Smiths Group Plc · LSE:SMIN
Smiths — FY2016 Earnings Presentation
44 slides from Smiths's earnings presentation, Sep 28, 2016
Slide 1: Results for the year ended 31 July 2016
Smiths Group plc Results for the year ended 31 July 2016 28.09.2016 Being the best at what we do www.smiths.com 1 Smiths Group plc Annual Results 2016
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 Business Review Andy Reynolds Smith Financial Review Chris O’Shea Strategy Review Andy Reynolds Smith Q&A 3 Smiths Group plc Annual Results 2016
Slide 4: Business Review
Business Review Andy Reynolds Smith Chief Executive 4 Smiths Group plc Annual Results 2016
Slide 5: Smiths Group Full year highlights
Smiths Group Full year highlights • Growth in reported revenue and headline operating profit in four out of five divisions • Good margin expansion in Smiths Medical, Smiths Detection and Smiths Interconnect • John Crane margins resilient at 21.9% • 102% cash conversion • Morpho Detection acquisition
Slide 6: John Crane Full year highlights
John Crane Full year highlights • Difficult oil and gas market conditions • 57% of revenue from oil & gas markets • Aftermarket revenue down 4% • First-fit revenue down 16% • Strong cost control actions underway Revenue Headline Headline operating Aftermarket operating profit profit margin £830m £18
Slide 7: Smiths Medical Full year highlights
Smiths Medical Full year highlights • Continued revenue growth, led by Vital Care • Emerging market sales increased 10%: − China +22% − India +21% • R&D increased from 5% to 6% of revenue, supporting increased product launches and pipeline Revenue Headline Headline operating Aftermarket and operatin
Slide 8: Smiths Detection Full year highlights
Smiths Detection Full year highlights • Strong revenue growth led by Ports & Borders • Operating profit growth boosted by value engineering and management actions • R&D 5% of revenue, focused on product launches in transportation and military • Morpho Detection expected to complete early 20171 Reven
Slide 9: Smiths Interconnect Full year highlights
Smiths Interconnect Full year highlights • Lower revenue reflecting mixed end markets • Margins rose across our main product lines: − productivity improvements − procurement savings • Reorganisation to focus on target markets and customers • R&D 6% of revenue, focused on higher growth market segment
Slide 10: Flex-Tek Full year highlights
Flex-Tek Full year highlights • Diverse end market performance: − US housing growth − growing medical demand • Margins softened from Construction product transition and lower industrial volumes • Continuing sales growth in China Revenue Headline Headline operating operating profit profit margin £284
Slide 11: Financial Review
Financial Review Chris O’Shea Chief Financial Officer 11 Smiths Group plc Annual Results 2016
Slide 12: Robust financial performance
Robust financial performance Underlying1 Reported (£m) 2016 2015 movement movement Revenue 2,949 2,897 -2% +2% Operating profit 510 511 -4% - Operating margin 17.3% 17.6% -40 bps -30 bps Headline free cash flow 400 339 +18% ROCE 15.3% 16.0% -70 bps Headline EPS 85.2p 86.1p -1% Dividend per share 42.
Slide 13: Group revenue fell 2% due to tough end market conditions in John Crane
Group revenue1 fell 2% primarily due to tough end market conditions in John Crane… £m 97 (6) (1) 6 43 (87) 2,994 Underlying revenue growth Underlying revenue growth 2,949 2,897 John Crane -10% volume/mix -£36m Medical +1% price -£20m Detection +9% other +£11m Interconnect -1% Group -£45m Flex-Tek 0%
Slide 14: Driving a 4% decline in profit
…driving a 4% decline in profit1 Volume/mix: -£59m Price: +£1m Cost savings: +£11m £m Volume/mix: -£2m 19 Volume/mix: +£22m Price: - Price: -£12m Cost savings: - Cost savings: +£3m 5 12 (2) (1) 13 Volume/mix: -£3m Price: +£1m Cost savings: +£7m (47) Volume/mix: +£23m Price: -£9m Cost savings: -£2m 5
Slide 15: Headline free cash flow increased 18%
Headline free cash flow increased 18%... (£m) 2016 2015 Variance Headline operating profit 510 511 Capex (108) (95) +14% Depreciation and amortisation 96 87 Working capital 9 (38) Other 13 19 Headline operating cash flow 520 484 +7% Operating cash conversion 102% 95% Interest (58) (54) Taxation (62)
Slide 16: £23m underlying reduction in net debt
…which drove a £23m underlying reduction in net debt £m 1,000 900 183 163 12 800 400 73 1,001 978 700 818 129 600 500 Net debt Foreign exchange Net debt at Headline free cash Pensions Other non-headline Other Dividend Net debt 31.07.15 & fair value constant currency flow 31.07.2016 31.07.2015 16 Smi
Slide 17: Non-headline items in operating profit
Non-headline items in operating profit (£m) 2016 2015 Change Headline operating profit 510 511 - Fuel For Growth (37) (38) Legacy liabilities - litigation (18) (27) Retirement benefits (16) 6 Impairment (31) (27) Amortisation of acquired intangibles (15) (33) Acquisition and disposal costs (6) 2 Tot
Slide 18: The Group has a good range of debt maturities
The Group has a good range of debt maturities Weighted average Weighted average Credit ratings debt facilities maturity interest rate1 BBB+/Baa2 4.5 years 3.7% stable Interest rate exposure USD800m 700 Fixed: 47% Floating 600 EUR 600m Floating: 53% 1.25% 500 USD 400m £m 400 EUR 300m 3.625% 4.125% US
Slide 19: Substantial progress made on pensions
Substantial progress made on pensions Funding exercise concluded, contributions materially lower • Triennial valuations agreed on SIPS and TIGPS schemes • US buyout complete resulting in transfer of $527m of liabilities • Certainty of funding over next three years, boost to free cash flow • Pension
Slide 20: Net pension position improved from a £108m deficit to a surplus of £80m
Net pension position improved from a £108m deficit to a surplus of £80m £m Contributions to Funded Schemes Hedging programme offsets Cash impact of interest rates 850 TIGPS Scheme £11m SIPS Scheme £32m Other UK Schemes £4m Total UK £47m US Schemes £68m Other Schemes £2m 650 Total Direct Cash £117m N
Slide 21: Current foreign exchange rates could provide a significant tailwind
Current foreign exchange rates could provide a significant tailwind in reported profits 2016 Revenue at 2016 Operating Profit Average and Year End FX Rates at Average and Year End FX Rates £m 3,400 Margin: £m 17.2% 560 3,200 540 2016 FX rates Average Closing 3,000 Margin: USD 1.46 1.32 520 17.3% EUR
Slide 22: Our financial strategy is straightforward and…
Our financial strategy is straightforward and… Underlying 17.3% margin Strong financial framework revenue -2% • Maintain a strong investment Revenue Profitability grade credit rating Growth • Invest in opportunities which create value • Measured balance sheet management • Active portfolio management
Slide 23: …is easily translated into day-to-day actions…
… is easily translated into day-to-day actions… Reduce costs to invest in growth Intelligent cost control generating activities Use assets more efficiently Opportunity to improve utilisation Reduce inventory and invest cash in Optimal working capital investment growth Cash as a key measure of underl
Slide 24: …and is driving further progress in focusing the portfolio
…and is driving further progress in focusing the portfolio John Crane 2016 reported performance Sale of John Crane Artificial Lift business 1,000 Revenue, £m Profit, £m 250 • $39.5m consideration 900 • Accretive to Group EPS Margin: 800 Margin: 200 23.7% • Removes John Crane 21.9% margin dilution 70
Slide 25: Outlook for 2017
Outlook for 2017 Broad continuation of 2016 trends Performance weighted to H2 Strong cash conversion Foreign exchange tailwind Completion of acquisition of Morpho1 25 Smiths Group plc Annual Results 2016 1 Subject to regulatory clearances
Slide 26: Medium-term guidance
Medium-term guidance Underlying Margin growth John Crane 20%+ Smiths Medical 20%+ Growth Smiths Detection mid-teens+ above the Smiths Interconnect market mid-teens+ Flex-Tek mid-teens+ 26 Smiths Group plc Annual Results 2016
Slide 27: Strategy Review
Strategy Review Andy Reynolds Smith Chief Executive 27 Smiths Group plc Annual Results 2016
Slide 28: Our vision and strategic priorities
Our vision and strategic priorities One of the world’s leading technology companies Outperforming Achieving our chosen world-class markets competitiveness Strong financial framework 28 Smiths Group plc Annual Results 2016
Slide 29: The majority of our businesses are well positioned
The majority of our businesses are well positioned High Market attractiveness Medium 60%+ Size Growth Segment profitability Low Competitor concentration Low Medium High Competitive Relative market share Relative profitability % = of Smiths Group revenues position Relative growth 29 Smiths Group plc
Slide 30: Strategy in action
Strategy in action Outperforming our chosen markets Achieving world-class competitiveness A Smiths business 30 Smiths Group plc Annual Results 2016
Slide 31: The growth framework
Outperforming our chosen markets The growth framework • Focus on growing market segments • Are we in the right geographies? • Do we serve the right customers? • Increased aftermarket • Increase value of content with each customer • High competitive differentiation Market leadership = Top 3 market po
Slide 32: Smiths Medical - market segmentation
Outperforming our chosen markets Smiths Medical - market segmentation We have a strong and broad portfolio Pump-to-Patient market • Respected brands with good margins Market size • Strong base to build a more focused £bn and competitive business 12 12 +4.3% Vascular • Move to higher tech, higher gro
Slide 33: Strategy in action
Strategy in action Outperforming our chosen markets Achieving world-class competitiveness A Smiths business 33 Smiths Group plc Annual Results 2016
Slide 34: Smiths driven by Excellence System
Achieving world-class competitiveness Smiths driven by Excellence System Customer Supply Chain People Excellence Programme Technology Production 34 Smiths Group plc Annual Results 2016
Slide 35: Customer Excellence - Connectors
Achieving world-class competitiveness Customer Excellence - Connectors Customer segmentation No. of customers Revenue growth Margin Technology partner Superior tech insight + Technology seeker Functionality > price Specification buyer Proven-tech, low cost Majority Minimalist Low-tech, low-cost - •
Slide 36: Technology Excellence – digital transformation
Achieving world-class competitiveness Technology Excellence – digital transformation • 250 software engineers today • Develop Group-wide capabilities • Key strengths in diagnostics, security algorithms, and software libraries • Moving to end-to-end solutions • i3 innovation forum New Group establish
Slide 37: Production Excellence – Detection, Wiesbaden
Achieving world-class competitiveness Production Excellence – Detection, Wiesbaden Objective • Make assembly processes more effective for generators and scanners • Consolidate manufacturing on a single site Medical market priorities What did we do? • Category strength and portfolio • 40% generator o
Slide 38: Supply chain Excellence
Achieving world-class competitiveness Supply chain Excellence Sales & Standard semiconductor test cable operations 14 WEEKS planning Order shipped, 1 9 4 0.1 invoice raised Value added Plan Order Produce Ship time 0.5 week Production materials Parts parts Reducing lead times and improving the flow a
Slide 39: Strategy in action
Strategy in action Outperforming our chosen markets Achieving world-class competitiveness A Smiths business 39 Smiths Group plc Annual Results 2016
Slide 40: Characteristics of a Smiths business
A Smiths business Characteristics of a Smiths business Technological Increasing differentiation digitisation Positioned in growing markets High proportion Sustainably of aftermarket and competitive recurring revenues and asset light More focused, better businesses in Top 3 leadership positions 40 Sm
Slide 41: Creating one of the world's leading technology companies
Creating one of the world’s leading technology companies Growth and Returns New Product Innovation vitality Value Improve attractive market focus Improve competitive position In-depth review of markets and Smiths competitiveness Time 41 Smiths Group plc Annual Results 2016
Slide 42: Questions & Answers
Questions & Answers Being the best at what we do www.smiths.com 42 Smiths Group plc Annual Results 2016
Slide 43: Appendix
Appendix www.smiths.com 43 Smiths Group plc Annual Results 2016
Slide 44: Reconciliation of operating profit
Reconciliation of operating profit £m Headline Operating Profit 510 Restructuring programmes (37) Litigation provision: John Crane, Inc. (23) Litigation provision: Titeflex Corporation (11) Changes to post-retirement benefits (9) Impairments (31) Acquisition and disposals (5) Cost recovery for John