Smiths Group plc

Good morning, everyone, and thank you for joining us today. I'll open with a short recap of fiscal 2023 before turning it over to Claire to walk us through the numbers in greater detail. I'll then come back and update you on our progress with respect to strategy and operations. And as always, we should have plenty of time at the end for Q&A. Okay, the overall headline is that fiscal 2023 was a record year for Schmitz. Record organic revenue growth of nearly 12% and record EPS growth of nearly 40%. We've now posted nine consecutive quarters of accelerating growth and year-on-year progress against all five of our medium-term financial commitments. In terms of execution, we're also seeing good progress, with operating margins up 20 basis points and Roche up 150. Operating cash conversion improved six points over last year to 86%. Our Smith's Excellence system, now fully bedded across the enterprise, is scaling nicely and proving central to this improvement. We further extended our strong sustainability track record in fiscal 23 as well by publishing our first sustainability report and delivering another year of sustained improvement across all of our key ESG metrics. With respect to people, engagement climbed to new levels in FY23, and a number of factors support this. including further improvement in safety and the launch of our Smith Foundation, where we committed an initial £10 million to support charitable causes linked to our purpose of improving our world through smarter engineering. As many of you are now familiar, the Smith's Value Engine connects the three components of our success, our purpose, our strengths, and our priorities. Our purpose has been an unwavering guide for us for over 170 years, enabling Smith's to develop distinctive and compelling strengths, including world-class engineering, leading market positions, global presence, and a robust financial framework. We direct these strengths against the three critical priorities you see in blue, growth, execution, and people. Growth powers the engine. Execution translates this growth into cash, and our people make all the progress possible. As you can see on slide six, our progress in fiscal 23 was encouraging. Our 12% organic revenue growth was nicely balanced between volume and price. As mentioned, we grew EPS nearly 40% and Rochi was up 150 basis points and is now within our target range. We expanded margins by 20 basis points on top of an 80 BIP gain in fiscal 22. Our margin performance reflects scaling investment to support continued growth in the future. Cash conversion came in at 86%, up six points from last year as we're now bringing safety stocks back down to more normalized levels as supply chains continue to stabilize. In short, we're pleased with our progress in fiscal 23 and expect continued momentum here in fiscal 24. As a result, we are guiding to 4-6% organic revenue growth this year, along with continued margin expansion consistent with the medium-term targets we introduced at our FY22 Capital Markets event. With that as an overview, I'll now turn it over to Claire to walk us through the details.

Thank you, Paul. As Paul mentioned, organic revenue growth for the year was a record 11.6%. FX added 5.7 percentage points and acquisitions a further percentage point, bringing reported growth to 18.3%. We grew operating profit to just over half a billion, up 12.7% organically. As guided, we delivered moderate margin progression of 20 basis points, while at the same time investing for growth. This contributed to record EPS growth of 39.6%. EPS growth was also supported by the share buyback program we initiated to return proceeds from the sale of medical. We took several actions to improve our working capital position, resulting in full-year operating cash conversion of 86%, a six percentage point increase versus last year, and a significant improvement on our first half cash conversion. Rokey was up 150 basis points to 15.7%, now within our target range and reflecting our increased profitability. And finally, in line with our progressive dividend policy, we're recommending a final dividend of 28.7p, resulting in a total full-year dividend of 41.6p, a 5% increase. Turning to the results in more detail and starting with our record organic revenue growth. We continue to prove our ability to consistently deliver growth, now having grown revenue on an organic basis for nine consecutive quarters. For FY23, this growth came equally from price and volume, demonstrating strong demand and pricing power across our markets. Growth in Q4 began to moderate toward our medium-term target range as we saw softening in some of our end markets and a moderating pricing environment as we enter FY24. We converted revenue growth into 12.7% organic profit growth. Margin expansion of 90 basis points was driven by increased volume across most of the group. Pricing, more than offsetting inflation, contributed a further 40 basis points expansion. Benefits from the Smith's Excellence System, together with our savings projects, expanded margin a further 80 basis points. And Translational FX added 10 basis points. Given the strong demand, we invested 100 basis points of margin back into the business in a number of areas, including capacity expansion, new product launches, and rewarding our people for the step-up in performance. And we saw a mixed headwind, firstly in FlexTech from product mix and secondly in detection, as record demand for our latest product innovations led to strong, lower-margin OE growth. Importantly, this OE growth today will support future growth in higher-margin aftermarket over the medium term. In summary, we delivered 16.5% operating margin, a 20 basis point expansion, in line with our guidance for moderate margin improvement. EPS growth was a record 39.6%. The primary driver was strong organic profit growth, which contributed over a third of the growth. Share buyback contributed another third, and the remainder was driven by positive FX, a lower effective tax rate, and lower interest expense, having repaid our $400 million bond in February of 22 and our 600 million euro bond in April of this year. Turning to cash, we made strong year-on-year progress on cash conversion, expanding by six percentage points to 86%, a significant improvement on the first half position of 63%. This progress reflects a structured approach to working capital management through our SMIS excellence system and largely mitigates the impact of investments we made in the first half to secure supply. The target investments we have made put us in a good position to meet customer demand and deliver against the strong order books in John Crane and Smith's detection. We increased CapEx to $81 million, representing 1.6 times depreciation, which included investing in new product development and expanding capacity to service high customer demand. Our medium-term target is over 100% cash conversion, and we have a strong track record of delivering this historically. As supply chains have largely normalized and our SES programs continue to scale, we expect further improvement next year. Finally, operating cash performance translated to 178 million pounds of free cash flow, a year-on-year increase of 37%. Now let's turn to divisional performance, starting with John Crane, which delivered a record organic revenue growth of 15.2%, an operating profit of 25.2%. Revenue surpassed a billion pounds for the first time. John Crane delivered growth on all fronts, aftermarket and original equipment, energy and industrial end markets, and in all geographic regions. This revenue growth translated into record profit growth and 170 basis points of margin expansion. Higher volumes and supply chain easing drove good operational gearing, and John Crane's pricing discipline offset the impact of cost inflation. We achieved this margin progression while also continuing to invest in growth, positioning us well to support record demand and our 15% order growth. John Crane has seen increasing demand as a result of energy security concerns and is also playing an increasingly important role in helping our customers improve efficiency and reduce emissions from their operations. In our energy business, John Crane continues to expand its energy transition pipeline, participating in important carbon capture and hydrogen projects, such as a significant offshore CCS project in Malaysia, which Paul will talk about. In industrial, we also won multiple contracts, including in paper and life sciences. Next, Tismith's detection, which delivered strong organic revenue growth of 16.4%, with growth in all segments. We're pleased with the performance across the business, and a notable highlight is the increase in other security systems. We saw original equipment growth continue to accelerate ahead of our strong aftermarket growth as our latest innovations, including our CT airport checkpoint scanners, have gained real traction with customers across the globe. While this OE growth has a near-term impact on margin, it maintains and extends our installed base and secures an attractive aftermarket for us that will contribute to margin expansion over the medium term. Operating profit growth was strong at 15.4% and contributed to operating margin expansion of 10 basis points as benefits from volume, SES, and savings projects more than offset the higher contribution of lower margin OE. Our excellent customer relationships and strong multi-year order book give us confidence in good revenue growth next year, which due to the expected timing of order delivery will be more weighted toward the second half. Our expected growth is underpinned by momentum in aviation, including winds in the UK and Japan. And in other security systems, we've had very strong order intake across defense for both current and future chem bio detection requirements, including for the U.S. DOD on their next generation program. Now moving to FlexTech, which grew 10.1% organically, with growth in both industrial and aerospace. We continue to enjoy strong demand in aerospace in the second half, supported by increasing new aircraft builds. And lower growth in industrial reflects a slowing US HVAC market. Organic operating profit growth for the year was 3.4%, driven by strong revenue and partly offset by higher costs, including capacity expansion in Houston to support growth, investment in new product development, and a mixed impact from strong industrial tubing sales. These factors together resulted in a strong operating margin of 19.4%, 120 basis points lower than the record margin in FY22. We made great progress on new product development, with Flextech successfully expanding into new adjacencies by providing superheating elements for the world's first green steel manufacturing facility. To complement this organic growth, last month we acquired a U.S.-based company heating and cooling products. This acquisition will broaden Flextech's customer base and product portfolio. Looking to FY24, we expect growth to be weighted to the second half, reflecting the exceptional first half performance of this year and an expected second half recovery in USHVAC. Coming to Smith's interconnect. Organic revenue contracted 2.8% this year, following the record FY22 performance, with softness in some end markets and delays on some large-scale programs. Organic operating profit declined 11.9%, resulting in operating margin contraction of 200 basis points. This reflects tough prior year comparators, lower volume, and continued R&D investment. Despite the challenging second half, we continue to expand our new product pipeline, and we progress the integration of our Plastronix acquisition, further strengthening our product portfolio. Orders in FY23 were down 17%, and we expect contraction into FY24. This reflects a continued slowdown in the semiconductor market, as well as signs of slowing in connectors. Connectors contributes around half of InterConnect's revenue and performed well in FY23. Importantly, we remain confident in the medium-term outlook for our markets and this business. Now turning to our capital allocation framework. Our net debt to EBITDA ratio is 0.7 times, giving us significant strength and flexibility. We returned 350 million pounds to shareholders in FY23, including 143 million in dividends and 207 million through the share buyback program we initiated to return proceeds from the sale of medical. We also repaid our 600 million euro bond and refinanced our revolving credit facility for a further five years and on very attractive terms. We prioritize organic growth, and accordingly, we continue to invest in R&D and CapEx this year. We supplement organic growth with strategic acquisitions, such as Plastronics and Smith's interconnect in the first half and HCP and FlexTech just last month. These acquisitions, along with Royal Metal, which we acquired in 2021, demonstrate a strong and disciplined track record. We'll maintain this disciplined approach as we actively look for further additions to complement our portfolio. We also return surplus capital to shareholders, and we're recommending a 5% increase in our final dividend in line with our progressive dividend policy. To summarize, we're well-positioned to deliver our growth strategy and to continue to deliver against our medium-term financial targets. Our performance in FY23 was a record, and we entered the new fiscal year with positive momentum. In FY24, we expect organic revenue growth in line with our medium-term target of 4% to 6%, and we expect this growth to be weighted toward the second half of the year. Our record order books in John Crane and Detection and our new product pipeline give us confidence in delivering this growth despite the record comparator, a moderating pricing environment, and the challenging market conditions facing parts of Flextech and Smith's interconnect. We also expect to see continued margin expansion in FY24 as we scale the Smith's excellence system and at the same time reinvest to support future sustainable growth. With that, I'll hand back to Paul.

Thank you, Claire. I will now give an update on some of our strategic and operational progress, beginning with growth. We build leadership positions in our four main end markets, industrial, safety and security, energy, and aerospace. Better accessing the growth available to us in these good markets has been the biggest contributor to our improved performance over the past couple of years. We generated strong growth in all four of these markets last year. General Industrial is our largest end market, and we serve it in John Crane, FlexTech, and Interconnect. John Crane and Flextech both grew high single digits, with particularly strong demand for John Crane in water and pharmaceuticals and double-digit growth for Flextech in our electric heating business, which is responding to surging demand in an array of energy transition applications. Our U.S. construction business was also up high single digits, although this business did slow in the second half, and we expect this to continue for the early part of FY24. To be clear, though, we expect continued growth in this business in FY24, just not at the exceptional levels of the past two years. Interconnect posted low single-digit growth in industrial, as good performance in connectors was offset by contraction in Semicon. Semiconductor down cycle is expected to continue into fiscal 24, and as such, our testing business, which represents about 3% of group sales, is also likely to contract during this period. Safety and security markets grew 7% last year, while we grew 12%, led by Smith's detection, which was up over 16%. Our aviation security business had a great year, and adjacent security markets, as Claire mentioned, like ports and borders and defense, were even stronger. Looking forward to FY24, we expect another good year for Smith's detection, especially in the second half, when some of our largest orders will be delivered. Energy, our fastest growing market at nearly 20%, and we saw fantastic traction in John Crane for both traditional and green energy applications, and we expect continued strong growth across fiscal 24. Aerospace markets grew by nearly 14%, propelled by upswings in the commercial aircraft segment. We built important positions in both Flextech and Interconnect, delivering 11% growth across the two. Flextech's strong growth was supported by aircraft builds, offset by Smith's Interconnect, which contracted marginally due to customer-specific delays in some space-related projects. As with energy and security, we expect aerospace demand to remain strong across fiscal 24. Innovation has long been the lifeblood of Smith's, and improved new product performance has contributed meaningfully to our accelerating growth. We generated over 300 basis points of growth from new products launched in the last 12 months. and nearly a third of our revenue now comes from products that didn't exist five years ago. We focus our R&D on helping our customers access their biggest opportunities, often centered on the four megatrends you see here. In H1, John Crane won 100% of the gas seals, couplings, and filters for the largest blue hydrogen project in Canada. And in H2, we won the tender for one of the world's biggest offshore carbon capture projects in Malaysia, with capacity to remove 3 million tons of CO2 from the atmosphere each year. This is the rough equivalent of taking 700,000 cars off the road. Moving counterclockwise, Smith's involvement in India's historic moon landing is an example of our divisions working together to support customer needs. In August, India became the fourth nation to successfully land a spacecraft on the Moon, and the first to do so on the previously unexplored South Pole. InterConnect provided the space-qualified components, John Crane the filters, and Flextech supplied mission-critical components for the fluid handling system. Smith has a long history of participating in pioneering missions. Other recent examples include the NASA DART mission, the landmark solar probe, and the Mars rover. To address ever-rising security needs, the world is now rapidly transitioning from traditional x-rays to CT scanning for carry-on bags. CT scanners, which do not require removal of liquids or laptops, provide enhanced capabilities for airports and a more enjoyable experience for passengers. We have now sold over 1,000 of our CTICS checkpoint systems, representing significant market share. Also in detection, we've had very strong order intake in defense, including for the U.S. DoD on their next-generation chemical detector program. Lastly, in the top right, we previously described our partnership with Mid-Rex Technologies and H2 Green Steel, and have now booked the first 8 million pounds of revenue from our 45 million pound contract. As Claire touched on in her comments, in a high margin, high return business like ours, the first priority for capital deployment will always be organic. Keeping this in mind, we increased R&D by 6% and CapEx by 14% in fiscal 23. The second priority for our surplus capital is accretive M&A, and in support of this, we completed a $30 million US Bullton in InterConnect in January and an $80 million acquisition in Flextech in August. Both deals were completed at accrete of multiples, and both complement our existing portfolios by accelerating penetration into targeted adjacencies. Heating and cooling products enhances our ability to serve customers through an even wider product portfolio and broader geographic reach. HCP also advances our sustainability focus as the deal brings patented ceiling duct technology for enhancing energy efficiency in customer sites. This transaction is similar in many respects. Deal size, market focus, operational capabilities to our FY21 acquisition of Royal Metal, which has had a 30% top line and 40% earnings CAGR under our ownership. I'll now turn to how we're further improving execution across our company. The Smith's Excellence System is fundamental to how we deliver results, develop talent, and advance our culture. We launched the program in earnest about 18 months ago by putting in place 29 full-time black belts and master black belts. In our first full year of the program, SES delivered 14 million pounds of earnings benefits ahead of the 12 million we expected. We now have close to 40 full-time SES resources, and with impact scaling quickly, we expect SES contribution to grow to 20 million pounds for fiscal 24. The importance of SES in building an ever-stronger SMIS extends beyond just financial benefits. For example, it's a key program for accelerating talent development across our company, both through the structured rotation for the black belts and also the many people now engaged in the 70 or so projects we have completed or that are underway. Still more, SES is foundational to advancing our high-performing and inclusive culture. By aligning our global team around a common short list of vital priorities, establishing a consistent operating rhythm, and encouraging one another to continually raise our game, SES is very much becoming the way we work at Smith's. To help bring this to life, here's a quick video of a typical SES project. This one focused on improving lead times in our Flextech aerospace business. Let me quickly set the stage. Consistent with the strong aerospace demand I noted earlier, Flextech is seeing a marked increase in orders for aircraft tubing systems. This initially resulted in longer cycle times impacting service to our customers. So we chartered an SES project to expand capacity through process optimization. Let's now hear from Sean and the team, how they defined the opportunity, developed solutions, implemented their plan, and captured benefits for both customers and for Schmitz.