Robust results lay foundations for future growth
- Growth in reported revenue and headline operating profit in four out of five divisions
- Group revenue declined 2% on an underlying1 basis; up 2% on a reported basis
- 53% of Group revenues derived from aftermarket and consumables
- Headline operating profit declined 4% on an underlying1 basis, driven by tough global energy market conditions for John Crane
- Good margin expansion in Smiths Medical, Smiths Detection and Smiths Interconnect
- John Crane margins resilient at 21.9%; Flex-Tek margins stable
- Earnings per share of 85.2 pence fell 1% year-on-year driven by higher finance costs
- 102% cash conversion drove an underlying reduction in net debt
- Proposed final dividend of 28.75 pence per share. Full year dividend growth of 2.4%
- $710m acquisition of Morpho Detection expected to complete in early 2017, subject to regulatory clearances
1 Underlying excludes the impact of acquisitions and divestments, and the effects of foreign exchange translation
Results for the year ended 31 July 2016
|Reported growth||Underlying growth#||2016
|Operating margin||17.3%||17.6%||(30) bps||(40)bps||13.1%||13.6%|
|Headline free cash-flow||400||339||18%|
|Return on capital employed||15.3%||16.0%||(70)bps|
*In addition to statutory reporting, Smiths Group reports its continuing operations on a headline basis. Definitions of headline metrics, and information about the adjustments to statutory measures are provided in the notes to the financial statements
#Organic growth adjusting for foreign exchange translation
Andy Reynolds Smith, Group Chief Executive, commented:
“Smiths Group delivered a robust performance this year. We achieved good growth in headline operating profits with associated margin expansion in our Medical, Detection and Interconnect divisions, driven by revenue growth and business improvement initiatives. However, significant headwinds in the global energy markets impacted John Crane, primarily in the sales of first-fit equipment; aftermarket was more resilient with underlying revenue down 4%. For Smiths Group as a whole, more than half of our revenue continued to come from the recurring aftermarket for our products and services.
“In the first year as CEO, my aim has been to lay the foundations for future value creation through stronger growth, improved competitiveness, more robust and consistent execution and a better focused portfolio. We have undertaken a strategic review across the Group to examine in detail the sustainable growth characteristics of the markets we serve and our competitive positioning within those markets. We start from a solid base with a Group of well-run and well-positioned businesses, with nearly two-thirds of Group revenues coming from market segments that have attractive growth rates. We see clear potential to increase our exposure to faster growing market segments and to improve our overall market competitiveness in the medium term as we take steps to focus our portfolio.
“Our strategic review gives us a clearer sense of where to focus investment in order to drive future growth and technological differentiation, and we have aligned our capital allocation process accordingly. As a result, we were able to commit $710m for the acquisition of Morpho Detection, and to make progress on the disposal of non-core assets. We will increase expenditure on research and development by around £20m in the coming year to invest in future growth opportunities, with a particular focus on our digital future. In parallel, we are implementing measures across the business to ensure continuous improvement and greater consistency of execution in everything we do in order to deliver productivity improvements across the Group. I am confident that, over the long term, our strategy will drive Smiths to become one of the world’s leading technology companies.
“We anticipate a broad continuation of the trends experienced in 2016, with ongoing challenges in John Crane’s end markets being more than offset by moderate underlying revenue growth in our other divisions. As is typically the case, Group performance in 2017 is expected to be weighted towards the second half. We expect cash conversion to continue to be strong in the coming year and the recent depreciation of sterling is expected to provide a tailwind to reported revenue and operating profit, should current rates prevail.”
Statutory reporting takes account of all items excluded from headline performance. On a statutory basis, pre-tax profit from continuing operations was £346m (2015: £325m) and earnings per share were 65.6p (2015: 62.4p).
See Accounting policies for an explanation of the presentation of results and note 3 to the accounts for an analysis of non-headline items.
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Andrew Lorenz, FTI Consulting
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