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.

Hey, I'm Dane Owen. I'm the VP and GM for the Heat Solutions Group with Flextech and we're located in Cookville, Tennessee.

I'm Justin Robertson. I work in the tech co-division of the heating solution group of Flextech located in Cookville, Tennessee. I'm the planning and inventory manager and I will be the process owner of the black belt process that came out of this project.

I'm Kevin Maudrill. I'm the black belt for the heat solutions group under the FlexTech group. I came through the engineering role before I entered into the black belt, so I've been very familiar with TUTCO and the heat solutions group.

The heat solutions group is a myriad of companies, about $250 million in revenue, and we have plants in the USA, in Mexico, and in China.

So basically, if you have a heating unit outside of your house in the U.S., there is a heating element that goes in there. The heating elements heat up and they blow air across it. Anything with electric heat that air blows across with elements that heat up, Techco can pretty much find that solution for you.

So when we talked to Dane and he told us the area that he needed the help with, it looked like a mountain.

The problem we were facing due to COVID, we had serious problems. component issues and our late list, which is historically half a million dollars to a million dollars, grew to an astonishing 13 million dollars. To me, the way I look at black belts is what is my greatest pain point? And there was not a greater pain point. than having a $13 million backlog.

Supply chain was an issue. China was shut down. The Ukraine and the Russian war had actually started. So there was all these outside influences that were influencing the supply chain.

And so Kevin walked into a firestorm and just jumped right in.

One of the solutions that we came up with was the dashboards.

Our teams are starting to see those dashboards. They're starting to recognize what they're doing for us and what they're telling us. But then also on the purchasing side of things, we have exception reports now, which is something we never had before.

Then we went to Dane and we went to the team and said, look, this is what the data is showing. Within a week, we had another line set up. We didn't have to add cost to that line, but we added another line to set up and we started producing more heat kits. So we increased heat capability 23%.

It really allowed us within about six months to take this $13 million backlog and reduce it down aggressively to about a million dollars. And so you can imagine the excitement from the group, from Mexico all the way to Cookville, our location, seeing the results and seeing how quickly we all connected and also seeing the solutions that came out of that. not just in getting us down to a minimal backlog.

The other thing was obviously the big thing was on lead times. Our lead times when we started the project was around four to six weeks. We are now back down to two weeks, which is fantastic.

So not only hitting head on the problem, but also digging deep down and finding, oh my goodness, there are so many other things now that made us better because of this.

Thank you, Dane and team. A terrific project. As growth accelerates across SMIS, we see variants of this opportunity in a number of areas and are quickly replicating the project, learning and building with each successive result. Our people priorities are focused in four areas. Safety, leadership development, diversity and inclusion, and engagement. Recognizing that a picture is worth a thousand words, we thought we'd share a few photos from some of the many powerful initiatives we have underway across our company. And if we get a thousand to one leverage with photos, hopefully the following video will further bring to life the wonderful culture that we're advancing here at Smith's.

Safety is the measurement of the heart. Safety is about people.

Our aim is zero harm. Zero harm to people, zero harm to the environment, as well as our communities.

I'm so pleased to welcome Pam Tang. We push the boundaries of technology as Smiths. You know, you think about detection. We're keeping the world safe. How do you improve the world? biotechnology and innovation.

So I found the Accelerate training really interesting and really valuable because it really underpins the meaning of what it takes to be a leader.

In as much as I'm developing myself, I want to carry people along because you can only go as far as the people around you.

I'm truly honoured to be here today to introduce our first ever celebration of Black History Month as a group.

I'm delighted to introduce you all to, title only once, Professor Dame Anne Dowling. Equity, so yes, being fair and just, and it means we've moved on beyond just being trying to treat everybody equal, but we're recognising that everyone is an individual.

I'm Tony Thielen, Group SES Director, and I'm so excited to be hosting the first Excellence Awards sponsored by the SES team.

It's a true honor to be part of the awards this year and have the chance to recognize some of the biggest impacts we're making to improve the world.

Sustainability. It plays an important role in our growth, execution, and people priorities. On the growth front, in addition to energy transition programs that I mentioned earlier, we have multiple green new product platforms in development. With respect to execution, we're accelerating emission reductions at the same time that we're growing our business. We're tracking ahead of plan on our three-year targets for water, waste, renewable electricity, and greenhouse gases. In terms of people, this is the first year where delivery of concrete ESG commitments are part of both our short- and longer-term incentive comp at Smith's. You can find a good summary of our sustainability strategy from John Ostergren, our CSO, if you visit the Capital Markets site on our webpage, and you can find even more detail in the Sustainability Report, which is also available for download in the same location. Sustainability is an area of both strength and competitive advantage for Smiths, so please do have a look. Just a few comments by way of summary, and then we'll open it up to all of you for your questions. After a record start in the first half, we're well on track for a strong fiscal 23. Our growth is good, 13.5% in organic terms and over 25% reported. Order books and current trading remain strong, and as such, we have once again raised our full-year organic revenue guidance now to at least 8%. Our execution is continually improving, allowing us to deliver year-over-year gains in four of our five medium-term financial commitments, including EPS, which was up 52%. SES is playing an important role on this dimension, and encouraged by our progress, we're scaling the program accordingly. And our people enable all this progress. And I want to thank and recognize my 15,000 colleagues around the world for doing what we do best, improving our world through smarter engineering. By aligning behind our people priorities of safety, development, D&I, and engagement, we're advancing the wonderfully inclusive and high-performing culture of Smith's. As a 172-year-old company, we think as much in quarter centuries as we do in fiscal quarters. We're encouraged by the progress we've made over the past six months and carry strong momentum into the second half and beyond. Thank you for your attention and support. And with that, we'll turn it back to the operator to open the Q&A.

To ask a question, you need to slowly press star 1 1 on your telephone keyboard and wait for an A to be announced. To withdraw your question, please press star 1 1 again. This will take a few moments. Now we're going to take our first question. And the first question comes from the line of Christian Kinderacher from Goldman Sachs. Your line is open. Please ask your question.

Yes, Paul, Claire, good morning, and thank you for the opportunity to start the questions. Very strong and better results, so forgive me for starting on one of the rare negatives in the print. Can we talk a little bit about inventories? Up from 22% of sales year-end, 24%. not unusual in terms of the industrial market that we're seeing in a minute, and obviously you've got good reason for that to support the percentage of growth. But you talked about targeting plans, including SDS projects, to reduce that inventory. Just be grateful for a little bit more clarity around that, as well as how we're thinking about inventory either in days or sales developing through the year and into the following. And then I'll come back to the other two.

yeah uh thanks for the question uh christian as claire mentioned in her comments uh about 85 of that inventory increase went into john crane and uh detection and what you'd like to see if you wrote that down was the components of inventory lining up with the growth so we look at inventory you know the three big categories raw materials work in uh process and then finished goods In John Crane, the largest percentage increase came in the working process. These are orders that came in, materials that are moving through the factory, and those will now, you know, progress on to customer sites.

We're further along on the detection side where the largest percentage increase was in finished goods.

These are, you know, large detection systems that now are fully assembled and we just wait for the customer to receive them. So that'll work through naturally here as the business progresses forward. For us, we think of it as an investment. In the same way that we're willing to trade near-term margin on OE for the higher margin recurring aftermarket, we're willing and in fact excited to use our strong balance sheet for competitive advantage to support this kind of growth.

i don't know if you had anything you wanted to add to that i think that's a terrific explanation of where our cash conversion in the half reflects our investment in inventory and it reflects our belief that that will in turn support medium-term growth so nothing has structurally changed about our ability to generate cash conversion consistent with what we've done in the past

Thank you both. Secondly, I wanted to ask about FlexTech. We're seeing a bit of a softening in the housing data, both in terms of starts and now year-on-year in terms of pricing. Can you talk about the positioning of the FlexTech business within the US housing market and what you're seeing in terms of the demand conditions today on the ground? I know that 67% of the division sales are now HVAC-related. That may provide a buffer, perhaps, in terms of spending towards energy efficiency over general DIY investment credit, if you like.

So FlexTech is a fabulous business. Over time it grows regardless of what's happening with its underlying markets. It has double digit, 5, 10, 15 year top line caterer and even better earnings caterers over that same period. We have been anticipating the well-understood slowdown in the U.S. housing market would have impacted FlexTech sooner. FlexTech came in stronger than many people expected. Now, we do see, as you pointed to, those macro indicators on the U.S. housing start. While it didn't impact us in the first half, in the first six weeks here, now of the second half, we are starting to see evidence of that. So, you know, FlexTech will continue to grow as it always has, just not at those same record levels we saw in fiscal 22 and then here in the half. They have two businesses balancing the construction impact that we just described. You noted one of them, Aerospace. Ordered growth in Aerospace was in the double digits in the first half, and that business will continue to grow here moving forward. And then the second is the electric heating business that we touched on in the call. The demand for electric heating elements is, you know, all businesses like ours have made net zero commitments. A place you look early is on your process heating. And so we're getting a strong inflow of questions, how we can help our customers convert from fossil-based heating to electric heating. We feel pretty good about where we're at.

Thank you, Paul. And then linking to my second question and then coming back to your comments on the net zero ambition, I wanted to ask if you're seeing any signs of this incremental demand from some of the policy announcements we've seen, for example, the CHIP Act, which might help in this connect, and then in fact, the U.S. IRA earlier on the call. Just wanted to think about how we should... calibrate the impact of those policies on demand for your businesses?

Energy transition is one of these giant global megatrends. $100 trillion to the world to invest over the next 20, 30, 40 years as we get to net zero, whether that's in 2040, 2050, we'll have to see. And this is now playing out in our business in a number of ways. We gave the example of the Blue Hydrogen facility in Canada. It's a very clear example of that. The H2 Green Steel partnership in between, another clear example of that. And so legislation like the Inflation Reduction Act and parallels of it in most major economies all help accelerate that tidal wave of transition that is coming. So we find that supportive, absolutely.

Thank you.

Thanks, Christian.

Thank you. Now we will take our next question. And the next question comes from the line of Andrew Wilson from JP Morgan. Your line is open. Please ask your question.

Hi, good morning. Thank you for taking my question. I thought, on John Crane, I'm interested in terms of what indications you're getting from customers with regards to the demand. I mean, the orders in the first half of 2016 were about 14, 10-year-old years, so clearly very strong there. I'm interested in terms of how much of that is a catch-up, maybe pent-up demand, supply chain obviously has been challenged, etc. How much of it is real, genuine, underlying, we're expecting an energy market to probably be pretty strong for... and maybe the next year or two at least. But I get interested in terms of what the customers are actually telling you, and interested in both traditional markets but also the newer markets as well in terms of the second half and maybe into FY24.

Yeah, thanks, Andy. It's a good question. Supreme is seeing strong demand both on the order front and on the revenue conversion side across all of its end markets, and then seeing it both on the OE and the aftermarket side. And there's three pockets of customer demand. Yes, the traditional energy business right now is seeing very strong demand. Part of that is post-COVID. Part of that is the increased demand for supply of non-russian sources. The second piece, remember John Crane also participates in a number of non-energy segments, water treatment, pharmaceuticals, chemical, all those businesses demand strong. The third piece of it is this energy transition wave again, which we had been thinking about as the future, but that future is very much here right now. 40 active hydrogen carbon capture projects underway right now. Our opportunity funnel more than doubling. And then some very big projects, like the Canada project, and last year we had a very large NEON project. So it is a good time in John Crane. incrementally exciting for us is there's good reason to believe for crane that a near term demand will extend into the medium term for all of the reasons I just described and then this long-term tailwind from energy transition provided that we can respond to the demand both in terms of operations but also in terms of new product and service offerings we should be well positioned here for some time to come

Thank you. And I guess the second question is actually something similar, I guess, on the detection side. It's a couple of aspects to it. Obviously, the first half was very encouraging in terms of that order conversion coming through, and I think being fairly clear in terms of what we'd expect of the second half on a slower order rate. But in terms of the visibility that you're getting with customers and the visibility that that's providing you with in terms of the profitability, I'm interested if you've been able to, I guess, make any progress with regards to the sort of better understanding the profile of the business going forward, because historically we have seen it being quite volatile, and it has been quite challenging, I think, at times, in terms of trying to understand what we should be expecting, and clearly within the context of the group target detection as a country, that sort of It's a very broad question, I appreciate it, but just in terms of your confidence and visibility around what you should be expecting in detection, again, probably in the next 12 to 18 minutes.

We think of detection in kind of a two-by-two grid. You have aviation security, you have other security systems, you have the OE part of the business, and then you have aftermarket. On the OE side of the business, you tend to have good visibility. The order book in detection tends to be multi-year, so you can see forward across many orders of what the OE side should look like. Attached to every OE order is typically a committed service period, and that service piece has both schedule maintenance as well as rate fix, so you can see the schedule maintenance and model that out. What you can't see as well is how fast these adjacencies grow. So we have a pretty good feel on the aviation side, but the adjacencies we're moving into, other security systems have very rapid growth, in particular on the OE side in the first half. I know that's a little bit more difficult to predict. And then, again, the other security system side of that business also has the defense piece. Those tend to be very large orders. And so when those come in or those roll off in a comparable period, that tends to introduce a little bit of volatility.

Paul, I'm going to add, we entered the second half with our largest order book ever in Smith's detection, which is up double digit versus a year ago and up high single digit percent growth in order book versus the start of the year. And so I think that positions as well. As mentioned, it is a programmatic business, so quarter to quarter things don't always advance in a smooth fashion because we do need to wait for customers to be ready to receive delivery. But overall, the order book that we entered the second half with positions as well for sustained growth in that division.

That's really helpful. Thank you very much, guys.

Thanks, Andy. Thank you. Now we're going to take our next question. And the next question comes from the line of Mark Davis Jones from Tickle. The line is open. Please ask your question.

Thank you very much and good morning both. If I can start with the broad one and then a couple more specifics. The broad one is obviously now you've roughly doubled your expectation of organic growth for the full year. If you are isolating particular parts of the business that are driven now, is it more about stronger demand and in which case what part of the business or is it more about better availability to deal with some of the supply chains? We can take that one first.

So for, well, call it 18 months now, demand has exceeded supply. And right now, both on John Crane and detection, they have such strong order books that Demand is still, you know, above our ability to supply it. We have been scaling supply in both crane and detection, both in terms of CapEx, adding capacity, but also SES is, you know, you saw a good example there with the FlexTech project. You know, we're getting more supply out of existing capacity. So on both fronts there, that's supportive.

Okay, thank you. And then this wave of OE within detection, what typically is the lag between one of those OE waves and the ultimate coming through? Is there a period of time when the ultimate is effectively included in the network system? How long is that lag?

For detection, it can be anywhere from six to 18 months for an order to convert to revenue. On the OB side, it's shorter, more typically three to six months for an aftermarket order in detection to convert to revenue.

Okay, and perhaps one quick question, Claire. There's a lot going on on the balance sheet. In terms of the benefit of seeing a lower finance cost coming through, do you think there's some indication of timing in the scale of that? Yes.

So we're planning, and thank you for the question, so we're planning to repay our $600 million. Thank you very much. Thank you.

Dear participants, as a reminder, if you wish to ask a question, please press Start11 on the top of the keypad. To withdraw a question, please press Start11 again. Now we're going to take over the next question. And the next question comes from the line of Andre Cookney from Predatory. Your line is open. Please ask the question.

Hi, good morning. Thank you very much for taking my questions. I'll go on time as well. Can I start with the Smith's equity system delivering results and you've outlined very clearly what to expect for the second half and then the increased annualized event of 25 million. But beyond that, should we think about SES as something that is a continuous process, and think about that similar level of annual saving that you generate in, obviously, 2024 with full annualization beyond that? Or is this something that you are still wrapping up very actively, and it is something that has got the potential to actually give it a substantial more than its current run rate?

So SES, you see in other businesses that have deployed continuous improvement methodologies across the enterprise, it brings you two primary things. It improves your execution, your project management, the predictability with which you can solve problems. And then the second thing it does for you is it accelerates development of talent. Certainly the Black Belts and Master Black Belts who are in full-time roles in the program, but all of the project participants learn that same problem-solving methodology, and then over time, you improve your culture. You get used to better execution, and it becomes the norm. Now, you can point that capability at a lot of different things. Across the first half, we principally pointed it at customer service because of Mark's question regarding demand and supply. With demand and seed supply, we have our SES team focused on customer service. It also helps, of course, on the productivity front. While we more than cover input inflation with our own price, there's still more margin to be captured. So moving forward, we're using a few more resources on the productivity side. As we get through that piece, I think you're going to see more emphasis, as Claire mentioned, on the working capital side. We started to bring our cash conversion numbers back up into that 100% range that you guys are used to from us. So SES does a lot of things for the company, and you can point it at a lot of different problems.

Great, thank you. And I guess maybe to kind of a little bit, I know it's multifaceted, but we have some companies that talk about kind of a minimum level of productivity to deliver every year. Some of them talk about 3%, 4%, 5% is at the highest. Is that really where for us to think about Smith going forward with SES being a tool and being flexibly applied to different kind of trading points?

Yeah, I mean, of course, you'd like to see productivity both on your college line, you know, in your factories, and then you'd like to see SG&A productivity. We look at both. We had good SG&A productivity in the first half. And if you look at SG&A as a percent of sales, it's down 70 basis points or something like that. And then if you look at our margin walk, you can see examples of that factory productivity coming in. So yes, productivity on both sides is absolutely something we're focused on.

Thank you. And if I may, just a couple of quick ones on Ukraine. One, very excited to hear about, see some numbers on the new energy. Is there any chance you could give us an order of magnitude of potential value of those, say, 40 projects? I know you wouldn't give it for an individual contract award, but just for us to have an idea what this 40 kind of project could mean in terms of potential revenue, even in a sort of a rough ballpark.

Yeah, at this stage, no, we couldn't give you an accurate answer. Because it is growing so quickly, it is tough to know what that growth rate will look like moving forward. If the current rate continues over several years, it will be a big part of our business.

Right. And finally, just on the margins of Ukraine, clearly strong performance in H1 and normally have quite healthy seasonality in the second half. Can that happen in this year, or should we get too overexcited on that kind of sequential potential improvement in margins that have already happened in H1?

I mean, all of our businesses have scale economies. So you put more volume through factories, you get longer runs, you get shorter, fewer changeovers, and all of that shows up in the gross margin line. You saw that in John Crane. And then secondly, of course, is the SG&A efficiencies. You put more revenue over the same cost base, you get margins managed from that. John Crane's high water mark is still north of where we currently are. So if we continue to execute as we have been, yes, we believe there's additional upside to Crane moving forward. Great. Thank you very much.

Thank you.

Now we're going to take on the next question. Please stand by. And then the next question comes from the line of Bruno Gianni from Exxon B&B Paribas. Your line is open. Please ask your question.

Hi, thanks for taking the question. My question relates to orders that are all around. I was called back at a capital market event a couple of months ago using the KF app. 57% organic water growth as possible in FY23. I was hoping you could share what organic water growth was in H1 and I was wondering whether you still expect to deliver 57% organic water growth this year or whether your expectations have evolved to develop

Thanks for the question, Bruno. So we shared the number for John Crane, the 14% order growth. That business remains strong, and we expect similar kinds of levels moving forward. In FlexTech, the order growth is most relevant in the aerospace part of that business. We're seeing low double-digit order growth for FlexTech. Detection, Claire mentioned, is a programmatic business, so looking at order intake growth probably isn't as helpful as looking at total order growth year over year. And as Claire mentioned, that was double digits here heading into the second half. The one business where we had negative order growth was InterConnect, and that relates to the slowing in semiconductor tests that we knew was coming, as well as a little bit in our Vocom business. Some of our customers have delayed projects. We think they will come, but in the first half they were delayed.

Okay, that's helpful. And I guess I have another question just on investments and growth and the impact that has on the bridge. Could you help us think about how we should be thinking about the development year-on-year in H2 in terms of the dilution margin? Am I right in thinking that the year-on-year headwind in H2-22 was more pronounced than it was this year. When we're looking at that year-over-year impact, it should be less pronounced. We started to ramp up investments more meaningfully towards the back end of last year, or the last fiscal year. Just to say it would be useful, and I guess just on the mixed elements as well, was there anything exceptional that was delivered in H1 that weighed down on that margin, and particularly that might not have been a piece in H2, or would you expect mixed within revenue for H2 2023

um for the full year we expect to continue seeing moderate margin improvement uh it'll be the same trade-off that we talked about for the for the first half um we could goose margins more um we could back off on our r d investment we could be more um discerning in terms of our oe uh tenders But our current posture is that we'll continue to prioritize growth. So tenders that play to our strength, that value technical differentiation, that value strong service using our global service networks. We're going to continue to invest in the OEPs, knowing that it's a near-term goal. margin impact because we have decades of evidence that it leads to higher margin recurring evidence. So I think it's going to be, Bruno, the same sort of dynamic here in the second half as we talked about with the first.

Sure, sure. And on detection, I guess we're seeing more airports install or rather order these technologies on the Captain's package side in Europe. Could you perhaps talk about the upgrade opportunities that exist, I guess, in Europe? You touched on it in terms of New Zealand. But what that opportunity might look like for you over the next two to three years?

Yeah, there's two sides of that business, of course. The checkpoint and the whole baggage conversion to CT in Europe is largely complete. It's the check baggage that's now going country by country, and it's different in each part of the world. The UK has mandated CT for the checkpoint here, I believe, by the end of 2024. The U.S. is just starting.

There's only one purchaser in the U.S.

that's the TSA. And for all intents and purposes, their major tenders right now are all for CT. So it's going country by country at a different pace. The furthest ahead is the Netherlands, for instance. They're nearly complete on both whole baggage and checked baggage.

Sure. And finally, on flex tech, so you notice that you're being able to slow down. Does that relate to just volume, or is pricing going to roll off as well in your construction market as well?

I would say you should expect a slowing on both sides. We did not see price come off in the first half. We had a good volume and price for FlexTech. But in particular on the construction side, our customers are asking more questions around price than they did before. you know, previously.

And that goes with demand.

When demand is strong, they ask you, when can you deliver? They don't ask you at what price. Now that demand on the construction side is normalizing, price comes into play.

Got it. Well, that's been very, very useful. Thank you very much.

Thank you.

Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star 11 on your telephone keypad. If you wish to withdraw your question, please press star 11 again. Dear participants, we'll give you just a few moments so that you would like to submit your last questions. Okay, well thanks everybody for tuning in.

As I think you heard on the call and you saw in the release, very strong momentum in the business right now. That's seven consecutive quarters of accelerating growth punctuated with record organic revenue growth, record reported revenue growth, and record EPS growth. Also unique in that all four businesses, all parts of the world, and all customer end markets were in growth in the first half. So we feel good about the momentum we currently have. We would balance that with an observation of macro uncertainty, which remains at a very high level. So the things that we can control, we expect to continue progressing in the second half, but uncertainty is pretty high. So you put those two together and you get the increased guidance for the full year of at least 8% organic revenue growth, which is our second raise now in two months. So thanks again for your interest, and we'll be talking to all you guys here in the coming days and weeks. Bye for now.