Smiths Group Plc · LSE:SMIN
Smiths — FY2017 Earnings Presentation
49 slides from Smiths's earnings presentation, Sep 22, 2017
Slide 1: Smiths Group plc Annual Results 2017
22 SEPTEMBER 2017 www.smiths.com Smiths Group plc Annual Results 2017 | 1
Slide 2: Disclaimer
DISCLAIMER This document contains certain statements that are forward-looking statements. They appear in a number of places throughout this document and include statements regarding our intentions, beliefs or current expectations and those of our officers, directors and employees concerning, amongst
Slide 3: Agenda
AGENDA BUSINESS REVIEW | ANDY REYNOLDS SMITH FINANCIAL REVIEW | BILL SEEGER STRATEGY UPDATE | ANDY REYNOLDS SMITH Q&A Smiths Group plc Annual Results 2017 | 3
Slide 4: Business Review
BUSINESS REVIEW ANDY REYNOLDS SMITH CHIEF EXECUTIVE Smiths Group plc Annual Results 2017 | 4
Slide 5: Executing Our Strategy
EXECUTING OUR STRATEGY STRATEGIC PRIORITIES FY17 PROGRESS OUTPERFORMING OUR • Focused investment for organic growth CHOSEN MARKETS • Significant portfolio upgrading • Smiths Excellence System implemented Group-wide ACHIEVING WORLD-CLASS • Innovation driving technological and digital transformation C
Slide 6: Good performance during period of repositioning
GOOD PERFORMANCE DURING PERIOD OF REPOSITIONING • Revenue broadly in line with prior year • Strong operating profit and margin expansion whilst also increasing investment • Operational excellence supporting strong cash conversion of 118% • Generating further investment capacity to continue portfolio
Slide 7: Building on a high quality business - John Crane
BUILDING ON A HIGH QUALITY BUSINESS - JOHN CRANE • Aftermarket revenue up 1%, OE sales down 11% • Growth in non oil & gas up 2%, oil & gas down 7% • Operational efficiency and disposal of Artificial Lift driving margin improvement • R&D: new products including innovative new seal designs and advance
Slide 8: Increased investment for future growth - Smiths Medical
INCREASED INVESTMENT FOR FUTURE GROWTH - SMITHS MEDICAL • Portfolio repositioning with investment in product pipeline and the disposal of Wallace • Softer revenue performance as we refresh and expand our product portfolios • Efficiency improvements supporting further investment and margin expansion
Slide 9: Strong revenue drivers - Smiths Detection
STRONG REVENUE DRIVERS - SMITHS DETECTION • Continued strong growth • Contract phasing weighted to the first half • Strong transportation sales; orders for 140 CT scanners • Increased focus on aftermarket and improved mix supporting margin expansion • R&D: increased 190bps to 7.1% of sales, pioneeri
Slide 10: Extending our global leadership and capabilities - Morpho
EXTENDING OUR GLOBAL LEADERSHIP & CAPABILITIES - MORPHO • Acquisition successfully completed and disposal of trace business • Integration on track • Supporting the division’s strong transportation sales in H2 • Confident of even greater benefits of the combination Smiths Group plc Annual Results 201
Slide 11: Refocused on core growth markets - Smiths Interconnect
REFOCUSED ON CORE GROWTH MARKETS - SMITHS INTERCONNECT • Ongoing revenue up 3%*; strong growth in space and commercial aerospace • Now focused on leading positions in six core markets which value technology • Divisional restructuring and procurement savings strengthening margin • Pursuing organic an
Slide 12: Further growth and margin improvement - Flex-Tek
FURTHER GROWTH AND MARGIN IMPROVEMENT - FLEX-TEK • Outperforming its key markets • Strong growth especially Heat solutions • Margin expansion supported by improved mix and operational efficiency • Agreement to acquire Osram’s heating division; further enhancing product portfolio and market position
Slide 13: Financial Review
FINANCIAL REVIEW BILL SEEGER CHIEF FINANCIAL OFFICER Smiths Group plc Annual Results 2017 | 13
Slide 14: 2017 Financial Results
2017 FINANCIAL RESULTS £m 2017 2016 Change Revenue 3,280 2,949 +11% (1)% Underlying decline2 Operating profit1 589 510 +16% 3% Underlying growth2 Operating margin1 18.0% 17.3% +70bps Profit before tax1 528 451 +17% Free cash flow 370 243 +52% Strong cash flow ROCE1 16.2% 15.3% +90bps EPS1 97.6p 85.2
Slide 15: Portfolio repositioning, underlying revenue broadly in line
PORTFOLIO REPOSITIONING…UNDERLYING REVENUE BROADLY IN LINE £m 421 62 22 4 11 (127) (33) (29) (4)% (3)% +4% +1% +3% 3,280 2,949 £(25)m – underlying1 revenue (1)% 2016 FX Divestitures Morpho John Crane Medical Detection Interconnect Flex-Tek 2017 1. Underlying excludes the effects of foreign exchange
Slide 16: Underlying operating profit increased 3%
UNDERLYING OPERATING PROFIT INCREASED 3% £m 2 6 16 71 15 8 (13) (18) (8) +£18m, underlying2 operating profit1 +3% due to 589 improving operational efficiency 510 2016 FX Divestitures Morpho John Crane Medical Detection Interconnect Flex-Tek Central costs 2017 1. Headline excludes non operating items
Slide 17: Improved margin while increasing investment
IMPROVED MARGIN WHILE INCREASING INVESTMENT Operating margin1 % 2017 2016 Change John Crane 23.0% 21.9% +110bps Medical 22.0% 21.4% +60bps Detection 15.0% 13.0% +200bps Interconnect 13.4% 13.1% +30bps Flex-Tek 19.3% 18.0% +130bps Group 18.0% 17.3% +70bps 1. Headline excludes non operating items as d
Slide 18: Strong cash flow conversion
STRONG CASH FLOW CONVERSION £m 2017 2016 Change Operating profit1 589 510 Operating cash flow & conversion Capex including capitalised R&D (98) (108) Depreciation and amortisation 101 96 Working capital 85 9 2017 118% Other 18 13 Operating cash flow1 695 520 +34% Interest (60) (58) 2016 102% Taxatio
Slide 19: Operational focus improves working capital
OPERATIONAL FOCUS IMPROVES WORKING CAPITAL Stock turns (x) 3.5 £52m reduction in 3.3 inventory Improvement accelerated in H2; exited the year at 3.2 3.9x 2015 2016 2017 Cash flow potential 2015 2016 2017 c.£100m per stock turn Stock turns (12 mths avg) 3.3x 3.2x 3.5x c.£30m for 1% pt change in WC %
Slide 20: Investing for sustainable growth
INVESTING FOR SUSTAINABLE GROWTH R&D Capex – fixed assets 3.8% 4.0% 4.6% £74m £59m £62m £150m £110m £117m 2015 2016 2017 2015 2016 2017 Expensed Capitalised Customer Funded • Increase in R&D as a percentage of sales, +60 bps • Supports asset light model • Focus on new product development, growth acc
Slide 21: Return on capital employed advances
RETURN ON CAPITAL EMPLOYED ADVANCES ROCE % (before tax) 2017 2016 Change Impact of the Morpho acquisition John Crane 22.9% 20.3% +260bps 16.7% Medical 16.7% 15.7% +100bps Detection 12.6% 11.9% +70bps 16.2% Interconnect 11.4% 10.3% +110bps 16.0% Flex-Tek 35.8% 31.6% +420bps Group 16.2% 15.3% +90bps 1
Slide 22: Pension accounting surplus increases
PENSION ACCOUNTING SURPLUS INCREASES £m 2017 2016 2015 De-risking actions - 2 buy-ins £380m UK 388 325 138 - Matching assets and liabilities: - 2017: 95% US (26) (99) (123) - 2016: 91% ROW (8) (9) (8) - US scheme 91% funded Total Funded 354 217 7 Cash payments for funded schemes - 2016: £117m Total
Slide 23: Group tax rate
GROUP TAX RATE Location % of revenue1 Tax rate US 52% 38% Europe 18% c.27% 52% of revenue in the US UK 6% 20% Guidance for 2018 • 29.5%-30.0% Asia 13% c.26% RoW 11% c.16% 1. 2017 revenue by origin Smiths Group plc Annual Results 2017 | 23
Slide 24: Progressive dividend policy
PROGRESSIVE DIVIDEND POLICY 2017 2016 • DPS up 3.0% Interim DPS 13.55p 13.25p • EPS advances Final DPS 29.70p 28.75p • Dividend cover at 2.3x • Free Cash Flow payout 45% Total DPS 43.25p 42.00p Smiths Group plc Annual Results 2017 | 24
Slide 25: Balance sheet remains strong
BALANCE SHEET REMAINS STRONG Morpho self- £m funded FCF Net Debt/ covers EBITDA dividend 1.4x 61 462 13 580 370 167 978 • Weighted average debt maturity: 6.5 years1 967 • Weighted average interest rate: 3.2%1 • Stable credit rating (BBB+/Baa2) Net debt FX Free Cash Flow Acquisitions Divestitures Div
Slide 26: Strong financial framework
STRONG FINANCIAL FRAMEWORK ROCE 16.2% Investment and returns Asset light Stock turns 3.5x Investment for growth Sustainable Operating margin 18.0% Strong cash Value creative M&A margins generation Progressive dividend Net debt/EBITDA 1.4x Financial discipline Strong balance sheet Credit rating BBB+/
Slide 27: 2018 Outlook: return to growth
2018 OUTLOOK RETURN TO GROWTH • John Crane: growth in non-oil & gas and aftermarket more than offset challenges in oil & gas • Medical: gradual improvement driven by new product launches during the year • Detection: good growth driven by air transportation – H2 weighted • Interconnect: further progr
Slide 28: Strategy Update
STRATEGY UPDATE ANDY REYNOLDS SMITH CHIEF EXECUTIVE Smiths Group plc Annual Results 2017 | 28
Slide 29: Strategic portfolio repositioning
STRATEGIC PORTFOLIO REPOSITIONING TECHNOLOGY INCREASING DIFFERENTIATION DIGITISATION POSITIONED IN GROWING MARKETS HIGH PROPORTION OF SUSTAINABLY AFTERMARKET AND COMPETITIVE RECURRING REVENUES AND ASSET LIGHT Smiths Group plc Annual Results 2017 | 29
Slide 30: Significant progress in 2017
SIGNIFICANT PROGRESS IN 2017 2016 2017 Businesses that Businesses that need improvement or need improvement or are in non-core markets are in non-core markets FIX Non-core SELL 60%+ 75%+ of our businesses of our businesses are well positioned are well positioned BUILD Smiths Group plc Annual Results
Slide 31: Targeting attractive growth markets - Interconnect
TARGETING ATTRACTIVE GROWTH MARKETS - INTERCONNECT FOCUSING ON 6 HIGH GROWTH END MARKETS 2016 2017 UNDERLYING UNDERLYING REVENUE1 REVENUE1 (3)% +3% 1. Ongoing business Smiths Group plc Annual Results 2017 | 31
Slide 32: Operational excellence
OPERATIONAL EXCELLENCE Customer • Smiths Excellence System delivering results Supply Chain People • Increasing competitiveness through Continuous Improvement Operational • Strategic sourcing driving £40m savings Excellence • £85m total working capital reduction; £52m from inventory Programme Technol
Slide 33: Increased organic investment - R&D and innovation
INCREASED ORGANIC INVESTMENT - R&D AND INNOVATION • Investing more and smarter in R&D Spotlight on • Group Head of Innovation and Chief CORSYS Digital Officer appointed • Group wide innovation framework • Digital detection - enterprise platform for • 6 i3 projects in progress ports and borders - COR
Slide 34: Enhancing our digital capabilities
ENHANCING OUR DIGITAL CAPABILITIES • Opening two ‘Digital Forges’ – US and UK • Centres of excellence to accelerate digital transformation • Customer facing innovation space • Merge physical and virtual • Enable business model innovation Smiths Group plc Annual Results 2017 | 34
Slide 35: People development
PEOPLE DEVELOPMENT • Investing in our people – global strategic plan in place • Group-wide talent review and incentive structures in place • Talent and best practice sharing • Culture change – Smiths Way Smiths Group plc Annual Results 2017 | 35
Slide 36: Solid progress in 2017 - building for the future
SOLID PROGRESS IN 2017 - BUILDING FOR THE FUTURE STRATEGIC PRIORITIES OUTPERFORMING OUR • Structure in place to drive sustainable growth CHOSEN MARKETS • Building on 75% well positioned businesses ACHIEVING WORLD-CLASS • Strong, sustainable margins supported by operational excellence COMPETITIVENESS
Slide 37: Questions & Answers
QUESTIONS & ANSWERS www.smiths.com
Slide 38: Appendix
smuths bringing technology to life - - APPENDIX www.smiths.com
Slide 39: Statutory income statement
STATUTORY INCOME STATEMENT (£m) 2017 2016 Change Revenue 3,280 2,949 +11% Headline1 operating profit 589 510 +16% Fuel For Growth (restructuring) (33) (37) Morpho integration costs (4) Legacy liabilities (Asbestos/CSST) (5) (18) Pension and scheme closures (9) (16) Impairment - (31) Amortisation of
Slide 40: Revenue and operating profit H1/H2 split
REVENUE AND OPERATING PROFIT H1/H2 SPLIT H1 Operating Outperforming H2 Operating 2017 Operating £m H1 Revenue1,2 H2 Revenue1 2017 Revenue1 1 profit1 profit1 ourprofit chosen markets John Crane 435 450 885 90 114 204 Medical 470 481 951 99 110 209 Detection 318 369 687 Investment 54 49 Achieving 103
Slide 41: Revenue analysis
REVENUE ANALYSIS +2% +9% +3% underlying1 underlying1 underlying1 growth growth growth John Smiths Air transportation Smiths Crane Detection Ports & Borders Interconnect Oil & gas Military Non-oil & gas Urban Security Core business Morpho Detection Divestitures Divestiture 2% 3% underlying1 underlyin
Slide 42: John Crane
JOHN CRANE FY underlying1 2017 Revenue Revenue by revenue growth by type end market OEM 36% (11)% Aftermarket 64% +1% OEM Oil & Gas 36% c.55% TOTAL 100% (4)% Aftermarket Non-oil & 64% Gas c.45% Oil & Gas c.55% (7)% Revenue by Non-oil & Gas c.45% +2% destination Americas 45% TOTAL 100% (4)% Europe 27
Slide 43: Medical
MEDICAL FY underlying1 2017 revenue growth Revenue by segment Infusion systems Infusion systems 32% (3)% Vascular access Vascular access 33% (4)% Vital Care and Vital Care & Specialty products 35% (2)% Specialty products TOTAL 100% (3)% Revenue by destination Americas 58% Europe 24% APAC 16% Operati
Slide 44: Detection
DETECTION FY underlying1 2017 revenue growth Revenue by segment Air transportation Transportation 52% +9% Ports and borders Ports & borders 15% (2)% Military Urban Security Military 9% (2)% Urban security 24% - Revenue by TOTAL 100% +4% destination Americas 35% Europe 27% APAC 18% Operating profit 1
Slide 45: Interconnect
INTERCONNECT FY underlying1 2017 revenue growth Revenue by Defence Defence 28% (4)% segment Semi-Conductor Medical Semi-conductor 20% (4)% Space Medical 8% +4% Commercial aerospace Space 5% +20% Rail, Industrial, Other Commercial aerospace 10% +44% Revenue by Rail, Industrial, Other 29% (5)% destina
Slide 46: Flex-Tek
FLEX-TEK FY underlying1 2017 revenue growth Revenue by segment Construction Construction products 32% +2% Fluid Management Fluid Management 24% (2)% Heat Solutions Flexible Solutions Heat solutions 25% +12% Flexible solutions 19% +3% Revenue by TOTAL 100% +3% destination Americas 81% Europe 10% APAC
Slide 47: Fuel for Growth
FUEL FOR GROWTH £m 2017 P&L costs 2017 capex 2017 cash John Crane (7) (14) (6) Medical (16) (16) Detection - (3) (2) Cumulative benefits Interconnect (2) (4) £70m Flex-Tek (1) (1) (1) Central costs (7) (7) Group (33) (18) (36) Total program (135) (52) (121) Smiths Group plc Annual Results 2017 | 47
Slide 48: Debt profile - key metrics
DEBT PROFILE - KEY METRICS Bonds £m • Weighted average debt Bank facility - undrawn USD maturity: 6.5 years1 800m Floating EUR EUR (2016: 4.5 years) 600m 650m 1.25% 2.0% • Weighted average interest rate: 3.2%1 (2016: 3.7%) USD 400m 3.625% • Interest rate USD exposure1: 54% fixed 250m 7.20% • Stable
Slide 49: FX sensitivity
FX SENSITIVITY Currency 2016 average rate 2017 average rate % change USD 1.46 1.27 13% EUR 1.32 1.16 12% • For each $0.10 move, the operating profit impact is £27m • For each €0.10 move, the operating profit impact is £7m Smiths Group plc Annual Results 2017 | 49