Earnings call: Smiths Group Plc sees strong FY ’24, targets growth in FY ’25

In a recent earnings call, Smiths Group (OTC:SMGZY) Plc (SMIN.L) CEO Roland Carter reported a robust fiscal year 2024 performance, with a focus on strategic growth and innovation. The company plans to invest heavily in the coming years and anticipates annualized savings by FY 2027. Smiths showcased organic revenue growth and an increase in operating profit, alongside a rise in constant currency EPS.

The company also declared an increased final dividend. Key divisions reported varied performance, with John Crane and Detection seeing organic revenue growth, while Flex-Tek faced a slight decline but improved margins. Smiths Interconnect experienced a revenue drop but is set for recovery. Looking forward, Smiths is optimistic about FY 2025, targeting organic growth and maintaining strong financial discipline.

Key Takeaways

Smiths Group Plc plans to invest GBP 60 million to GBP 65 million over the next two years, targeting annualized savings of GBP 30 million to GBP 35 million by FY 2027.
Organic revenue grew by 5.4%, with a total revenue increase of 3.1%, despite negative foreign exchange impacts.
Operating profit rose to GBP 526 million, marking a 7.1% increase.
The final dividend recommended is 30.2p, a 5.2% increase from the previous year.
John Crane division reported a 9.8% organic revenue growth, while Detection saw an 11.1% increase.
Flex-Tek experienced a 0.8% revenue decline but improved its margins by 100 basis points through cost control and acquisitions.
Smiths Interconnect faced a 6.5% organic revenue decline but is positioned for recovery.
The company expects organic growth in the range of 4% to 6% for FY 2025.

Company Outlook

Smiths Group Plc projects 4% to 6% organic revenue growth in FY ’25, driven by strong demand in key areas and a recovery in U.S. construction.
The company is focusing on innovation and R&D, with investments totaling GBP 181 million.
Smiths anticipates a positive performance in Semi Test and Aerospace sectors.
The company maintains a strong balance sheet, with a leverage ratio of 0.3 times net debt to EBITDA, expected to rise to 0.4 times post-acquisitions.

Bearish Highlights

Flex-Tek’s slight decline in revenue due to softness in U.S. construction.
Smiths Interconnect’s organic revenue decline due to weakened demand in connectors and the Semi Test market.
Operating profit in Smiths Interconnect fell by 17.8%.

Bullish Highlights

Strong aftermarket sales in John Crane, particularly in the Middle East and Latin America.
High demand for CT scanners in the aviation sector, boosting Detection’s performance.
Increased efficiency in Original Equipment installations, with a 21% rise despite only a 7% increase in field service engineers.

Misses

Challenges in the John Crane chemicals segment, though overall order intake remains strong.
Temporary revenue hiatus in security systems contracts for ports and borders.

Q&A Highlights

CEO Carter addressed concerns about contract timing in security systems, asserting long-term demand remains robust.
Carter expressed confidence in John Crane’s order book and the expected conclusion of capacity expansion in FY ’25.
The company’s SES program is projected to yield GBP 23 million in benefits in FY ’25, contributing to margin expansion.

Smiths Group Plc remains committed to delivering value through strategic investments, cost management, and innovation. The company’s focus on maximizing profitable growth and disciplined M&A strategies positions it well for the future, as it aims to capitalize on market opportunities and enhance its competitive advantage. With a strong outlook for FY 2025, Smiths Group Plc continues to advance its position in the global market. The next market update is scheduled for November 13, 2023.

Full transcript – Smiths Group PLC (SMIN) Q4 2024:

Roland Carter: Good morning, everyone, and thank you for joining us today. As I said in March, it is an honor to be CEO of Smiths. This is a great company, doing many outstanding things. As you’ll see, the business is in a strong position, delivering good results. I’ll start with some initial thoughts and a short recap of our FY 2024 performance before turning it over to Clare to walk us through the numbers. I’ll then come back and update you on how I view our strategy and outlook, and we’ll have plenty of time at the end for Q&A. As many of you know, I’ve been at Smiths for well over 30 years. And during that time, I’ve had the privilege to run several of our businesses. This has given me a deep appreciation of the group’s impressive attributes that have seasoned over time. Smith is a portfolio of market-leading businesses and has many strengths, talented people, many of them with world-class engineering expertise, differentiated proprietary technology and strong brands. We are well-positioned in attractive markets that offer significant opportunity for profitable growth. And we’re helping our customers to make the world safer, more energy efficient and productive and better connected. A great foundation, and I firmly believe that we are well-placed to create more value in the future. We have diverse and immense talent in the company and we’re committed to nurturing, supporting and developing this most precious of resources. I’ve always and continued to see my role as creating value for shareholders, customers and colleagues. And indeed, I have benefited from my experience across different businesses and regions, developing and sharing best practice. I intend to ensure that more of our people have similar development opportunities. In addition, our commitment to safety, engagement and inclusion, talent development and sustainability will continue to strengthen our culture. Although our business is strong, there’s always more to do from delivering improved performance in partnership with our customers and suppliers, to sharing best practice across the group, and inspiring and empowering our people. Each business has a clear road map to improve profitability and enhance capabilities. This will take time and although we’re not looking at a radical reset, there are a number of initiatives which will drive improvements centered around our acceleration plan. I look forward to sharing these with you today and updating you regularly as we deliver. To be clear, this plan is about value creation, not just transformation, so we will optimize footprint to support customers as well as invest to enable our processes to scale efficiently as we grow. We propose to invest approximately GBP60 million to GBP65 million over the next two years and deliver GBP30 million to GBP35 million of annualized savings by FY ’27. I will also outline where I think we can improve things to achieve further growth and drive our margins sustainably to deliver the medium-term financial targets we set and which I reaffirm today. With that, let me turn to the results. I’m pleased to report we have continued to have a robust delivery against our strategy with a good operational and financial performance. Both organic revenue growth and operating margins were in line with our guidance. Our cash flow conversion has improved, and we’ve deployed cash into organic R&D investment and into M&A. This morning, we are pleased to announce two acquisitions which will be integrated into Flex-Tek, enhancing HVAC and industrial heating platforms. Our balance sheet remains strong to support our continued growth strategy. Overall, we’re making good strategic, operational and financial progress. So, looking beyond next year, we have reaffirmed our medium-term targets. Our focused strategy and leading businesses mean that we are well-positioned to create value for all our stakeholders. The opportunities ahead are significant, and we look forward to executing on them. With that, I will now turn it over to Clare to walk you through the financial results.

Clare Scherrer: Thank you, Roland, and good morning, everyone. Organic revenue growth for the year was 5.4%, acquisitions added 2%, and there was a negative 4.3% FX impact bringing reported growth to 3.1%. We increased operating profit to GBP526 million, up 7.1% organically. Importantly, we continued investing for the future and at the same time, improved operating margin by 30 basis points. Operating profit, acquisitions and our share buyback activity contributed to constant currency EPS growth of 12.9%. Including the impact of FX, our basic EPS growth was 8.3%. We also increased operating cash conversion by 11 percentage points to 97%. And ROCE was up 70 basis points to 16.4% driven by increased profitability. Finally, in line with our progressive dividend policy, we’re recommending a final dividend of 30.2p, resulting in a total full year dividend of 43.75p, a 5.2% increase. Turning to results in more detail and starting with organic revenue growth. We continue to extend our track record of growth and are pleased to report our third consecutive year of organic revenue growth building on FY ’23’s record organic growth. We converted revenue growth into 7.1% organic operating profit growth. Pricing more than offset inflation, contributing 50 basis points of margin expansion. With respect to volume, John Crane and Detection volume drove 60 basis points of margin expansion of which 40 basis points was offset by volume declines in Flex-Tek and Interconnect. Mix also reduced margin by 40 basis points. And finally, consistent with our philosophy of saving where we can in order to invest where we want we invested in several growth initiatives. These were funded by benefits from SES and other savings projects. So, in summary, we delivered a 16.8% operating profit margin and a 30-basis-point expansion in line with our guidance for continued margin improvement. For the year, the primary drivers of EPS were growth in operating profit, our accretive acquisition of heating and cooling products or HCP and the benefit of our share buyback activity. On a constant currency basis, we delivered 12.9% EPS growth and including the impact of FX, our reported EPS growth was 8.3%. We delivered an 11 percentage point increase in operating cash conversion to 97%. This reflects both a tailwind from disciplined working capital management as well as a headwind from increased CapEx supporting capacity expansion and automation investment in John Crane. John Crane’s machining upgrade program started in FY ’24, but it’s largely weighted toward and will complete in FY ’25. Therefore, at the group level for FY ’25, we anticipate spending approximately GBP110 million in CapEx. In addition to our normal CapEx, FY ’25 higher-than-usual spend will cover the completion of the John Crane efficiency investment program, which I just mentioned as well as some additional CapEx initiatives that Roland will speak to later, all of which will support continued profitable growth. And we anticipate returning to recent trend levels of CapEx in FY ’26. Finally, this year’s GBP509 million of operating cash converted to GBP298 million of free cash flow, a notable 67% year-on-year increase. Now turning to each of our divisions and starting with John Crane. John Crane delivered organic revenue growth of 9.8%, with an exceptional performance in the first half before moderating to strong growth as expected in the second half. Growth was led by energy, especially in aftermarket sales and notably in the Middle East and Latin America. This revenue growth translated into strong operating profit growth and 60 basis points of organic margin expansion due to good operating leverage, disciplined pricing and SES benefits, which more than offset cost inflation and mix. John Crane delivered this margin expansion while continuing to invest for future growth, including hiring additional sales reps and service engineers. Given our ability to help customers improve efficiency and reduce emissions from their operations, we had notable wins across the world from Kazakhstan to Canada, John Crane’s energy diversification pipeline also continues to expand, and we’re now actively pursuing around 125 carbon capture and hydrogen projects. Finally, our strong recent order intake growth supports our positive outlook for FY ’25. The Smiths Excellence System, or SES, also underpins our outlook. At our John Crane deep dive event last November, we spoke about how we’re using SES, lean and automation to improve efficiency and customer responsiveness. As just one example, we previously invested in machine data capture in John Crane’s check plant. This enabled us to analyze and optimize machine utilization, operator productivity and scheduling as well as shop floor layout at that location. We then invested in and rolled out those learnings to another nine John Crane locations across seven countries. We’ve also centralized and standardized our programming in India. So, in summary, using our SES framework to apply lean principles to automation across key value streams has driven both efficiency and cost improvements in our John Crane operations and enables us to rapidly respond to customer demand in FY ’25 and beyond. Detection also executed on a strong order book and delivered organic revenue growth of 11.1%, with growth in both segments. In Aviation, OE sales increased 25%, reflecting strong demand for our CT airport checkpoint scanners with multiple new wins across the globe, including the U.S., the U.K., South Korea, Saudi Arabia, New Zealand and Germany. And we estimate that globally, the current checkpoint upgrade is about 45% of the way through. So good demand should continue for the next roughly 3 years. Of note, our win rate to date on CTiX tenders remains above 50%. And importantly, the OE sales we secure come with an attractive aftermarket that we expect to continue to add to margin expansion over the medium term. 2.6% organic revenue growth in other security systems reflects a strong performance in defense and urban security, partially offset by weaker ports and borders. As a reminder, in FY ’24, we received an initial GBP88 million multiyear contract from the U.K. Ministry of Defense for next-generation chemical detection equipment. Operating profit grew 18% and margin expanded by 70 basis points. This reflects higher volumes and improving operational efficiency in the second half even including Detection’s continued investment in field service engineers to support record installation activity. Order intake growth in the year was exceptionally strong and we ended the year with a record order book that will support growth in FY ’25 and beyond. This anticipated growth, ongoing SES activities and increasing Defense and aftermarket revenue underpin our expectation for continued margin expansion in the coming years. In detection, we have a heritage of innovating to meet the world’s evolving security needs. And most recently, we pre-launched X-ray diffraction at the Frankfurt passenger terminal Expo in April. We’re now working closely with regulators to gain necessary certifications. And in parallel, we’re educating a range of hold baggage customers on the merits of this new technology. We expect to achieve modest first orders for this product in FY ’25 with associated revenue coming through in FY ’26 and beyond. Here’s a short video which brings diffraction to life. [Presentation]

Clare Scherrer: As you’ve just seen, x-ray diffraction provides significantly enhanced detection accuracy within the hold baggage screening operation. It reduces the number of false alarms, which are time-consuming to resolve and so improved efficiency. Although designed for aviation hold baggage, we’re exploring the potential of diffraction with other commercial customers such as cargo operators and customs agencies. A great example of innovation at Smiths. And now turning to Flex-Tek. Revenue declined 0.8% organically with an improved second-half performance when we returned to growth as we guided. Flex-Tek’s Industrial segment declined 3.5% as expected, mainly in HVAC and reflecting extended softness in U.S. construction. Partially offsetting this, Aerospace sales grew almost 11% linked to new aircraft builds. Despite overall lower sales, organic operating profit increased 4.2% and Flex-Tek expanded operating margins by 100 basis points. Margin expansion was driven by exceptional cost control in light of lower volumes and the positive mix impact from industrial heating contracts. In addition, the integration of heating and cooling products, which we acquired in August of 2023 is running ahead of plan. Looking forward, the timing and shape of the U.S. housing recovery would be a key determinant for Flex-Tek in FY ’25. And we expect aerospace sales to remain strong given they’re underpinned by a healthy order book. Today in Flex-Tek, we’re also pleased to announce two strategic and disciplined acquisitions for a combined purchase price of GBP95 million, plus up to an additional GBP15 million earnout tied to the performance for one of the acquisitions over the next 3 years. This combined purchase price represents an average trailing EBITDA multiple of roughly 8 times. These acquisitions enable us to meaningfully expand in two of Flex-Tek’s core platforms: HVAC and industrial electric heating. Now a bit more about our acquisitions. First, Modular Metal Fabricators. Modular Metal is a metal and flexible ducting manufacturer which extends our HVAC presence in the Western U.S. and broadens our product range to include their sealed flexible duct solution. This acquisition is similar to our August 2023 acquisition of HCP, which expanded our coverage in the Midwest and Eastern U.S. We expect to complete this acquisition in October. And second, Wattco. The acquisition of Wattco enables Flex-Tek to expand into medium temperature, immersion and circulation heating, an attractive market adjacency which is highly complementary to our existing open coil electric heating business. We’ve already completed this acquisition. Both acquisitions have been on our radar for some time and our family-owned businesses, which we acquired in bilateral discussions, clear evidence that our acquisition targeting and cultivation is working. And we’re well positioned to continue to advance an active pipeline of attractive opportunities. Turning now to Smiths Interconnect, where organic revenue declined 6.5% as a result of weakness in connectors and the Semi Test market. Like Flex-Tek, Interconnect’s second-half performance improved and posted marginal organic growth, reflecting lower volumes. Organic operating profit declined by 17.8% and operating margin contracted 190 basis points. The team in Interconnect diligently managed costs while also maintaining R&D investment to support our new product launches and longer-term new product pipeline. So, we’re well positioned for an improving market backdrop. Our order activity improved sequentially throughout the year, especially for our Semi Test products. This together with our new product pipeline underpin our expectation for performance improvement in Semi Test and Aerospace and Defense programs as we progress through FY ’25. On the left-hand side of this page is an example of one of Interconnect’s new products, the DaVinci 112 test socket within our Semi Test business. It’s used by leading AI and data center semiconductor manufacturers to test high-speed and complex circuits. It eliminates false fall and functional failures. So, our customers can benefit from increased production yields and throughput. On the right-hand side, we’re also a market leader in space-grade transceivers, and we have a strong order book in this product family as well. A good example of innovation here is the recent launch of the Mini-Lock Connector, which offers superior radio-frequency performance, is compact and lightweight, and is designed for harsh environments such as satellites and space and defense. Turning now to our capital allocation framework. Our priorities remain unchanged. We aim to fuel organic growth, pursue strategic and disciplined acquisitions and have demonstrated our commitment to returning excess capital to shareholders. In support of organic growth in FY ’24, we invested GBP181 million in R&D and CapEx. Also, just discussed in Flex-Tek’s divisional results, in FY ’24, we acquired HCP. And today, we’re announcing two strategic and disciplined acquisitions that enhance Flex-Tek’s core capabilities. Our third priority is returning capital to our shareholders. Today, we’re recommending a 5.2% increase in our final dividend in line with our progressive dividend policy. In FY ’24, we spent a total of GBP70 million on share buyback. This comprised the final GBP29 million from the group’s 2021 share buyback program plus GBP41 million from the initial GBP50 million tranche of the program we announced in March of this year. Post the year-end, we completed the remaining GBP9 million of this first tranche. Given today’s acquisition announcements, our active pipeline of potential acquisitions and the acceleration plan, we’ve not yet initiated the second tranche. During FY ’24 and the start of FY ’25, we also sold the majority of our stake in ICU Medical (NASDAQ:ICUI), which raised GBP233 million in proceeds. In summary, our leverage at the fiscal year-end was 0.3 times net debt to EBITDA. On a pro forma basis, taking into account the two acquisitions we’re announcing today, the buybacks and our ICU share sales, our pro forma leverage is 0.4 times. This balance sheet strength gives us the financial flexibility to execute our strategic and financial goals. Finally, a few words about our outlook for FY ’25. We’re again expecting organic growth within our medium-term target range of 4% to 6%, reflecting continued strong demand and good order book visibility at John Crane, Smiths Detection and Flex-Tek Aerospace, a recovery in U.S. construction for Flex-Tek and recovery in Semi Test end markets for interconnect. We also expect continued margin expansion in FY ’25, reflecting operational leverage and continued benefits from the Smiths Excellence System and lean initiatives in particular. Roland will describe the timing and shape of the acceleration plan, which he introduced in his opening remarks and which we’re initiating today. The acceleration plan will have minimal headline impact in FY ’25 as we take associated costs below the line and benefits will begin to phase in during FY ’26. Regarding cash conversion, in FY ’25, we expect the full year to be in the low 90s percent and to be weighted towards the second half of the year. This reflects the timing of CapEx investments in John Crane efficiency, which I discussed earlier, and a small amount of CapEx that is part of the acceleration plan. In conclusion, we have positive momentum, clear execution priorities and an energized team under Roland’s leadership as we enter FY ’25. With that, let me hand back to Roland.

Roland Carter: Thank you, Clare. As the new CEO, I realize that you’re keen to know what’s going to change and what will stay the same. So, let me give you a quick overview now and then go into detail afterwards. My remit is simple: build on and out from our solid foundations and to take the best of Smiths and to make it better. Our purpose and mission remain unchanged as to the key components of our strategy, which are to deliver profitable growth from attractive markets, to invest in technology and engineering for competitive differentiation, and to implement often mission-critical solutions within long-term customer partnerships. As you’ll recall, we group our priorities into three areas. These are broadly the same, but there are some important changes. We are resolutely focused on delivering profitable organic growth. And there is more to do to capture the growth opportunities in our core markets. There will also be a focus on our innovation agenda to get the most out of our new products. And lastly, we’re prioritized moving into new growth accretive adjacencies. These markets respond to key megatrends and we’ll align our R&D resources here towards products and service innovation to enter these markets organically. We’ll also use our balance sheet strength, M&A when used well, can accelerate the pace and scale of strategic execution, as we’ve demonstrated with the announcement of two transactions for Flex-Tek today. These deals consolidate existing market segment positions, offer access to adjacent markets and bring significant engineering capabilities, and we’re delighted to welcome these businesses into Smiths. As I mentioned at the very start, we achieved nothing for our customers without the effort and talent of all the people who work at Smiths. Our priorities here are unchanged. And we need to ensure that the good foundational work in values, leadership behaviors and culture can make a real long-term difference to how we operate. So, our focus will be on ensuring that ownership of our key initiatives, such as talent attraction and leadership development happens at all levels in the business. Our group functions support the portfolio of businesses and provide them with strong flexible oversight and governance. We’re making this more efficient with the controlled rollout of a global shared business services to provide more cost-effective and colleague-focused support. And finally, execution. Our operational excellence journey is well underway, but has more to offer. The SES function, Black Belts and Master Black Belts were set up to identify and deliver projects, and this will continue. Now we need to switch the emphasis in SES to gain enduring group-wide traction. As a result, lean and other continuous improvement activities will now be driven at the grassroots level under the direction of site lean leaders rather than directed top-down from group. We recognize that we need to deliver our target operating margin faster, and we’re launching our acceleration plan to do just that. Our businesses serve different customers and have different competitors across many end markets. Nevertheless, we share some strong customer-facing capabilities and common characteristics. We’ve already seen the benefit of digital know-how transferred from Smiths Detection to John Crane. And as many of you know, they also share broad aftermarket capabilities. Deep-seated manufacturing and process knowledge spans John Crane, Smith Interconnect and Flex-Tek as does material technology, for example, all the businesses either use or process ceramics. John Crane relies on ceramics to improve the extreme temperature and pressure characteristics of its seal faces, Interconnect uses high-purity novel ceramics in radio-frequency components, the open coil heating elements used in Flex-Tek’s heat solutions are held in place by ceramic insulators. And Smiths Detection uses high-grade ceramics in its X-ray detector boards. It’s important to note that these capabilities or characteristics aren’t all shared equally or by every business, but they are real, and we can benefit from shared learnings to create and sustain group-wide competitive advantage. What is common, however, is the group framework, which supports every business in a cost-effective and agnostic fashion. We’ve undertaken some necessary and very successful work to drive results within a common performance framework, and we’re now ready to build on and out from these solid foundations. By expanding the remit of our global shared business services, we’re covering all businesses and the key support functions in addition to IT, which it already manages in a cost-effective way. Our broad portfolio means that we participate in a range of end markets whose potential for future growth is propelled by powerful megatrends. Smith is well positioned to access these, for example, energy diversification, the world’s ever-increasing security needs, the rise of the circular economy or our insatiable appetite for data. Importantly, accessing these brings us closer to our customers and enable us to deliver our purpose to make the world safer, more energy efficient and productive and better connected. The Smiths of today is a strong business, and I am convinced more than ever of its potential. Our recent successes have been built on better accessing the many opportunities available to us in attractive core markets and to grow profitably and increase share. New products and services also contribute meaningfully. As I mentioned earlier, we can do more here to capitalize on organic growth potential in our core markets and commercialize new products and services more rapidly. Nevertheless, it’s the penetration of priority adjacencies often directly connected to megatrends that can offer growth acceleration for us. Process of electrification, high-speed space and satellite communications or new sealing solutions and services are all examples of current organic innovation, which is why you’ve heard us speak about our involvement in green steel or participating in the world’s largest green city as well as blue hydrogen projects. A combination of organic investment in CapEx and R&D, augmented by targeted and disciplined M&A will further fuel our progress. As you can see here, Smiths serves four primary end markets and, in most cases, through multiple businesses. General industrial is our largest end market at roughly 39% of group sales. Just under one-third of our revenues come from safety and security. Energy represents just under one-fourth of our business, and aerospace and defense represents just over 10% of group revenue. In aggregate, these end markets grow at 4% to 5% through the cycle, underpinning our medium-term growth target. I’ll highlight just a couple of additional points. We had a particularly good year in energy and safety and security, posting double-digit organic revenue growth. By contrast, our performance in general industrial primarily reflected cyclical downturn in U.S. construction, semiconductor testing and connectors. Although we expect conditions in these markets to improve as we progress through FY ’25. In summary, we operate in growing global markets where our pioneering technologies and capabilities position us well for success. First and foremost, Smiths is an engineering business. We have 3,000 highly skilled engineers working in new product development, operations and aftermarket service. We make a meaningful investment in R&D each year, GBP109 million in FY ’24 alone or about 3.5% of sales. If we include the targeted engineering investment in John Crane, this increases to 4.8% of sales. We invest at these levels because it makes a big difference for our customers, around one-third of our revenue today comes from products that didn’t even exist 5 years ago. Importantly, much of this investment is done for or in partnership with our customers to deliver differentiated solutions. As a result, Smiths’ world-class engineering is fundamental to building the strong and defensible market positions we’ve earned over time. At Smiths, innovation takes place at many levels, new products and services, new ways of manufacturing and new ways of exploiting technology. Let me take you through just a few examples. We continue to expand our Flex-Tek HVAC product range, innovating to reduce cost and weight and to improve ease of installation. Smith’s Detection is bringing two notable new technologies to market, ruggedized and miniaturized chemical agent detectors using ion mobility spectroscopy, and mass spectroscopy as well as x-ray diffracting, which you saw in the video earlier. Finally, in process innovation, John Crane’s new reliability services incorporate digital, predictive analytics and monitoring capabilities. And Smiths Interconnect have revolutionized the rapid development and associated manufacturing process for a new generation of isolator. I’ve worked in several of Smiths businesses over the past 30 years, and I can see real opportunities for our engineers to work more closely together. For example, in new areas such as factory automation as well as more traditional areas such as extrusion and grading and we will encourage more of this collaboration in the future. Execution begins with customers. We serve market-leading global players in critical industries, where uptime is everything, when airports, communication networks or energy grids go down, entire communities are disrupted. Our global presence allows us to deliver real-time mission-critical support to our customers and importantly, embeds us with them more closely. The trust and confidence that comes with this has helped us build large installed bases, which in turn drive predictable aftermarket revenues, now over half of Smiths Detection sales and over 70% of John Crane. This ethos of customer intimacy and long-term partnership also extends to Flex-Tek and Interconnect, where even though we don’t have installed bases of equipment, we enjoy high levels of incumbency with important customers. To serve global customers, we have to be global as well. Smiths has long architected our global supply chains with a local-for-local design. We aim to source where we manufacture and we manufacture where we sell. We have operations in over 50 countries, 75 manufacturing or R&D facilities paired with a network of 170 service centers. Customer proximity, coupled with service delivery across large installed bases allows us to create real competitive advantage. Today at Smiths, SES is simply how we work. It’s central to how we sell problems and deliver results. It’s also central to how we develop our talent and advance operational excellence across the group. As we seek to develop capability for the longer term, we now have lean leaders in all major sites to drive operational excellence effort from the grass roots. While our Black Belts and Master Black Belts continue to lead projects and leverage activity deep within the business, recent investments are now delivering. We have a high-performing full-time team in place, and we generated approximately GBP23 million worth of savings this year. The importance of SES in building an ever-stronger Smiths extends beyond financial benefits. For example, it plays a key role in accelerating talent development across our company. Our first wave of Black Belts and Master Black Belts have reentered the company in high-impact roles and have been replaced by the next cohort of talent. This cycle helps us lock-in operational gains and further embeds SES culturally in the way that we work at Smiths. As I said earlier, we are focused on building enduring group-wide traction. So lean and other continuous improvement activities will now be driven at the grassroots level under the direction of site lean leaders rather than directed top-down from the group. We are impatient for its success. And whilst SES has and will continue to deliver bottom-up benefits from continuous improvement, we believe that certain transformational actions can deliver a step change in our performance. We are undertaking a fundamental review of operating leverage and cash generation potential and have identified a set of business-led initiatives, which will enhance operating margins, improve productivity and build capabilities faster. To be clear, and as I said earlier, this plan is about value creation, not just transformation. Importantly, these initiatives will deliver end-to-end process improvements for resilience and scalability over the longer term. Our acceleration plan will increase the pace with which we can deliver against our medium-term targets. The plan covers the whole group, and each business has identified a specific set of proposed actions, for example, investment in process and capability improvements, such as the more systematic deployment of sales and operations planning systems as well as reviewing footprint optimization to locate activity closer to the customer, and to consolidate product families in centers of excellence. The plan also covers the rollout of our global shared business services, where required, we will consult appropriately with colleagues around the planned changes and we’ll keep them informed. The total cost of the planned investment is expected to be GBP60 million to GBP65 million, which will be spent over FY ’25 and FY ’26 and be treated as exceptional for accounting purposes as well as GBP10 million in CapEx. We expect to deliver benefits of GBP30 million to GBP35 million on an annualized basis in FY ’27, of which a quarter is expected in FY ’26. Each business has a clear road map to improve profitability and enhanced capabilities. This slide shows both the growth agenda and the execution agenda over the near to medium term. It should come as no surprise that we see significant opportunities for cross business collaboration in areas of innovation and operational excellence. Much of this is familiar to you. Essentially, this is business as usual, although it is much more focused and structured. It also puts the acceleration plan into context and demonstrates that this is the next step on our journey to delivering our targets. Importantly, it highlights the attractive trajectory for each business and demonstrates the value creation opportunities we see in all our businesses. Let’s turn to people. This slide shows four aspects of what matters to us. Firstly, safety. We’re committed to maintaining our culture of care and strive to improve our top quartile performance where our recordable incident rate has been at or below 0.44 for 8 straight years, roughly 20 basis points stronger than even the top quartile of global manufacturers. Next, engagement and inclusion. In terms of engagement, 85% of us participated in our annual survey and our latest overall satisfaction rating was the highest we’ve ever achieved. We live our purpose every day, and this is underpinned by our commitment to safety, innovation and putting the customer at the heart of everything that we do. We work hard to make Smiths, a company that people want to join and where they can build rewarding careers. So, we’re committed to bringing in the best diverse talent and then investing in people as they grow and develop. As you would expect, we have a particular focus on extending our technological capabilities and leadership. Finally, our commitment to sustainability is deeply practical. Our codes of doing business, ensure that we work with like-minded suppliers and customers. And the early success of the Smiths Group Foundation demonstrates how important it is to my colleagues to improve our world with our communities and to invest locally where we work. We’ve committed to net zero for Scope 1 and 2 by 2040 and Scope 3 by 2050. And we’ve delivered another year of robust reductions in greenhouse gas emissions from operations. We underpin this by aligning a portion of both executive and management remuneration to improving energy efficiency and achieving greenhouse gas reductions in the coming years. Our reduction pathway was validated by the science-based targets initiative in December. We’ve published new targets for a number of environmental metrics for FY ’25 to FY ’27, which you can find in the appendix. We’re making good progress against all medium-term targets, and the delivery of the acceleration plan will help us meet the one target our operating margin where our progress has been slower than we would have liked. So, to confirm what I said at the very start of this presentation, we are reaffirming our commitment to delivering these targets over the medium term. FY ’24 was another good year for Smiths, strong organic revenue growth of 5.4%, yielding EPS growth of 8.3%. We also delivered year-on-year gains in all medium-term financial commitments and effectively meeting four out of our five targets. And although at 97% this year, our average operating cash conversion has been 99% over the last 5 years. And we have actionable plans to deliver against our operating profit margin target. With all this momentum, we are well positioned for another year of good progress and performance, expecting 4% to 6% organic revenue growth and continued margin expansion with further investment in sustained growth through the acceleration plan. Our continued progress is made possible by our talented, committed and capable colleagues around the world. Thank you all for what we’re achieving together. So, to summarize, we remain firmly grounded in our purpose, engineering a better future, and we are clear about our strategy. We are focused on our priorities: maximizing profitable growth in our core markets and driving high value innovation, investing in growth accretive, profitable adjacencies, developing and supporting our people driving operational excellence to continue to increase margin, improve cash flow and process efficiency and maintaining a strong and flexible balance sheet to support our growth. Finally, we have three important catalysts, which are designed to accelerate value creation and to help us to deliver enhanced performance. A continued focus on investment in innovation, to drive organic growth in core markets and into attractive adjacent segments. Our group-wide acceleration plan will enhance operating margins, improve productivity and enhance capabilities. Importantly, it will also deliver end-to-end process improvements for resilience and scalability over the long term. And with M&A, we can accelerate the pace and scale of our delivery, and we now have a more active pipeline than previously. As demonstrated with the two transactions for Flex-Tek today. We’re delighted with these deals, and we’ll continue to remain disciplined and focused. The combined average trailing EBITDA multiple of roughly 8 times demonstrates this. Smiths is an intrinsically strong company with serious world-class engineering, leading positions in critical and attractive markets, distinct global capabilities and a powerful financial framework all of which signal real potential. Our strategy builds on and out from these foundations and a sharpened focus on maximizing growth opportunities in our core markets through innovation driving a step change in execution through the acceleration plan and using M&A appropriately will drive increased value for all stakeholders. And with that, I’ll ask the operator to please open the Q&A.

Operator: [Operator Instructions]. And your first question comes from the line of Lushanthan Mahendrarajah from JPMorgan.

Lushanthan Mahendrarajah: I’ve got three, I think. The first is just really on current trading and orders, please, and sort of what you’re seeing across the division. I think at the H1 point, you guys said orders across the group were up 16.5% and then get some divisional detail there to sort of any sort of similar kind of sort of numbers for the second half that would be quite helpful just to see what the trends are. The second question is just on John Crane and general industrial, a bit of a slowdown in the second half, particularly in aftermarket. Just any color in terms of what’s happening there and sort of how you expect to develop over the next year. And then the third is just on capital allocation and sort of the buyback and M&A, I guess. Sort of your point around not starting the second tranche yet, just given the sort of M&A pipeline and the sort of the deal was done today. I guess even post that leverage doesn’t seem particularly high. Just wanted to get a bit more color around that pipeline that you said is more active. Are these bigger deals than perhaps you’ve been used in the last couple of years? Or are this sort of still bolt-ons? And is it just Flex-Tek or these sort of across all four divisions? Thank you.

Roland Carter: Thank you, Lushanthan. Let me pick up on your first point about current trading first. We have had consistent and good performance over the past 3 years, and that’s continued as we see. I think what comforts me for going forward is the order book growth that we’ve seen and really the strength that we’ve seen in — to give you a bit of color by division. The strength that we’ve seen in John Crane, the strength that we’ve seen in Flex-Tek, Aerospace as well and also the record order book that we’ve come into the year with — from detection. We did see some challenges at the end of last year with Interconnect and also Flex-Tek. But we did see in the second half, there was growth in both of those, which was comforting. As you heard Clare mentioned, U.S. housing use isn’t as strong as it might be, but we are encouraged by the Fed count as well. So, and then also in Interconnect connectors, we saw the destocking and we’re waiting for that bounce back. But in the medium term, we are confident in our medium-term guidance on the current trading because of the strength of the order books that we’re going into the year with around that. On particularly the John Crane industrial point, we did see last year, the comparator in the second half as we were comparing against a very strong comparator on that. We’re now seeing strength in the John Crane order book, and we believe that, that will return with the market as well. So again, confidence around that. I’ll let Clare talk a little bit about the detail of capital allocation as well. But let me just tee that up. I mean we intend to be very disciplined in our use of capital allocation, whether that’s for R&D, supporting organic growth, whether that’s M&A or buyback or what you’ve seen about the acceleration plan that we put forward. I don’t know if there’s anything you’d like to add on that, Clare.

Clare Scherrer: Well, I would add that we have a clear track record of returning excess capital to shareholders. And over the last 3 years, that’s been over GBP1.2 billion through both our progressive dividends and our buybacks. In terms of your question, Lush, we’re so excited today that we do have two really strategic acquisitions that we’re announcing in Flex-Tek. And as you mentioned, we do have an active pipeline. Our active pipeline of other opportunities we’re looking at spans all of the businesses. It’s more active in John Crane and in Flex-Tek, but we do look at opportunities across all of the businesses. And finally, you asked about size. So most of the opportunities we look at are bolt-ons, similar to the size of acquisitions we announced today or have announced in the past, but we don’t limit ourselves to look only at bolt-ons. Of course, we also explore larger opportunities when we feel that there’s real value that we could create and where they would be strategic additions to Smiths. So, we’ve not yet initiated the second tranche of the buyback in light of the pipeline that we’re looking at and also in light of the spends that we’ll be making near term as we launch today the acceleration plan.

Lushanthan Mahendrarajah: Okay. Can I just get a point of clarification on John Crane? Were orders up in the second half and sort of were they similar to sort of H1?

Clare Scherrer: We’re standing on firm ground in John Crane, our current order intake is strong. When you look at where the softness was in the second half for John Crane, it’s very clearly in the Industrial segment. As Roland mentioned, when we look at this second half versus last year, it was a difficult comp in industrials because we had some very strong industrial revenue that came in last year in the second half. And to point to where the particular softness was, it was in chemicals. We had good growth in food and beverage, pharma and marine. But as you know, Chemicals has been a particularly soft end market for everyone recently.

Lushanthan Mahendrarajah: Thank you, very much.

Operator: We will now take the next question, and the question comes from the line of Mark Davis Jones from Stifel. Please go ahead.

Mark Jones: Good morning, guys. Could I turn to the subject of the balance between the divisions and the center and particularly some more color around what you’re saying about global shared services. The operating companies have always been quite autonomous within Smith. Are you flagging effectively that you’re going to run those more from the center? Does that have implications for what the ongoing level of central cost might be? And can you give us some slightly more tangible examples of what will be changing and what processes will be now managed from the center and what benefit you think that brings?

Roland Carter: Yes. So, thank you. So, I think there’s several aspects to the answer for this question. Firstly, and foremost, it really is about empowering the businesses. So, we are very much focused on making sure that the customer-facing parts of this organization really are facing the customer and allowing our customers to differentiate and be more successful. And so, the innovation and the commercialization of that innovation is very much what the business is about. So, you’ll also see the other aspect of how SES is maturing within Smith. So, it is the way that we do business. But with the site lean leads that can be driven much, much more from the grassroots, where we believe that it’s much more effective. So, there’s definitely empowerment of the businesses going on. So, stepping back to what can the group do well and how does it supports the businesses for things that aren’t as customer focused or as technology focused. That’s about how we support them. So already within Smiths, there’s a very, very powerful model for this. And we’ve seen it work very effectively and we’ve seen it mature and deliver. And that’s our IT infrastructure. So, our IT support and infrastructure is already centrally delivered. We’re also seeing the pockets and the businesses have been doing themselves about shared services. So, to get to the nub. So, this is talking about HR services. This is talking about finance services, for example, and to a degree, a little bit of indirect procurement as well. So, we’re already seeing that. We’ve seen successes we did within detection, a lot of success within John Crane. And this is really pulling together those noncustomer-facing aspects of the business. I know there’s always challenges about how we do it. So, we’re going through a very mature way of approaching and a thoughtful way of approaching this. But we believe that we can deliver value on a global scale on this.

Mark Jones: Okay. And does that have implications for the cost base held centrally? You have to invest more at the center in terms of ongoing central costs?

Roland Carter: So, from the point of view of the efficiency and the effectiveness. You’ve seen what our central costs look like this is not about increasing central costs substantially at all. This is about becoming more effective in fact. So, the whole point is to empower the businesses rather than to create some large central functions.

Mark Jones: Thank you. And then Clare, just to get back to Lusha’s point on buybacks, it does seem odd in the circumstances, even with M&A on the horizon, that an additional GBP50 million is an issue given your current balance sheet. So, is the message that that’s on hold until you know what you’re buying? Or is it just that you’re being a little more careful on the timing?

Clare Scherrer: We always intend to be thoughtful and nimble as we assess all of the options for capital return that are available to us. As we said, we haven’t initiated it yet. We do have some other irons in the fire. And so, as you’ve seen us in the past, we are always looking foremost at what we can do from an organic perspective. We’re always looking if there are good acquisitions on the horizon. And as I said, we have a full pipeline. And then when we deem that we have excess that can be returned, our actions have spoken louder than our words in terms of getting after returning the capital. So please continue to think of us as being committed to returning excess capital when we feel we can and to be nimble in terms of constantly evaluating the balance of all of the options where we can put our capital. Our aim is always to get the best return for shareholders.

Mark Jones: Okay. Thank you.

Operator: [Operator Instructions]. We will now go to the next question, and your next question comes from the line of Kyle Summers from Redburn Atlantic. Please go ahead.

Kyle Summers: Thank for taking my question. Just one for me, please. I just wanted to ask for other security systems within detection. Could you please provide just a bit more color as to the contract timing issues you’re seeing there in ports and borders.

Roland Carter: Yes. Thank you. Thanks for the question. So, as you saw, we did experience growth in other security systems driven by the urban security market, but especially with our focus on our defense products. As Claire pointed out, we did have weakness in the ports and borders. These are always very long-term contracts usually at ports and borders as you see from the title. So, there’s a lot of infrastructure that goes around there, and these are often challenging environments. So, we see this as a hiatus in the revenue in that business. However, we see in the long term, there’s still a lot of demand for our products out there.

Kyle Summers: Thank you.

Operator: [Operator Instructions]. And your next question comes from the line of Jonathan Hurn from Barclays. Please go ahead.

Jonathan Hurn: Good morning. Just three questions for me. First question was just on John Crane. Obviously, you continue to put capacity into that business. And talking about that, obviously, concluding in FY ’25. But if you look about or if we look at the comments in terms of the outlook, you are saying that the growth is going to slow ’25 versus ’24. So, the question what you focus on, obviously, the capacity is going in, growth is slowing. Are we going to have a bit of an overhang in terms of overhead in that business? And could that become ultimately a drag to the margin going forward? That was the first question. Let’s go one by one.

Roland Carter: Okay. So as with many of our plans, this is about building resilience and about building scalability in our businesses. So, from the point of view of what we just said about the John Crane order book, we actually feel confident in the John Crane order book going into the year. So, we’re not seeing that slowing across the broad business of John Crane. In fact, we are very positive on that. So, to answer those two pieces, I think the capacity will help us actually respond to the growth we expect to experience.

Jonathan Hurn: Okay. The second question is just on SES. I mean probably two parts. One is, could you just give us a feel for maybe the scale of the benefits you expect in ’25 for SES? And then secondly, if we look to ’24, you obviously got benefits from SES, but they are all offset by taking that money and reinvesting it back into growth opportunities. So, as we go to ’25, are we going to see any net benefits coming through from your SES program?

Roland Carter: Okay. So, from SES, we — the previous year, we saw about GBP14 million coming through from SES as it began to mature. What we’re seeing this year is we anticipated GBP20 million. We, in fact, managed GBP23 million out of that. As SES changes shape and as I mentioned earlier, we are moving towards a yet more mature model within the building on the great foundations of the black belt and the Master Black Belt. But really, this is going to be driven into the businesses and driven from the grass roots going forward as opposed to a top-down initiative. We’ve already got site lean leads in pretty much all our sites over 100 people. So, this is going to be mixed in with how we then work with the businesses and support the businesses, not only in the pure SES, but looking across the VAVE, the engineering savings we can make through better engineering and also pure-play procurement savings as well. So, going forward, this will be brought together. So, we won’t report the SES savings separately going forward, but I’m very confident we will still be driving savings through the businesses. From the point of view of where we’ve guided on continued margin expansion, we anticipate that SES just as it has in previous years will contribute to that. But also, we are very keen. If you think about the 200 sort of basis points that we saw from our R&D investment from new products, for example, we’re very keen that we continue to invest. This is an engineering business so that we continue to invest in services and new products going forward. So, you’ll see us, again, as always, in the same way that Clare was talking about being disciplined in the M&A space. We’ll be very disciplined in the organic space as well.

Jonathan Hurn: Okay. That’s very clear. And then the last one is just on the Aerospace market. Obviously, you’re putting it out there as an area of strength in terms of order book going into ’25. But if you just kind of look at the wide Aerospace market. There’s quite a lot of disruption there in terms of build or supply chain. I mean have you seen that at all? And obviously, in terms of how you’re guiding, are you factoring any of that potential weakness coming through to the businesses that are exposed to that Aerospace order book?

Roland Carter: So, if we think about our — and thank you for the question. If you think about our Aerospace and Defense business, it’s roughly 12% of Smiths at the moment. Much of that is to do with isolators for RS systems, tubing for engines. At the moment, we have actually a very positive outlook, both on across that whole broad range of markets actually. So very aware of the noises in the industry at the moment and some of the engineering challenges people are having. But really, that plays well to our strength. So, we’re seeing a positive outlook in our aerospace and defense area.

Operator: [Operator Instructions]. And your next question comes from the line of Bruno Gjani from BNP Paribas (OTC:BNPQY). Please go ahead.

Bruno Gjani: Thank you for taking my questions. The first one was just on the John Crane margin. I think you highlighted in the release the systems headwind in John Crane. I wonder if you could provide us with some color around the magnitude of the mix impact or the systems mix headwind in H2 of this year, if that’s possible.

Roland Carter: Yes. Let me talk broadly and then I’ll hand over to Clare to talk about the mix impact. So, what we see very much in the same form as we see in Smiths Detection as well, that the OE has low, low margins, I’m sure you’re aware than the aftermarket. So, all these system sales that we see go in, in either of those businesses are good news from the point of view of the margins that they actually develop over the lifetime of the product through the service tail. So yes, short term, challenging on the margins, longer-term beneficial footprint and market share. Clare, would you like to talk about the margin?

Clare Scherrer: Yes. And the OE aftermarket mix is one that you’ve heard us talk about frequently, it’s the same in John Crane as it is in detection, which is on a relative basis, OE is a lower market — a lower margin sale than the aftermarket sale is. So, we had a heavy and interesting set of opportunities in OE in the second half for John Crane. As we always say, those will lead to higher market and higher margin aftermarket revenues as we go forward. So, we still had margin expansion in John Crane in the second half. It was 10 basis points.

Bruno Gjani: Okay. That’s understood. And what I thought was quite interesting as well was just the detection margin half of the half and improved quite a bit, 80 basis points, but I look at the mix within that it’s heavily skewed to the OE. So, a lot of the incremental sales came from OE. So, can you help us understand what drove the better detection margin half of the half? Is it the OE margins improving or executing on richer priced orders? Just any color there would be appreciated.

Roland Carter: Yes. So, thank you for the question, Bruno. So, we did deliver 70 basis points organic improvement in operation margin. Really, that does reflect some of the OE growth. I mean, Clare already mentioned 25% growth in OE and some growth in the aftermarket. Its very much aviation focused and the — if you recall, we were talking about how long it was taking us to install. So, you definitely saw we installed 21% more last year than we had previously and we only had to bring on another 7% of field service engineers. So definitely, there’s improvement through the installation process. The hard work of SES coming through, definitely SES savings large there as well. Then you’ve got the mix, so with the MOD contracts starting to come in, which are traditionally the defense contracts are traditionally higher margin. And also, obviously, there was a volume recovery as well. Clare, I don’t know if there’s anything much you can add to that.

Clare Scherrer: We had some good contracts in the second half for detection. It’s a programmatic business, all of the trends that Roland was talking about, and we also had some programs where we had very good margins.

Bruno Gjani: Understood. And the last thing, I was struggling a little bit with in terms of the restructuring program. So, there’s quite a bit of incremental benefits to flow through. That add about circa 100 basis points to the margin. But the midterm margin aspirations don’t change. So, I guess, are we reinvesting a lot of these cost savings back into growth. So therefore, you haven’t revisited the midterm margin aspiration? Or why haven’t you, I guess?

Roland Carter: No. Thank you for the question about the acceleration plan. This plan is very much focused on improving efficiency, resilience and supporting growth. And through this, we do see and we certainly intend to deliver the better margins, which we’ve guided to in the medium term. I’m very impatient to get on with and to meet that medium-term guidance, and that’s where we’re going to see the main thrust of that. So, if we think about how that’s broken up in its constituent pieces, one-third of it is about footprint optimization, and this is about the footprint being in the right place for our customers. So as our customers are developing their businesses, we need to be — we’ve always said we’re local for local. We need to be closer to our customers. So, you’ll see about one-third of that going through there. But two-third of it is all about process improvements. So, we’ve grown a lot, and we intend to grow more, and we need to have those processes in place. So, this is very much setting us up for the future and making it scalable but also resilient for the future as well.

Operator: There are currently no further questions. I will now hand the call back to Roland for closing remarks.

Roland Carter: Thank you very much. So, to summarize, a good set of results, expanding our track record of growth and margin expansion. We are guiding to 4% to 6% organic revenue growth in FY ’25 with continued margin expansion. I’m delighted to announce 2 acquisitions today, enhancing Flex-Tek’s HVAC and their industrial heating businesses. And we are very clear on our strategic priorities, which will build on and out from solid foundations, a sharpened focus on maximizing growth opportunities through innovation and a step change in execution through the acceleration plan as well as disciplined M&A, all of which will drive increased value for our stakeholders. And our next update to the market will be Q1 trading and the AGM on the 13th of November.

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