Smiths Group plc

Good morning, everyone, and thanks for joining us. With me in London today is our CFO, Claire Scherer. In terms of our agenda, I'll make a few opening comments before turning it over to Claire to walk us through the numbers. I'll come back and provide an update on our strategic and operational progress, and then we'll open it up to all of you for Q&A. By way of overview, we saw continued improvement in the first half, resulting in meaningfully higher performance. We posted record organic revenue growth of 13.5%, which translated to nearly 26% on a reported basis. We've now delivered seven consecutive quarters of accelerating growth as we capitalized on strong underlying demand in most of our end markets. Our earnings conversion was stronger still, as we also delivered record EPS growth of 52%. And given this strong momentum, we have once again raised our full-year guidance, now to at least 8% organic revenue growth. Operating margins grew 20 basis points, reflecting strong volume as well as continued investment in future growth. Roche expanded by a point. Our SMIS excellence system is the centerpiece of our stronger execution, and the impact of SES is now visible in our financial statements as we're on track to deliver over $25 million of annualized operating profit from SES. Our people make this progress possible, and we have a number of initiatives underway across our company to advance our inclusive and high-performing culture. Our ESG plan is also progressing at pace, as detailed in our inaugural sustainability report, which is available on our website. In summary, we delivered another period of higher performance, enabled by our strategy of accelerating growth, improving execution, and investing in our people, the focal point of our SMIS value engine, which I'll recap on the next slide. Our value engine connects the three components of our success, our purpose, our strengths, and our priorities. We are grounded in our purpose of improving the world through smarter engineering. This has been the North Star for Schmitz for over 172 years and continues to guide and inspire us today. Our strengths are unique and compelling. World-class engineering, leading positions in critical markets, global capabilities, and a robust financial framework. You'll see evidence in the coming slides of how each of these is contributing to an ever-stronger Smiths. Our purpose and our strengths are then directed towards advancing the three priorities I mentioned on the previous slide, accelerating growth, improving execution, and doing even more to inspire and empower our wonderful people. We first shared this slide with you in November of 2021, my first capital markets event with Smiths, when we laid out five medium-term financial commitments by which to measure our progress. This chart provides a summary of how we're tracking. We're making good progress on organic growth, and for the first half we're well ahead of our 4-6% committed range. About half our growth is coming from volume and the remainder from price, which we expect will subside at some point as the world eventually returns to more normalized inflation levels. As mentioned, we're also having good success converting revenue to EPS. We commit to 7-10% earnings per share growth over time and are tracking above the range here as well. Higher profitability naturally supports higher ROCHI, and you can see this in our 120 basis point gain, which brings us into our 15-17% range. Operating margins were up 20 basis points and a half, on top of the 150 BIP expansion in the same period last year. We see further upside available to us in this category, as we'll continue to progress into the 18-20% range moving forward. The only area where we did not post year-over-year improvement was operating cash conversion. We continue to see record demand across several of our end markets and we're naturally supporting this growth with investment. Cash generation has long been a calling card of Smith's with 100% cash conversion over the past five years. We expect to return to these levels as growth and supply chains normalize. With that as an overview, I'll turn it over to Claire to walk us through our first half results in greater detail.

Thank you, Paul. Good morning, everyone, and thank you for dialing in. I'm pleased to share the half-year results. a half which provides more evidence of the progress we're making. On revenue, as Paul said, we delivered record organic growth of 13.5%, with FX increasing reported growth to 25.6%. We generated $241 million of operating profit, which equates to organic growth of 12.7% and a margin of 16.1%, up 20 bps over the same period last year. EPS growth of 52.1% was a record for Smith's. Cash conversion was impacted by investment in working capital, and I'll talk later about the actions we're taking to drive improvement. Rokey expanded by 120 bps, reflecting our increased profitability. And as planned, we're rebuilding our dividend cover post the sale of Smith's Medical and are recommending an interim dividend of 12.9 P, an increase of 5%. In the first half, we returned 241 million pounds to shareholders, including both our share buyback and the FY22 final dividend. Now looking at the results in more detail and starting with our record organic revenue growth. We've posted seven consecutive quarters of organic revenue growth, and both Q1 and Q2 delivered growth in excess of 13%. First half growth was driven equally by price and volume, and we delivered growth across all divisions, geographic areas, and major customer and markets. Revenue for the half also surpassed our pre-COVID revenue, up 12% compared to the first half of FY20. As per our guidance, this revenue growth translated into moderate operating margin improvement of 20 bps to 16.1%. We delivered 60 bps of margin expansion from increased volume. and 50 bps of margin improvement from the targeted savings projects which we announced at the full year, primarily in John Crane and Smith's detection. These programs remain on track with expected benefits for the full year of approximately $15 million and annualized benefits in line with our previous guidance of between $25 and $30 million. On pricing, we more than offset cost inflation thanks to the positive pricing actions that we took throughout last year and going into this year. FX translation had a positive impact on margin of 30 BIPs. SES projects in this period primarily focused on pricing, customer service, and productivity and generated $5 million of incremental profit. Offsetting these gains were three headwinds, supply chain disruption in some key parts of the business, resulting in 10 bps of impact, although overall we did see supply chains trending positively. We continued to invest in growth to support increasing demand, which had a 90-bit impact. The largest impact on margin was mix, reflecting rapid growth in original equipment in Smith's detection. This will support future growth from the associate aftermarket services. And the final impact in FlexTech was from product mix. This strong profit performance drove record EPS growth, up more than 52%. The largest contributor to this was organic profit growth, which drove roughly a third of the increase, or 5.1p. Our share buyback, which was 88% complete at the half, had a 4.6p benefit on EPS, about a quarter of the total. Weaker sterling through the first half had a positive FX translation impact of 4.3p. Our effective tax rate reduced 200 BIPs to 26%, resulting in a 1.4 P benefit on EPS. We also had reduced interest expense as a result of repaying our $300 million bond in February of 22. All of these drivers resulted in basic EPS of 46.6 P for the first half. Smith's has a strong track record of delivering over 100% operating cash conversion over time. Our operating cash conversion during this half reflects the impact of both strong customer demand and our continuing investment to secure supply. Two of our fastest growing businesses in the half were Smith's Detection and John Crane, which accounted for over 85% of our $106 million working capital outflow and 60% of our $36 million of CapEx investment. These investments not only ensure that we meet customer demand, but also underpin the large order books that both businesses have going into the second half. Working capital also reflects where we have secured supply to overcome specific supply chain challenges for critical electronic components in Smith's detection and for elastomers and ceramics used in some John Crane products. That being said, while we continue to prioritize customer delivery, at the same time, we're taking targeted reduction actions where we can. These targeted plans and SES projects include improving demand planning, optimizing our global network, and continuing to reduce sole source supplier positions. We know that we have a hard road ahead on inventory reduction, but we remain committed to our medium-term target of 100% operating cash conversion and we're confident that the actions we are taking now will put us back on this path. Let's now look at our divisional performance in more detail. starting with our largest business, John Crane, which delivered accelerating growth and strong operating leverage. Organic revenue grew 14.6%, driven by strong demand across all parts of the business. OE and aftermarket grew in both the energy and industrial segments. We've improved order to revenue conversion, as the actions we've taken to manage the supply chain have had a positive effect. Operating profit grew even faster than revenue, up 24.6% to deliver margin expansion of 200 bps. This was achieved as higher volumes drove good operational gearing and our pricing actions more than offset inflation. Looking ahead to the second half, John Crane's order book remains very strong, with order intake in the first half of 14.2%. And we're excited by the critical role that our products play in supporting energy transition, particularly in methane emission reduction, carbon capture, and hydrogen applications. We're well positioned in these areas with over 40 years experience in providing sealing solutions for hydrogen and with an installed base today of over 5,000 units. Key wins in the half include multiple orders supplying the largest hydrogen project in Canada and dry gas seal upgrades in Oman. As we go through the second half, we'll continue to deliver against a strong order book and our margins will benefit from SES and productivity programs. Next to Smith's detection, which has solidly returned to growth, up 14% and with revenue growth in all segments. Aviation was up 10.3% and other security systems up 22.9%. It's especially good to see the return to growth in OE. Although this has a near-term impact on margin, it puts detection in a strong position in the medium term, given that aftermarket revenue directly results from growing our installed base. Operating profit increased 4.5%, with margins of 10.5%, reflecting the fact that lower margin OE was up 20.7%, while higher margin aftermarket was up 8.4%. Again, this OE investment will be margin accretive in the aftermarket going forward. Order book conversion is also improving in Smith's detection, although supply chain constraints continue, especially with some electronic components. And we also took action in the first half to simplify our organization, which will improve efficiency and reduce cycle times going forward. And looking to the second half, our order book includes a number of airport CT checkpoint upgrades. At airports which install CT at their checkpoints, passengers will no longer need to remove laptops and liquids from their carry-on luggage. An example of this is in New Zealand, where we won the contract for its five major international airports. We also won a contract with DHL in Australia for centralized air cargo screening. Increased security needs is a megatrend, driving not only strong demand in aviation, but also in other security systems, with 39.2% OE revenue growth in the first half and good wins across all segments, including port screening in Japan and the provision of X-ray screening for the G20 Summit in Indonesia. Flextech built on its consistent track record with another period of strong growth. Revenue was up 17% with double-digit growth in both industrials and aerospace. Operating profit was up 9% to $77 million, a record, driven by increased volume and price offsetting inflation. Operating margin remained high at 19.5% and included new product launch costs and the ramp of a new ducting facility in Houston. Mix impacted margins here as well, as we saw especially strong volumes in our industrial tubing product. And a few weeks into the second half, we are beginning to see slowing in our U.S. construction business as we expected. However, FlexTech's diversified end market exposure and new product launches are supporting resilience and continued growth in this segment. Aerospace was up 14.8% in the first half, driven by increasing aircraft builds and our expanded product offering. And we'll continue to benefit from aerospace growth in the second half. New product launches are also ramping well. We received our first Midrex H2 green steel purchase order, and our Python flexible refrigerant line platform is growing quickly. On to Smith's Interconnect, which, as expected, saw more modest growth of 3.3% in the first half following a record year in FY22. Operating profit of $32 million reflects pricing actions to offset inflation and an increase in R&D to support new product development. At Interconnect, we have a good pipeline of next-generation products, which will support future growth. as will the strategic acquisition of Plastronix, which closed in January. Plastronix is a leading supplier of test sockets, which complement our existing product range, and it's a great example of an accretive and strategic bolt-on acquisition. We are beginning to see the expected slowdown in the semiconductor end market, although this accounts for less than 3% of Smith's group revenues. Underpinning our accelerated growth is a strong and flexible balance sheet. Net debt to EBITDA was 0.8 times at the end of January. This is after the return of 241 million pounds to shareholders in the first half, which consisted of our share buyback and our final FY22 dividend payment. We also expect a reduction in gross debt in the second half with the repayment of our 600 million euro bond. Our capital allocation policy is unchanged. First, we look to maximize organic opportunities through investment in R&D, sales and marketing, and capacity expansion. And in the first half, we invested $77 million in R&D and CapEx projects. Second, we want to implement this organic strategy with complementary and disciplined M&A, such as the acquisition of Plastronics. And third, we look to return capital that is surplus to our reinvestment needs. We have a progressive dividend policy and have recommended a 5% dividend increase. Through the first half, we continued to repurchase shares under the 742 million pound share buyback program, which is now 90% complete. By staying true to these three pillars of our capital allocation policy, we're confident we can deliver our medium-term financial targets. And in conclusion, as a result of the strong first half and recent trading, we're once again raising our guidance for the full year. We now expect organic revenue growth of at least 8% with moderate margin improvement. This is supported by a number of tailwinds, such as the strong order books, particularly in John Crane and Smith's detection, coupled with a good pipeline of new products. SES projects will continue to deliver growth and strength in execution, and targeted cost actions will improve our speed and operating leverage. Moderating this, we have stronger top-line comparators in the second half, and OE growth will continue to have a mixed impact as our installed base grows. Geopolitical and macro uncertainty remains high, and we're actively managing supply chain challenges that persist. And while a couple of our smaller end markets are showing signs of softness, momentum in the rest of the business remains strong. So balancing these various headwinds and tailwinds, we remain confident of delivering a second half of further progress. And with that, I'll hand back over to Paul.

Thank you, Claire. I'll now provide a strategic and operational update organized within the framework of growth, execution, and people. And we'll begin with growth. New products are clearly playing a role in our accelerating growth. Our new Product Vitality Index, which measures the proportion of revenues from products launched in the last five years, was just under 30% for the half, up 90 basis points year over year. The vast majority of our new products are developed to support specific customer needs, and as such they are well aligned with key global megatrends like energy transition, ever-rising security needs, or the world's insatiable demand for data. On this slide, you can see examples of new platforms launched already this year in support of these trends. Collectively, new launches delivered 32 million pounds of revenue in the half, or just over two points of growth on a gross basis. To continue fueling our strong new product pipeline, we increased R&D investment by almost 14% in the period. In addition to strong new product performance, we're making good headway building out priority adjacencies like those you see here. Energy transition describes the $100 trillion multi-decade transformation of the world's energy supply, from fossil-based to zero-carbon sources. John Crane is ideally positioned to help our customers along this journey, with our leading installed base and our global service network. We're currently engaged in over 40 active hydrogen and carbon capture projects around the world and have seen our opportunity funnel more than double over the past 12 months. For example, in the first half, we won 100% of the gas seals, couplings, and filters tendered to date for a $1.6 billion blue hydrogen facility being built in Edmonton. making it the largest ever in Canada, producing enough liquid hydrogen to power every public transit agency across the province of Alberta. The surging demand is propelled by a number of market and regulatory forces, such as the Inflation Reduction Act in the U.S. and similar programs in other parts of the world. For Smith's detection, in addition to double-digit growth in aviation, we expanded our presence in other high-security markets like ports and borders, defense, and urban security. Our business in these adjacencies grew 23% in the first half, behind major customer wins in markets like the U.S., Japan, and Indonesia. FlexDeck is helping customers meet their sustainability goals in a number of ways. In October, we announced a strategic partnership with Mid-Rex Technologies and H2 Green Steel to build the world's first zero-emission steel plant in northern Sweden. Mid-Rex provides the hydrogen reduction process that powers the facility, and FlexTech provides the high-temperature electric elements that superheat the hydrogen. As Claire mentioned, we completed the bolt-on acquisition of Plastronix in January, leveraging cross-cell and new product synergies with Smith's interconnect and extending our leadership into attractive adjacencies in connectors and testing. Now, having shared some updates on growth, let me say a few words about our progress on the execution front. The Smith Excellence System is the framework through which we're building a more aligned, consistent, and higher performing culture here at Smith. SES improves results delivery and accelerates talent development. We relaunched SES around this time last year, initially putting in place five full-time master black belts to lead the program and 20 black belts to lead the projects. The first wave of projects have now been completed, contributing roughly 5 million pounds to the bottom line. The impact of SES is scaling quickly. Our initial target was to generate 20 million pounds in annualized benefit, and based on the good start in first half, we're now tracking to just over 25 million. And encouraged by our progress, we've added an additional master black belt and five more black belts in key commercial and operational areas around our company. SES is fast becoming the way we work here at Smith's. To give you a feel for how this plays out on a day-to-day basis, we thought we'd share a typical project. I'll quickly frame the effort and then turn it over to the project team to walk you through the details. I mentioned on a previous slide that demand for electric heating solutions is growing quickly, driven by the same megatrends we just touched on. FlexTech supports customers in this area in a number of ways. The green steel program I mentioned is one example. Another is our electric heat kits used in residential HVAC units. Around this time last year, high demand coupled with supplier constraints resulted in surging back orders in this part of our business. We pointed SES at the problem, and over the span of roughly six months, increased our capacity by a quarter, cut lead times in half, and fully eliminated the customer backlog. Now let's hear from Dane, Justin, and Kevin, who led the project.