Smiths Specialty Engineering
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Growth |
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2008 |
2007 |
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John Crane |
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Sales |
283 |
252 |
12% |
8% |
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Headline operating profit |
37 |
31 |
18% |
8% |
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Headline operating margin |
13.0% |
12.4% |
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Statutory operating profit |
30 |
43 |
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Growth |
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2008 |
2007 |
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Specialty - Other* |
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Sales |
237 |
240 |
(2)% |
7% |
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Headline operating profit |
30 |
29 |
1% |
7% |
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Headline operating margin |
12.5% |
12.2% |
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Statutory operating profit |
56 |
29 |
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*The reported figures include three months of trading for Marine Systems and six months in the comparative period.
Specialty Engineering is Smiths largest division, accounting for 48% of sales. Following the disposal of Marine Systems in November, it now operates in three areas: John Crane, Interconnect and Flex-Tek. John Crane is a market leader in sealing systems and related technologies with a strong presence in the petrochemical sector. It has opportunities to increase margins, create further efficiencies and grow through bolt-on acquisitions. Interconnect, which manufactures electronic sub-systems, performed well in its major markets of military and wireless communications. It has demonstrated the potential to improve margins, expand its low cost manufacturing and extend its geographic reach. Flex-Tek designs and manufactures heating and fluid movement components for the domestic appliance, aerospace and medical devices markets. It has been adversely affected by the US housing recession but has the opportunity to expand its non-construction business, reduce costs and rationalise its production sites.
John Crane
John Crane grew sales by 12%, headline operating profit by 18% and margins increased by 60 basis points to 13.0%. On an underlying basis, both sales and headline operating profit rose by 8%. This growth has been driven by high levels of investment by the petrochemical industry, reflecting the strong demand for oil and gas.
John Crane's largest sector is the petrochemical industry where growth is focused in two areas. First to broaden its technological footprint by adding new product lines and services that complement John Crane's market-leading positions in mechanical seals and related sectors. Second to expand into upstream energy services which leverage its strong global service and support infrastructure.
Investments reflect this two-track strategy. For example, larger and higher pressure gas seals are now being developed for customers as a result of our investment in high-pressure test equipment at a new world-leading testing facility in Slough (UK). In addition, the acquisition of Sartorius Bearing Technology in November 2007 expands John Crane's offering into the area of rotating bearings for turbo machinery. We announced on 19 March 2008 the agreement, subject to approvals, to acquire Indufil which will add specialist filtration systems to John Crane. Indufil designs and manufactures systems for rotating equipment in the oil and gas, chemical and power sectors. It serves similar customers to John Crane and has a strong aftermarket for its products which fits well with John Crane's business model. Indufil had estimated sales of £26m in the financial year ending 31 December 2007. Acquisition of CDI Energy Services in March 2007 expanded John Crane's upstream energy services capability. The CDI service and product offering extends the reliability of artificial lift systems which pump oil from depths of more than 10,000 feet. Over the course of the last six months, John Crane has already begun to benefit from CDI's service offering being leveraged across John Crane's geographic footprint. The agreement to acquire Fiberod, announced on 19 March 2008, will complement the CDI business. Fiberod is a world-leading manufacturer of fibre-glass sucker rods. These are used as a light-weight alternative to traditional metal rods for the artificial lift of oil and gas from the reservoir and will add to the upstream service we are now internationalising. In the financial year to 31 December 2007, it reported sales of £12m.
The growth in the petrochemical sector has increased original equipment orders to record levels. To help meet these requirements John Crane has invested over £4m worldwide to increase manufacturing capacity by over 20%.
The provision of maintenance and repair services to customers through the aftermarket represents two-thirds of John Crane's sales. The sale of original equipment for new production facilities creates subsequent aftermarket service opportunities that are delivered via John Crane's network of service centres, and the business has continued to build its global service base. Local service centres are now present in 52 countries worldwide. This capability significantly reduces downtime for customers by avoiding seals being shipped over long distances for repair. Current developments are focused on key growth markets. For example, in Saudi Arabia we are building a new service, sales and manufacturing facility in Dammam. This new facility has an upgraded gas seals test capability and adds significant service capacity in an area where extensive investment is planned by the petrochemical industry over the next 10 years.
Another growth opportunity is China where construction began in August 2007 on a new facility in Tianjin. This will support further growth as well as enable the relocation and consolidation of two existing businesses to a single site. This new facility will accommodate sophisticated manufacturing, including assembly testing and enhanced product development, as well as providing a sales and service centre for the domestic Chinese market.
Looking ahead, sustained growth in demand for oil and gas is likely to continue to drive investment by petrochemical companies and original equipment manufacturers into new technology and facilities. John Crane is building on its strong position to support this demand in the future.
Specialty – Other
Specialty – Other comprises Interconnect and Flex-Tek. Interconnect recorded double-digit growth in sales and profit, while at Flex-Tek a good performance in sales of components and services for commercial and military aircraft helped offset the impact of the substantial decline in the US residential construction market. A third business element, Marine, was disposed of after three months of trading in this financial year. The reported results for Specialty – Other include the three months of trading in the current period and the whole six months in the prior period. The underlying performance adjusts for the impact of this disposal and currency translation. Sales for Specialty – Other fell by 2% and headline operating profit rose by 1%. Operating margin increased by 30 basis points to 12.5%.
Interconnect
Smiths Interconnect delivered strong sales and profit growth with increased margin. Performance in the period was enhanced by sales of lightning and surge protection solutions supplied to major US 4G wireless broadband providers for mobile internet access. A development contract was secured for Interconnect's next generation Satellite Communications On The Move (SOTM) antenna systems, which deliver effective mobile communications for the armed forces in areas of conflict.
Interconnect has seen good progress from a number of important military programmes that will continue for some years. These include three-frequency band data link (MDAS) to support multiple unmanned aircraft systems; the Multi-Function Radio Frequency System (MFRFS) that can detect and track a full spectrum of threats to current and future ground vehicles; and the Warfighter Information Network-Tactical (WIN-T) the US army system for reliable, secure and seamless high bandwidth communications.
Interconnect is seeking opportunities, where appropriate, to bring its manufacturing together in lower-cost environments and progress on this continued in the half year. Manufacturing in Mexico and Tunisia has risen significantly while manufacturing in China and Costa Rica continues to play an important role.
There are good opportunities for Interconnect to grow – particularly in Asia Pacific – and it operates in an industry with scope for bolt-on acquisitions. Looking ahead, Interconnect's markets remain robust and good opportunities are expected over the next six months.
Flex-Tek
Flex-Tek's sales remained flat while profit declined. Sales of fluid distribution components and services for commercial and military aircraft helped to offset the impact of the decline in the US residential construction market. Illustrating this, Flex-Tek announced on 19 March 2008 an $18m contract for the provision of flexible and rigid fuel and hydraulic hoses on the Boeing 787 Dreamliner.
During the period, Flex-Tek completed the reorganisation of its tubular systems business with a relocation and consolidation of manufacturing in Tennessee. This project will cut costs and improve customer service.
Flex-Tek is facing continued uncertainty in the US residential construction market. The challenge is to reduce costs and position this business to deliver future value when its main markets improve.