Smiths Group Plc

Good morning, everyone, and thanks for joining us. As we typically do, I'll provide a short recap of our first half results and then turn it over to Claire to walk us through the numbers. I'll come back and update you on our progress with respect to strategy and operations, and then we'll open up for your questions. Before we get to results, though, let me say a few words about today's announcement regarding our CEO transition. As you will have seen, I am leaving Smiths to take a new role in the U.S., and our board has appointed Roland Carter as my successor. The last three years have been a period of strong progress for Smiths. We completed a transformative portfolio action in FY22, We delivered record performance in FY23, and we've now posted 11 consecutive quarters of growth with, as we'll cover in just a moment, significant momentum for the second half of FY24 and beyond. Roland is the right leader to build on all this momentum. Claire and I will cover results in Q&A today, but I did want to take this opportunity to introduce and personally congratulate Roland. Roland, over to you.

Thank you very much. Hello, I'm Roland Carter. I am delighted to have been appointed as CEO of Smith Group. I'm a chartered engineer and I have been at Smith for over three decades. In this time, I've had the opportunity and the privilege to lead many parts of this company. This has enabled me to develop an in-depth operational and strategic understanding of Smiths and its fundamental growth drivers. For the past six years, I have been president of Smiths Detection. Prior to that, I was president of Smiths Interconnect and Asia Pacific. I've worked for Smiths in the UK, China, France, Germany and several other places. And I'm responsible for some of the acquisitions that form part of Smiths and also for some of the divestments that have reshaped us. Smiths is a fantastic business with great people and a wonderful culture. It has a hugely exciting growth potential. I would like to thank Paul for all he has done for Smith's. We are making great strategic progress, and our operational and financial performance has improved, with Smith's well-positioned to deliver on its significant potential. Thank you.

Thank you, Roland, and again, congratulations. Okay, having covered the CEO transition, let's now turn to our first half results. I will open with a short recap of our first half performance before turning it over to Claire to walk us through the numbers. I'll then come back and update you on our progress with respect to strategy and operations. And as always, we'll have plenty of time at the end for Q&A. We delivered 3.9% organic revenue growth in the first half, building on a record year in FY23. We've now posted our 11th consecutive quarter of growth, extending our track record of consistent performance. Driven by strong underlying demand in energy, security, and aerospace, our orders grew 16.5% in H1, providing good momentum for the second half and beyond. Our execution focus and Smith's excellent system are delivering further tangible benefits. Organic operating profit increased over 5%, resulting in a 20 basis point increase in operating margin and a 50 basis point improvement in ROCHI. Our balance sheet remains strong and cash flow is much improved. Operating cash conversion increased 26 percentage points to 89% and free cash flow more than doubled. As such, we increased our dividend by 5% and have announced a new 100 million pound share buyback program. With respect to people, we continue to actively develop our global talent. For example, we more than doubled our investment in leadership development and our Wave 1 cohort of Black Belts and Master Black Belts are now completing their assignments and re-entering into high-impact leadership roles across our company, backfilled by an even larger cohort of Wave 2 talent. We're also continuing to make good progress on advancing our sustainability strategy, as the Science-Based Targets Initiative validated our net-zero targets and plans last December. In support of our communities, I mentioned the launch of our new Smiths Foundation on our FY23 call in September. I'm now excited to share that we are making our first wave of grants in support of charitable causes that link to our purpose of improving our world through smarter engineering. In summary, we're off to a successful start in fiscal 2024 and carry strong momentum into the second half. And as such, we are reaffirming our full-year guidance of 4% to 6% organic revenue growth with continued margin expansion. You are familiar with our Schmitz Value Engine, which connects the three components of our success, our purpose, our strengths, and our priorities. For today's presentation, we've also added our financial commitments to the slide to illustrate how our strategy is purposefully shaped to deliver the financial commitments we make to all of you. Let's turn to those now. Claire will provide details on each of these in just a moment, so I'll just hit the high points. It was yet another period of strong, well-balanced performance for Schmitz. 4% organic top-line growth and 6% with M&A. Good operational execution turning this into 4.5% EPS growth or 11% on a constant currency basis. and improved capital efficiency, resulting in a significant increase in operating cash conversion and more than doubling free cash flow. As all of you know, when this business grows, as it has now for 11 straight quarters, it generates a lot of profit and cash. And with that as an overview, I'll hand it over to Claire.

Thank you, Paul. As previously mentioned, organic revenue growth for the half was 3.9%. Acquisitions added 2.2%, and there was a negative 5.4% FX impact, bringing reported growth to 0.7%. We grew our operating profit to $246 million, up 5.3% organically. And we improved margin by 20 basis points, while at the same time investing for growth. This operating profit growth, combined with the net impact of the previous share buyback program and FX, contributed to EPS growth of 4.5%. We increased cash conversion by 26 percentage points to 89%, with improvements in working capital. ROKI was up 50 basis points to 15.7%, reflecting increased profitability. In line with our progressive dividend policy, we're announcing a 5% interim dividend increase. And I'm also pleased to announce a new share buyback program of 100 million pounds. We launched the initial tranche of up to 50 million to be completed by the end of September. We continue to extend our track record of delivering growth, now having grown revenue on an organic basis for 11 consecutive quarters, with growth in the first half against strong comparators last year. Notably, eight of those quarters were in or above our medium-term target range. H1 performance reflected growth in our two largest divisions, John Crane and Detection, and was delivered despite softness in certain end markets at Flextech and Interconnect. Our portfolio helps provide resilience when end market performance is variable, underpinning a more consistent growth performance for Smiths. We converted revenue growth into 5.3% organic operating profit growth. On the positive side, acquisitions added 10 basis points and pricing more than offset inflation, leading to a further 20 basis point expansion. Benefits from the Smith's Excellence System, together with the 2023 savings projects, added 130 basis points. Volume in John Crane, Detection, and Flextech together contributed 100 basis points. The market-driven sharp volume contraction at InterConnect compressed margin by 80 basis points. And to support the elevated activity at Smith's Detection, we invested in additional field service engineers, increasing the number of engineers by 11%, and this impacted margin by 30 basis points. We also invested 120 basis points to support future growth, primarily in John Crane, reflecting additional hiring and operations, together with increased spending on marketing and systems. In summary, we delivered a 16.3% operating profit margin, a 20 basis point expansion, and in line with our full year guidance for continued margin improvement. For the half, the primary drivers of EPS growth were growth in operating profit and the benefit from our previous share buyback program. FX netted EPS growth down to 4.5 percent. However, on a constant currency basis, we delivered 11.3 percent EPS growth. Cash conversion in the first half was 89 percent, a 26 percentage point increase from last year, driven by working capital improvement. Our medium-term target is 100% cash conversion, and we look to make further improvements in the second half toward this level. We increased CapEx 5.6% to 38 million, representing 1.5 times depreciation. This included capacity expansion and investment in automation at John Crane. Finally, operating cash performance translated to 112 million of free cash flow, more than doubling year-on-year. Now turning to each of the divisions. John Crane delivered organic revenue growth of 12.7%, with a particularly strong performance in the first quarter. And this was against a strong comparator last year. Growth was broad-based by end market and in both original equipment and aftermarket sales. This revenue growth translated into strong operating profit growth and 110 basis points of organic margin expansion. Pricing discipline offset the impact of cost inflation, and SES also drove performance. And we delivered this margin progression while also continuing to invest in growth to service the strong demand we see now and in the future. This encompasses additional hiring and operations to support the strong growth, together with increased spending on marketing and systems. Order intake grew 10.9% in the half, and the sustained high order book supports our positive outlook and expectation for continued growth through the second half of the year. And John Crane is playing an increasingly important role in helping our customers improve efficiency and reduce emissions from their operations, and is now present in more than 100 hydrogen and carbon capture projects. We'll talk later about some of these recent contract wins. Smith's detection delivered strong organic revenue growth of 8.9%, with growth in both aviation and other security systems. In aviation, we continue to have strong demand for our CT airport checkpoint scanners, and we continue to secure new contracts with multiple wins across the globe during the first half. We estimate that the industry is only about 40% of the way through the checkpoint upgrade. Importantly, these OE sales secure an attractive aftermarket for us that we expect to continue to contribute to margin expansion over the medium term. In other security systems, aftermarket revenue growth was particularly strong at 34%. We expect growth overall to remain strong in the second half. OPERATING PROFIT GROWTH WAS 10.3%. MARGIN EXPANDED BY 20 BASIS POINTS REFLECTING THE POSITIVE BENEFITS OF SES AND COST ACTIONS AND THE INVESTMENT WE MADE IN INCREASING OUR FIELD SERVICE ENGINEERING TEAM BY 11% TO SUPPORT OUR RECORD ACTIVITY. Orders were up more than 38%. Order intake in defense was particularly strong, driven by a multi-year contract for an initial £88 million award from the UK Ministry of Defense for the next generation of chemical detection equipment. This followed an earlier award. from the US Department of Defense to supply chemical agent detectors. Orders and detection are for multi-year deliveries, with around a third of the order book expected to contribute to revenue this year. In summary, Smith's detection is delivering on its growth potential, and we believe SES benefits, increasing aftermarket revenue, and the impact of new contracts will support margin expansion in the coming years. Now let's look at Flextech, where revenue declined 4.1% organically. Flextech's industrial segment declined 7.6% in the first half, as expected, mainly in HVAC and due to soft U.S. residential construction. Offsetting this, aerospace sales grew more than 12%, linked to new aircraft builds. Despite the overall lower sales, organic operating profit increased 2.6%, and we expanded margins by 140 basis points. The margin expansion resulted from tight cost control plus positive mix impact. impacts reflecting new industrial contracts. This was supplemented by the contribution of HCP, the acquisition we made in Q1, where integration is ahead of plan. Looking forward, we expect our HVAC sales to improve as the U.S. construction market recovers. Combined with continued strong aerospace sales, we anticipate that Flextech will return to growth in the second half of the year. Turning now to Smith's Interconnect, organic revenue contracted 13.7% in the first half as a result of challenging semiconductor and connector end markets. Although importantly, the market backdrop improved through the half. In Q1, Smith's Interconnect had double-digit organic revenue decline, and in Q2, this improved to flat. Order activity has also improved. We had order growth in the second quarter and we now have a positive book-to-bill ratio. Reflecting lower sales, organic operating profit declined by a third, resulting in an operating margin contraction of 370 basis points. Despite the challenging first half, we maintained R&D investment to support our new product pipeline with recent product launches in medical, space, and defense markets. Our orders have returned to growth, and the market backdrop is showing signs of gradual improvement, underpinning our expectation for an improved second half and underscoring our confidence in our medium-term outlook. Now to our capital allocation framework. Our first priority is to support organic growth, and we invested $83 million in R&D and CapEx in the first half. We supplement organic growth with strategic acquisitions, and we've spent $90 million on three Bolton acquisitions since the start of 2023, most recently FlexTech's acquisition of HCP, which we announced in the first half. We'll maintain a disciplined approach as we actively look for further additions to complement our portfolio. And at the end of the first half, we sold around a third of our stake in ICU Medical, raising almost $70 million, and have flexibility on future monetizations. Our third priority is returning capital to our shareholders, and we're increasing our interim dividend by 5%. And given the strength of our balance sheet, we're also announcing a new 100 million buyback program with an initial tranche of up to 50 million to be completed by the end of September. Our leverage at the end of the half was 0.9 times net debt to EBITDA, so we have the strength and financial flexibility to execute our growth strategy and to continue to deliver against our medium-term financial targets. Finally, with respect to our guidance, we're well positioned for the remainder of the year. With record order books at John Crane and Smith's detection, an expected gradual market recovery in Semicon and U.S. construction, and our new product pipeline, we expect growth to improve in the second half, and we reiterate our 4% to 6% organic growth guidance. We also expect to see continued margin expansion. 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. Building on what Claire said earlier, underlying demand remains strong in three of our largest end markets, energy, security, and aerospace, while two other markets, construction and semiconductors, contracted in H1. In the interest of time, I'll touch on current dynamics in just one end market for each business, beginning in the top left with energy for John Crane. Energy was our fastest growing market in the first half, where we grew 17%. Energy volume is a key metric for John Crane, as it determines capacity needs for our customers, which in turn drives demand for both OE and aftermarket services for our products. As you can see from the chart, energy output continues to climb steadily, a trend we expect to continue throughout the second half and beyond. Moving counterclockwise to Flextech in the lower left, our construction sales in H1, around 15% of total Smiths, were down 10%, consistent with the housing start data that you see here. We track a number of indicators in this part of our business, housing starts, permit applications, mortgage rates, builder confidence, etc. And some of these factors, for instance, housing permits and builder confidence, are trending positively. Others, however, like U.S. mortgage rates, still have further to go before a sustained construction uptick can confidently be expected. Now, as Claire mentioned, in total, we expect FlexTech to return to growth in H2 behind continued momentum in aerospace and industrial electrification, alongside gradually improving conditions in HVAC. Moving to the lower right, you see semiconductor market growth over time. Semi-test represents just under 3% of group sales, and after bottoming out in the spring of last year, this market is now showing signs of recovery. As such, we expect semi-test specifically and interconnect more broadly to also return to growth in the second half. Finally, for detection in the top right, Revenue passenger kilometers, one important metric for our business, were up almost 30% in the half. Regulatory mandates are another important driver, such as required checkpoint CT upgrades, which are underway across the globe, and of which I'll say more in just a moment. The strength of these and other dynamics underpin good ongoing growth for SMIS detection. One final item to note on this chart is the clear benefit that comes from a balanced portfolio. H1 softness in FlexTech and Interconnect was more than offset by strength in John Crane and Detection. You'll remember that the exact opposite took place in FY22, when FlexTech and Interconnect both grew double digits, while Crane and Detection were still recovering from COVID. With a well-balanced portfolio, Balanced by market, balanced by geography, and balanced between OE and service, we are now demonstrating that we can deliver profitable growth as well as stability. Let me now say a few words about our near-term progress accessing longer-term megatrends. Energy transition describes the world's multi-year, multi-trillion dollar commitment to moving from fossil-based to low-carbon fuels. As we covered in some detail at our H1 Capital Markets event, John Crane is uniquely positioned to support our customers along this journey. We continue to see strong growth in this part of our business with a number of new contract wins in H1, two of which you see here. On the top left, a contract to supply dry gas seals for critical compressors in a large-scale blue hydrogen project in Texas, and in the lower left, a significant contract to supply wet seals for an electric battery facility in Tennessee. The scope and diversity of these wins further demonstrates the breadth and depth of John Crane's capabilities in energy transition. With respect to supporting the world's insatiable demand for data and connectivity, Smith's interconnect is similarly well positioned. Our orders in satellite communications grew double digits in H1. Further bolstering momentum here, we received a £2 million grant from the UK Space Agency to expand our Space Qualification Lab in Dundee, Scotland, a major satellite manufacturing hub for Europe. And on the right side of the chart, Mist detection plays a central role in protecting our world from ever-rising security threats. During H1, we secured two awards to develop and supply next-generation chemical detector systems, one from the US Department of Defense and the other from the UK Ministry of Defense. These multi-year awards will contribute accretive growth in H2 and beyond. As mentioned on the previous slide, mandated upgrades of airport security checkpoints are now well underway. 40% of the roughly 6,000 checkpoints around the world have thus far ordered new machines. Smith Detection has won more than half of all awards, and we were particularly active in H1. These are just a few of the many growth programs underway across our company. At our capital markets event in 2022, we discussed our strategy of building pan-North American coverage for our highly successful HVAC business headquartered in South Carolina. This is a great business for us, one where geographic proximity to customers is especially important due to freight costs, cycle times, and regional product differences. The first step in our expansion, several years back, was opening greenfield locations in Florida and Arizona, two of the fastest growing states in America. In 2021, we acquired Royal Metal Products in Georgia, another fast growth state, further bolstering our position in the Southeast. In 2022, we opened our third greenfield site in Texas, strengthening our coverage in yet another top 10 housing market. And earlier this fiscal, we acquired heating and cooling products in Ohio, a market leader in important Midwest and Northeast states. While we are now able to competitively serve customers across North America, we'll continue to look for additional organic opportunities to deepen our penetration in markets where our customers need us most. Having covered a few of the many growth initiatives underway, let's now turn to execution, where our Smith's excellent system is at the core of our strategy. As we did on the full year call, today I'll share another example of SCS in action, this time in Smith's InterConnect. Let me quickly set the stage. In partnership with a major global healthcare customer, we designed a custom medical connector, leading to a 10 million pound contract. As the size of the program necessitated more than a tenfold increase in line capacity, we charted a black belt project to map the value stream, optimize line layouts, and implement visual management systems, enabling our team to respond in real time. The results of the project have been encouraging for both our customer and for Smith. This project delivered a five-point improvement in gross margins. and a follow on order for an additional 4 million pounds with line of sight to still more opportunity down the road. Let's now hear from Melissa Skidmore, one of our senior engineering managers.

Smith Center Connect supplies advanced electronic components and subsystems and optical and radio frequency products for customers requiring reliable high speed and secure connectivity across many end markets. One end market our connectivity solutions supplies is medical devices, where our products are used in applications ranging from MRI systems to defibrillators.

As the principal engineer for medical connectors and cables, I was the lead on this important project where we partnered with a leading medical device manufacturer to develop an extension cable for next-generation heart mapping catheters used to map the electrical activity of the heart. Each cable consists of dozens of micro coax cables, each finer than a human hair. Our cross-functional team designed and are in the process of patenting a method that connects each tiny wire in a way that achieves reliable electrical and mechanical performance.

At the start of the project, we were producing 50 cables per week with an average first pass yield of 85 per station. Our black belt project began by improving the measurement system so we could first understand the baseline state of our production line with a high level of precision and accuracy. We now achieved this by having implemented an hour-by-hour tracker for each workstation to measure and track output and quality performance. Our team analyzed the data and performed a value stream map and process mapping. To quantify our current state and as-is value flow, we used a statistical process control to identify the main bottlenecks in our process. Using lean tools including 5S, standard work, and Kaizen, an optimized line layout has now been established. We have introduced standardized documentation to support our efforts which the teams audit at the start of each shift. In addition, the cross-functional team participates in daily meetings to build ownership and identify opportunities to continuously improve the process.

We now deliver a fully validated and technically superior product within the aggressive 18-month timeline that our customer required. We recognize that the SES toolbox contains great methodologies and tools to support this required expansion, so we initiated a black belt project to rapidly scale assembly line output and position us to realize this 10 million pound annual sales opportunity.

We are currently building at a rate that exceeds 20,000 cables per year, with an average first pass yield per station greater than 98%. Our customer is delighted, and what's more, the capabilities we developed for this program have positioned Smith Center Connect to deliver tremendous value to our customers and end users across the medical field. It's a great testimonial to how SES makes a profound difference for us and for our customers every day.

Thank you, ELISA and team. Another 50 or so projects like this are currently underway across the company and we're on track for 20 million pounds in SES contribution for the full year. Consistent with this, our Smith's Excellence Awards, which we celebrated last fall, recognize distinctive contributions in support of the highest priorities you see here. They are organized around our strategies for growth, execution, and people. The Excellence Awards are one of a broad array of initiatives that continually reinforce and advance our high-performing and inclusive culture. You've seen a marked uptick in Smith's performance over the past three years. The many actions we've taken across this time, for example, strengthening our leadership team, revitalizing our new product engine, improving our portfolio, and embedding SES in the Smith's leadership behaviors are all interconnected building blocks of a much broader, stronger, and more stable foundation for Smith. It is our culture of continuous improvement that underpins our sustained performance. And it is this foundation that will provide continued success as we move forward. I'll close my comments on H1 with a quick update on people and culture, before wrapping things up with a look forward to H2. With an eye to supporting all stakeholders, we launched the Smiths Group Foundation last summer. Across the first half of this fiscal, employees from around the world nominated close to 100 different causes for funding consideration. And after a rigorous selection process, the first wave of grants are now being made. We've asked Hannah Constantine, Group Director of Legal Operations and Chair of the Smiths Group Foundation, to say a few words about how we're advancing our purpose and supporting stakeholder success.

I'm Hannah Constantine, Chair of the Smiths Group Foundation. We launched the Foundation in August 2023 with an initial commitment of £10 million from Smiths Group. The Foundation supports our goal of contributing positively to our communities by providing grants to charitable organisations that align with our purpose to improve our world through smarter engineering. Each year we aim to donate between half a million and one million pounds with individual grants ranging in size from ten thousand pounds to two hundred thousand pounds. The charities all support causes with activities in three key areas. One, expanding access to STEM education and skills for underrepresented groups. Two, improving safety and connectedness within our communities. And three, improving the environmental sustainability of our communities. Importantly, Smith's employees nominate the organisations that will benefit from these grants, choosing causes that are close to their hearts and within their own communities. Now, having reviewed and vetted this first round of nominees, with the help of the Charities Aid Foundation, I'm excited to announce that we're making our first grants worth around £1 million in total. Let me share with you just a few of the organisations that we'll be supporting and the impact the grants will have. Inspire, Geneco Foundation, Palace for Life and Stamazing Kids will provide greater access for STEM learning, mentoring and career support for underrepresented groups in a number of communities. Meanwhile, Just a Drop and Flint Global will support activities to safeguard safety and environmental sustainability. I look forward to seeing the outcomes and impacts of these first grants and to the many awards we'll make in the future. Thank you.

Thank you, Hannah. Exciting to think about the positive impact that these grants will support. Now, just a few comments by way of summary, and then we'll open it up for your questions. Double-digit order growth in H1, coupled with gradually improving market conditions, has us well on track to deliver our full-year organic growth guidance of 4-6%. The operating leverage that comes with this, alongside additional benefits, Benefits from SES and other productivity initiatives has us reaffirming our guidance of continued margin expansion. And on the back of our strong balance sheet and much improved cash flow, we're announcing a 5% dividend increase and a new 100 million pound share buyback. In short, a good start in H1 with even more to come in H2. Our wonderful people make all this progress possible, and I want to recognize my colleagues around the world for doing what we do best, improving our world through smarter engineering. In the same way, we're grateful for the strong support that we enjoy from customers and shareholders. And with that, I'll ask the operator to please open it up for Q&A. Thank you.

Thank you. To ask a question, please press star 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. Please stand by while we compile the Q&A roster. We will now take the first question. It comes from the line of Lars Mahendra Raja from JP Morgan. Please go ahead.

Morning all. Thanks for taking my questions. I've got two, I think. The first is just on margins, and I guess going back to that operating bridge you showed in terms of both the 80 basis points, Edwin, I think, from interconnect volumes, and then the 30 basis points from from detection and sort of field service engineers, I guess, how do we think about both those moving parts going forward, presumably interconnect, that reverse in the second half, perhaps not fully, and in detection, I guess, how much further you have to go in terms of the field service engineers? Is that going to be an incremental headwind going forwards as well, or are you sort of done there?

Morning, Lyle.

Thanks for the question. Let's see, with respect to margins, you asked about interconnect and detection. Let me take the two in sequence. For interconnect, yes, your hypothesis is correct as that business gradually returns to growth here in the second half. Margins will gradually return as well. You'll remember that was an 18 percent margin business in FY22, and as it gets back to the same volume levels, that same ballpark is about right for what you should expect. With respect to detection, we're clearly prioritizing growth over margin in that business right now, and that's for two reasons. First, we're as interested in operating profit growth as we are in operating margin for detection. It's had double-digit operating profit growth, both in 23 and in the first half, just that the top line is growing so quickly that the margin percentage probably isn't as pronounced as you would typically think with that much top line growth. The second important thing is the market share piece for detection. The world is going through an upgrade of all checkpoint systems from 2D to 3D scanners. Those machines will be in service for 10 years, and the gross margin on the service is better than two times what it is on the OE. So we're pleased with our market share performance there. As I mentioned in my earlier comments, The world is maybe 40% through the total upgrade, and we've won better than half of all tenders. So the NPV of those awards will generate a lot of value moving forward.

Okay, helpful. Thank you very much. And the second one is just on sort of the orders, which are very strong in the first half, and some of these divisions are a bit more obvious than the others. But it would be helpful just to get a reminder in terms of, the sort of timing of orders and sort of for each division in terms of when that sort of leads to sales. And also, I guess, particularly for interconnect and FlexTech, what percentage of revenue do you have visibility on in orders? I guess I'm just trying to get an idea of H2 and the underpinning there with all the growth you've seen in H1.

Yeah, let's see. A couple of questions in there. Let me see if I can remember. The first is orders were up 17% in the first half and we expect roughly half of that to convert to revenue in fiscal 24. A little bit different business by business. The largest percent of order book conversion or the shortest cycle time is in John Crane. Almost all of their double digit order growth will convert here in fiscal 24. um... probably the lowest number would be detection those are typically multi-year contracts in particular the two large defense contracts those are eight to ten year contracts so maybe a third of detections record order book will convert in this fiscal And then it's about half for FlexTech and for Interconnect. Alyssa, you asked how much of Flex and Interconnect is covered by orders. Roughly a third of FlexTech is order-driven and roughly two-thirds of Interconnect.

Brilliant. Thank you very much.

Thank you. We will now take the next question. Coming from the line of Mark Davies-Jones from Stifel, please go ahead.

Mark Davies- Thank you very much. Morning, Paul. Morning, Claire. Can I ask a bigger picture one to start? Paul, as you plan to depart, firstly, I'm sorry to see you go, but can you tell us any more hints about where you're heading to? And can you give us a little reflection on where you think Smith is relative to that U.S. industrial peer group operationally? I know you did some benchmarking when you turned up. Where are we now, do you think? Because obviously there is still quite a big valuation gap.

Yeah, thanks for the question, Mark. So as I mentioned in my introductory comments, I'm going back to the US to lead a US listed company and doing so principally for personal reasons. I come from a big and close knit family and our kids, our siblings, our parents are all in the States. And this is just a great opportunity to be closer to them. With respect to US versus UK industrials, I took this job and you and I talked a lot about that when I did because I saw an opportunity for a fundamentally good company to perform at a higher level in line with Smith's vast potential. And as I reflect back on the last three years, that proved to be even more true than I imagined at the time. And my second reflection would build on that. For all Smith's has accomplished over the last three years, I haven't a shred of doubt that our brightest days are still ahead. I don't see any meaningful performance difference between the high performing UK industrials and our peers in the U.S. I think you're accurate, though, that there is a valuation difference in aggregate, but there isn't in specific. The highest valued U.K. engineering companies trade at multiples as good or better than what they would trade in the U.S.,

Thank you. Can I ask one slightly more specific one around FlexTech? Very impressive margins there in the period. You talked about mix within industrial.

What's driving that? Our industrial business is 80% of total FlexTech. Of the 80, two-thirds of that, or 60%, is HVAC and 20% or one-third of it is other industrial, and a big part of that is our process electrification business. So the mixed comment we made there would be specific to process electrification. In particular, we talk about the H2 Green Steel project. That's very high margin. The last 20% then of FlexTech is aerospace, and, of course, that is margin accretive as well. Yeah, yeah. Thanks very much.

Thank you.

We will now take the next question. Coming from the line of Christian Hinderaker from Goldman Sachs, please go ahead.

Good morning, Claire, Roland, Paul. Can I just ask firstly on the interconnect business in terms of the mix, 19% semi-task, 26% other industrial, 40% safety, security, and the rest aerospace. I think the semi-test and SATCOM dynamics may be a bit better understood. Can you just remind us of the technology applications and growth dynamics for the other parts, and then also maybe add some color on which of those areas drove that sharp inflection in orders in the second quarter?

Yeah, you set the table well. Roughly half of all interconnect is connectors. I'll come back to that. Maybe a quarter is SATCOM and then a quarter is SEMITEST. You're also right that the dynamics are well understood. SATCOM market strong, double-digit growth and no signs of softening. I spoke about SEMITEST earlier. Gradually recovering, we expect it to return to growth in the second half. Now for the connectors part, there's a couple different pieces to that. We have a Industrial connectors business, a typical application would be rail. Our connectors are good in high vibration environments, so the connectors between two rail cars is a typical example. That market is still in recovery, kind of up and down. We have a medical connector business that we gave an example of the SES project for. That's going well because of these big contracts that we're winning. And then we have a small defense electronics piece of that as well, connectors that go into those applications. And as you would expect, that market is growing, but they're typically forward-dated contracts.

Well, I've got two now on the capital allocation. I guess the buyback, £100 million, and how we should think about that in the context of the 70 million proceeds from the ICU state sale. Should we assume that one sort of spurred the other, and how do we think about the remaining equity stake in ICU? Claire, you want to take that?

Yeah. So thanks, Christian. The decision to initiate a new buyback program reflects our improved cash conversion and also our commitment to return excess capital to shareholders. So we took that decision looking holistically at our anticipated sources and uses of cash. So we took into account, firstly, our first priority for capital allocation, which is organic investment. We looked at our anticipated acquisition.

Thanks, Claire. Maybe just if you could add to that, what are the sort of views here in terms of comfort levels on leverage? I think 0.9 times net debt EBITDA today. And then in terms of the M&A piece, you know, are there particular priorities across the portfolio that we should be thinking of?

At 0.9 times net debt to EBITDA, we're sitting very comfortably. We feel that that is a balance sheet that allows us to pursue all of the organic and inorganic opportunities that we have in our site. It's a very comfortable place for us to be. In terms of our M&A pipeline, I would describe that as active and growing. And you have seen the successful acquisitions we've made recently. Since the start of FY23, we deployed 90 million pounds for acquisitions, the largest of which was HCP and FlexTech, which is performing ahead of plan, and we're really happy with that integration. We would love to do more acquisitions like that.

Very clear. Thank you all.

Thank you. We will now take the next question from the line of Jonathan Horne from Barclays. Please go ahead.

Hey, guys. Good morning. Just three questions for me. Firstly, I just wondered if we can just come back to the margin bridge for 24, but sort of take it up to a group level. Maybe, Claire, could you just give us a little bit of color about how would you think on a four-year basis the impacts from MIX, from investment, from growth, and also what kind of tailwinds on a four-year basis we could see from price cost and SES, please.

Yeah. So when you think about the full year, we reiterate our guidance for continued margin expansion. We will continue to save where we can in order to spend where we want. And that is what you see when you look at the group level margin bridge. We will continue to achieve more in price than in input inflation. We intend to continue to deliver SES benefits. We have almost 50 black belt projects in flight. You saw one of those described here today. That will continue to deliver benefit. We also have the full year benefit of the savings programs that we put in place last year. And then on the other side, we will, of course, have the benefit of the order books coming through in crane and detection and gradual recovery in FlexTech and InterConnect, which will improve volume and operating leverage. And as Paul mentioned, though, we're going to continue to lean into growth. And that's where you saw the investment in field service engineers for detection. You also saw the investment primarily in John Crane in commercial aftermarket support and systems and marketing, because we have momentum and we want to continue to build that momentum.

Okay. So, but just on a sort of a basis point impact, is there going to be any significant difference four-year relative to what we saw in the half-year bridge?

It will not be significantly different.

Okay. That's very clear. Thank you. The second question was just on obviously the defense contracts that you won. I think you sort of alluded to them being mixed beneficial. Can you just talk a little bit about the margins of those defense contracts, please?

Well, we

Go ahead.

I was going to say we certainly don't talk about margin by contract, but that segment, the defense segment within detection is margin accretive.

Okay. Is that significantly above where the current margin for detection is in terms of relative for those defense contracts? Yes.

Yeah. Jonathan, these are chemical detector contracts to develop the next generation of lightweight mobile chemical detector to be used in defense and civil applications. Again, one is with the U.S. DOD, one is with the U.K. MOD. So the first piece of it is development revenue that tends to be high margin, and then it turns into production units. Those units are also accretive, margin accretive to detection.

That's clear. And just finally, just maybe on John Crane, obviously you've talked about the order book and most of that being delivered, if not all of that being delivered in the second half. If we look to John Crane to next year, FY25, I mean, obviously you're coming up against tougher comps. How do we think about that sort of growth of that business? Do you think it starts to slow down to all sort of mid-single digits growth, or do you think next year could be another year of high to maybe double-digit growth for John Crane? Thanks.

I'd say two things. First is we don't see any evidence in the market data that we get or in our order book or in our customer behavior of near-term slowing in that market. Both the traditional energy side and certainly the new energy side are buoyant right now. With respect to the second half, as I mentioned, Half of our order book, of our total order book for Smiths will convert in FY24, but almost all. value creative decision. That's why we're doing it.

Does that continue into 25, Paul? Sorry.

Will that continue into 25? If the market dynamics continue to give opportunity, we will continue to prioritize growth. And along with that comes not just top-line growth, Andy, but the operating profit growth. Over the last three years, the company has a compounded annual growth rate of operating profit of 14%, alongside the 7% CAGR on organic growth. So we're getting strong top-line growth and converting it to even stronger profit growth. We're very pleased with that dynamic.

And then, Andy, in terms of your other questions, as we look to the second half, we do have the opportunity to continue to improve working capital. We also specifically have the opportunity to improve inventory and our inventory turns. So that's why I said that we do believe as we go to the second half, we will continue to improve upon the 89 percent operating cash conversion. From an M&A perspective, Primarily, what we look at are what you would describe as bolt-ons, consistent with what we've done in the past, most recently HCP and Plastronix. Of course, we look at opportunities for all of the divisions across all geographies. We're always looking to see if there are new technologies that enhance our core or strengthen us in adjacencies. We do, of course, look at larger opportunities when they come along, but our primary focus continues to be on bolt-on opportunities. And then finally, in terms of your question around the balance sheet, prior to the sale of medical, we ran the balance sheet at around 1.5 times leverage. We're now at 0.9 times. So we have ample headroom if we were to find an interesting and larger acquisition. But right now, I think it's a very comfortable... place for us to be. I think it allows us to execute on what we've consistently communicated as the priority ranking, organic first, M&A second, and then returning excess capital to shareholders.

Okay. Thank you very much, and good luck, Paul, with your next venture.

Thanks, Andy.

Thank you. There are no further questions on the phone at this time. I would like to hand back over to Paul for closing remarks.

Okay, well thanks everyone for tuning in today. As we mentioned, we're pleased with the start to FY24. Good top line growth again, converting to even higher EPS growth on a constant currency basis. And the very strong order growth in the first half leaves us confident of continued margin expansion and acceleration in the second half, causing us to reaffirm guidance of 4% to 6% for the year. So with that, we'll thank you for your kind attention, and we'll leave it at that.