Smiths Group Plc · LSE:SMIN
Smiths — H1 2008 Earnings Presentation
40 slides from Smiths's earnings presentation, Mar 19, 2008
Slide 1: Smiths Group, Interim Results
Smiths Group, Interim Results London, 19 March 2008
Slide 2: Forward-looking statements
This presentation contains certain forward-looking statements with respect to the operations, performance and financial condition of the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from tho
Slide 3: Introduction
Introduction Philip Bowman, Chief Executive Interim Results 2008 3
Slide 4: Agenda
Agenda • Business Highlights • Financial Review • Operational Review and Priorities Interim Results 2008 4
Slide 5: Business highlights
Business highlights • Good growth in pre-tax profit of 19% • Sales increased by 7% • Headline operating profit up by 7% • Drivers of growth: • New Detection contracts • Strong petrochemical demand benefits John Crane • Good progress at Interconnect • Opportunities to create value Interim Results 200
Slide 6: Financial review
Financial review John Langston, Finance Director Interim Results 2008 6
Slide 7: Interim Results 2008
Interim Results 2008 £m Headline* Statutory 2008 2007 2008 2007 Continuing activities Sales 1,088 1,021 +7% 1,088 1,021 Operating profit 158 148 +7% 170 149 Margin 14.5% 14.5% 15.6% 14.6% Pre-tax profit 159 134 +19% 165 136 Basic EPS (p) 30.8p 17.4p 34.3p 18.6p Interim Dividend (pps) 10.5p 10.5p 10.
Slide 8: Profit progression H1 2007 to H1 2008
Profit progression H1 2007 to H1 2008 • Volume: Driven by Detection, John Crane and Interconnect Currency translation • Operational: Includes scaling up of manufacturing capacity, £1m labour, raw materials and Medical supply chain costs £15m PBT: £159m Underlying operating Interest performance is hi
Slide 9: Detection: 10% underlying growth, investment for future growth
Smiths Detection: 10% underlying growth, investment for future growth £m 2008 2007 reported underlying Sales 222 182 +22% +21% Operating profit 31 27 +13% +10% Margin 14.0% 15.0% Operating profit Half year £m • Volume: Driven by airport 2006/07 27 checkpoint equipment, Volume 15 cargo screening & mi
Slide 10: Medical: Sales held back by supply chain disruption
Smiths Medical: Sales held back by supply chain disruption £m 2008 2007 reported underlying Sales 346 347 0% +1% Operating profit 61 60 0% +4% Operating margin 17.5% 17.4% Operating profit Half year £m • Mix: Growth in some higher margin franchises 2006/07 60 • Operational: Supply chain delivery, Mi
Slide 11: Specialty Engineering - John Crane: Strong petrochemical demand
Specialty Engineering - John Crane: Strong petrochemical demand John Crane (£m) 2008 2007 reported underlying Sales 283 252 +12% +8% Operating profit 37 31 +18% +8% Margin 13.0% 12.4% Operating profit Half year £m • Volume: Stronger performance in all 2006/07 31 segments, particularly petrochemical
Slide 12: Specialty - Other: Interconnect growing strongly, Flex-Tek challenged
Specialty - Other: Interconnect growing strongly, Flex-Tek facing challenging markets Specialty - Other (£m) 2008 2007 reported underlying Sales 237 240 (2)% +7% Operating profit 30 29 +1% +7% Margin 12.5% 12.2% Operating profit Half year £m • Disposal: Marine sold in November 2006/07 29 • Volume: I
Slide 13: Reconciliation: Headline operating profit to statutory profit
Reconciliation: Headline operating profit to statutory profit £m Headline operating profit 158.1 Integration of Medex (2.4) Profit on disposal of businesses 27.0 Provision for John Crane litigation - mark to market (5.7) Exceptional operating items 18.9 Amortisation of acquired intangible assets (7.
Slide 14: Operating cash conversion
Operating cash conversion £m (for continuing activities) 2008 2007 Headline operating profit 158 148 Changes in working capital (55) (17) Share based payment 7 7 Capital expenditure (Property, plant & equipment) (24) (27) Depreciation 24 24 Development costs & other intangibles (11) (11) (net of amo
Slide 15: Net debt increased by £85m to £675m
Net debt increased by £85m to £675m £m 2008 Net debt at start of period* (590) Operating cash (after capex etc) 99 Interest and tax (64) Exceptionals (21) Free cash flow 14 Dividends (91) Share options/Purchase of shares (3) Acquisitions/disposals 18 Exchange (23) Change in net debt (85) Net debt at
Slide 16: Financials: Conclusion
Financials: Conclusion • Detection: Further growth; margin below last year • Medical: Priority to fix supply chain problems • John Crane: Continued growth; improved margins • Flex-Tek: US housing market uncertainty • Interconnect: Continued growth; 4G success • Net debt circa £750m (subject to acqui
Slide 17: Operational review and priorities
Operational review and priorities Philip Bowman, Chief Executive Interim Results 2008 17
Slide 18: Observations
Observations • Strong positions in growing and resilient markets • Reservoir of technology and IP • Employees with good knowledge base • Opportunities for margin enhancement • Scope for enhanced integration & efficiencies • Shared services • Best practice • Improved data flow • Improve capital alloc
Slide 19: Detection: Market drivers - threats, technology & legislation
Smiths Detection: Market drivers - threats, technology & legislation • Airline checkpoint automation and improved passenger experience • Cargo screening in response to US legislation • Latest military programmes Global market growth 11% CAGR over next 5 years Airports, Ports & Borders, Military, 201
Slide 20: Detection: A global leader
Smiths Detection: A global leader • Global presence in key markets • Technology & IP • Strong growth in H1 • Success in: • Passenger checkpoint UK & US • Customs/border US & Russia Headline • Military sales JCAD for US DoD Sales/ H1 Sales operating profit 400 100 Sales by sector 2007: £438m Military
Slide 21: Detection: Opportunities
Smiths Detection: Opportunities • R&D increasing +11% in H1 • New technologies continue to be brought to market • Biological detection • Millimetre wave • Seeking acquisitions • Opportunity for efficiencies • Implementation of single ERP starts H2 • Smarter sourcing initiative Interim Results 2008 2
Slide 22: Detection: Operational priorities
Smiths Detection: Operational priorities • Further roll out of airport checkpoint & cargo screening systems • Launch new generation biological detection products • Successful start to ERP roll out Interim Results 2008 22
Slide 23: Medical: Market drivers - demography, outcomes & economics
Smiths Medical: Market drivers - demography, outcomes & economics • Ageing population and increasing prosperity • Safety legislation and regulation • Healthcare productivity needs • Increasing use of IT Consistent Market Growth Vital Care Medication Safety 4% Delivery 6% 6% Source Smiths Medical int
Slide 24: Medical: Niche device manufacturer
Smiths Medical: Niche device manufacturer • Global sales & marketing network Smiths Medical brands • Established brands with practitioner loyalty • Increasing roll-out of new products • CADD Solis • H1 R&D spend increased 4% • Manufacturing and supply chain issue Headline Sales/ H1 Sales operating p
Slide 25: Medical: Manufacturing & supply chain issues
Smiths Medical: Manufacturing & supply chain issues Issues Action plan Initial results • Relocation of • Focusing on Unfulfilled orders Short Term manufacturing key issues: and reduction • Unfulfilled orders of plants • Least effective sites • Inventory re 65% du • Medex ct ion integration • Simplif
Slide 26: Medical: Opportunities
Smiths Medical: Opportunities • Scope to reduce costs and improve margins • Focusing increased R&D investment on higher growth segments and markets • Leverage global product development process • Increase percentage of sales from products under 3 years old Interim Results 2008 26
Slide 27: Medical: Operational priorities
Smiths Medical: Operational priorities • Further resolve supplier & manufacturing issues • Increase R&D spend focusing on growth sectors • Launch new products in growing markets including ambulatory pumps • Improve customer service Interim Results 2008 27
Slide 28: Specialty Engineering - strong business opportunities
Smiths Specialty Engineering - strong business opportunities John Crane Oil & Gas Chem/Pharma General Industry Specialty - Other Smiths Interconnect Military Wireless Rail Flex-Tek US Housing Aerospace Appliances Medical Interim Results 2008 28
Slide 29: John Crane: Petrochemical market drivers
John Crane: Petrochemical market drivers Global energy consumption • Largest segment is petrochemical industry: 600 2.0% CAGR Quadrillion Btu • Upstream 1.7% CAGR • Midstream & pipelines 300 • Downstream • Two-thirds of revenue 0 1990 2020 from aftermarket service Source: U.S. Department of Energy,
Slide 30: John Crane: Global leader
John Crane: Global leader • Market leader in its field, blue-chip customer base Top 10 customers H1 achievements • Sales and margin increasing; Sartorius acquisition • Increasing OE sales and manufacturing capacity • Further develop of service bases – Saudi Arabia/China Headline Sales/ H1 Sales oper
Slide 31: John Crane: Opportunities
John Crane: Opportunities • Expanding technology footprint - Sartorius & Indufil • New upstream services business leverages global network - CDI & Fiberod • Extend global customer service network • Margin expansion - sales and cost reduction • Implementation of ERP system continues H2 • Possibility
Slide 32: John Crane: Operational priorities
John Crane: Operational priorities • Improve margin - reduce costs • Expansion of upstream energy services • Migration of John Crane to one ERP system • Service centre growth • Additional manufacturing capacity Interim Results 2008 32
Slide 33: Interconnect: Military & communications markets
Smiths Interconnect: Military & communications markets US DoD Procurement Budget ($bn) Global Wireless Subscribers (millions) 3000 Source: CIBC/Wall Street Sources: StrategyAnalytics, Worldwide Cellular User Forecasts and TIA 2007 Industry Playbook 100 2000 1000 60 0 2007 2008 2009 2010 2011 2003 20
Slide 34: Interconnect: Operating in growth markets
Smiths Interconnect: Operating in growth markets • Strong B2B brands; growing markets Top 10 customers • Strong tech differentiation and blue chip customers H1 achievements • Strong growth and margin enhanced in H1 • Sales to US 4G wireless providers • Contracts in defence • Increased low-cost headc
Slide 35: Interconnect: Opportunities
Smiths Interconnect: Opportunities • Expand globally from US base • Potential to rationalise manufacturing and accelerate move to lower costs • Sector fragmented with many potential bolt-on acquisitions • Report separately from FY09 Interim Results 2008 35
Slide 36: Interconnect: Operational priorities
Smiths Interconnect: Operational priorities • Margin improvement • Expansion of low cost manufacturing • Geographic expansion in Asia Pacific • Deliver major customer requirements to maintain momentum in key contracts Interim Results 2008 36
Slide 37: Flex-Tek: Difficult market conditions
Flex-Tek: Difficult market conditions • US construction market in recession • Good performance in other markets – civil & military aircraft demand rising • US household appliance demand driven by macro-economic cycle Opportunities & priorities • Expand non-construction markets e.g. aerospace & medic
Slide 38: Group: Opportunity to create value
Smiths Group: Opportunity to create value Smiths Detection • Strong technology positions Driven by changing threats, • Good access to growing market technology & legislation • Investment in R&D increasing Smiths Medical • Manufacturing & supply chain issues Driven by demography, • New product develo
Slide 39: Group: A growth opportunity
Smiths Group: A growth opportunity GROWTH: Margin expansion and top line growth INVESTMENT • Restructuring & efficiencies • Manufacturing & service capacity • Working capital • R&D • Bolt-on acquisitions • Dividend growth consistent with building cover Interim Results 2008 39
Slide 40: Questions & Answers
sm ths bringing technology to life Questions & Answers Making the world safer, healthier and more productive