Smiths Group Plc · LSE:SMIN
Smiths — H1 2014 Earnings Presentation
56 slides from Smiths's earnings presentation, Mar 19, 2014
Slide 1: Interim Results 19 March 2014
Interim Results 19 March 2014 [email protected] www.smiths.com
Slide 2: Forward-looking statements 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 other thin
Slide 3: Introduction
Philip Bowman Chief Executive Introduction Smiths Group plc Interim Results 2014 | 3
Slide 4: Key messages
Key messages Good progress in commercial end markets, tough in medical and defence • Continued to rebalance the business towards growth markets • Strengthening the management team, our processes and information systems Continued focus on investment in growth drivers • Company-funded R&D investment u
Slide 5: Results overview
Results overview Reported headline revenue down 2%; underlying down 1% Headline operating profit down 3%, underlying down 2% Headline EPS down 1.4p to 39.5p Cash conversion strong at 86% - free cash flow of £30m Return on capital employed down 10 bps at 16.6% Dividend up 2% to 12.75 pence Smiths Gro
Slide 6: Promoting responsibility: increased focus is delivering improvements
Promoting responsibility: An increased focus is delivering improvements Recordable & lost time incident rates continue to improve • Continued progress on environment performance Lost time incident rate Recordable incident rate* • Beat multi-year 0.71 targets in FY2013 0.66 0.60 0.54 0.53 • Set new 5
Slide 7: Financial review
Peter Turner Finance Director Financial review Smiths Group plc Interim Results 2014 | 7
Slide 8: Underlying headline revenue and profit performance
Underlying headline revenue and profit performance Revenue Operating profit growth growth John Crane +2% +9% Smiths Medical -4% -18% Smiths Detection -1% -7% Smiths Interconnect -4% -7% Flex-Tek +3% +13% Group -1% -2% Smiths Group plc Interim Results 2014 | 8
Slide 9: Headline profit progression 2013 to 2014
Headline profit progression 2013 to 2014 Net efficiencies Average exchange rates US$ 1.61 (H1 2013: 1.60) Euro 1.19 (H1 2013: 1.24) Translation FX ready reckoner 1 US cent = c. £2m HOP 1 Euro cent = c. £1m HOP £8m Non-recurring costs PBT: £223m £4m £17m Cost £2m inflation £10m Additional £3m Investm
Slide 10: Group cash conversion
Group cash conversion £m (for continuing activities) 2014 2013 Headline operating profit 245 253 Changes in working capital (32) (43) Share based payment 4 6 Capital expenditure (Property, plant & equipment) (24) (21) Depreciation 23 27 Development costs & other intangibles (net of amortisation and
Slide 11: Reconciliation: Headline operating profit to statutory profit
Reconciliation: Headline operating profit to statutory profit £m Headline operating profit 245 Restructuring programmes (14) Litigation provision: John Crane, Inc. (34) Litigation provision: Titeflex Corporation (5) Other items 2 Exceptional operating items (51) Amortisation and impairment of acquir
Slide 12: Fuel for growth – driving efficiencies to support growth investment
Fuel for growth – driving efficiencies to support growth investment £m Costs Total Full annualised H1 2014 costs benefits John Crane 4 28 14 Medical 4 46 23 Detection 2 28 14 Interconnect 2 15 7 Flex-Tek - 3 2 Total 12 120 60 £m H1 2013/14 2014/15 2015/16 2016/17 Ongoing Savings in year 1 5 20 40 50
Slide 13: Pensions: Deficit improved modestly to £236m
Pensions: Deficit improved modestly to £236m Deficit movement since 31 July 2013 Annual cash contributions £m 2014 Deficit at 31 July 2013 (254) Funded scheme Foreign exchange 13 contributions £80m Return on assets 106 - Smiths Industries PS £36m Contributions (net of service costs) 47 - TI Group PS
Slide 14: Strong balance sheet supports investment in acquisitions and growth
Strong balance sheet supports investment in acquisitions and growth Interest split Currency split Debt split Net debt £m Borrowings 1,071 USD Cash (170) Fixed Euro Bank Floating other Public Net debt 901 £m Weighted average life of debt is 4.5 years 300 Credit Rating: 250 BBB+ (stable)/Baa2 (stable)
Slide 15: Guidance – financial items
Guidance – financial items Headline finance charge c. £60m Headline tax rate 26-28% Cash conversion 90-100% Funded pension scheme contributions c. £80m + £24m to escrow Year end net debt (subject to FX and acquisitions) c. £800m Smiths Group plc Interim Results 2014 | 15
Slide 16: Operational review and priorities
Philip Bowman Chief Executive Operational review and priorities Smiths Group plc Interim Results 2014 | 16
Slide 17: John Crane: Delivering revenue growth, improving margins and returns
John Crane: Delivering revenue growth, improving margins and returns Underlying revenue Underlying headline profit Headline operating margin 2014 H1 Revenue:£469m +140 bps + 2% + 9% 23.2% 1 First-fit OEM 38% Aftermarket 62% 2 Oil, gas & petrochem 39% 3 Chemical and pharma 8% • Sales growth driven by
Slide 18: John Crane: Investments position for future growth
John Crane: Investments position John Crane for future growth Investments in emerging markets are driving revenues • Emerging market revenues up 9% • Up 47% in Saudi Arabia, up 15% in Brazil, Singapore and Malaysia both up 60% • Investing in China, ASEAN countries and Middle East • Emerging markets
Slide 19: John Crane: Medium-term operating ranges
John Crane: Medium-term operating ranges Revenue growth Market growth drivers Strategic growth initiatives Underlying • Demand for global energy • Driving above average growth growth - Investment in oil and gas • Expansion of service centre network in high-growth markets - Utilisation of installed b
Slide 20: John Crane: Outlook
John Crane: Outlook Outlook • Strong order book supports growth • H2 growth rate expected within our operating range • Increased investment in growth initiatives – sales network, new product development • Margins expected towards upper end of target range Reliability engineer performs system checks
Slide 21: Medical: Tough trading with volume and price pressure
Smiths Medical: Tough trading: volume and price pressure with distributor destocking Underlying revenue Underlying headline profit Headline operating margin 2014 H1 Revenue: £389m (280) bps (4)% (18)% 18.3% 1 Medication delivery 28% 2 Vital care 42% 3 Safety devices 30% • Tough trading in developed
Slide 22: Medical: Investing in new products and emerging markets
Smiths Medical: Investing in growth opportunities: new products/emerging markets New product investment at new high - up 5% to 4.9% of revenue (2013: 4.5%) • CADD-Solis PIB – recently received FDA clearance, launched in US in February • Recent launches continue to provide traction: • Jelco IntuitIV,
Slide 23: Smiths Medical: Medium-term operating ranges
Smiths Medical: Medium-term operating ranges Revenue growth Market growth drivers Strategic growth initiatives Underlying • Emerging market growth • Portfolio penetration in developed markets growth • Safety legislation (EU, Brazil) • Continued investment in emerging market growth • Chronic conditio
Slide 24: Smiths Medical: Outlook
Smiths Medical: Outlook Outlook • Developed markets are likely to remain challenging • Second half performance is expected to be below the prior year at constant currencies with a reduced rate of decline compared with the first half • Focus will remain on investment in new product development • Inve
Slide 25: Detection: Government budget pressures against a strong comparator
Smiths Detection: Government budget pressures against a strong comparator Underlying revenue Underlying headline profit Headline operating margin 2014 H1 Revenue: £251m (20) bps (1)% (7)% 11.8% 1 Transportation 51% 2 Ports & borders 18% 3 Military 10% 4 Emergency responders 2% 5 Critical infrastruct
Slide 26: Detection: Investing in future growth through new products and markets
Smiths Detection: Investing in future growth through new products and markets Increased investment in new products – strong pipeline of new launches • Company-funded spend increased 13% to £19m or 7.5% of sales (2013: £17m and 6.6%) • Total spend of £21m or 8.4% of sales – with £2m of customer-funde
Slide 27: Smiths Detection: Medium-term operating ranges
Smiths Detection: Medium-term operating ranges Revenue growth Underlying Market growth drivers Strategic growth initiatives growth • Globalisation of trade • Increase penetration of specific end-use markets/key Variable, • Increasing international travel geographies to drive revenue growth Averaging
Slide 28: Smiths Detection: Outlook
Smiths Detection: Outlook Outlook • Order book is slightly behind last year • Remains subject to government budgets and project timing • Strong pipeline of new products • Margins will benefit from cost savings and operational efficiencies The Target-ID helps police and government agencies identify i
Slide 29: Interconnect: Defence market headwinds against a strong comparator
Smiths Interconnect: Defence market headwinds against a strong comparator period Underlying revenue Underlying headline profit Headline operating margin 2014 H1 Revenue: £210m (40) bps (4)% (7)% 1 Connectors 35% 2 Microwave 43% 13.1% 3 Power 22% • Reduced demand on military programmes offsetting gen
Slide 30: Interconnect: Investing in new products and emerging markets
Smiths Interconnect: Investing in new products and emerging markets New product development focused on high growth markets • Company-funded R&D increased 8% to £12m or 5.8% of sales (2013: 5.2%) • Customer-funded portion stable at £2m • Total R&D spend of £14m or 6.5% of sales (2013: 5.9%) • New pro
Slide 31: Smiths Interconnect: Medium-term operating ranges
Smiths Interconnect: Medium-term operating ranges Revenue growth Market growth drivers Strategic growth initiatives Underlying • Growth in commercial markets - data • Transition focus towards higher-growth commercial centre, mobile telecoms, semiconductor, customers with reduced reliance on lower-gr
Slide 32: Smiths Interconnect: Outlook
Smiths Interconnect: Outlook Outlook • Commercial markets (telecoms, semiconductor test, data centres) are expected to grow • Defence market is likely to remain challenging • Revenue and profit growth improving in H2 compared with H1 • Margins should benefit from continuing productivity initiatives
Slide 33: Flex-Tek: Growth from US construction and specialty heating
Flex-Tek: Growth from US construction and specialty heating; strong margin boost Underlying revenue Underlying headline profit Headline operating margin 2014 H1 Revenue: £123m +160 bps 3% 13% 1 Fluid Management 33% + + 2 Construction 32% 18.3% 3 Heat Solutions 21% 4 Flexible Solutions 14% • Revenue
Slide 34: Flex-Tek: Medium-term operating ranges
Flex-Tek: Medium-term operating ranges Revenue growth Market growth drivers Strategic growth initiatives Underlying • Demand for next generation aircraft • Secure positions on next generation airframes and engines growth - Improved fuel efficiency, quieter, greener, • Capacity expansion in the US an
Slide 35: Flex-Tek: Outlook
Flex-Tek: Outlook Outlook • Residential construction market should see steady modest growth • Commercial aerospace market remains positive • Margins will benefit from higher volumes but face pressure from increased R&D investment, competitive pricing and potential commodity inflation Production of r
Slide 36: Operational priorities for 2014
Operational priorities for 2014 Continue to rebalance the business profile to accelerate sales growth Increase investment in growth drivers: new products, emerging markets Deliver the benefits of ‘Fuel for Growth’ Seek acquisitions to support growth and improved returns for shareholders Focus on tal
Slide 37: Questions & Answers
Questions & Answers Interim Results 19 March 2014 [email protected] www.smiths.com
Slide 38: John Crane
John Crane Revenue £m A world-leading provider of engineered 973 986 894 products and services for a global customer 790 786 base across the energy services sector. Operating in more than 50 countries with more than 230 facilities, we offer customers the largest global service network in the industr
Slide 39: John Crane
John Crane Our products and services help ensure the reliability of mission-critical equipment in challenging operating environments. In addition to lowering total cost of ownership of equipment, our products reduce emissions and help our customers meet environmental responsibilities. For nearly 100
Slide 40: John Crane: Margins ahead with higher underlying revenues and efficiencies
John Crane: Margins ahead with higher underlying revenues and efficiencies £m 2014 2013 reported underlying Revenue 469 469 0% +2% Headline operating profit 109 102 +6% +9% Margin 23.2% 21.8% +140 bps ROCE 26.5% 24.3% +220 bps Headline operating profit £m 2012/13 102 • Price/mix: Favourable movement
Slide 41: Smiths Medical
Smiths Medical Headline revenue £m A leading supplier of specialist medical devices, 834 858 838 864 850 consumables and equipment for global markets. Our products are focused on the medication delivery, vital care and safety devices market segments. 2009 2010 2011 2012 2013 Contribution to 2013 Hea
Slide 42: Smiths Medical
Smiths Medical In medication delivery, our devices help treat cancer patients and provide relief to those in pain. Our vital care products reduce hospital-acquired infections, manage patients’ airways before, during, and after surgery, maintain body temperature and assist reproduction through IVF th
Slide 43: Smiths Medical: Facing headwinds from volume, price and US device tax
Smiths Medical: Facing headwinds from volume, price and US device tax £m 2014 2013 reported underlying Headline revenue 389 413 (6)% (4)% Headline operating profit 71 87 (18)% (18)% Margin 18.3% 21.1% (280) bps ROCE 15.3% 16.9% (160) bps Headline operating profit £m • Price/mix: Negative pricing in
Slide 44: Smiths Detection
Smiths Detection Revenue £m A world-leading designer and manufacturer 574 559 519 of sensors that detect and identify 501 510 explosives, weapons, chemical agents, biohazards, nuclear & radioactive material, narcotics and contraband. 2009 2010 2011 2012 2013 Contribution to 2013 Revenue by sector 20
Slide 45: Smiths Detection
Smiths Detection Our technology helps customers in the global transportation, ports and borders, critical infrastructure, military and emergency responder markets. We have the most comprehensive range of detection technologies in the world, including X-ray, trace detection, infra-red and gamma ray s
Slide 46: Smiths Detection: Decline in contract margins offset by restructuring
Smiths Detection: Decline in contract margins offset by restructuring initiatives £m 2014 2013 reported underlying Revenue 251 255 (1)% (1)% Headline operating profit 30 31 (3)% (7)% Margin 11.8% 12.0% (20) bps ROCE 8.6% 12.2% (360) bps Headline operating profit £m • Volume: Critical infrastructure
Slide 47: Smiths Interconnect
Smiths Interconnect Revenue £m A leader in electronic components and 449 461 sub-systems that connect, protect and control 379 340 critical systems for the global data centre, 318 wireless telecommunications, aerospace, defence, space, medical, rail, test and industrial markets. 2009 2010 2011 2012
Slide 48: Smiths Interconnect
Smiths Interconnect We design and manufacture products that connect, protect and control critical systems for the global data centre, wireless telecommunications, aerospace, defence, space, medical, rail, test and industrial markets. Our products are application-specific and incorporate innovative t
Slide 49: Smiths Interconnect: Volume declines partly offset by operational efficiencies
Smiths Interconnect: Volume declines partly offset by operational efficiencies £m 2014 2013 reported underlying Revenue 210 218 (4)% (4)% Headline operating profit 27 30 (7)% (7)% Margin 13.1% 13.5% (40) bps ROCE 12.2% 12.3% (10) bps Headline operating profit £m • Volume: Declines across all busines
Slide 50: Flex-Tek
Flex-Tek Revenue £m A global provider of engineered components 253 233 that heat and move fluids and gases for the 222 212 221 aerospace, medical, industrial, construction and domestic appliance markets. 2009 2010 2011 2012 2013 Contribution to 2013 Revenue by sector 2013 Group revenue: 8% £253m 44
Slide 51: Flex-Tek
Flex-Tek Our flexible hosing and rigid tubing provide fluid management for fuel and hydraulic applications on commercial and military aircraft, deliver fuel gas and conditioned air in residential and commercial buildings, and provide respiratory care for medical applications. Flex-Tek heating elemen
Slide 52: Flex-Tek: Volume and pricing improvements; record return on capital employed
Flex-Tek: Volume and pricing improvements; record return on capital employed £m 2014 2013 reported underlying Revenue 123 120 +3% +3% Headline operating profit 22 20 +13% +13% Margin 18.3% 16.7% +160 bps ROCE 32.7% 29.8% +290 bps Headline operating profit £m • Price/mix: Improved pricing 2012/13 20
Slide 53: Interim results 2014
Interim results 2014 £m Headline* Statutory† 2014 2013 2014 2013 reported underlying# Revenue 1,442 1,475 (2)% (1)% 1,442 1,475 Operating profit 245 253 (3)% (2)% 170 211 Margin 17.0% 17.1% (10) bps - 11.8% 14.3% Pre-tax profit 215 223 (4)% (3)% 132 166 Basic EPS (p) 39.5 40.9 (4)% 23.7 30.7 Free ca
Slide 54: Improved return on capital from Flex-Tek, John Crane and Interconnect
Improved return on capital from Flex-Tek, John Crane and Interconnect 12 months to 31 January 2014 12 months to 31 January 2013 29.8% 32.7% 35.0 26.5% 30.0 24.3% 25.0 % 16.7% 16.6% 16.9% 20.0 15.3% 15.0 12.3% 12.2% 12.2% 8.6% 10.0 5.0 0.0 Smiths Group Flex-Tek John Crane Smiths Medical Smiths Interc
Slide 55: Net debt increased by £157m driven by dividend payments
Net debt increased by £157m driven by dividend payments £m 2014 Net debt at start of period (744) Operating cash (after capex etc.) 211 Interest and tax (88) Exceptionals/Pensions (93) Free cash flow 30 Dividends (225) Financing acquisitions and disposals (1) Foreign exchange 50 Movement in fair val
Slide 56: Asbestos litigation
Asbestos litigation Key facts Key figures • Production ceased in 1985 Gross provision £231m • Exposure within John Crane, Inc. Discounted pre-tax provision £207m • Resists claims based on ‘safe product’ defense Claims dismissed 232,000 Claims outstanding 81,000 • Provision determined using independe