15 May 2012

Smiths Group plc Interim Management Statement

In the nine months to 28 April 2012, Smiths Group delivered growth in sales, driven principally by increased underlying volumes in John Crane and the acquisition of Power Holdings Inc. (PDI). Underlying headline operating profit was also ahead of the same period last year reflecting margin improvement in John Crane and Flex-Tek. Overall, subject to exchange rates, expectations for the year remain in line with the guidance given at the interim results, despite the continued difficult economic and trading conditions.

John Crane continued to deliver a strong performance in the first nine months, reflecting demand for its first-fit original equipment and aftermarket services in the oil and gas markets. As expected, the rate of growth in the last quarter has moderated against the strong comparator period. Margins have improved slightly as a result of the drop-through from higher volumes, even though there has been increased investment in sales and marketing and an expansion of its sales and service network. A strong order book supports continued growth into early fiscal 2013. The integration of Turbo Components and Engineering, which services, repairs and builds replacement bearings and seals, is making good progress.

In the first nine months, underlying sales at Smiths Medical were flat on last year in the face of constrained healthcare budgets and pressure on procedure volumes. Growth in single-use consumable devices has been offset by declines in hardware sales. Headline operating profit margins were in line with the same period last year. Cost saving initiatives have continued to offset increased investment in new product development and sales and marketing. This, along with a greater focus on emerging markets, will build a platform for improved sales growth in the future.

Underlying sales and headline operating profit at Smiths Detection have grown in the three months to 28 April, compared to the equivalent period last year. In spite of this improving trend, however, the cumulative performance in the first nine months remains slightly behind that of the same period last year. Sales growth was strong in critical infrastructure and in air transportation markets outside the United States, offset by declines in military and cargo screening. Margins have been adversely affected by the lower volumes and the restructuring costs associated with the performance improvement programme. The programme is expected to deliver £40m of annualised savings by the end of the 2014 financial year. Looking to the full year, the current order book is expected to support sales at a similar level as last year’s, subject to the delivery and timing of orders. Headline operating margins will benefit from the £15m of restructuring initiatives, offset by around £7m of associated costs.

Underlying sales at Smiths Interconnect were down in the first nine months reflecting weaker connector sales and lower sales to military customers caused by defence project deferrals, which offset growth in sales to wireless telecommunications customers. Underlying operating margins were also lower than last year as a result of the reduced volumes, adverse operational gearing and mix effects. Looking to the full year, while the outlook for many of the end markets remains subdued, the sales trend in the third quarter has improved and the order book has strengthened. Full year margins will benefit from cost saving initiatives currently underway but are expected to be behind last year. Reported sales in the first nine months are ahead as result of the acquisition of PDI, where integration is well underway. As guided in the interim results, the market conditions for PDI have been mixed with slower growth in the data centre market offset by significant declines in alternative energy.

Flex-Tek has delivered underlying sales growth in the first nine months with a strong performance in aerospace offset by slightly weaker sales to the US residential construction and domestic appliance sectors. Headline operating margins improved significantly reflecting higher aerospace revenues and the change in accounting treatment for the legal defence costs associated with the flexible gas piping business, as announced in the interim results. Sales for the full year are expected to show modest overall growth as the continued improvement in the aerospace order book is likely to be moderated by the tough trading environment in other market sectors.

At 28 April, net debt was £941m, down £16m in the quarter from the 28 January, largely reflecting cash generation and exchange rate movements partly offset by the payment of the interim dividend.

 

This press release contains certain forward-looking statements with respect to the operations, performance and financial condition of the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of the press release and the Company undertakes no obligation to update these forward-looking statements. Nothing in this press release should be construed as a profit forecast.