Smiths Group PLC (LON:SMIN) has announced its full year results for the 12 months ended 31 July 2023.
· Record annual growth – organic1 revenue growth of +11.6%; headline2 EPS growth of +39.6%
o Full year growth delivered ahead of guidance, balanced between price and volume
o +310bps of growth from new products, demonstrating the impact of innovation
o Well positioned for FY2024 growth within our medium-term targets, with orders3 up +6.7%
· Continued improvement in execution – Smiths Excellence System (“SES”) delivering benefits
o Headline operating profit growth of +20.0%; with margin expansion of +20bps to 16.5%
o ROCE up +150bps to 15.7%, benefiting from strong profit growth
o Cash conversion2 up 6 percentage points to 86%; with improvement in working capital
o Advancing our Sustainability strategy with significant progress across our environmental metrics
· Empowering our people – increasing engagement with our colleagues and communities
o Continued improvement in our safety record, with a 26% reduction in Recordable Incident Rate
o Successful rollout of Smiths Leadership Behaviours, driving our high-performance workforce
o High employee engagement reflected in 310bps reduction in voluntary turnover
o Launched Smiths Foundation, committing an initial £10m towards charitable STEM-related causes
· Strong balance sheet – providing flexibility on capital allocation
o Successful acquisition of Plastronics in Jan 2023 and Heating & Cooling Products in Aug 2023
o Net debt to EBITDA of 0.7x; £387m net debt
o £350m returned to shareholders through dividends and share buyback, which is now complete
o Proposed final dividend of 28.7p, up 5.1%, bringing the full year to 41.6p
FY2024 Outlook
· Expect FY2024 organic revenue growth within our medium-term target range of 4-6%, with continued margin expansion
| Headline2 | FY2023 | FY2022 | Reported | Organic1 |
| Revenue | £3,037m | £2,566m | +18.3% | +11.6% |
| Operating profit | £501m | £417m | +20.0% | +12.7% |
| Operating profit margin4 | 16.5% | 16.3% | +20bps | +10bps |
| Basic EPS | 97.5p | 69.8p | +39.6% | |
| ROCE4 | 15.7% | 14.2% | +150bps | |
| Operating cash conversion4 | 86% | 80% | +600bps |
| Statutory | FY2023 | FY2022 | Reported |
| Revenue | £3,037m | £2,566m | +18.3% |
| Operating profit | £403m | £117m | +244.4% |
| Profit for the year (after tax)5 | £232m | £1,035m | (77.6)% |
| Basic EPS5 | 65.5p | 267.1p | (75.5)% |
| Dividend per share | 41.6p | 39.6p | +5.1% |
Paul Keel, Chief Executive Officer, commented:
“We had another strong year of progress in fiscal 2023 as we further accelerated our growth, sharpened our execution, and developed our talented people. We delivered year-on-year improvement against all five of our medium-term financial commitments, including record organic sales and EPS growth.
“Innovation is central to our purpose of improving our world through smarter engineering, and new product launches contributed more than three percentage points to our growth. We continued to invest in R&D as artificiaI intelligence and other digital technologies are playing an increasingly important role in enabling us to support our customers more effectively. We are also further building our capabilities to capitalise on the growing megatrends we are exposed to across the major markets we serve, including energy transition and the world’s ever-increasing need for better security.
“Looking forward to our next fiscal year, we expect to deliver 4-6% organic revenue growth, in line with our medium-term financial commitment. I applaud my 15,000 colleagues around the world who live Smiths’ purpose each and every day. We are encouraged by our progress, proud of our accomplishments in FY2023, and even more excited by all we see ahead for Smiths.”
UPCOMING EVENTS
| Date | Event |
| 16 November 2023 | Q1 Trading Update |
| 16 November 2023 | Annual General Meeting |
| 30 November 2023 | John Crane Deep Dive |
| 22 March 2024 | HY2024 Interim Results |
Statutory reporting
Statutory reporting takes account of all items excluded from headline performance.
See accounting policies for an explanation of the presentation of results and note 3 to the financial statements for an analysis of
non-headline items.
Definitions
The following definitions are applied throughout the financial report:
1 Organic is headline adjusted to exclude the effects of foreign exchange and acquisitions.
2 Headline: In addition to statutory reporting, the Group reports on a headline basis. Definitions of headline metrics, and information about the adjustments to statutory measures, are provided in note 3 to the financial statements. Headline performance is on a
Smiths Group basis, excluding the results of Smiths Medical.
3 Order intake growth excludes the effects of foreign exchange.
4 Alternative Performance Measures (“APMs”) and Key Performance Indicators (“KPIs”) are defined in note 29 to the financial statements.
5 FY2022 statutory profit and EPS includes the proceeds from the sale of Medical.
Presentation
The webcast presentation and Q&A will begin at 08.30 (UK time) today at: https://smiths.com/investors/results-reports-and-presentations. A recording will be available from 13.00 (UK time).
Our Purpose
We are pioneers of progress – improving our world through smarter engineering. Smarter engineering means helping to solve the toughest problems, for our customers, our communities and ourselves. We help to create a safer, more efficient and better-connected world.
Our Priorities and Targets
Smiths is intrinsically strong with world-class engineering, leading positions in critical markets, and distinctive global capabilities, all underpinned by a strong financial framework. In November 2021, we set out how Smiths will deliver performance in line with our significant potential by focusing on three top priorities of accelerating growth, strengthening execution and doing even more to inspire and empower our people.
Our focused plan, the Smiths Value Engine, is the means through which we will deliver the medium-term targets that we have set. In FY2023, we have continued to make meaningful progress towards these targets, outperforming on several metrics.
| Targets | Medium-Term Target | FY2022 | FY2023 | Progress |
| Organic Revenue Growth | 4-6%(+ M&A) | +3.8% | +11.6% | Accelerated, record organic revenue growth ahead of medium-term target |
| Headline EPS Growth | 7-10%(+ M&A) | +17.8% | +39.6% | Record earnings growth, driven by organic operating profit and benefit of share buyback |
| ROCE | 15-17% | 14.2% | 15.7% | Improvement in ROCE into target range with strong operating profit performance |
| Operating Profit Margin | 18-20% | 16.3% | 16.5% | Margin improvement benefiting from SES with continued investment in growth |
| Operating Cash Conversion | 100%+ | 80% | 86% | Working capital improvement in H2 2023 to deliver solid cash conversion |
These targets are underpinned by Smiths operational KPIs and environmental targets, including a commitment to Net Zero for Scope 1 and 2 emissions by 2040 and Net Zero for Scope 3 emissions by 2050.
FY2023 Business Performance
Smiths delivered record organic revenue growth of +11.6%, ahead of our guidance. We generated £501m of operating profit, up +20.0% on FY2022 as we continue to make significant progress on our strategy.
| £m | FY2022 | Foreignexchange | Acquisitions | Organicmovement | FY2023 |
| Revenue | 2,566 | 146 | 8 | 317 | 3,037 |
| Headline operating profit | 417 | 27 | 0 | 57 | 501 |
| Headline operating profit margin | 16.3% | 16.5% |
GROWTH
Accelerating growth is the primary driver of unlocking enhanced value creation for the Group. We grew in every quarter of FY2023 and raised our guidance three times during the year, delivering record organic revenue growth of +11.6%. We have now delivered nine consecutive quarters of organic revenue growth.
| Organic revenue growth (by business) | H1 2023 | H2 2023 | FY2023 |
| John Crane | +14.6% | +15.8% | +15.2% |
| Smiths Detection | +14.0% | +18.8% | +16.4% |
| Flex-Tek | +17.0% | +3.6% | +10.1% |
| Smiths Interconnect | +3.3% | (8.4)% | (2.8)% |
| Smiths Group | +13.5% | +9.9% | +11.6% |
Strong growth continued in the second half for our two largest businesses; with both John Crane and Smiths Detection delivering double digit growth throughout the year. Flex-Tek continued to grow in the second half, with growth moderating to +3.6% reflecting anticipated softness in the US construction market. Smiths Interconnect declined (8.4)% in the second half, as anticipated, impacted by a weakening semiconductor test market as well as delays in some large defence and aerospace programmes.
Revenue grew +18.3% on a reported basis, to £3,037m (FY2022: £2,566m). This included +£146m of favourable foreign exchange translation, and +£8m from the acquisition of Plastronics in January 2023.
Strong execution to access end market opportunity is the first of the four actionable levers for accelerating growth.
Our business operates across four major global end markets: General Industrial, Safety & Security, Energy, and Aerospace. Our strong market positions, coupled with the balanced market exposure we have across our businesses, are distinctive long-term advantages for Smiths.
| Smiths organic revenue growth in our end markets | % of Smithsrevenue | H1 2023 | H2 2023 | FY2023 |
| General Industrial | 40% | +15.4% | +1.0% | +7.8% |
| Safety & Security | 31% | +9.4% | +14.4% | +11.9% |
| Energy | 22% | +17.1% | +21.8% | +19.5% |
| Aerospace | 7% | +10.1% | +10.8% | +10.5% |
| Smiths Group | 100% | +13.5% | +9.9% | +11.6% |
Smiths organic revenue in our largest end market, General Industrial, grew +7.8% in FY2023, supported by strong demand for John Crane’s industrial products in chemical processing, water treatment and life sciences. Slower H2 growth of +1.0% reflects a strong prior year performance, and a softening in demand for Flex-Tek’s heating, ventilation and air conditioning (“HVAC”) products and Smiths Interconnect semiconductor test solutions. Organic revenue growth in Safety & Security was +11.9%, accelerating in the second half due to Smiths Detection’s strong delivery against its orderbook, partially offset by a decline in Smiths Interconnect from the timing of defence programmes. The +19.5% growth in Energy reflected strong demand in John Crane. Growth in Aerospace of +10.5% continued throughout the year driven by aircraft build demand benefiting Flex-Tek and helping to offset the impact of delays in aerospace programmes in Smiths Interconnect.
Our second lever for faster growth is improved new product development and commercialisation. During FY2023, +310bps of growth was delivered from high impact new products including John Crane’s next-generation diamond coating product offering for high-speed and high-heat applications, Smiths Detection’s next-generation 3D Computed Tomography (“CT”) machines installed with threat recognition software, and Flex-Tek’s ducting in energy efficient Rheia air management systems. Gross vitality, which measures the proportion of revenues coming from products launched in the last five years, was 31% (FY2022: 31%), supported by our successful new product commercialisation.
As an industrial technology leader, continuing to invest in R&D ensures we capitalise on the wealth of opportunities in our pipeline, with increasing demand for our sustainability-related products. During FY2023, we invested £113m in R&D (FY2022: £107m), of which £73m (FY2022: £80m) was an income statement charge, £21m was capitalised (FY2022: £12m) and £19m (FY2022: £15m) was funded by customers.
To support new product launches, and the strong demand for our existing solutions, we increased capex +14.1% in FY2023 to £81m (FY2022: £71m). This represents 1.6x depreciation and amortisation
(FY2022: 1.5x).
Our third growth lever is building out priority adjacencies. Each of our four businesses are executing strategies to expand beyond their existing core markets and ensure we capitalise on the long-term megatrends of energy transition and sustainability, increasing security needs and enhanced connectivity. Examples in FY2023 include Flex-Tek’s high temperature heating solution for the world’s first green steel production facility; and Smiths Detection’s +34.9% revenue growth in its Other Security Systems segment, supported by key wins in ports and borders and parcel delivery markets.
Our fourth growth lever is using disciplined M&A to augment our organic growth focus. In January 2023, Smiths Interconnect acquired Plastronics, a leading supplier of burn-in test sockets and patented spring probe contacts, extending our reach into an attractive market adjacency. We will benefit from Plastronics’ attractive position in artificial intelligence, data centres and automotive end markets, and expanding Plastronics’ sales globally by leveraging Smiths Interconnect’s strong presence in Asia.
Following the year end, in August 2023, we acquired Heating & Cooling Products (“HCP”) in our Flex-Tek business. This further expands the Group’s presence in the North American HVAC market, enabling Smiths to serve more customers with an even broader product range. Acquired for $82m (approximately £65m), at less than 7x estimated 2023 EBITDA, this acquisition further demonstrates our disciplined and targeted approach to M&A.
EXECUTION
Stronger execution is our second key priority.
In FY2023, headline operating profit grew +12.7% (+£57m) on an organic basis, and +20.0% (+£84m) on a reported basis to £501m (FY2022: £417m). Headline operating profit benefited from strong profit growth in John Crane and Smiths Detection, and a solid contribution in Flex-Tek, partially offset by a decline in Smiths Interconnect.
| £m | FY2022 | Foreignexchange | Acquisitions | Organicmovement | FY2023 |
| Headline operating profit | 417 | 27 | 0 | 57 | 501 |
| Headline operating profit margin | 16.3% | +10bps | +10bps | 16.5% |
Headline operating profit margin was 16.5%, up +20bps on a reported basis supported by volume growth, pricing more than offsetting inflation, and the benefits of SES and savings actions; all of which offset the impact of product mix and investment in growth. By division, strong operating leverage in John Crane reflected improved execution and supply chain conditions. Smiths Detection also improved its margin despite higher Original Equipment (“OE”) sales mix. Flex-Tek and Smiths Interconnect contracted from their record prior year high margins, with Flex-Tek continuing to invest in new product development and commercialisation, and Smiths Interconnect seeing lower volumes.
Headline EPS grew +39.6%, driven by headline operating profit growth which contributed over a third of the growth, the share buyback programme which contributed another third, with the remainder of the growth coming from FX and a reduction in both the effective headline tax rate and interest expense. The headline tax charge for FY2023 of £121m (FY2022: £104m) represents an effective rate of 26.0%
(FY2022: 27.6%).
ROCE increased +150bps to 15.7% (FY2022: 14.2%) reflecting the higher profitability of the Group. For further detail, please refer to note 29 of the financial statements.
Headline operating cash conversion for FY2023 was 86% (FY2022: 80%), with stronger conversion in the second half supported by improvement in working capital. This was delivered through targeted and disciplined working capital management helped by focused SES projects. Headline operating cash-flow4 was £433m (FY2022: £332m). In FY2023, free cash-flow4 generation was £178m (FY2022: £130m) or 35% of headline operating profit (FY2022: 31%).
During FY2023 we continued to make good progress on SES. There are currently 71 Black Belt projects completed or underway being driven by our 6 Master Black Belt and 31 Black Belt employees across the Group. Projects completed in the year contributed £14m of profit, ahead of our plan of £12m. For FY2024, we expect a contribution of £20m from SES as our hopper of new projects continues to scale.
We implemented some targeted savings projects across the Group through FY2023. These projects were focused on simplification and improving efficiency. Costs amounting to £36m in respect of these projects have been charged to non-headline in the year, with no further charges anticipated. In line with our previous communications, £11m of benefit was realised in FY2023 from these projects, with the annualised benefits expected to be £25m.
PEOPLE
Inspiring and empowering our people is our third key priority and our people plan is focused around four key areas of safety, leadership development, diversity, equity and inclusion, and engagement.
The first area, safety, is at the forefront of everything we do. Our Recordable Incident Rate (“RIR”) for FY2023 improved to 0.41 (FY2022: 0.56), and we delivered a record low lost time injury rate of 0.14. This improvement in safety has been achieved through continuous reinforcement of our safety culture with over 13,000 Safety Leadership Tours and Safety Observations undertaken in the year. Of particular focus was our Royal Metal site, acquired in 2021, which delivered an 80% reduction in the number of incidents through changes to manufacturing, new risk management processes and leveraging technology to make safety easier.
Our biggest people initiative this year was the continued rollout of our Smiths Leadership Behaviours to define our expectations for an inclusive and high-performance culture. We continued the rollout of these seven behaviours to fully embed them throughout the organisation. We completed 94 workshops, attended by over 1,600 leaders and the behaviours are now used in our annual performance assessment process.
Alongside Smiths Leadership Behaviours, talent development is a key priority within our People plan. We are focused on growing and promoting talent from within and in FY2023, 70% of open roles for manager level and above were filled internally, versus 39% in the past. To support our talent development, we have relaunched the Accelerate Leadership Development programme having trained our first 300 leaders in FY2023, introduced mentoring programmes with the Executive Committee for our high potential leaders and continued to develop our Early Career Programme, which includes several engineering apprenticeship programmes.
Promoting diversity, equity and inclusion is another key part of our people strategy. We are specifically focused on increasing gender diversity at all levels of the organisation and we have ramped up our initiatives this year, including introducing women’s support networks and flexible working arrangements. As at 31 July 2023, 25% of our senior leaders, 25% of our Executive Committee and 40% of our Board of directors are women. With the help of the multiple initiatives throughout the organisation, we expect to continue to drive improvement in these metrics.
Overall, through our focus on inspiring and empowering our people we have seen a year-on-year improvement in our voluntary attrition, down 310bps to 12% for our global employees and down 410bps for our engineering employees.
OUR ESG APPROACH
Environment, Social and Governance (“ESG”) performance is at the very centre of our Purpose, and fundamental to each of our three key priorities.
Growth
ESG at Smiths is approached with a growth mindset. Our R&D is focused on commercialising high-value green technology. Our progress is evident through John Crane’s growing presence in hydrogen and carbon capture markets with over 70 active projects and in Flex-Tek supporting the development of the world’s first green steel production facility. Our proven ability to serve these customers positions us well today and in the future as the world increasingly relies upon smart engineering to achieve Net Zero.
Execution
| Environmental metrics | FY2022 | FY2023 |
| Absolute Scope 1 & 2 GHG emissions reductions | 0.9% reduction | 11.8% reduction |
| Energy efficiency6 | n/a | 7.9% improvement |
| Proportion of electricity from renewable sources | 63% | 70% |
| Non-recyclable waste7 | 11.5% reduction | 9.8% reduction |
| Water use in stressed areas7 | 4.5% reduction | 13.3% reduction |
6 Normalised to local currency revenue, excluding growth from price. Data not available prior to 2022 I 7 Normalised to reported revenue
We are executing well against our ESG strategy, with significant progress against our sustainability metrics, which are now fully incorporated into both our annual and long-term incentives. In the year, we launched our first Sustainability report, submitted our Science Based Targets for review and validated our framework through completion of our first-ever ESG double materiality assessment in accordance with applicable guidance under the Corporate Sustainability Reporting Directive (“CSRD”). We also extended the scope of the limited assurance work carried out by KPMG to follow the more rigorous ISAE3000/3410 standard for FY2022 and FY2023 data.
People
Engagement with our communities has long been a strength of Smiths. This year we have gone one step further with the launch of our new charitable foundation, “The Smiths Group Foundation”. The foundation committed an initial £10m of funding linked to engineering-related good causes. The mission of the foundation is central to Smiths purpose of “Improving our world through smarter engineering.” We also launched our global volunteering policy, amplifying the multitude of grass-roots efforts already in place across the organisation.
CAPITAL ALLOCATION
With our strong technology, market positions, and financial frameworks, our highest capital priority continues to be organic growth. Accretive M&A, either to strengthen core positions or to accelerate penetration of priority adjacencies comes second. Third, we have a strong track record of returning capital to shareholders, as evidenced by the £350m returned in FY2023, on top of the £661m returned in FY2022.
Organic investment
In FY2023 we invested £81m in capex projects, including £21m in capitalised R&D on programmes such as next-generation hold and cabin baggage screening and further advancements in our defence portfolio. A further £73m in R&D was charged to the income statement, supporting new product development.
M&A
In January 2023, Smiths Interconnect acquired Plastronics, a leading supplier of burn-in test sockets and patented spring probe contacts. In August 2023, following the year end close, Flex-Tek acquired HCP, a manufacturer of HVAC solutions in North America.
These acquisitions support our strategy to make complementary inorganic investments to accelerate our presence in adjacent markets or expand our product offering. We have an active acquisition pipeline and disciplined M&A approach across the Group.
Shareholder returns
During the year we continued to repurchase shares under the £742m share buyback programme initiated in November 2021, in connection with our commitment to return the majority of cash proceeds from the disposal of Smiths Medical to shareholders. We have now completed the share buyback programme.
In line with our progressive dividend policy and plan to rebuild dividend cover after the sale of
Smiths Medical, the Board is recommending a final dividend of 28.7p, bringing the total dividend for the year to 41.6p, a year-on-year increase of +5.1% (FY2022: 39.6p). The final dividend will be paid on
24 November 2023 to shareholders on the register at close of business on 20 October 2023. Our dividend policy aims to increase dividends in line with growth in earnings and cash-flow, with the objective of maintaining minimum dividend cover of around 2 times. The policy enables us to retain sufficient
cash-flow to finance investment in growth and meet our financial obligations. In setting the level of dividend payments, the Board considers prevailing economic conditions and future investment plans.
The Company offers a Dividend Reinvestment Plan (“DRIP”) enabling shareholders to use their cash dividend to buy further shares in the Company – see our website for details. To participate in the DRIP, shareholders must submit their election notice to be received by 3 November 2023 (“the Election Date”). Elections received after the Election Date will apply to dividends paid after 24 November 2023. Purchases under the DRIP are made on, or as soon as practicable after, the dividend payment date and at prevailing market prices.
Net debt
Net debt4 at 31 July 2023 was £387m (FY2022: £150m), an increase of £237m as we paid £143m in dividends and returned £207m to shareholders via our share buyback during the year. Net debt to headline EBITDA4 was 0.7x (FY2022: 0.3x).
As at 31 July 2023, borrowings were £654m (FY2022: £1,166m) comprising a €650m bond which matures in February 2027 and £117m of lease liabilities. The £512m reduction in borrowings is due to repayment of a €600m bond in April 2023. There are no financial covenants associated with these borrowings. Cash and cash equivalents as at 31 July 2023 were £285m (FY2022: £1,056m).
In May 2023, we refinanced our $800m (c.£620m at the period-end exchange rate) revolving credit facility (“RCF”) which was due to mature in November 2024. The new RCF is for the same amount, with the same lenders, on substantially the same terms and matures in May 2028. There are no financial covenants attached to the new facility and it remains undrawn. Taking cash and the RCF together, total liquidity was over £0.9bn at the end of the period.
ICU Medical stake
Since the sale of Smiths Medical in January 2022 the Group holds a financial asset reflecting our investment in 10% of the equity in ICU Medical, Inc (“ICU”). See note 14 of the financial statements for further detail.
STATUTORY RESULTS
Income Statement
The £98m difference between headline operating profit of £501m and statutory operating profit of £403m is non-headline items as defined in note 3 of the financial statements. The largest constituents relate to the amortisation of acquired intangible assets of £52m, costs from savings projects of £36m, acquisition related costs of £7m, £9m in costs for asbestos litigation in John Crane, Inc and a provision reduction of £7m for subrogation claims in Titeflex Corporation. Statutory operating profit of £403m was £286m higher than last year (FY2022: £117m), reflecting higher headline operating profit and lower non-headline charges.
Statutory finance costs were £43m (FY2022: £14m), mainly due to a prior year non-headline £22m foreign exchange gain on an intercompany loan with Smiths Medical.
Non-headline taxation items of £13m relate to amortisation of acquisition-related intangible assets, legacy pension scheme arrangements, litigation provisions and non-headline finance items. The statutory effective tax rate was 37% (FY2022: 87%). Please refer to notes 3 and 6 of the financial statements for further details.
Total Group profit after tax and EPS
Statutory profit after tax for the total Group decreased by 77.6% to £232m (FY2022: £1,035m) as the prior year included the profit on sale and results of Smiths Medical of £1,022m. Statutory basic EPS was 65.5p (FY2022: 267.1p).
Statutory cash-flow
Statutory net cash inflow from operating activities for the total Group was £293m (FY2022: £279m).
See note 28 of the financial statements for a reconciliation of headline operating cash-flow to statutory cash-flow.
Pensions
Included within free cash-flow was £5m of pension contributions (FY2022: £9m). These contributions relate to unfunded, overseas schemes and healthcare arrangements.
It is not anticipated that any further contributions will be made to the TI Group Pension Scheme (“TIGPS”), the liabilities of which have now been insured via a series of buy-in annuities. Smiths and the TIGPS Trustee are working toward final buy-out of the scheme in order to deliver certainty for the Scheme’s
21,000 members and remove future risk for Smiths.
The other major pension scheme, Smiths Industries Pension Scheme (“SIPS”) is estimated to be in surplus on the Technical Provisions funding basis, and no cash contributions are currently being made. The Group and the SIPS Trustee continue to work together to progress towards the long-term funding target of full buy-out funding.
The two main UK pension schemes and the US pension plan are well hedged against changes in interest and inflation rates. Over 90% of their assets are invested in third-party annuities, government bonds, investment grade credit or cash, with no remaining equity investments. As at 31 July 2023, over 60% of the UK liabilities had been de-risked through the purchase of annuities from third party insurers.
Foreign exchange
The results of overseas operations are translated into sterling at average exchange rates. Net assets are translated at period-end rates. The Group is exposed to foreign exchange movements, mainly the
US Dollar and the Euro. The principal exchange rates, expressed in terms of the value of Sterling, are shown in the following table.
| Average rates | Period-end rates | |||
| 31 Jul 2023(12 months) | 31 Jul 2022(12 months) | 31 Jul 2023 | 31 Jul 2022 | |
| USD | 1.21 | 1.32 | 1.29 | 1.22 |
| EUR | 1.15 | 1.18 | 1.17 | 1.19 |
Outlook
In FY2024, we expect organic revenue growth within our medium-term target range of 4-6%, with growth weighted towards the second half of the year. Our strong orderbooks in John Crane and Smiths Detection, along with our new product pipeline, give us confidence in delivering this growth despite a record comparator, moderating pricing environment, and the challenging market conditions facing parts of
Flex-Tek and Smiths Interconnect. We also expect continued margin expansion in FY2024, as we continue to scale the Smiths Excellence System and reinvest to support future sustainable growth.
| Business review |
JOHN CRANE
John Crane is a leading provider of mission-critical engineered solutions, improving customers’ reliability and sustainability in process industries. 61% of revenue is derived from the energy sector (downstream and midstream oil & gas and power generation, including renewable and sustainable energy sources). 39% is from other process industries including chemical, life sciences, mining, water treatment, and pulp & paper. 71% of John Crane revenue is from aftermarket sales. John Crane represents 36% of Group revenue.
| FY2023 | FY2022 | FY Reported | Organic growth | |||
| £m | £m | growth | H1 | H2 | FY | |
| Revenue | 1,079 | 901 | +19.8% | +14.6% | +15.8% | +15.2% |
| Original Equipment | 169 | 148 | +14.3% | +13.3% | +6.8% | +9.9% |
| Aftermarket | 487 | 382 | +27.5% | +18.5% | +27.8% | +23.2% |
| Energy | 656 | 530 | +23.8% | +17.1% | +21.8% | +19.5% |
| Original Equipment | 145 | 131 | +10.5% | +14.1% | (0.9)% | +6.0% |
| Aftermarket | 278 | 240 | +16.0% | +9.2% | +12.3% | +10.9% |
| General Industrial | 423 | 371 | +14.0% | +10.9% | +7.6% | +9.2% |
| Headline operating profit | 244 | 188 | +29.7% | +24.6% | +25.7% | +25.2% |
| Headline operating profit margin | 22.6% | 20.9% | +170bps | +190bps | +180bps | +180bps |
| Statutory operating profit | 217 | 167 | +29.9% | |||
| Return on capital employed | 23.8% | 19.4% | +440bps | |||
| R&D cash costs as % of sales | 1.7% | 2.5% | (80)bps | |||
Revenue
| £m | FY2022reported | Foreignexchange | Organicmovement | FY2023reported |
| Revenue | 901 | 36 | 142 | 1,079 |
John Crane delivered record organic revenue growth of +15.2% for the year, accelerating to +15.8% in H2 executing well against strong demand, with orders up +15%. Organic revenue grew across all segments and geographies. Aftermarket organic revenue grew +18.4% to make up 71% of sales
(FY2022: 69%) and OE grew +8.1%.
Reported revenue grew to record levels at over £1bn for the first time, which was up +19.8% reflecting the organic growth and a favourable foreign exchange impact.
In Energy, organic revenue grew +19.5% benefiting from an increased focus on energy security and higher demand for energy efficiency and emissions reduction solutions. John Crane is well positioned to support customers with their decarbonisation goals as they look to become more efficient and reduce leakage within existing facilities or invest in new infrastructure for low carbon alternatives. Notable contract wins in the year included one of the world’s largest offshore Carbon Capture and Storage (“CCS”) facilities in Malaysia and compressor seals for use in an innovative energy storage solution for a customer in Europe. John Crane’s leadership in this area was recognised by the UK government through a £925k grant awarded for its innovative high temperature sealing solution, which is designed to improve customer efficiency through reduced emissions.
The Industrial segment grew +9.2% organically, driven by strong demand across chemical processing, water treatment and life sciences. Efficiency in industrial processes is as important as it is to John Crane’s
Energy customers, evidenced by multiple wins across all markets.
Operating profit and ROCE
| £m | FY2022 reported | Foreignexchange | Organicmovement | FY2023 reported |
| Headline operating profit | 188 | 7 | 49 | 244 |
| Headline operating profit margin | 20.9% | 22.6% |
Headline operating profit of £244m grew a record +25.2% on an organic basis, resulting in +170bps of margin expansion. This was driven by the increased volumes and improving plant efficiency, pricing offsetting inflation and benefits from SES and savings projects, while continuing to invest in growth to service the strong demand.
On a reported basis, headline operating profit was up +29.7%, including a favourable foreign exchange impact. The difference between statutory and headline operating profit includes the net cost in relation to the provision for John Crane, Inc. asbestos litigation and charges from savings projects.
ROCE was 23.8%, up 440bps, reflecting the record headline operating profit growth.
R&D
Cash R&D expenditure was 1.7% of sales (FY2022: 2.5%). John Crane’s continued investment in R&D is primarily focused on reducing product lead times and enhancing the efficiency, performance and sustainability of high duty seals and hydrogen compressors.
John Crane plays a significant role in its customers’ sustainability journeys through reducing leaks, including for demanding hydrocarbon pipelines. John Crane’s recently launched Safematic Upstream Pumping System product nearly eliminates cooling water requirements, delivering significant energy and emissions reductions in liquid sealing.
SMITHS DETECTION
Smiths Detection is a global leader in the detection and identification of threats and contraband, supporting safety, security and freedom of movement. It produces equipment for customers in the Aviation market and Other Security Systems for ports & borders, defence and urban security markets. 51% of Smiths Detection’s sales are derived from the aftermarket. Smiths Detection represents 26% of Group revenue.
| FY2023 | FY2022 | FY Reported | Organic growth | |||
| £m | £m | growth | H1 | H2 | FY | |
| Revenue | 803 | 655 | +22.6% | +14.0% | +18.8% | +16.4% |
| Original Equipment | 226 | 198 | +14.2% | +10.3% | +8.6% | +9.4% |
| Aftermarket | 309 | 269 | +14.6% | +10.3% | +7.0% | +8.6% |
| Aviation | 535 | 467 | +14.5% | +10.3% | +7.7% | +8.9% |
| Original Equipment | 164 | 102 | +60.2% | +39.2% | +64.4% | +51.3% |
| Aftermarket | 104 | 86 | +21.5% | +2.9% | +28.3% | +15.2% |
| Other Security Systems | 268 | 188 | +42.7% | +22.9% | +47.9% | +34.9% |
| Headline operating profit | 90 | 73 | +23.1% | +4.5% | +26.8% | +15.4% |
| Headline operating profit margin | 11.2% | 11.1% | +10bps | (110)bps | +70bps | 0bps |
| Statutory operating profit | 55 | 36 | +52.8% | |||
| Return on capital employed | 7.7% | 7.1% | +60bps | |||
| R&D cash costs as % of sales | 8.4% | 9.3% | (90)bps | |||
Revenue
| £m | FY2022reported | Foreignexchange | Organicmovement | FY2023reported |
| Revenue | 655 | 34 | 114 | 803 |
Smiths Detection returned firmly to growth in FY2023 with organic revenue growth of +16.4%, executing well against the multi-year orderbook. Growth was delivered across all segments with particularly strong growth in lower margin OE, up +23.9% organically. Aftermarket revenue grew +10.2% organically, making up 51% of sales (FY2022: 54%). Orders grew +6% in the year, supporting revenue growth in FY2024, which due to the expected timing of order delivery will be weighted towards the second half. Reported revenue was up +22.6% reflecting the organic growth and a favourable foreign exchange impact.
In Aviation, organic revenue grew +8.9% with continued strong demand for Smith Detection’s latest range of 3D CT machines for cabin baggage, CTIX, with over 1,000 now sold, supported by regulatory requirements in many countries mandating upgrades. Smiths Detection continues to achieve a good win rate in Aviation with key contract wins in all regions of the world across the year including provision of CTIX machines to Birmingham and Edinburgh airports in the UK and JAL Airline in Japan, and full-sized lane configurations to the US Transportation Security Administration.
Other Security Systems (“OSS”) grew +34.9% driven by high growth in all three sub-segments of urban security, ports and borders and defence, demonstrating good progress in these attractive market adjacencies. Order intake in defence was very strong for both current and future chemical and biological detection requirements, including for the US DoD on their next-generation programme. Smiths Detection has also been contracted to provide security screening at COP28 in November this year.
Operating profit and ROCE
| £m | FY2022Reported | Foreignexchange | Organicmovement | FY2023 reported |
| Headline operating profit | 73 | 5 | 12 | 90 |
| Headline operating profit margin | 11.1% | 11.2% |
Headline operating profit was up +15.4% on an organic basis for the year, supported by the strong organic revenue growth, SES benefits and targeted actions on cost. On a reported basis, headline operating profit was up +23.1% including favourable foreign exchange translation.
Headline operating profit margin of 11.2% was up 10bps on a reported basis as the benefits of SES and cost actions offset the mix impact of lower margin OE. These OE deliveries will secure longer-term, high margin aftermarket revenue, which together with a building SES impact, will support future margin expansion.
The difference between statutory and headline operating profit primarily reflects amortisation of acquired intangibles and charges from savings projects.
ROCE increased by +60bps to 7.7%, driven by the headline operating profit growth.
R&D
Cash R&D increased +9.8% representing 8.4% of sales (FY2022: 9.3%). This includes an increase in customer funded projects to £18m (FY2022: £14m).
Smiths Detection continued to invest in next-generation detection devices, new algorithms to improve the detection of dangerous goods, and digital solutions to strengthen the aftermarket proposition. During the year Smiths Detection launched a new high volume air cargo screening technology and an extension of their automated detection algorithm.
FLEX-TEK
Flex-Tek provides innovative solutions to heat and move fluids and gases for industrial and aerospace applications that support energy efficiency and improved air quality. 81% of Flex-Tek’s revenue is derived from Industrials and 19% from the Aerospace sector. Flex-Tek represents 25% of Group revenue.
| FY2023 | FY2022 | FY Reported | Organic growth | |||
| £m | £m | growth | H1 | H2 | FY | |
| Revenue | 768 | 647 | +18.6% | +17.0% | +3.6% | +10.1% |
| General Industrial | 624 | 531 | +17.5% | +17.5% | +0.9% | +9.0% |
| Aerospace | 144 | 116 | +24.4% | +14.8% | +16.4% | +15.6% |
| Headline operating profit | 149 | 133 | +11.9% | +9.0% | (2.0)% | +3.4% |
| Headline operating profit margin | 19.4% | 20.6% | (120)bps | (150)bps | (110)bps | (130)bps |
| Statutory operating profit | 131 | 106 | +23.6% | |||
| Return on capital employed | 26.1% | 25.6% | +50bps | |||
| R&D cash costs as % of sales | 0.4% | 0.4% | 0bps | |||
Revenue
| £m | FY2022reported | Foreignexchange | Organicmovement | FY2023reported |
| Revenue | 647 | 50 | 71 | 768 |
Organic revenue grew +10.1% in the year, with growth in H2 of +3.6%. Revenue on a reported basis grew +18.6%, supported by a favourable foreign exchange translation.
In Industrial, organic revenue was up +9.0% in the year reflecting strong demand for Flex-Tek’s products, primarily in HVAC applications. These products include energy efficiency solutions such as the Rheia air distribution system and the partnership with Midrex to deliver heating solutions that enable the production of commercial “green steel”. As expected, demand slowed in the second half reflecting a softer US HVAC market. In Aerospace, organic revenue grew +15.6% in the year, with growth in the second half accelerating to +16.4% supported by an increasing number of aircraft builds.
Operating profit and ROCE
| £m | FY2022reported | Foreignexchange | Organicmovement | FY2023reported |
| Headline operating profit | 133 | 11 | 5 | 149 |
| Headline operating profit margin | 20.6% | 19.4% |
Headline operating profit grew +3.4% on an organic basis, driven by the revenue growth which was partly offset by higher costs including starting up a new facility in Houston to expand capacity. This increase in costs, together with continued investments in new product development and a product mix impact, contributed to a 19.4% headline operating margin, (120)bps lower than the record prior year comparator.
The difference between statutory and headline operating profit is due to amortisation of acquired intangible assets and the provision for Titeflex Corporation subrogation claims.
ROCE increased +50bps to 26.1% reflecting the continued profit growth in FY2023.
In August 2023, Flex-Tek acquired HCP expanding its presence in the North American HVAC market and broadening its product range and customer base.
R&D
Cash R&D expenditure grew in-line with sales remaining at 0.4% of sales (FY2022: 0.4%). R&D is focused on developing new products for the construction market, and an expanded product offering in aerospace.
SMITHS INTERCONNECT
Smiths Interconnect designs high performance connectivity solutions for demanding applications in the aerospace and defence, semiconductor test, and industrial end-markets. Smiths Interconnect represents 13% of Group revenue.
| FY2023 | FY2022 | FY Reported | Organic growth | |||
| £m | £m | growth | H1 | H2 | FY | |
| Revenue | 387 | 363 | +6.5% | +3.3% | (8.4)% | (2.8)% |
| Headline operating profit | 62 | 65 | (4.6)% | (1.7)% | (20.7)% | (11.9)% |
| Headline operating profit margin | 16.0% | 18.0% | (200)bps | (80)bps | (250)bps | (170)bps |
| Statutory operating profit | 50 | 64 | (21.9)% | |||
| Return on capital employed | 13.3% | 16.3% | (300)bps | |||
| R&D cash costs as % of sales | 6.3% | 5.6% | +70bps | |||
Revenue
| £m | FY2022 reported | Foreign exchange | Acquisitions | Organic movement | FY2023 Reported |
| Revenue | 363 | 26 | 8 | (10) | 387 |
Smith Interconnect’s organic revenue declined (2.8)% for the year following the strong +13.9% growth last year, with +3.3% growth in H1 more than offset by the (8.4)% decline in H2. Reported revenue grew +6.5% in the year including a favourable foreign exchange impact and an £8m contribution from the acquisition of Plastronics.
The performance in the year reflected a weakening in the semiconductor market and delayed timing on large aerospace and defence related programmes, partly offset by strong demand for industrial connector products such as a new medical cable assembly product. Contraction into FY2024 is expected with FY2023 orders down 17%, continued weakness in the semiconductor market and a slowing in connectors.
During the first half, Smiths Interconnect acquired Plastronics to strengthen the product portfolio and leverage Plastronics’ attractive positions in artificial intelligence, data centres and automotive end markets.
Operating profit and ROCE
| £m | FY2022 reported | Foreignexchange | Acquisitions | Organicmovement | FY2023 reported |
| Headline operating profit | 65 | 5 | 0 | (8) | 62 |
| Headline operating profit margin | 18.0% | 16.0% |
Headline operating profit declined (11.9)% on an organic basis, resulting in a (200)bps reduction in operating profit margin to 16.0%. This decline was driven by the lower volumes and continued investment in R&D. Headline operating profit was down (4.6)% on a reported basis, reflecting the organic decline, partly offset by a favourable foreign exchange impact.
The difference between statutory and headline operating profit reflects the amortisation of acquired intangibles, acquisition costs and charges from savings projects.
ROCE reduced (300)bps to 13.3% driven by the lower operating profit.
R&D
Cash R&D expenditure increased to 6.3% of sales (FY2022: 5.6%). R&D is focused on bringing to market new products that improve connectivity and product integrity in demanding operating environments. Product launches include the next-generation of radio frequency components and transceivers.
Smiths Group plc is a British, multinational, diversified engineering business headquartered in London, England.
