24 May 2013

Smiths Group plc Interim Management Statement

In the nine months to 4 May 2013, Smiths Group grew underlying revenue across all divisions.  Underlying headline operating profit was also ahead of the same period last year.  Headline operating margin improved in all divisions except Smiths Medical which invested substantially more in sales and marketing in higher growth markets and incurred additional expense from the US medical device tax.  Overall, expectations for the year remain in line with the outlook given at the interim results in March, albeit with a slightly different mix by division.

John Crane delivered sustained underlying revenue growth in the first nine months, with flat revenues to first-fit OEM customers and continued growth in the aftermarket.  Headline operating margin rose as a result of productivity gains and favourable price/mix, while investing in growth drivers such as new product development.  The order book is ahead of last year with a positive book-to-bill ratio. As a result, the outlook has improved and we now expect second half sales to be ahead of the same period last year.  Headline operating margins should benefit from on-going productivity efforts, better mix and pricing, despite investing in growth opportunities.

Smiths Medical sustained underlying revenue growth from the first half into the third quarter, driven by both single-use consumables and hardware sales.  Around half of the growth came from emerging markets, reflecting increased investment in sales and marketing in these high growth regions.  As expected, headline operating profit in the first nine months lags the prior year as a result of the additional investment in emerging markets made over the past year.  In addition, the introduction of the US medical device tax in January also affected profitability.  Looking to the full year, revenue growth is expected to continue, driven by emerging markets and new products.  Operating margins will reduce compared with the prior year as a result of the device tax and increased investment.  We are partially offsetting this through operational improvements.

Smiths Detection grew both underlying revenue and headline operating profit in the first nine months.  We continue to make progress in restructuring the manufacturing footprint and generating operational improvements.  Headline operating margin, although ahead of last year, has been affected by changes in contract mix.  This was caused by a shift in the anticipated timing of certain contracts, reflecting pressures on government spend and delays to airport infrastructure programmes.  These contract delays are expected to result in second half sales below the strong level achieved last year.  Headline operating margins for the full year are expected to be at a similar level to last year.  This reflects the shorter term impacts of contract mix and initial under-recovery of overheads at the new manufacturing sites.

Smiths Interconnect delivered underlying growth in revenue and headline operating margin against a weak comparator period. Revenue rose across all business units: Connectors, Microwave and Power, although the power markets remain relatively weak.  The outlook for the final quarter remains challenging, given the strong comparator period and there continues to be uncertainty in several end markets, particularly with on-going weakness in Europe and the risk of US defence budget cuts.

Flex-Tek has made good progress growing underlying revenue through a strong performance in aerospace and US residential construction.  Helped by the division’s high operational gearing, headline operating profit and margins improved as a result of the higher volumes.  The outlook for the full year remains positive driven by the aerospace order book and US housing, despite the demanding comparator period.

The headline effective tax rate for the full year is expected to be slightly below the rate reported at the half year.  At 4 May, net debt was £891m, up from £855m at 31 January, reflecting the interim dividend payment and adverse foreign exchange translation.