, Spectris plc - Chief Executive [25]
------------------------------
Thanks, Harry.
------------------------------
Operator [26]
------------------------------
[Chris Fairbourne], Goldman Sachs.
------------------------------
Will Wyman, Goldman Sachs - Analyst [27]
------------------------------
Morning, John. It's Will Wyman at Goldman Sachs.
------------------------------
John O'Higgins, Spectris plc - Chief Executive [28]
------------------------------
Hello.
------------------------------
Will Wyman, Goldman Sachs - Analyst [29]
------------------------------
Could you give us a sense of who the main customers are? To what extent are the big oil service majors customers or do they have competing technologies?
------------------------------
John O'Higgins, Spectris plc - Chief Executive [30]
------------------------------
No, the customers are the production companies, the leaseholders, the oil and gas producers. The major oil services companies do have some competing technologies. Some of them do. Not all of them do. But they are competitors. But then they're bundlers of a suite of services and products. ESG is very focused on their niche, on their application, as we find in all specialist businesses. We compete with integrated players across all of our segments. But our businesses tend to be very focused on their technology, on their applications and so forth.
So in that sense it's very much in line with the business model, the sort of businesses that Spectris owns that are high barriers to entry, high technology, great know-how, very focused on customers and outcomes for customers.
------------------------------
Will Wyman, Goldman Sachs - Analyst [31]
------------------------------
How do you define that niche compared to what a Halliburton or a Schlumberger has in that area? How is it differentiated?
------------------------------
John O'Higgins, Spectris plc - Chief Executive [32]
------------------------------
Well, I'm not sure you can compare. We're not saying we're going to compete with Schlumberger overall. Schlumberger, as you know, has a huge portfolio of equipment, of services and so on for oil and gas operators. They do have an offering in microseismic. But, again, probably as in most cases where we compete with very highly integrated players, they are less focused on specific areas of their portfolio than we are and certainly than ESG are in this case.
------------------------------
Will Wyman, Goldman Sachs - Analyst [33]
------------------------------
Okay. Thank you.
------------------------------
Operator [34]
------------------------------
(Operator Instructions). Gentlemen, as there seem to be no further questions at this stage, may I please pass it back to you for any closing comments?
------------------------------
John O'Higgins, Spectris plc - Chief Executive [35]
------------------------------
Yes, thank you Hugh. Yes. So thanks very much again for joining us today. Just to conclude by saying that we are very excited by today's news and that we have in ESG a company which provides tremendous growth opportunities, which we believe will be accelerated by ESG joining the Spectris family. The acquisition's a demonstration of our ability to expand into new technology areas, with high barriers to entry in niche markets that provide additional sources of growth. The acquisition also fits the Spectris financial profile, of attractive margins, strong cash generation and return on invested capital.
Thank you very much again for joining us. As disclosed in today's statement, we will be publishing a trading update for the year ending December 31 on Friday January 16, 2015. And we look forward to speaking with you again then and in the meantime wish you all a very happy holidays and happy New Year. Thank you.
------------------------------
Operator [36]
------------------------------
This now concludes the call. Thank you all very much for attending. You may now disconnect.
------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the
Transcript has been published in near real-time by an experienced
professional transcriber. While the Preliminary Transcript is highly
accurate, it has not been edited to ensure the entire transcription
represents a verbatim report of the call.
EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional
editors have listened to the event a second time to confirm that the
content of the call has been transcribed accurately and in full.
------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other
information on this web site without obligation to notify any person of
such changes.
In the conference calls upon which Event Transcripts are based, companies
may make projections or other forward-looking statements regarding a variety
of items. Such forward-looking statements are based upon current
expectations and involve risks and uncertainties. Actual results may differ
materially from those stated in any forward-looking statement based on a
number of important factors and risks, which are more specifically
identified in the companies' most recent SEC filings. Although the companies
may indicate and believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate or
incorrect and, therefore, there can be no assurance that the results
contemplated in the forward-looking statements will be realized.
THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2018 Thomson Reuters. All Rights Reserved.
------------------------------