Smiths Group Plc · LSE:SMIN
Smiths — H1 2017 Earnings Presentation
43 slides from Smiths's earnings presentation, Mar 24, 2017
Slide 1: Interim results for the 6 months ended 31 January 2017
Smiths Group plc Interim results for the 6 months ended 31 January 2017 24.03.2017 Being the best at what we do www.smiths.com 1 Smiths Group plc Interim Results for 6 months ended 31 January 2017
Slide 2: Disclaimer
Disclaimer This document contains certain statements that are forward-looking statements. They appear in a number of places throughout this document and include statements regarding our intentions, beliefs or current expectations and those of our officers, directors and employees concerning, amongst
Slide 3: Agenda
Agenda H1 Business Review Andy Reynolds Smith H1 Financial Review Chris O’Shea Strategy update Andy Reynolds Smith Q&A 3 Smiths Group plc Interim Results for 6 months ended 31 January 2017
Slide 4: Solid progress on strategy actions
Solid progress on strategy actions One of the world’s leading technology companies Outperforming Achieving our chosen world-class markets competitiveness Excellence system Strong financial framework 4 Smiths Group plc Interim Results for 6 months ended 31 January 2017
Slide 5: H1 Business Review
H1 Business Review Andy Reynolds Smith Chief Executive 5 Smiths Group plc Interim Results for 6 months ended 31 January 2017
Slide 6: Smiths Group - Half year financial highlights
Smiths Group - Half year financial highlights • Group revenue slightly up on an underlying basis; up 18% on a reported basis • Group headline operating profit up 8% on an underlying basis; up 27% on a reported basis • Basic headline EPS up 30% • Cash conversion strong at 115%; FCF up 44% • Proposed
Slide 7: John Crane - Continuing resilience
John Crane - Continuing resilience • Ongoing challenges in global energy markets • Aftermarket revenue* up 3%; first-fit down 15% • Progress in non-Oil & Gas markets • R&D: condition monitoring field trials expanded • Disposal of Artificial Lift completed – significantly reducing upstream O&G exposu
Slide 8: Smiths Medical - Weaker revenue but profit up
Smiths Medical - Weaker revenue but profit up • Revenue decline driven by Vascular Access and Infusion Systems, growth in Vital Care • Margin expansion despite pricing pressure and revenue decline, driven by efficiency improvements • Asia market: − India +24% − South East Asia +8% − China -13% • R&D
Slide 9: Smiths Detection - Strong revenue and profit growth
Smiths Detection - Strong revenue and profit growth • Revenue growth driven primarily by Transportation, Military and Critical Infrastructure • Margin expansion due to higher sales, improved mix and efficiencies • Asia-Pacific +7% • R&D increased 70bps to 6.3% of sales • Morpho Detection expected to
Slide 10: Smiths Interconnect - Progress to sharpen focus
Smiths Interconnect - Progress to sharpen focus • Flat sales from Connectors, offset by lower sales from Microwave • Increased margin due to restructuring and procurement savings • Divisional reorganisation implemented • China +7% • Disposal of Power completed Headline revenue Headline Headline oper
Slide 11: Flex-Tek - In line with expectations
Flex-Tek - In line with expectations • Continued steady progress • Revenue growth in Construction and Heat Solutions, driven by US housing market • Margin expansion driven by efficiency savings Headline revenue Headline Headline operating operating profit profit margin £161m £30m 18.3% +2%* +7%* +70
Slide 12: H1 Financial Review
H1 Financial Review Chris O’Shea Chief Financial Officer 12 Smiths Group plc Interim Results for 6 months ended 31 January 2017
Slide 13: Financial performance
Financial performance Underlying1 Reported (£m) H1 2017 H1 2016 growth growth Headline revenue 1,616 1,372 0% +18% Headline operating profit 277 217 +8% +27% Headline operating margin 17.1% 15.8% +150 bps +130 bps Headline free cash flow 252 174 +44% ROCE 16.3% 15.4% +90 bps Headline EPS 45.7p 35.2p
Slide 14: Group headline revenue in line with prior year
Group headline revenue1 in line with prior year £m 236 (18) 33 (2) 4 (9) Underlying revenue growth Underlying revenue growth 1,616 1,608 John Crane -4% volume/mix +£26m Medical -2% price -£7m 1,372 Detection +12% other -£11m Interconnect -1% Group +£8m Flex-Tek +2% Group 0% H1 16 Revenue Currency tr
Slide 15: Headline profit increased by 8%
Headline profit1 increased by 8% Volume/mix: -£8m Volume/mix: +£16m Volume/mix: - Price: +£8m Price: -£4m Price: -£2m Costs: -£4m Cost savings: +£6m Cost savings: +£4m £m 18 4 2 38 7 (5) (4) Volume/mix: +£5m Volume/mix: +£1m Price: -£6m Price: +£1m Cost savings: +£8m Cost savings: +£2m 277 255 Opera
Slide 16: Headline free cash flow increased 44%
Headline free cash flow increased 44% (£m) H1 2017 H1 2016 Variance Headline operating profit 277 217 Capex (51) (42) +21% Depreciation and amortisation 52 45 Working capital 27 (10) Other 15 8 Headline operating cash flow 320 218 +47% Operating cash conversion 115% 101% Interest (22) (19) Taxation
Slide 17: Underlying reduction in net debt of £343m
Underlying reduction in net debt of £343m £m 17 252 44 114 320 41 13 978 995 635 Net debt Foreign Net debt at Headline free Pensions Proceeds from Other non- Other Dividend Net debt 31.07.16 exchange & fair constant currency cash flow disposals headline 31.01.2017 value 31.07.2016 17 Smiths Group pl
Slide 18: Inventory Days
Inventory Days 120 7 day reduction • 1 day of inventory = £5m 7 • In 6 months 110 = 4 day reduction • In 12 months = 7 day reduction 100 • Opportunity to improve further inventories 90 Monthly 12 month rolling 18 Smiths Group plc Interim Results for 6 months ended 31 January 2017
Slide 19: Strong and continuous cash generation
Strong and continuous cash generation • Cash positive every month • Steady cash generation quarter after quarter • Ability to de-leverage every month Q3 16 Q4 16 Q1 17 Q2 17 19 Smiths Group plc Interim Results for 6 months ended 31 January 2017
Slide 20: The Group has a good range of debt maturities
The Group has a good range of debt maturities Weighted average debt Weighted average Credit facilities maturity interest rate1 ratings 6.5 years* 3.5%* BBB+/Baa2 +2.0 years -20bps stable Interest rate exposure* Bonds Fixed: 55% Floating: 45% USD 800m Bank facility - undrawn Floating EUR 650m EUR 600
Slide 21: Continued de-risking on pensions
Continued de-risking on pensions 31 31 UK Pension January July Hedge Scheme Assets • Reduced annual required 2017 2016 contributions to c.£60m following the outcome of the 2015 triennial Corporate bonds 26% 23% Interest valuation - Certainty of funding over next three years Government 41% 49% Intere
Slide 22: M&A activity to high grade the portfolio
M&A activity to high grade the portfolio Revenue Operating profit (11) 17.1% 2 (5) (47) (3) 17.3% (7) 1,616 1,553 277 269 H1 2017 Artificial Lift Wallace Power H1 2017 pro- H1 2017 Artificial Lift Wallace Power H1 2017 pro- (JC) (Medical) (Interconnect) forma (JC) (Medical) (Interconnect) forma 22 S
Slide 23: Morpho Detection acquisition
Morpho Detection acquisition In final stages of regulatory approval Completion expected shortly Remedies: Morpho Detection’s Trace business being marketed and following close of transaction will be held separate until disposal. Morpho Trace detection revenue = c. 25% of Morpho Detection Lower afterm
Slide 24: Our financial strategy remains focused
Our financial strategy remains focused Underlying revenue flat 17.1% margin (H1 2016: -3%) (H1 2016: 15.8%) Strong financial framework Revenue Profitability • Maintain a strong investment grade Growth credit rating • Invest in opportunities which create value • Measured balance sheet management Cash
Slide 25: Overall outlook is unchanged
Overall outlook is unchanged Continued revenue pressures in John Crane Performance slightly weighted to H2 Strong cash conversion Foreign exchange tailwind Completion of acquisition of Morpho Detection1 1 Subject to regulatory clearances 26%-27% effective tax rate for 2017, expected to increase to 3
Slide 26: Strategy update
Strategy update Andy Reynolds Smith Chief Executive 26 Smiths Group plc Interim Results for 6 months ended 31 January 2017
Slide 27: Strategy in action: Outperforming our chosen markets
Strategy in action Outperforming our chosen markets Achieving world-class competitiveness 27 Smiths Group plc Interim Results for 6 months ended 31 January 2017
Slide 28: Repositioning the portfolio for future growth
Repositioning the portfolio for future growth Add Morpho Detection, FIX remove disposals Businesses that need improvement or are in non-core markets 60%+ Businesses that need improvement or are in non-core markets 70%+ Non-core SELL of our businesses of our businesses are well positioned are well po
Slide 29: Outperforming our chosen markets - organic growth
Outperforming our chosen markets - organic growth Technology Increasing differentiation digitisation Positioned in growing markets High proportion of Sustainably aftermarket and competitive recurring revenues and asset light 29 Smiths Group plc Interim Results for 6 months ended 31 January 2017
Slide 30: Outperforming our chosen markets - innovation
Outperforming our chosen markets - innovation New Product Phase 0 0 Product Concept i3 Introduction process Phase 1 - Group-wide technology • Standardised process 1 Project Planning roadmaps across the Group Phase 2 2 Dev. and Verification - Now commissioning projects - Consistency ultra high speed
Slide 31: Outperforming our chosen markets - targeting the right geographies
Outperforming our chosen markets - targeting the right geographies • Asia exposure is too low • Requires fundamental shift in approach • Appointed Smiths Group Asia President at Executive Committee level • Leadership across region to build commercial presence and operations 31 Smiths Group plc Inter
Slide 32: Strategy in action: Achieving world-class competitiveness
Strategy in action Outperforming our chosen markets Achieving world-class competitiveness 32 Smiths Group plc Interim Results for 6 months ended 31 January 2017
Slide 33: Achieving world-class competitiveness - the Excellence system
Achieving world-class competitiveness - the Excellence system Customer Supply People Chain Excellence Programme Technology Production 33 Smiths Group plc Interim Results for 6 months ended 31 January 2017
Slide 34: Supply chain excellence
Supply chain excellence INVENTORY • Group initiative on Strategic Supplier development 3.4 3.3 • Connectors suppliers 3.2 cut from 2,500 to 350 7 • Benefits: 4 - Procurement savings H1 2016 FY 2016 H1 2017 FY 2017 - Collaboration to improve processes, Cumulative improvement in days (12 month rolling
Slide 35: Channels to market and sales effectiveness
Channels to market and sales effectiveness • Undertaking review of channels to market • Reviewing sales effectiveness and incentivisation across the Group • Initiatives underway to drive more effective selling - Detection: distributors role in aftermarket sales and servicing - Interconnect: halved n
Slide 36: Production excellence
Production excellence • Layout optimised: “doing more with less” - 59% reduction in lead time - 57% reduction in work in progress - 32% in headcount reduction • Frees up people and space to support other business activities • Smiths Excellence System aims to transfer best practice across the Group 3
Slide 37: Introduction of the Smiths Way
Introduction of the Smiths Way • Building an organisation based on Talent and Leadership • ‘Smiths Way’ culture change programme • Leadership programmes launched • Incentivising leaders on key metrics 37 Smiths Group plc Interim Results for 6 months ended 31 January 2017
Slide 38: Solid progress on strategy actions
Solid progress on strategy actions One of the world’s leading technology companies Outperforming Achieving our chosen world-class markets competitiveness Excellence system Strong financial framework 38 Smiths Group plc Interim Results for 6 months ended 31 January 2017
Slide 39: Questions & Answers
Questions & Answers Being the best at what we do www.smiths.com 39 Smiths Group plc Interim Results for 6 months ended 31 January 2017
Slide 40: Appendix
Appendix www.smiths.com 40 Smiths Group plc Interim Results for 6 months ended 31 January 2017
Slide 41: Non-headline items in operating profit
Non-headline items in operating profit (£m) H1 2017 H1 2016 Change Headline operating profit 277 217 +27% Fuel For Growth (15) (15) Legacy liabilities - litigation 5 5 Retirement benefits (4) (15) Amortisation of acquired intangibles (6) (9) Acquisition costs (6) - Profit of disposals 126 - Total no
Slide 42: Current foreign exchange rates could provide a tailwind in reported profits
Current foreign exchange rates could provide a tailwind in reported profits • Sensitivity - For each $0.1 movement, +/- £15m on operating profit - For each €0.1 movement, +/- £3m on operating profit • H1 2017 FX tailwind - Revenue £251m (+18%) - Operating profit £39m (+18%) • FY 2016 average rates v
Slide 43: Exceptional items - H1 2017
Exceptional items - H1 2017 £m John Crane Medical Detection Interconnect Flex-Tek Central HY 2017 Headline operating profit – existing basis 90 99 54 26 30 (22) 277 Existing operating margin % 20.8% 21.0% 16.8% 11.3% 18.3% 17.1% Restructuring programmes (3) (6) (1) (2) (1) (2) (15) Pension admin cos