Okay, good morning and welcome to Oxford Instruments' Half-Year Results. In terms of the agenda for today, I'll take you through the highlights for the half-year and then update you on our progress with our Horizon Strategy. I'll then hand over to Gavin, who will take you through the financial results before returning for an operational review and then closing with our outlook. Moving straight to the highlights. We've made good progress in the early stages of implementing the Horizon Strategy in line with our plans. We have continued our proactive approach to portfolio management, successfully completing the disposal of the industrial analysis business in July. Now, as a more focused nanotechnology group, we have reorganized our structure in line with our chosen customer segments and applications.
In addition to our progress with Horizon, we have maintained our focus on the near-term delivery with reported revenue in line with the previous year, adjusted profit before tax is up 24.4%, and adjusted operating margin up 180 basis points, both supported by a currency tailwind. Reported orders for the group were up 6%, with increased demand for our own products and related services being partially offset by lower orders in our U.S. healthcare business. The order book, representing orders for future delivery, increased by 11.8% at constant currency since the year-end and is up 3.3% on the prior half-year. The sale of industrial analysis has strengthened the balance sheet, significantly reducing net debt. I'd now like to remind you of the key highlights regarding our Horizon Strategy that I announced back in June.
Horizon is a transformational program focused around two key anchors of repositioning the group for long-term sustainable growth and margin improvement, building on our world-class nanotechnology expertise. A key part of Horizon is our focus on those market segments where nanotechnology provides long-term growth drivers for our customers and also where we have the opportunity to achieve or retain market leadership. We provide value for our customers by offering products that enable them to be successful, tailoring our solutions and services to help them within fundamental research, applied R&D, and commercial end markets. Our customers and their applications are at the center of our focus, and I have previously outlined the key capabilities of market intimacy, innovation and product development, customer support, and operational excellence that we are embedding as our operating model across our organization.
While it is still early in our Horizon journey, we've made good progress in a number of areas in support of our strategy. In the past 18 months, we have undertaken significant management of the portfolio, and in July, we successfully completed the sale of industrial analysis, resulting in a more synergistic and focused group. We are building the management, leadership, and core capabilities across the group to enable us to deliver the Horizon Strategy. As an indication of the top 40 leaders across the group, 37% are new appointments since September 2016. We have specifically targeted leaders from a range of different markets and disciplines to build on our existing capabilities. Another core part of Horizon is the transition of the group from a product and technique focus to being customer application and market focused.
In line with this, today, we are announcing our new structure for the group. Our new structure aligns our business around our chosen market segments and our customers' applications. It will help us build stronger links to our customers and will drive further synergies across and within our businesses. We have three sectors. The materials and characterization sector uses high-technology products that enable the fabrication and characterization of materials and devices down to the atomic scale and represents 38% of group revenue. Research and discovery provides enhanced solutions that create unique environments and enable measurements down to the molecular and atomic level, with 36% of group revenue. Our service and healthcare sector provides customer support related to our own products and the service sale and rental of third-party healthcare imaging systems and represents 26% of our group revenue.
Looking at our market segments, our new structure is aligned with serving our core end markets in healthcare and life science, semiconductor and communications, quantum technology, environment, energy, advanced materials, and research and fundamental science. Now, within each of these segments, we have identified and are actively focusing on a number of niche areas. As a group, 31% of our revenue comes from healthcare and life science, 30% from semiconductor and communications, with 20% from the advanced materials segment. Research into fundamental and basic science represents 2% of group revenue. Materials and characterization is strongly dominated by customers in semiconductor and communications and advanced materials applications, whereas our research and discovery sector has an increased focus on healthcare and life science applications with a stronger contribution from quantum technologies.
In terms of funding, materials and characterization has a high proportion of commercial customers, representing 48% of revenue from the sector, whereas research and discovery has a significantly higher proportion of customers who are academic or government-funded, representing 72% of revenue from the sector. As a group, and including our service and healthcare sector, 45% of our revenue in the period was from commercial organizations. Now, I remain excited by the potential of the Horizon Strategy and believe that we are making good progress. I'll now hand over to Gavin, who will take us through the financial results.
Thanks, Ian. Good morning, everyone. The sale of the industrial analysis business was completed in July. Numbers I'm discussing today are on a continuing basis, with IA numbers included in discontinued operations for this financial year and the comparator period. Starting with the income statement, reported revenue was broadly in line against last year at GBP 132.1 million. On a constant currency basis, revenue fell by 4.5%. Adjusted operating profit grew by 14.6% to GBP 18.8 million, with adjusted operating margin rising by 180 basis points to 14.2%, primarily from expected currency benefits. On a constant currency basis, adjusted operating profit fell by 12.2%. Lower debt arising from business disposals and a reduction in pension financing charges led to a fall in net financing cost to GBP 2.5 million. Adjusted profit before tax grew by 24.4% to GBP 16.3 million, with margin rising by 240 basis points to 12.3%.
Amortization of acquired intangibles of GBP 5.6 million is a non-cash charge. Other adjusting items include GBP 600,000 of costs, which half relates to restructuring costs with our Scienta Omicron joint venture. The mark-to-market gain in respect of derivative financial instruments was GBP 2.6 million. This reflects a movement from a net fair value liability to a small net asset position on currency derivatives that are hedging future transactional currency exposures for the group compared to the previous year-end. The improvement in profit before tax to GBP 12.7 million led to a rise of just under 24% in adjusted EPS. The board has decided to hold the interim dividend at last year's level of 3.7 pence. As Ian has mentioned, following the sale of industrial analysis, we have reorganized our reporting sectors. Asylum Research, and Plasma Technology constitute the materials and characterization sector.
All Andor Technology, NanoScience, and X-ray Technology are included within research and discovery, as well as our share of Scienta Omicron. Our service and healthcare sector remains unchanged, incorporating the results from our healthcare businesses along with the service revenue and profit from businesses in the other two sectors. The previous nanotechnology tool sector was comprised of the businesses now within materials and characterization and research and discovery, with the addition of magnetic resonance and X-ray Technology, both of which were previously part of our industrial products sector. For this half-year, these two businesses would have accounted for approximately 10% of total sector revenue and 6% of total adjusted operating profit under the old nanotechnology tools sector.
Moving towards revenue by sector, reported revenue from materials and characterization grew by 10.6%, 6.6% at constant currency, with particular strong growth driven by demand for semiconductor and advanced materials processing solutions and scanning probe microscopes. A decline in reported revenue of 13.4%, 17.5% in constant currency for research and discovery was attributable to lower first-half microscopy revenue, some of which is expected to unwind in the second half of the year, and an increased proportion of customized magnet and cryogenic systems with longer production lead times. Increased sales of services for our own products drove reported revenue growth of 7.6% and constant currency growth of 2.5%. Moving to revenue by territory, in Europe, we have seen constant currency revenue growth of 4.6%, driven by strong demand for our plasma process products, in addition to increased sales of our microanalysis systems.
Orders in the region are up 5.5% at constant currency. In North America, the decline of 10% at constant currency is largely due to a weak first half for our optical microscopy systems, as well as a reduction in revenue for OI Healthcare due to lower equipment sales against last year. In North America, if we exclude our U.S. healthcare business, reported order book growth is 11.4% and 5.7% at constant currency. Following several periods of good growth in Asia, constant currency revenue declined by just under 2%. Orders for the region are up 9% against last year at constant currency, with first-half shipment phasing negatively impacted by a change in process within China, the issuance of duty-free certificates. The order book has grown by 3.3% since last year at constant currency to GBP 141.8 million.
Constant currency growth was just under 20% for materials and characterization, with strong growth for our scanning probe microscopes and semiconductor and advanced materials processing solutions. All constituent businesses within research and discovery grew their order book, leading to constant currency growth of 10%. A decline in the sale of used imaging equipment within our U.S. healthcare business led to an order book decline of 31.5% at constant currency within the service and healthcare sector. If we exclude U.S. healthcare, we would have seen a rise in total order book growth from 3.3% to 13.9% against last year. Looking at adjusted operating profit by sector, constant currency adjusted operating profit in materials and characterization grew by 21.4%. The operating margin increased to 14.4%, assisted by currency benefits. The decline in underlying adjusted operating profit within research and discovery was principally due to two factors.
The first was the impact from lower first-half microscopy sales, some of which are expected to unwind in the second half. Second, the longer production lead times from our customized magnet and cryogenic systems, combined with their margins being lower than the business average due to additional production costs. As a result, we saw a corresponding decline in margin to 8.8% for the sector. Strong demand for sales of our services of our own products led to a 34.6% rise in constant currency operating profit. Turning to the cash flow, the group made an adjusted EBITDA of GBP 22.8 million, with an adjusted operating cash flow of GBP 4.1 million. The half-year working capital cycle resulted in an outflow of GBP 15 million, the most significant movements being an increase in inventories of GBP 6.6 million and a decrease in payables of GBP 9.2 million.
The increase in inventories reflects an increase in work in progress and inventory of customized magnets and cryogenic systems. The fall in payables is due to inventory building during the last quarter of last year to support order growth for our semiconductor and material processing solutions, as well as the cash settlement of currency hedging contracts. The pension deficit fell from GBP 25 million last year to GBP 22.5 million due largely to deficit recovery payments. The completion of the sale of industrial analysis in July resulted in net proceeds of GBP 73 million. The shareholders of Scienta Omicron agreed to a capital injection to strengthen the balance sheet of the joint venture and ensure future liquidity in support of the business strategy. Our share was GBP 2.1 million and was paid in September. Net debt fell to GBP 45.5 million.
This represents a net debt to EBITDA leverage of 0.9 times, well within our covenant of three times. Just looking at currency exposure for the group, the business has a large exposure to foreign currency fluctuations facing translational and transactional currency exposures. Our total currency exposure is detailed on this chart. For the half-year in sterling equivalent, we have net exposures of $19 million, EUR 14.9 million, and JPY 7.2 million. As many of the manufacturing sites in the U.K., we have a short sterling exposure of GBP 18.8 million. The group maintains a hedging program against its net transactional exposure using internal projections of currency trading transactions expected to arise over a period extending over the next 18 months. To finalize the key financial highlights from the first half, we've seen good reported and constant currency orders growth in orders and growth in order book.
Adjusted operating margin has risen to 14.2%, primarily through expected currency benefits. Continuing adjusted basic EPS grew by just under 24%. Finally, the proceeds from the sale of industrial analysis has left us with a strong balance sheet, with net debt down to GBP 45.5 million. With that, I'll hand back to Ian.
Thank you, Gavin. Moving on to look at our operational performance in the half-year. The materials and characterization sector produces high-technology products, enabling the fabrication and characterization of materials and devices down to the atomic scale. Our products are used across a broad range of academic and applied R&D activities and commercial-end applications. For example, those undertaking work in semiconductors, photonic devices, metals, and polymers who explore fundamental properties through to quality assurance and quality control.
We continue to aid the fundamental science in these areas and facilitate the development of new devices, as well as the next generation of higher-functioning, stronger, and lighter materials. The sector has delivered strong growth and improved profitability, driven by the successful uptake of newly launched products and increased focus on customer applications. Plasma Technology had a strong first half, driven by increased demand for our semiconductor processing solutions, combined with operational improvements. We have seen growth in academic research and specialized production for a range of applications, including plastic electronics, sensors, and quantum devices. In particular, we have seen increased demand in optoelectronics, where customers are developing lasers and photonic devices required for the increased device connectivity and usage, and the development and ramp-up to enable 5G networking.
Our expertise in advanced processing of compound semiconductors, which form the active elements of these structures, provides the foundation for further growth within specialized production markets. Asylum Research delivered strong order growth, driven by the success of recently launched products that have addressed specific customer challenges in advanced materials and life science applications. The recently launched Cypher VRS is providing new insights to researchers exploring disease mechanisms and drug discovery. It achieves this by enabling the observation of biological interactions in real time. For example, in this image of DNA strands, the researcher has added enzymes, which can be seen as the bright spots in the image, to specifically cut the DNA at certain locations. Now, whilst a still image like this can be useful, the Cypher VRS enables you to observe the dynamic interaction taking place at video rates.
You can clearly observe the enzyme locate, attach, and then eventually cut the DNA at the desired location on the strand. We've already sold a number of these systems to leading researchers in this and related fields, with increasing interest from a broad range of life science and advanced materials applications where understanding dynamic processes is of great interest. NanoAnalysis delivered steady growth in both orders and revenue reported by two major product launches earlier in the year. Both provide enhanced capabilities and significant productivity improvements for customers. For example, Symmetry, our material structure analyzer, is providing major productivity improvements to customers researching and manufacturing semiconductors and advanced materials. Previously, customers had to choose between two distinct instruments: one with higher sensitivity that acquires higher quality data, or one that images at higher speed.
Now, Symmetry removes the need for the customer to make a choice by providing superior quality data at significantly faster speeds without compromise. This is proving particularly attractive for customers in automotive, aerospace, and steel markets. Now, moving to research and discovery. This sector provides advanced solutions that create unique environments and enable measurements down to the molecular and atomic level, used in fundamental and applied research through to some commercial applications. Revenue and profitability were down in the period due to microscopy systems and longer production lead times, as mentioned previously by Gavin. However, the sector had order growth, driven in part by increased quantum-related research funding. Andor Technology delivered a softer performance in the half-year due to lower sales of optical microscopy systems. This was due to the transitioning from third-party systems to our own in-house portfolio.
Increased orders at the back end of the half-year and the launch of the complementary and lower-priced Dragonfly 200 system provide a positive momentum going into the second half of the year. We saw growth from Imaris, our image analysis software, which is enabling customers in cell biology and neuroscience to visualize and interpret the huge data sets that are now being acquired by modern instrumentation. We sell Imaris for use with our own and also third-party providers of optical microscopy systems. We also saw improved performance from our range of market-leading scientific cameras used in astronomy. The first-ever observation of the violent collision between two neutron stars, identified by gravitational waves, which you may have heard about recently on the news, utilized over 25 of our deep-cooled scientific cameras at various telescope locations around the world.
We have merged our NanoScience and magnetic resonance businesses, providing operational efficiencies and broader capabilities to drive future growth. NanoScience has seen strong order growth, with its cryogenic and magnetic environments being critical for the understanding and exploitation of quantum technology in areas such as quantum information processing and quantum sensors, where there are significant increases in government and corporate funding. Performance in the first half was impacted by an increased volume of longer production lead time and lower margin systems. We are at the early stages of addressing this by moving towards a greater proportion of revenue from more standardized systems. Magnetic resonance has seen strong order growth for both academic and industrial customers, where our improved benchtop performance is providing a practical alternative to wet chemistry and higher-cost instruments for food and chemical analysis.
X-ray Technology had growth in healthcare applications, more than offset by decline from industrial customers. Scienta Omicron has shown continued positive momentum, with year-on-year improvement in its operational and financial performance. Moving on to the service and healthcare sector. This sector comprises the service contracts, billable repairs, training, and support services related to our own products under the OI Service brand, and the sale, service, and rental of refurbished third-party MRI and CT scanners under the OI Healthcare brand. Reported revenue increased in the half-year, driven predominantly by strong demand for OI Service offerings. Increased orders from OI Service were more than offset by reduced orders for refurbished equipment sales within OI Healthcare due to a combination of sales timing and previously reported structural changes in the market. Within OI Service, we continue to deliver enhanced support services tailored to meet our customers' specific needs.
Within OI healthcare, the first half of the year has largely been focused on management restructuring, with the recruitment of talent from a range of disciplines and the continuation of our strategy to move the business towards a higher proportion of service contracts relative to the sale of refurbished systems. Moving on to our summary and outlook. I'm excited by the potential of the Horizon Strategy. Whilst we're at the start of the business transformation, I'm pleased with our progress. Our new reporting structure enhances our focus on the growth drivers of our markets and the evolving demands of our customers, and will more effectively drive cross-business synergies. Our full-year expectations remain unchanged, supported by growth in constant currency orders and order book, the timing of introduction of new products, our normal second half seasonal bias, and favorable currency effects.
I'm encouraged by the progress that we've made in the early stages of implementing the Horizon Strategy, providing confidence in the long-term delivery of sustainable revenue growth and margin improvement. I thank you for your attention and open the floor to any questions.
Thanks, morning. It's Henry Carver from Peel Hunt. Just a couple of questions. First of all, the sort of the bigger picture, if you like, the shift from, or towards, from sort of product expertise to the wider offering. What sort of specific things are you needing to invest in the business to achieve that? Secondly, just on the OI healthcare business, what percentage of sales is from selling refurbished machines at the moment?
Okay. I'll take the first question. I'll let Gavin take the second part of that, if I may. The move from a product and technique focus is much about how we organize our businesses. It's about personalization of our product to specific customers and their needs. Our businesses that do this well are more profitable businesses. It will drive the way we think about and invest in product development, all the way through to the way that we service our customers and the way we go about our sales practices. Gavin, do you want to pick up the second?
The total revenue from refurbished systems was around $2.5 million or so for the first half. It was a lot lower than it was in a comparative period.
There was a question, Michael.
Thank you.
Morning. Michael Blogg from Investec. Could I just go back to one of Gavin's slides, the analysis of the movement in profits in the segments between organic or underlying and FX? Can I just ask, the adjustment on both material characterization and research and discovery for FX, does that back out both transactional and translational, or is it just translation?
That will back out transactional and translational. I think it is worth saying where we've seen pricing pressure from customers to reduce prices due to the devaluation of sterling, that falls in the underlying movement, not in FX. It does tend to exaggerate the reduction in constant currency.
Okay. My other two questions, one is, where precisely were the longer lead times, production lead times, and is that resolvable?
Those particular challenges are within our NanoScience business, where we often take and have in the past taken large systems that are more bespoke or specialized. That is something that, as I mentioned, we are looking to move the business to more standardized products, which will over time move us away from that particular challenge.
On that issue, I know some companies actually look forward to a bit of customization because they can recoup greater margins from that sort of business than they can from standard product sales. Is there a sort of halfway house where you have basically a standard platform, which you then customize at a late stage?
is exactly the way we'd like to move. You get some gearing from the platform development, and then you look to optimize and personalize the solution for the customer. That is what we do in our more profitable businesses.
Thanks.
Morning. Richard Page from Barclays. Looking at that slide again on research and discovery, the nearly $5 million underlying decline in profit. Are you able to give us a sort of idea of the quantum of the two effects you spoke about, the microscopy and the longer lead times?
Gavin, do you want to pick that one, the quantum of the?
Yeah. It's fairly well split between the NanoScience and the Andor businesses. As we've talked about, NanoScience was a profitable business in the first half last year and was loss-making, small loss in the first half this year, and that led to a large part of the decline. That is, Ian has talked about, will take longer to turn around. The Andor business was more about lower revenue dropping through to profit in the first half, which we expect some to unwind.
Thank you. You also mentioned in the statement the Dragonfly 200 release is now out. Is that mean you've got the full suite of products now in the market to replace this third-party?
We were covering the Dragonfly 500, covered the very top end, and was attractive to many customers. Dragonfly 200 is very much targeted towards the mid-end customer base, and we will always continue to develop and improve our portfolio moving forward.
Thank you.
David Lark from Numis. You put as more money into Omicron, you're obviously confident that's going to turn into the black. Can you give us a sort of a feel for when you think that's going to be? Start with that.
Okay. Yes, Omicron is, as I mentioned, operational, and financial performance is improving year on year. We see a longer-term plan of that continuing to grow. It is in the black now in half-year. We see that as a good investment to support our shareholding in that business. We are fully supportive of the strategy of continuing to improve that business.
Just in terms of your new divisional sort of breakdown, I mean, it's obviously shown in the first half quite a lot of volatility as you'd expect with these sort of capital equipment-type businesses. Should we go forward expect that volatility to continue? Do you think that's a bit sort of unusual in the first half?
I'm not quite sure what you mean by volatility. We always have a seasonal first half, second half waiting. We've seen good order growth across the business in all of the divisions in the materials and characterization and research and discovery. Certainly, research and discovery has longer lead time production items in NanoScience and this issue that we're resolving within our microscopy systems. The ongoing volatility in the marketplace, we're not necessarily seeing huge struggles with that at the moment.
Morning, Chris from Investec. Kind of maybe two quick questions to finish. Firstly, just around FX, maybe you could just remind us what the second half looks like in terms of a benefit, and then into 2019, what you think things look like at the moment for yourselves. Second question around order books and the first half delivery. Is there anything particularly lumpy in there that we should know about now that in a year's time you might kind of say, "Well, actually, that was driven by this particular large contract," particularly within around the semis market? Is there anything in there that you want to pull out as a kind of big order or big lump of revenue?
Should I take the FX?
Yep.
We alluded to fully a FX benefit of being around GBP 7 million at the moment given FX rates. We expect that to be a little higher, probably a little closer to 10. I would expect some of the constant currency negative variances that we've seen in the first half will reduce for the full year.
Thank you.
The main lumpy order book we have is put up primarily in NanoScience. We do have a number of systems, as you correctly alluded to, in our Plasma Technology businesses, but that is their normal trading. A few of those items could move by a month or two depending on our customers' availability to take product. There is nothing significantly major that is a huge proportion of revenue at this stage.
Yep. Maybe final question. Obviously, at the moment, we're kind of living in a world where you haven't put any targets, and I'm not asking for targets, but as you look at your markets in aggregate over the next, say, three to five years in a kind of normal environment we're currently seeing, what kind of rates of growth should we be expecting from Oxford Instruments? Is it a 2% growth business, or is it a 10% growth business? It's quite hard for us to—we can read your peers what they're saying, but you're different from your peers in that by nature of your different end market segments. Where do you think you are at this stage? What is the ambition for the business? Is it a very low single-digit growth business, or is it a high single-digit growth business?
Our ambition will be to improve the business, returning it to sustainable revenue growth, and improve the margins over the medium term. We think up to the mid to high teens is possible. If we get our Horizon strategy right, I think we can move towards the upper bounds within our peer group for the growth. The drivers for our customers are there. The funding's there. If we deliver the Horizon strategy, I believe we'll return to a good level of growth. I'm not prepared today to actually put a number on it because I think there's a lot of moving parts in markets over that period.
Yeah. Thank you.
Any other questions? Okay. Thank you very much for your attention.