SMITHS GROUP PLC - HALF YEAR RESULTS FOR 6 MONTHS ENDED 31 JANUARY 2024

Pioneers of progress - improving our world through smarter engineering

 

+3.9% organic revenue growth and +16.5% order growth in H1;
reaffirming full-year guidance of 4-6% organic revenue growth

 

·    Solid first half performance with good momentum for the second half

o Organic revenue growth¹ of +3.9% against record comparator, led by strong growth at
John Crane +12.7% and Smiths Detection +8.9%

o Revenue declines at Flex-Tek of (4.1)% and Smiths Interconnect of (13.7)%; with improved performance in the second quarter in both divisions

o Group orders² up +16.5%, driven by John Crane +10.9%, Smiths Detection +38.2% and Flex-Tek aerospace +11.6%; double-digit order growth at Smiths Interconnect in Q2, following a
double-digit decline in Q1

 

·    Commercial wins underpinning full-year guidance and future growth

o Continued improvement in demand for John Crane's solutions supporting energy security and energy transition, including wins across carbon capture, blue hydrogen and battery manufacturing

o Smiths Detection secures multiple next-generation CTiX platform contracts globally; an award from the US DOD to supply portable aerosol and vapour chemical detectors and an initial £88m contract with the UK MoD to provide chemical detection technology

 

·    Execution focus driving performance improvements; SES delivering further tangible benefits

o Headline organic operating profit³ +5.3%; headline operating margin³ expansion of +20bps to 16.3%, alongside reinvestment for growth

o ROCE⁴ up +50bps to 15.7%, driven by the profit improvement

o SES benefit of £10m; on track for full-year contribution of £20m

o Cash conversion⁴ up 26 percentage points year-on-year to 89%, resulting from working capital improvement; free cash-flow more than doubled to £112m

 

·    Strong balance sheet supports investment in organic and inorganic growth

o Net debt to EBITDA⁴ of 0.9x

o Acquisition of Heating & Cooling Products for <7x EBITDA; integration progressing ahead of plan

o Interim dividend of 13.55p, up 5.0%

o New £100m share buyback programme announced, with first tranche of up to £50m to be completed by the end of September 2024

 

·    Roland Carter appointed as the Group's Chief Executive Officer, with immediate effect, following Paul Keel's decision to step down to take on a new role as chief executive of a US public company

 

FY2024 Outlook

·    Reaffirming FY2024 organic revenue growth within our medium-term target range of 4-6%, with continued margin expansion

 

Headline3	HY2024	HY2023	Reported	Organic1
Revenue	£1,507m	£1,497m	+0.7%	+3.9%
Operating profit	£246m	£241m	+2.1%	+5.3%
Operating profit margin4	16.3%	16.1%	+20bps	+20bps
Basic EPS	48.7p	46.6p	+4.5%
ROCE4	15.7%	15.2%	+50bps
Operating cash conversion4	89%	63%	+26pps

 

Statutory	HY2024	HY2023	Reported
Revenue	£1,507m	£1,497m	+0.7%
Operating profit	£192m	£187m	+2.7%
Profit for the half year (after tax)	£111m	£109m	+1.8%
Basic EPS	32.0p	30.6p	+4.6%
Dividend per share	13.55p	12.9p	+5.0%

Paul Keel, Chief Executive Officer, commented:

"We are off to a good start in FY24 with +3.9% organic revenue growth and +16.5% order growth in the first half, against a record comparator last year, and marking our 11^th consecutive quarter of revenue growth.

 

"We continue to focus on innovation as an enduring driver of value, as highlighted through the roll-out of our next-generation threat detection technology in airports around the world. We also continue to strengthen our energy transition impact, with significant project wins in carbon capture, blue hydrogen and electric battery manufacturing.

 

"We expect growth to improve in the second half, driven by a record order book for Smiths Group, continued strength in end markets like aerospace, security and energy, as well as gradually improving conditions in the industrial segments that were softer in the first half. Together, this gives us confidence in reaffirming our
full-year 2024 guidance of 4-6% organic revenue growth, with continued margin expansion.

 

"As we continually advance our Purpose of improving our world through smarter engineering, we are pleased to announce that the Smiths Group Foundation is now awarding its first set of grants to charities which are aligned with our Purpose.

 

"Thank you to my colleagues around the world for all you do. It has been a tremendous honour to have led this wonderful company over the past three years, working alongside our many talented employees, and I am proud of everything we have achieved together. I'm excited for what lies ahead for Smiths and to see Roland continue to build on its successes and deliver further value for all Smiths Group's stakeholders."

 

UPCOMING EVENTS

Date	Event
21 May 2024	Q3 Trading Update
24 September 2024	FY2024 Full Year Results
13 November 2024	Q1 Trading Update and Annual General Meeting

 

Statutory reporting

 

Definitions

Investor enquiries Siobhán Andrews, Smiths Group +44 (0)7920 230093 [email protected]	Media enquiries Tom Steiner, Smiths Group +44 (0) 7787 415891 tom.steiner@smiths.com
	Alex Le May, FTI Consulting +44 (0)7702 443312 [email protected]

Presentation

The webcast presentation and Q&A will begin at 08.30 (UK time) today at: https://smiths.com/investors/results-reports-and-presentations. A recording will be available from 13.00 (UK time).

 

 

 

 

 

 

Legal Entity Identifier (LEI): 213800MJL6IPZS3ASA11

 

This document contains certain statements that are forward-looking statements. They appear in a number of places throughout this document and include statements regarding the intentions, beliefs and/or current expectations of Smiths Group plc (the "Company") and its subsidiaries (together, the "Group") and those of their respective officers, directors and employees concerning, amongst other things, the results of operations, financial condition, liquidity, prospects, growth, strategies, and the businesses operated by the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this document and, unless otherwise required by applicable law, the Company undertakes no obligation to update or revise these forward-looking statements. The Company and its directors accept no liability to third parties. This document contains brands that are trademarks and are registered and/or otherwise protected in accordance with applicable law.

Our Purpose

We are pioneers of progress - improving our world through smarter engineering. Smarter engineering means helping to solve the toughest problems for our customers, our communities and ourselves. We help to create a safer, more efficient and better-connected world. 

 

Our Priorities and Targets

Smiths is intrinsically strong with world-class engineering, leading positions in critical markets, and distinctive global capabilities, all underpinned by a strong financial framework. We continue to make progress and deliver on our potential by focusing on three top priorities of accelerating growth, strengthening execution and doing ever more to inspire and empower our people.

 

Our focused plan, the Smiths Value Engine, is the means through which we are delivering the
medium-term targets that we have set. We have continued to make solid progress across these targets, including eleven consecutive quarters of organic revenue growth.

 

Targets	Medium-Term Target	HY2023	HY2024	Progress
Organic Revenue Growth	4-6% (+ M&A)	+13.5%	+3.9%	Reaffirmed full-year guidance of 4-6%
Headline EPS Growth	7-10% (+ M&A)	+52.1%	+4.5%	EPS growth driven by operating profit growth and benefit of share buyback, partially offset by FX
ROCE	15-17%	15.2%	15.7%	ROCE within our medium-term target range, reflecting growth in operating profit
Operating Profit Margin	18-20%	16.1%	16.3%	Continued margin improvement, benefiting from SES, with continued investment in growth
SmiOperating Cash Conversion	100%+	63%	89%	Improvement in working capital delivers solid cash conversion

 

These targets are underpinned by Smiths operational KPIs and environmental targets, including a commitment to Net Zero for Scope 1 and 2 emissions by 2040 and Net Zero for Scope 3 emissions by 2050.

HY2024 Business Performance

Smiths delivered organic revenue growth of +3.9% in the first half. We generated £246m of headline operating profit, up +5.3% on HY2023 on an organic basis, and delivered moderate margin improvement as we continue to drive growth, improve execution and invest in our people. 

 

£m	HY2023	Foreign exchange	Acquisitions	Organic movement	HY2024
Revenue	1,497	(76)	31	55	1,507
Headline operating profit	241	(14)	6	13	246
Headline operating profit margin	16.1%				16.3%

 

GROWTH

Accelerating growth is the primary driver of unlocking enhanced value creation for the Group. We have now delivered eleven consecutive quarters of organic revenue growth. Momentum improved in the second quarter, with organic growth of 4.2%, following 3.5% organic growth in the first quarter, against record comparators of 13.2% and 13.6% in Q1 and Q2 of FY23.

 

Organic revenue growth (by business)	H1 2023	H2 2023	HY2024
John Crane	+14.6%	+15.8%	+12.7%
Smiths Detection	+14.0%	+18.8%	+8.9%
Flex-Tek	+17.0%	+3.6%	(4.1)%
Smiths Interconnect	+3.3%	(8.4)%	(13.7)%
Smiths Group	+13.5%	+9.9%	+3.9%

 

Strong growth continued in the first half for our two largest businesses. John Crane posted double digit growth in both revenue and orders. Smiths Detection delivered +8.9% organic revenue growth and +38.2% order growth, with particular strength in computed tomography ("CT") for airport checkpoints and chemical detection for defence. For Flex-Tek, strength in aerospace was not enough to overcome softness in the US construction market, leading to a (4.1)% overall decline. We anticipate that Flex-Tek will return to growth in the second half. Smiths Interconnect declined (13.7%). This was anticipated, as FY23 orders were down (17%). We are seeing early signs of recovery in Smiths Interconnect, with positive order growth and flat revenues in the second quarter, after a sharply negative first quarter. 

 

Revenue grew +0.7% on a reported basis across the Group, to £1,507m (HY2023: £1,497m). This included a (£76m) negative foreign exchange translation impact and +£31m from the acquisitions of Plastronics and Heating and Cooling Products ("HCP").

 

Strong execution to access end market opportunity is the first of the four levers for accelerating growth.

 

Our business operates across four major global end markets: General Industrial, Safety & Security, Energy, and Aerospace. Our strong market positions, coupled with the balanced market exposure we have across our businesses, are distinctive long-term advantages for Smiths.

 

Organic revenue growth (by end market)	% of Smiths revenue	H1 2023	H2 2023	HY2024
General Industrial	39%	+15.4%	+1.0%	(5.5)%
Safety & Security	31%	+9.4%	+14.4%	+7.2%
Energy	23%	+17.1%	+21.8%	+16.6%
Aerospace	7%	+10.1%	+10.8%	+5.4%
Smiths Group	100%	+13.5%	+9.9%	+3.9%

Organic revenue in our largest end market, General Industrial, declined (5.5)% in HY2024, with good demand in John Crane's industrial markets more than offset by weaker demand for Flex-Tek's heating, ventilation and air conditioning ("HVAC") products and Smiths Interconnect semiconductor test and connectors products. Organic revenue growth in Safety & Security was +7.2%, reflecting Smiths Detection's strong delivery against its orderbook, partially offset by a decline in Smiths Interconnect from the timing of defence programmes. The +16.6% growth in Energy reflected the broad-based strong demand at
John Crane and execution against its record order book. Aerospace organic revenue increased +5.4% with new aircraft build programmes supporting demand at Flex-Tek offsetting the impact of delays in aerospace programmes in Smiths Interconnect.

 

Our second lever for faster growth is improved new product development and commercialisation. In HY2024, 200bps of growth was delivered from high impact new products including John Crane's next-generation diamond coating product offering for high-speed and high-heat applications, Smiths Detection iCMORE software which uses AI and advanced detection algorithms for automated detection, and a high-density electrical connector for the medical market from Smiths Interconnect. Gross vitality, which measures the proportion of revenues coming from products launched in the last five years, was 31.5% (HY2023: 29.5%), supported by our successful new product commercialisation.

 

As an industrial technology leader, continuing to invest in R&D ensures we capitalise on the wealth of opportunities in our pipeline, with increasing demand from our customers for solutions that help them achieve their sustainability objectives. In the first half, we invested £52m in R&D (HY2023: £59m), of which £35m (HY2023: £41m) was an income statement charge, £7m was capitalised (HY2023: £8m) and £10m (HY2023: £10m) was funded by customers. Partly accounting for the year-on-year decline is the decision to move certain R&D projects to lower cost jurisdictions, resulting in more efficient R&D spend.

 

To support new product launches, and the strong demand for our existing solutions, we increased capex +5.6% in HY2024 to £38m (HY2023: £36m), with a key project being investment in automation at
John Crane. This equates to 1.5x depreciation and amortisation (HY2023: 1.4x).

 

Our third growth lever is building out priority adjacencies. Each of our four businesses are executing strategies to expand beyond their existing core markets and ensure we capitalise on the long-term megatrends of energy transition and sustainability, ever-rising security needs and enhanced connectivity. Examples in HY2024 include Flex-Tek's heating solutions used by our customers in various process electrification applications, and building out Smiths Detection's defence business, with two multi-year chemical detection awards, from the US Department of Defence and an initial £88m contract from the UK Ministry of Defence.  

 

Our fourth growth lever is using disciplined M&A to augment our primarily organic growth focus. We acquired HCP in August 2023. HCP provides geographic synergy to Flex-Tek's existing HVAC business and its patented axial and radial seal duct products help our customers meet increasing efficiency regulations in residential and light commercial construction. The acquisition is off to a good start with integration progressing ahead of plan.

 

EXECUTION

Stronger execution is our second key priority.

 

In HY2024, headline operating profit grew +5.3% (+£13m) on an organic basis, and +2.1% (+£5m) on a reported basis, to £246m (HY2023: £241m). Group headline operating profit benefited from +18.3% organic growth in John Crane and +10.3% in Smiths Detection. Flex-Tek delivered +2.6% organic headline operating profit growth as positive mix impact and good cost control offset the lower sales. Organic headline operating profit declined (33.3)% in Smiths Interconnect, behind sharply lower volumes. 

 

£m	HY2023	Foreign exchange	Acquisitions	Organic movement	HY2024
Headline operating profit	241	(14)	6	13	246
Headline operating profit margin	16.1%	(10)bps	+10bps	+20bps	16.3%

 

Headline operating profit margin was 16.3%, up +20bps on both an organic and a reported basis.

 

Headline operating profit margin (by business)	HY2023	HY2024
John Crane	22.0%	23.0%
Smiths Detection	10.5%	10.7%
Flex-Tek	19.5%	21.2%
Smiths Interconnect	16.6%	12.2%
Smiths Group	16.1%	16.3%

 

By division, strong operating leverage on the higher sales volume resulted in margin expansion at
John Crane. Smiths Detection improved its margin moderately. Flex-Tek delivered a higher margin, despite the lower organic revenue, helped by positive mix impact and good cost control. The sharply lower organic revenue at Smiths Interconnect resulted in an associated margin decline.

 

Headline EPS grew +4.5%, driven by the headline operating profit growth and the benefit from the share buyback programme, partially offset by foreign exchange impacts. The headline tax charge was £59m (HY2023: £58m) which represents an effective rate of 26.0% (HY2023: 26.0%).

 

ROCE increased +50bps to 15.7% (HY2023: 15.2%) reflecting the higher profitability of the Group. For further detail, please refer to note 19 of the financial statements.

 

Headline operating cash conversion for HY2024 was 89% (HY2023: 63%), supported by a marked improvement in working capital versus the same period last year. Headline operating cash-flow⁴ was £218m (HY2023: £151m). In HY2024, free cash-flow⁴ generation more than doubled to £112m (HY2023: £46m) or 45% of headline operating profit (HY2023: 19%).

 

The Smiths Excellence System ("SES") is one of the key initiatives to enhance execution and support the delivery of our medium-term financial targets. In the first half, SES projects delivered a £10m benefit to operating profit (HY2023: £5m). The Group continues to expect the full-year benefit to amount to £20m.

 

Supporting this delivery, there are 46 Black Belt projects currently underway. Our first cohort of Black Belts and Master Black Belts are now completing their roughly two-year assignments and returning to leadership roles across the Group. This accelerates the cultural benefits of SES as programme graduates incorporate SES learnings into leadership roles across the Group. New Master Black Belts are being appointed, whilst we continue to expand our Black Belt cohort. SES is fast becoming the way we work at Smiths and to celebrate the contribution it is making, the Smiths Excellence Awards in November recognised a number of outstanding achievements across the Group.

 

PEOPLE

Inspiring and empowering our people is our third key priority and our people plan is focused around four key areas of safety; leadership development; diversity, equity and inclusion; and engagement. 

 

The first area, safety, alongside health and well-being, is an essential foundation of our success. In the first half of the year, our recordable incident rate was 0.46 (HY2023: 0.42), demonstrating the need to continue to focus on strengthening culture and reducing risk across all sites. A key event in the first half was our three-day global HSE conference in February which covered topics including safety culture, the connection between SES and HSE, and hazard perception and risk assessment. Safety leading indicator activities, comprising peer-to-peer observations and leadership tours, reinforce these messages on a day-to-day basis.

 

Following the rollout of our Smiths Leadership Behaviours through the course of FY2023, we have embedded them into our key people-related activities such as talent development, performance management and learning programmes across all our operating businesses and geographies.

 

In terms of talent development, our Accelerate Leadership Development programme ("Accelerate") rollout continues. We have doubled the number of workshops to date this year and expanded it to 15 new countries, including Brazil and Singapore. With 300 employees having participated to date; we expect to have around 600 participants complete the programme by the fiscal year end. Accelerate improves the effectiveness of our leaders and the engagement of our teams. In parallel with this, we have also launched an initiative focused specifically on building capability in leading change. The Leading Change & Action Learning programme was piloted in John Crane and is now being extended across the Group.

 

Our commitment to fostering diversity, equity, and inclusion is integral to our people strategy. We prioritise enhancing gender diversity across all organisational levels, striving for equity in advancement opportunities. Our efforts to foster an environment of inclusivity and belonging is further bolstered by active employee resource groups ("ERGs") such as the Black Employee Network, Veterans Network, Pride Coalition and Women@Work, and the recently launched Neurodiversity ERG.

 

Through this focus on inspiring and empowering our people, our voluntary attrition rate continues to improve, down 170bps at the end of the first half for our global employees, and down 100bps for our engineering employees.

 

OUR ESG APPROACH

Environment, Social and Governance ("ESG") is at the very centre of our Purpose, and fundamental to each of our three key priorities.

 

Growth

An important element of our ESG plan centres on supporting our customers on their sustainability journeys. Many of our new products and R&D initiatives are focused on commercialising high-value green technology, as well as enhancing production efficiency for our customers. One example is John Crane's growing presence (now more than 100 projects) in hydrogen and carbon capture markets. Another example is Flex-Tek supporting the development of the world's first green steel production facility in northern Sweden. A third example is in Smiths Detection, where our new CTiX scanners improve our airport customers' energy efficiency by using up to 20% less electricity when compared to alternative systems.

 

Execution

We are executing well against our ESG framework, with significant progress and performance against our sustainability metrics, which are now fully incorporated into both our annual and long-term incentives.

 

We were pleased to receive validation of our net zero GHG emission targets by the Science Based Targets initiative ("SBTi") in the first half. Smiths' targets align with the UN's critical global climate objectives under the Paris Agreement and our ambition to limit global warming to 1.5°: Net Zero GHG emissions from Smiths operations (Scope 1&2) by 2040; and Net Zero GHG emissions from Smiths value chain (Scope 3) by 2050.

 

Both targets are supported by a robust and credible, bottom-up decarbonisation pathway and delivery plan using fiscal year 2021 as the baseline year and, in accordance with SBTi methodology, include 2032 interim targets for supplier engagement and reducing Scope 1&2 emissions by 50%. Both overall and interim targets in the plan have been validated by the SBTi. We continue to implement programmes to deliver on our targets, with energy efficiency the primary focus, but are also making progress in other areas such as renewable electricity sourcing and a greater number of fleet cars being switched to EVs.

 

People

Engagement with our communities has long been a strength of Smiths. Following the launch in FY2023 of our new charitable foundation, "The Smiths Group Foundation", we are making our first grants, totalling c.£1m, to charities around the world. The Foundation has committed an initial £10m of funding aligned with our Purpose of improving the world through smarter engineering. These cover three key areas: expanding access to STEM education and skills for under-represented groups; improving safety and connectedness within communities, for example, cleaner air or water or food security; and improving the environmental sustainability of communities, for example climate change resilience, recycling or water conservation. We look forward to seeing the impacts achieved with these grants at the charities supported in this first round.

 

Governance

The Board has appointed Roland Carter as the Group's Chief Executive Officer and as a Director of Smiths, with immediate effect. This follows Paul Keel's decision to step down from his position as Chief Executive Officer and from the Board with immediate effect, to return to the USA to take on a new role as chief executive of a US public company. (See separate RNS announcement published today).

 

In November, Steve Williams was appointed as Chairman for Smiths Group. We announced that Bill Seeger will retire from the Board of Smiths on 31 May 2024, at which point Mark Seligman will take over as the Senior Independent Director.

 

CAPITAL ALLOCATION

With our strong technology, market positions and growth opportunities, and financial framework, our highest capital priority continues to be organic growth. Accretive M&A, either to strengthen core positions or to accelerate penetration of priority adjacencies comes second. Third, we have a strong track record of returning capital to shareholders, with more than £1.1bn returned to shareholders in the past two and a half years, via dividends and the share buyback programme.   

 

Organic investment

In the first half, we invested £38m in capex projects, including investment in automation at John Crane. This spend included £7m in capitalised R&D on programmes such as next-generation hold and cabin baggage screening and further advancements in our defence portfolio. A further £35m in R&D was charged to the income statement, supporting new product development.

 

M&A

Plastronics, acquired in January 2023, has now successfully been integrated into Smiths Interconnect.
We also completed the acquisition of HCP in August 2023, a US-based manufacturer of HVAC solutions.
Its integration into our Flex-Tek division is progressing ahead of plan.

 

These acquisitions support our strategy to make complementary inorganic investments to accelerate our presence in adjacent markets or expand our product offering. We have an active acquisition pipeline and disciplined M&A approach across the Group.

 

Shareholder returns

During the first half, we completed the Group's £742m share buyback programme, with the final £29m spent in the period. A new share buyback programme of £100m is now being launched, with up to £50m to be completed by the end of September 2024.

 

In line with our progressive dividend policy, the Board is declaring an interim dividend of 13.55p, a year-on-year increase of +5.0% (HY2023: 12.9p). The interim dividend will be paid on 13 May 2024 to shareholders on the register at close of business on 5 April 2024. Our dividend policy aims to increase dividends in line with growth in earnings and cash-flow, with the objective of maintaining minimum dividend cover of around two times. The policy enables us to retain sufficient cash-flow to finance investment in growth and meet our financial obligations. In setting the level of dividend payments, the Board considers prevailing economic conditions and future investment plans.

 

The Company offers a Dividend Reinvestment Plan ("DRIP") enabling shareholders to use their cash dividend to buy further shares in the Company - see our website for details. To participate in the DRIP, shareholders must submit their election notice to be received by 19 April 2024 ("the Election Date"). Elections received after the Election Date will apply to dividends paid after 13 May 2024. Purchases under the DRIP are made on, or as soon as practicable after, the dividend payment date and at prevailing market prices.

 

Net debt

Net debt⁴ at 31 January 2024 was £505m (FY2023: £387m), as we paid £100m in dividends and returned £29m to shareholders via our share buyback which completed during the half. Net debt to headline EBITDA⁴ was 0.9x (FY2023: 0.7x).

 

As at 31 January 2024, borrowings were £673m (FY2023: £654m) comprising a €650m bond which matures in February 2027 and £125m of lease liabilities. There are no financial covenants associated with these borrowings. Cash and cash equivalents as at 31 January 2024 were £180m (FY2023: £285m). Together with our $800m (c.£629m at the period-end exchange rate) revolving credit facility, which matures in May 2028, total liquidity was £809m at the end of the period.

 

ICU Medical stake

Since the sale of Smiths Medical in January 2022, the Group has held a financial asset reflecting our equity ownership in ICU Medical, Inc ("ICU"). See note 12 of the financial statements for further detail.
In February, we sold 830,000 shares in ICU, representing approximately 3.44% of ICU's issued share capital, and equivalent to approximately 33% of Smiths' holding in ICU, with net proceeds of c.$88m (£70m) from the sale. Smiths continues to hold 1,670,000 shares representing approximately 6.92% of ICU's issued share capital. In anticipation of Bill Seeger's retirement from the Smiths Board on 31 May 2024,
Bill resigned as the Smiths nominated Director on the Board of ICU, effective 28 February 2024.

 

STATUTORY RESULTS

Income Statement

The £54m difference between headline operating profit of £246m and statutory operating profit of £192m is due to non-headline items as defined in note 3 of the financial statements. The largest non-headline items relate to the amortisation of acquired intangible assets of £25m, an increase of £22m in costs for asbestos litigation in John Crane Inc, offset by a provision reduction of £7m for subrogation claims in Titeflex Corporation. The statutory operating profit of £192m was £5m higher than last year
(HY2023: £187m), reflecting the higher headline operating profit.

Statutory finance costs were £21m, broadly flat with the prior half-year (HY2023: £20m). 

 

The statutory effective tax rate was 35.0% (HY2023 38.4%) and includes a non-headline tax charge of £1m (HY2023 £6m). Please refer to notes 3 and 5 of the financial statements for further details

 

Total Group profit after tax and EPS

Statutory profit after tax for the Group was £111m (HY2023: £109m) and statutory basic EPS was 32.0p (HY2023: 30.6p).

 

Statutory cash-flow

Statutory net cash inflow from operating activities for the total Group was £168m (HY2023: £100m). See note 16 of the financial statements for a reconciliation of headline operating cash-flow to statutory cash-flow. 

 

Pensions

Included within free cash-flow was £3m of pension contributions (HY2023: £3m). These contributions relate to unfunded, overseas schemes and healthcare arrangements.

 

As previously announced, it is not anticipated that any further contributions will be made to the TI Group Pension Scheme ("TIGPS"), as the liabilities of which have now been insured via a series of buy-in annuities. Smiths and the TIGPS Trustee are working toward final buy-out of the scheme to deliver certainty for the Scheme's 20,000 members and remove future risk for Smiths.

 

The other major pension scheme, Smiths Industries Pension Scheme ("SIPS") is estimated to be in surplus on the Technical Provisions funding basis, and no cash contributions are currently being made. The Group and the SIPS Trustee continue to work together to progress towards the long-term funding target of full buy-out funding.

 

The two main UK pension schemes and the US pension plan are well hedged against changes in interest and inflation rates. The entirety of their assets are invested in third-party annuities, government bonds, investment grade credit or cash, with no remaining equity investments. As at 31 January 2024, over 60% of the UK liabilities had been de-risked through the purchase of annuities from third party insurers.

 

Foreign exchange

The results of overseas operations are translated into sterling at average exchange rates. Net assets are translated at period-end rates. The Group is exposed to foreign exchange movements, mainly the
US Dollar and the Euro. The principal exchange rates, expressed in terms of the value of Sterling, are shown in the following table.

 

		Average rates			Period-end rates
	31 Jan 2024 (6 months)		31 Jan 2023 (6 months)	31 Jan 2024		31 Jan 2023
USD	1.25		1.18	1.27		1.23
EUR	1.16		1.15	1.17		1.13

 

Outlook

For FY2024, we reaffirm our guidance of organic revenue growth within our medium-term target range of 4-6%, underpinned by record order books. We expect growth to improve in the second half, supported by continued strength in end markets such as aerospace, security and energy, and gradually improving market conditions in US HVAC and semiconductors. We also reaffirm our expectation for continued margin expansion in FY2024.

JOHN CRANE

John Crane is a leading provider of mission-critical engineered solutions, improving customers' reliability and sustainability in process industries. 63% of revenue is derived from the energy sector (downstream and midstream oil & gas and power generation, including renewable and sustainable energy sources).
37% is from other process industries including chemical, life sciences, mining, water treatment and
pulp & paper. 73% of John Crane revenue is from aftermarket sales. John Crane represents 37% of Group revenue.

 

	HY2024	HY2023	Reported	Organic
	£m	£m	growth	growth
Revenue	555	519	+7.1%	+12.7%
Original Equipment	80	83	(4.3)%	+0.3%
Aftermarket	271	233	+16.5%	+22.5%
Energy	351	316	+11.0%	+16.6%
Original Equipment	72	73	(0.0)%	+5.0%
Aftermarket	132	130	+1.7%	+7.4%
General Industrial	204	203	+1.1%	+6.5%
Headline operating profit	128	114	+12.7%	+18.3%
Headline operating profit margin	23.0%	22.0%	+100bps	+110bps
Statutory operating profit	106	99
Return on capital employed	25.1%	21.7%
R&D cash costs as % of sales	1.6%	2.0%

 

Revenue

£m	HY2023 reported	Foreign exchange	Organic movement	HY2024 reported
Revenue	519	(26)	62	555

 

John Crane continued its strong organic growth performance and has now delivered eleven consecutive quarters of growth as it executes on its record order book. For the first half, John Crane delivered organic revenue growth of +12.7%, with a particularly strong performance in the first quarter. Aftermarket sales, which comprise 73% of sales (HY2023: 70%), grew +17.1%, while OE grew +2.5%, both on an organic basis.

 

Order intake grew +10.9% in the half, and the sustained high order book supports a positive outlook and continued growth through the second half of the year.

 

Reported revenue grew to £555m, which was up +7.1%, reflecting strong organic growth, partially offset by a negative foreign exchange impact.

 

In Energy, organic revenue grew +16.6%, benefiting from an increased focus on energy security and higher demand for energy efficiency and emissions reduction. Regionally, there was a strong performance in the Middle East and Asia for our advanced seals and gas compression products.

 

John Crane is well positioned to support customers with their decarbonisation goals with 30% of its sales coming from products and services which provide some type of decarbonisation benefit. John Crane won several notable energy transition project contracts in the first half - including one to supply dry gas seals for three supercritical CO₂ compressors of a large-scale blue hydrogen project in the USA, and a significant contract to supply wet seals for almost a hundred pumps to a zero-emission vehicle electric battery manufacturing facility, also in the USA. 

 

In January, John Crane celebrated a key milestone for its CCUS offering, supplying its 1,100^th sealing product for CO₂-related applications. John Crane has been a constant enabler of technology since installing its very first dry gas seal at a carbon capture facility in 1996, working to reduce emissions for its customers. The pipeline of opportunities John Crane is pursuing within energy transition in CCUS, hydrogen and biofuels continues to expand rapidly.

 

The Industrial segment grew +6.5% organically, with good growth across both OE and aftermarket sales, driven by broad-based demand and particular strength in water, pharmaceutical and marine sales.

 

Operating profit and ROCE

£m	HY2023    reported	Foreign exchange	Organic movement	HY2024     reported
Headline operating profit	114	(6)	20	128
Headline operating profit margin	22.0%			23.0%

 

Headline operating profit of £128m grew +18.3% on an organic basis, resulting in +110bps of margin expansion. This was driven by increased volumes with good operating leverage, partially offset by higher investment in growth to service the strong demand and deliver future opportunities. Pricing offsetting inflation and the benefits from SES projects supported margin expansion to 23.0%.

 

On a reported basis, headline operating profit was up +12.7%, which included a negative foreign exchange impact. The difference between statutory and headline operating profit mainly relates to the net cost of the provision for John Crane, Inc. asbestos litigation.

 

ROCE was 25.1%, up 340bps, reflecting headline operating profit growth.

 

R&D

Cash R&D expenditure was 1.6% of sales (HY2023: 2.0%). John Crane's continued investment in R&D is primarily focused on gas compression projects and enhancing the efficiency, performance and sustainability of heavy-duty seals and hydrogen compressors.

 

John Crane is well placed to support energy transition projects with its extreme temperatures/high pressure sealing solutions. John Crane continues to work with universities to develop and bring to market these innovative technologies and solutions that will help solve customer challenges and accelerate the decarbonisation agenda.

 

 

 

SMITHS DETECTION

Smiths Detection is a global leader in the detection and identification of threats and contraband, supporting safety, security and freedom of movement. It produces equipment for customers in the Aviation market and Other Security Systems for ports & borders, defence and urban security markets.
54% of Smiths Detection's sales are derived from the aftermarket. Smiths Detection represents 27% of Group revenue.

 

 

	HY2024	HY2023	Reported	Organic
	£m	£m	growth	growth
Revenue	404	390	+3.6%	+8.9%
Original Equipment	112	110	+0.8%	+5.7%
Aftermarket	157	153	+2.7%	+8.0%
Aviation	269	263	+1.9%	+7.0%
Original Equipment	74	79	(5.3)%	(0.1)%
Aftermarket	61	48	+27.8%	+34.1%
Other Security Systems	135	127	+7.2%	+12.8%
Headline operating profit	43	41	+4.1%	+10.3%
Headline operating profit margin	10.7%	10.5%	+20bps	+20bps
Statutory operating profit	33	24
Return on capital employed	7.9%	7.2%
R&D cash costs as % of sales	7.6%	8.4%

 

Revenue

£m	HY2023 reported	Foreign exchange	Organic movement	HY2024 reported
Revenue	390	(19)	33	404

 

Smiths Detection delivered +8.9% organic revenue growth in the first half, converting strong orders to revenue, with growth across most segments. Aftermarket revenue grew +14.2% organically, making up 54% of sales (FY2023: 51%).

 

Orders grew +38.2% in the half, with several large multi-year contracts awarded, supporting revenue growth in FY2024 and beyond.

 

Reported revenue was up +3.6% reflecting organic growth, partially offset by an unfavourable foreign exchange impact.

 

In Aviation, organic revenue grew +7.0%, reflecting continued strong demand for Smith Detection's latest range of 3D-image computed tomography ("CT") machines for cabin baggage, CTiX. Smiths Detection continues to achieve a strong win rate in aviation with key contract wins in all regions globally and to date, has now sold more than 1,200 CTiX scanners. Notable wins in the first half included Australia,
Czech Republic, France, Germany, Japan, Saudi Arabia, the UK and the USA. 

 

Other Security Systems sales grew +12.8% organically, notably in aftermarket. Order intake in defence was particularly strong for chemical detection, driven by a multi-year contract for an initial
£88 million from the UK Ministry of Defence, for next generation chemical detection equipment. This followed an award from the US Department of Defense to supply next generation portable aerosol and vapour chemical agent detectors. In urban security, Smiths Detection provided security screening at COP28 and its X-ray screening equipment was used to protect the NFL Super Bowl.

 

 

Operating profit and ROCE

£m	HY2023 reported	Foreign exchange	Organic movement	HY2024 reported
Headline operating profit	41	(2)	4	43
Headline operating profit margin	10.5%			10.7%

 

Headline operating profit was up +10.3% on an organic basis for the year, supported by the strong organic revenue growth and SES benefits. On a reported basis, headline operating profit was up +4.1%, including a moderate negative foreign exchange translation.

 

Headline operating profit margin of 10.7% was up 20bps on both an organic and a reported basis reflecting the positive benefits of SES and cost actions. This was partly offset by the expansion in field service engineers to support the high installation activity. Further, over the longer term, higher margin aftermarket revenue associated with new OE sales, our continued SES initiatives, and a positive mix impact from new defence contracts coming online are expected to support continued margin expansion.

 

The difference between statutory and headline operating profit primarily reflects amortisation of acquired intangibles.

 

ROCE increased by +70bps to 7.9%, driven by the headline operating profit growth.

 

R&D

Cash R&D representing 7.6% of sales (HY2023: 8.4%) supports Smiths Detection investment in
next-generation detection capabilities and included £9m in customer funded projects (FY2023: £9m). Smiths Detection also benefits from external R&D funding, and during the first half, was selected for EU funding as part of a consortium to develop new AI-based algorithms for automatic detection of narcotics in passenger baggage, and to develop a maritime customs border control screening system for portable screening technology for shipping containers.

 

FLEX-TEK

Flex-Tek provides innovative solutions to heat and move fluids and gases for industrial and aerospace applications that support energy efficiency and improved air quality. 81% of Flex-Tek's revenue is derived from Industrials and 19% from the Aerospace sector. Flex-Tek represents 25% of Group revenue.

 

	HY2024	HY2023	Reported	Organic
	£m	£m	growth	growth
Revenue	384	395	(2.8)%	(4.1)%
General Industrial	310	326	(4.8)%	(7.6)%
Aerospace	74	69	+6.3%	+12.1%
Headline operating profit	81	77	+5.3%	+2.6%
Headline operating profit margin	21.2%	19.5%	+170bps	+140bps
Statutory operating profit	74	64
Return on capital employed	26.1%	26.6%
R&D cash costs as % of sales	0.4%	0.4%

 

Revenue

£m	HY2023 reported	Foreign exchange	Acquisitions	Organic movement	HY2024 reported
Revenue	395	(22)	26	(15)	384

 

Organic revenue declined (4.1)% in the first half. Revenue on a reported basis declined (2.8)%, with a (£15m) organic decline and a (£22m) negative foreign exchange translation impact, partly offset by a +£26m contribution from HCP, which was acquired in August 2023.

 

In General Industrial, organic revenue was (7.6)% lower in the first half versus a tough comparator last year. As expected, soft US residential construction activity continued to impact our HVAC sales, which started to slow in the second half of last year. Market expectations that mortgage rates will continue to moderate, combined with a meaningful housing inventory deficit and improving builder confidence, inform our expectation that our HVAC sales will improve in the second half. Combined with continued strong aerospace sales, we anticipate that Flex-Tek will return to growth in the second half.

 

In Aerospace, organic revenue grew +12.1% in the first half, supported by an increasing number of aircraft builds. A strong order book supports our expectation for continued good growth into the second half.

 

Operating profit and ROCE

£m	HY2023 reported	Foreign exchange	Acquisitions	Organic movement	HY2024 reported
Headline operating profit	77	(4)	6	2	81
Headline operating profit margin	19.5%				21.2%

 

Headline operating profit grew +2.6% on an organic basis. The decline in revenue was offset by a higher gross margin, reflecting tight cost control in light of the lower volume, plus positive mix impacts reflecting new industrial heating contracts and the contribution of HCP.

 

The difference between statutory and headline operating profit is due to amortisation of acquired intangible assets and the provision for Titeflex Corporation subrogation claims.

 

ROCE decreased (50)bps to 26.1%, with profit growth offset by the foreign exchange impact.

 

The integration of HCP is progressing ahead of plan. The acquisition expanded Flex-Tek's presence in the North American HVAC market by extending its customer base in the midwest and north-east, and broadened its product range, including HCP's patented axial and radial seal duct technology.

 

R&D

Cash R&D expenditure grew in-line with sales, remaining at 0.4% of sales (HY2023: 0.4%). R&D is focused on developing new products for the construction and aerospace markets, and new electrification opportunities within industrial markets.

 

SMITHS INTERCONNECT

Smiths Interconnect designs high performance connectivity solutions for demanding applications in the aerospace and defence, semiconductor test, and industrial end-markets. Smiths Interconnect represents 11% of Group revenue.

 

	HY2024	HY2023	Reported	Organic
	£m	£m	growth	growth
Revenue	164	193	(15.3)%	(13.7)%
Headline operating profit	20	32	(37.4)%	(33.3)%
Headline operating profit margin	12.2%	16.6%	(440)bps	(370)bps
Statutory operating profit	19	30
Return on capital employed	10.5%	15.8%
R&D cash costs as % of sales	6.8%	6.5%

 

Revenue

£m	HY2023 reported	Foreign exchange	Acquisitions	Organic movement	HY2024 Reported
Revenue	193	(9)	5	(25)	164

 

Smiths Interconnect's organic revenue declined in the first half, reflecting continued weakness in the semiconductor market and a slower market in connectors resulting in part from customer destocking, as well as a tough year-on-year comparator in both these segments. A double-digit contraction in the first quarter was followed by a flat second quarter, resulting in a (13.7)% organic decline overall for the first half.

 

Reported revenue decreased (15.3)% reflecting a negative foreign exchange impact and a £5m contribution from Plastronics which has strengthened the semiconductor product portfolio and provided greater exposure to automotive and industrial end markets.

 

Although the semiconductor market downturn has been longer than expected, activity levels are starting to increase and alongside good growth in space and defence-related programmes, orders returned to growth in the second quarter, with a positive book to bill for the division.

 

Operating profit and ROCE

£m	HY2023 reported	Foreign exchange	Acquisitions	Organic movement	HY2024
Headline operating profit	32	(2)	(0)	(10)	20
Headline operating profit margin	16.6%				12.2%

 

Headline operating profit declined (33.3)% on an organic basis, resulting in a (370)bps reduction in operating profit margin to 12.2%. The decline was driven by lower volumes more than offsetting pricing, SES benefits and the impact of cost control initiatives. Headline operating profit was down (37.4)%, mostly reflecting the organic revenue decline.

 

The difference between statutory and headline operating profit reflects the amortisation of acquired intangibles, acquisition costs.

 

ROCE reduced (530)bps to 10.5% driven by the lower operating profit.

 

R&D

Cash R&D expenditure as a percentage of sales was 6.8% of sales (HY2023: 6.5%). R&D is focused on developing new products that improve connectivity and product integrity in demanding operating environments. Product launches during the first half included a high-density electrical connector for the medical market and a new series of fixed attenuators and Thermopad® products for use in space, defence and aerospace applications.

 

Space grade products are a key development focus, and in the first half, Smiths Interconnect received funding from the UK Space Agency of around £2m through its 'Space Clusters Infrastructure Fund'. Smiths Interconnect will use the funding to enhance its Dundee-based Space Qualification Laboratory, which simulates the extreme conditions of space to assure the quality and durability of space components.

 

PRINCIPAL RISKS AND UNCERTAINTIES

The Group has a risk management structure and internal controls in place which are designed to identify, manage and mitigate business risks. Smiths faces a number of risks and uncertainties which could have a material impact on the Group's long-term performance.

 

Principal risks and uncertainties

The Group has a risk management structure and internal controls in place which are designed to identify, manage and mitigate business risks. Smiths faces a number of risks and uncertainties which could have a material impact on the Group's long-term performance. The Group's principal risks and uncertainties at 31 July 2023 are detailed on pages 68 to 74 of the 2023 Annual Report. The principal risks and uncertainties affecting the Group for the remaining six months of the financial year continue to be those set out briefly below and more fully in the Annual Report.

·   Organic growth: Failure to deliver anticipated organic growth, which may lead to missing strategic growth targets and shareholder value erosion.

·   Climate change: Failure to identify and act on the significant opportunities arising from the world's transition to a low-carbon economy and/or failure to respond appropriately to climate change risks and regulation.

·   Technology: If we fail to maintain our technological differentiation and our innovation pipeline does not meet customers' evolving requirements, we may lose market share to a new or existing competitor. This could impact our financial performance and our ability to attract and retain talent.

·   People: Failing to attract, develop, and retain the right people with the right skills may affect our ability to achieve our commercial ambitions.

·   Business continuity: Disruption to our supply chain, manufacturing or service operations, or customers' operations could impact our financial performance.

·   Economy and geopolitics: The challenging economic and geopolitical environment in which we operate may have an adverse effect on demand for our products, our cost structure, pricing strategies, profitability and market share. External adverse events could cause an unanticipated and sudden disruption to our business.

·   Commercial: Failure to act in a timely manner and adapt our market strategy in response to changes in the commercial environment in which we operate may result in an adverse effect on our financial performance and market share.

·   Product quality: Failure of one of our products, including failure due to non-compliance with product regulation, may result in financial loss and reputational damage. In the ordinary course of business, we could be subject to material product liability claims and lawsuits, including potential class actions from customers or third parties.

·   Cyber security: Cyber-attacks attempting to compromise the confidentiality, integrity and availability of IT systems and the data held on them are a continuing risk. We operate in markets and product areas which are known to be of interest to cyber criminals. Digitalisation and increased interconnectivity of our products intensifies the risk.

·   Legal and compliance: We have more than 15,000 colleagues in more than 50 countries. Individuals may not all behave in accordance with the Group's Values and in accordance with ethical and legal requirements. We operate within increasingly complex legal regimes, often in highly regulated markets and with governments, customers and suppliers requiring strict adherence to laws. We may fail to deliver contracted products and services or fail in our contractual execution due to delays or breaches by our suppliers or other counterparties.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The directors confirm that, to the best of our knowledge:

·   the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the United Kingdom and in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006; and

 

·   the interim management report includes a fair review of the information required by:

 

a)    DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

b)    DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

For and on behalf of the Board of directors:

Paul Keel	Clare Scherrer
Chief Executive Officer	Chief Financial Officer

 

25 March 2024