SMIN Smiths Group Plc

SMITHS GROUP PLC - FULL YEAR RESULTS FOR 12 MONTHS ENDED 31 JULY 2024

Pioneers of progress - engineering a better future

Continued good delivery against our strategy; well positioned for ongoing value creation

·    Good financial results for the year: +5.4% organic¹ revenue growth, 16.8% headline² operating profit margin and +8.3% headline² EPS growth

·    Headline² operating cash conversion of 97%; strong balance sheet 0.3x net debt/EBITDA; proposed final dividend of 30.2p, up +5.2%

·    Announcing today two strategic and disciplined acquisitions for up to £110m, enhancing Flex-Tek's HVAC³ and industrial heating businesses

·    Continued focus on high-performance, purpose-based culture and ESG initiatives

·    Launching a Group-wide Acceleration Plan to enhance profitability and productivity, for one-off costs totalling £60-65m in the period FY2025-FY2026; £30-35m of annualised benefits in FY2027

·    Expect FY2025 organic revenue growth of 4-6%, with continued margin expansion

·    Reaffirming medium-term financial targets and strategic focus on growth, people and execution

Roland Carter, Chief Executive Officer, commented:

"I am pleased to report strong organic revenue growth against a record comparator, continued headline operating profit margin expansion and two new acquisitions. I am also pleased to guide to further growth and margin expansion in FY2025 and reaffirm our medium-term financial targets. We are making good strategic, operational and financial progress, and all our businesses are well positioned for compelling value creation.

"We have high-quality teams, an incredible breadth of engineering excellence, and a relentless focus on our customers. Effective strategy execution is enhancing our performance - and we will build on, and out from, this solid foundation, enabling us to grow more profitably to make Smiths even better. This will be delivered through improved prioritisation of investment in R&D and innovation to power organic growth; the Group-wide Acceleration Plan, which is designed to drive productivity and profitability - bringing delivery of our medium-term margin target closer; and disciplined M&A, all of which offer the opportunity to augment overall performance.

"As a team, we focus on solving our customers' toughest problems and are united by our purpose of engineering a better future. Thank you to all my colleagues for a great year. I look forward to achieving even more together, as we continue to accelerate value creation for all our stakeholders."

Statutory reporting and definitions

Presentation

A 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 - engineering a better future. We are focused on solving the toughest problems for our customers, helping address critical global needs such as safety and security, decarbonisation and the ever-increasing demand for connectivity. At the same time, we are building the long-term strength and resilience of Smiths Group and our global operations. We are united by our purpose. It is what we do, how we think, and how we will continue to use our passion for innovative technology and engineering. 

Legal Entity Identifier (LEI): 213800MJL6IPZS3ASA11

This document contains certain statements that are forward-looking statements. They appear in a number of places throughout this document and include statements regarding the intentions, beliefs and/or current expectations of Smiths Group plc (the Company) and its subsidiaries (together, the Group) and those of their respective officers, directors and employees concerning, amongst other things, the results of operations, financial condition, liquidity, prospects, growth, strategies, and the businesses operated by 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 this document and, unless otherwise required by applicable law, the Company undertakes no obligation to update or revise these forward-looking statements. The Company and its directors accept no liability to third parties. This document contains brands that are trademarks and are registered and/or otherwise protected in accordance with applicable law.

UPCOMING EVENTS

SUMMARY

I am pleased to report a good performance at my first set of results as CEO. We delivered further progress, with organic revenue growth of +5.4% and a +30bps increase in headline operating profit margin to 16.8%, both in line with guidance, and headline earnings per share growth of 8.3%. We improved headline operating cash conversion to 97% through a focus on working capital. We have announced two highly attractive acquisitions for up to £110m, deploying capital in a disciplined way whilst maintaining our strong balance sheet. We are well set for continued delivery in FY2025, and beyond. 

During the last six months, we have been reviewing the Group's current strategy to define our future direction. From my 35-year career at Smiths, I have a deep appreciation of the Group's compelling attributes. Smiths has many strengths, and our businesses are well positioned for the future - leading positions in attractive markets, world-class engineering expertise, differentiated proprietary technology, strong brands and talented people united by a purpose-led, innovative and continuous improvement culture.

Effective execution of our strategy has enhanced our performance, but there is more we can do - and we will build on, and out from, this solid foundation. Our strategic priorities around growth, people and execution will remain, although there are a number of important changes:

·    We remain resolutely focused on delivering continued profitable organic growth, but we will work harder to focus our innovation and the commercialisation of our new products. In addition, we will increase the importance of moving into new, higher-growth adjacencies with targeted allocation of our R&D resources. Highly disciplined M&A offers additional opportunities. This is demonstrated by the acquisitions announced for Flex-Tek, and we now have a more active acquisition pipeline to accelerate the pace of strategy execution;

·    Our talented people and our purpose-led culture serve us well in delivering value for our customers, but the recent foundational work in values, leadership behaviours and culture must make a real long-term difference to how we operate. We will ensure that talent attraction and leadership development initiatives permeate through the Group, benefiting all. We are also taking a more end-to-end approach to improve business-level processes by implementing a global shared business services model which will provide improved cost-effective support; and

·    The Smiths Excellence System (SES) is our way of working, and Lean and continuous improvement activities will be driven at the grass roots level, rather than led 'top-down' from Group. In addition, to deliver our operating margin target faster, we are launching a Group-wide Acceleration Plan which identifies a set of business-led transformational initiatives to enhance margin, improve productivity and build capabilities.

We see significant opportunities within all our businesses to deliver substantial additional value creation from this approach.

STRATEGY UPDATE

Compelling portfolio of leading businesses

Our portfolio position is compelling - with resilient and competitively advantaged businesses. Our businesses have independent products, customers and go-to-market models. Even so, they share similar customer-facing capabilities and common characteristics, an opportunity we can, and will, take better advantage of. For example, deep-seated manufacturing and process knowledge, aftermarket service, digital, automation and material technologies are all mutual characteristics we can better leverage to enhance how we support our customers, how we perform, and to create and sustain Group-wide competitive advantage.

Group functions will continue to provide strong, effective oversight and governance. We will improve these by developing and expanding the remit of our global shared business services - to cover all businesses and key support functions in addition to IT, which it already manages in a cost-effective way. We will continue to deploy SES, an important element of which is Lean - reducing waste and improving efficiency to enhance our operations - with Lean leaders at our major sites, maintaining the pace of continuous improvement. This common Group approach takes operational excellence to another level of maturity, alongside talent development and capital allocation, and will ensure consistent strategy execution, optimal capital allocation and cost-effective portfolio management.

Positioned in secularly attractive markets

We are positioned in attractive markets that we believe offer significant opportunities for profitable growth - energy, safety and security, aerospace and defence, general industrial - where we are helping our customers to make the world safer, more energy efficient and productive, as well as better connected. These markets are exposed to positive megatrends:

·     Safety and security - in the context of an increasing prevalence of travel and cross-border trade, alongside increasing threats and greater geopolitical instability;

·     Energy efficiency - the requirement for energy diversification as well as reductions in emissions, coupled with the rise in infrastructure development;

·     Productivity - within the industrial world, the need to manage the use of resources and raw materials efficiently is critical, and will support the development of the circular economy; and

·     Better connectivity - the demand for data is continually increasing as the world becomes more connected and computing power expands, requiring new technologies across many sectors.

We will continue to focus on accessing the growth that these markets offer, with a clear view to capturing market share and expanding our addressable markets.

Participation in attractive new market adjacencies to accelerate growth

As well as driving growth in our existing markets, we will look to build out priority adjacencies to accelerate our growth, for example into new sealing solutions and services at John Crane; next generation threat detection at Smiths Detection; electrical industrial process heat at Flex-Tek; and high-speed satellite communications at Smiths Interconnect. Accessing these adjacent opportunities will be done both organically through dedicated R&D spend, and through disciplined M&A, to augment our organic growth focus.

We have a strong balance sheet and the flexibility to support a range of growth opportunities and will continue to allocate capital in a disciplined way for value creation. The priorities here are unchanged - organic investment (R&D and capex) will remain our primary focus, followed by strategic and disciplined M&A, and then returning excess capital to shareholders through our progressive dividend and, when compelling, share buybacks.

As evidenced by the new acquisitions for Flex-Tek, we have a more active acquisition pipeline than historically, providing us with a greater set of opportunities through which we can grow our businesses, but will maintain our strict value creation discipline.

Investing in proprietary technology, differentiated products and service capability

Innovation takes place on many levels within Smiths: new products and services, new ways of manufacturing and new ways of exploiting technology. Our innovation capability and ongoing investment in developing differentiated, proprietary technologies and solutions ensures that we maintain a robust, value-oriented approach to commercialising new products. Our new product pipeline is focused on responding to emerging customers' needs and bringing next-generation technology to market.

We have a high proportion of recurring revenue through our aftermarket and services in John Crane and Smiths Detection, and we are looking at additional ways to improve customer intimacy and capture greater value here; for example through expanded services, as well as digital and software applications. We will also partner with customers to develop solutions to demanding specifications, again leveraging Group-wide skills and experience to better commercialise these types of growth opportunities.

Launching Acceleration Plan to drive Group-wide productivity and capability enhancements

We continue to drive productivity and process improvements and further embed deployment of SES which has delivered tangible benefits and contributed to recent margin expansion. However, we now need to capture the next level of improvements to accelerate the realisation of our medium-term margin target and deliver process improvements for resilience and scalability over the longer term.

To achieve this, and in addition to our planned SES activity, we are now launching a Group-wide Acceleration Plan. This comprises a number of discrete initiatives focused on delivering the next wave of productivity and capability enhancements across all our businesses.

This proposed programme has identified £30-35m of potential annualised benefits, of which around a quarter are planned to be realised during FY2026, with the full benefit in FY2027. Delivering these ongoing savings will result in one-off costs totalling approximately £60-65m, of which approximately £30-35m will be spent in FY2025 and £30m in FY2026, plus an additional £10m of capex in FY2025. Benefits and savings areas are focused on: process, improving organisational effectiveness through simplifying interaction and processes for our customers and our colleagues, and property, through a footprint optimisation review. Where required, we will consult appropriately with colleagues around the planned changes. It is now the right time to invest in these ambitions, to drive operating margin expansion and competitiveness more rapidly as we continue to grow.

Purpose-based and high-performing culture

Delivering on our growth and execution priorities requires the dedication and commitment of all our colleagues; and we are committed to doing more to inspire and empower them. Safety will continue to be our highest priority and we remain committed to maintaining our top quartile performance by elevating the focus on this around the Group even further. Our purpose-based culture is strong, and we continue to evolve our approach where talent development, engagement and inclusion and sustainability all define how we operate. I have worked with, supported and been supported by many colleagues over the years, and I am excited about what the future holds and what we can deliver together.

Reaffirming medium-term targets, underpinned by our performance framework

This focused strategic and operational plan is the means through which we will realise the medium-term financial targets that we previously set. We have again made solid progress against these targets in FY2024 and continue to believe these are the right metrics and set the right ambition.

We are reaffirming these financial targets. In FY2024, we are already within the target range for three of these metrics and are clear on the key actions needed to achieve them for operating profit margin. Each of our businesses has a clear roadmap to improve profitability. Given our investment in growth, we now believe a cash conversion of around 100% through the cycle is more appropriate than 100%+.

FY2025 outlook

For FY2025, we expect organic revenue growth to be within our medium-term target range of 4-6%. A strong demand backdrop and good order book visibility underpin our positive view for John Crane and Smiths Detection, although growth is expected to moderate from the strong performance seen in FY2024. Good demand in aerospace, alongside the pace of market recovery in US construction, will determine the pace of growth in Flex-Tek, and recovery in semiconductor test alongside growth in aerospace and defence-related programmes underpins our expectation for an improving performance in Smiths Interconnect.

We also expect continued margin expansion in FY2025, reflecting operational leverage, continued deployment of SES and Lean initiatives, and our reinvestment to support future sustainable growth. Headline operating cash conversion is expected to be in the low nineties percent given an increase in capex to around £110m. This will be weighted towards the second half of the year, reflecting timing of machining capacity and automation investments, mainly in John Crane.

FY2024 BUSINESS PERFORMANCE 

Smiths delivered organic revenue growth of +5.4% in FY2024. We generated £526m of headline operating profit, up +7.1% on an organic basis year-on-year and a +30bps margin improvement as we continue to drive growth, improve execution, and invest in our people. 

Revenue grew +3.1% on a reported basis to £3,132m (FY2023: £3,037m). This included a (£119m) negative foreign exchange translation impact and +£57m from the acquisitions of Heating and Cooling Products (HCP) and Plastronics.

Growth

Accelerating growth is key to value creation for the Group. We have now delivered three years of organic revenue growth, with momentum improving through FY2024. Organic revenue growth of 3.9% in the first half was followed by 6.8% in the second half.

Strong growth continued for our two larger businesses, with more challenging end market dynamics in our other two businesses, although both returned to growth in the second half:

·    John Crane's growth was led by energy, especially in aftermarket, as it executed on its strong order book;

·    Smiths Detection's growth reflected strength in aviation, particularly for computed tomography for airport checkpoints;

·    Flex-Tek's performance reflected ongoing US construction market headwinds, which more than offset strength in aerospace; and

·    Smiths Interconnect's performance reflected weakness in connectors and the semiconductor test end market. 

Our business operates across four major global end markets: General Industrial, Safety & Security, Energy, and Aerospace & Defence.

1 Our end market allocations have been revised such that Smiths Interconnect's revenue related to aerospace and defence has been moved from Safety & Security into Aerospace & Defence. FY2023 has been restated on this new basis. See note 1 to the financial statements for further information.

·    In General Industrial, the decline reflected weaker demand in construction for Flex-Tek's heating, ventilation and air conditioning (HVAC) products and Smiths Interconnect semiconductor test and connectors products, with John Crane's industrial performance flat year-on-year;

·    Safety & Security growth reflected Smiths Detection's continued strong delivery against its order book;

·    Energy growth reflected robust demand at John Crane and execution against its strong order book; and

·    In Aerospace & Defence, new aircraft build programmes drove demand at Flex-Tek which was partly offset by phasing in some aerospace and defence-related programmes in Smiths Interconnect.

Organic growth is supported by new product development and commercialisation. In FY2024, 200bps of growth was delivered from high impact new products including John Crane's next-generation diamond coating product, Smiths Detection's iCMORE and the latest generation of high-speed semiconductor test sockets (DaVinci 112) from Smiths Interconnect. Gross vitality, which measures the proportion of revenues coming from products launched in the last five years, was 28.5% (FY2023: 31%), supported by our successful new product commercialisation.

We also augment our organic growth with disciplined M&A and today have announced two acquisitions with a combined value of £95m at an EBITDA multiple of c.8x, enabling expansion in Flex-Tek's HVAC and electrical heating solutions platforms. An additional amount of up to £15m is payable subject to the performance of one of the acquisitions over a three-year period.

·    Modular Metal Fabricators, Inc. (Modular Metal) is a US-based metal and flexible ducting manufacturer which expands Flex-Tek's geographical presence in the western US and broadens its product range to include Modular Metal's sealed flexible duct solution. This acquisition builds on our August 2023 acquisition of HCP, which expanded our geographical coverage in North America and added HCP's patented axial and radial seal duct products.

·    Through the acquisition of Wattco, Inc. (Wattco), Flex-Tek expands into medium temperature immersion and circulation heating - an attractive market adjacency and highly complementary to our existing open coil electrical heating businesses. This acquisition follows our successful acquisition of SureHeat in 2017. Wattco also brings additional capability in terms of supplying vertically integrated heating solutions and will be integrated into the Flex-Tek heat solutions business.

·    The acquisition of Wattco has already completed, while Modular Metal is expected to complete in Q1 FY2025.

Execution

Stronger execution remains a key priority, with an improving financial performance again in FY2024. Headline operating profit rose +7.1% (+£34m) on an organic basis, and +5.0% (+£25m) on a reported basis, to £526m (FY2023: £501m).

Headline operating profit margin was 16.8%, up +34bps on an organic and +30bps on a reported basis, and in line with guidance of continued margin expansion, reflecting operational leverage and efficiency improvements, alongside reinvestment to support future growth.

Three of our businesses delivered margin expansion:

·    John Crane had good operating leverage on the higher sales volume, partially offset by mix impacts from higher systems sales and while continuing to reinvest in capacity expansion, sales and service to support current and future growth;

·    Smith's Detection delivered a 70bps increase in margin, reflecting higher volumes and improving operational efficiency in the second half;

·    Flex-Tek delivered a higher margin, despite the lower organic revenue, reflecting a positive mix impact and good cost control; and

·    Smiths Interconnect posted a margin decline reflecting the lower year-on-year volumes, despite cost control initiatives.

And at a Group level, we invested in several growth initiatives which were funded by the benefits from the Smiths Excellence System and other savings projects, and which offset each other.

ROCE increased +70bps to 16.4% (FY2023: 15.7%) reflecting the higher profitability of the Group, which also translated to growth in headline EPS of +8.3% to 105.5p. This reflected a headline tax charge of £122m (FY2023: £121m) which represents an effective rate of 25.0% (FY2023: 26.0%) and also benefited from the share buyback programme, partially offset by foreign exchange impacts.

The focus on execution also enhanced headline operating cash conversion, which improved to 97% (FY2023: 86%), supported by a year-on-year improvement in working capital. Headline operating cashflow was £509m (FY2023: £433m) and free cashflow generation increased +67% to £298m (FY2023: £178m) or 57% of headline operating profit (FY2023: 35%).

SES is one of our key initiatives to enhance execution and support the delivery of our medium-term financial targets. SES projects delivered a £23m benefit to headline operating profit in FY2024 (FY2023: £14m), in line with expectations. SES is the way we work at Smiths and is supported by our cohort of Black Belts (BBs) and Master Black Belts (MBBs). As our first cohort return to leadership roles across the Group, SES learnings are better embedded within the businesses, and to continue this process, new MBBs and BBs have been appointed. In addition, our major sites have Lean leaders in place to continually assess processes and ingrain Lean practices at the local level.

We are also executing well against our ESG framework, with progress against our sustainability metrics, which are now fully incorporated into both our annual and long-term incentives. We continue proactively to manage reductions in the environmental impact of our operations and manufacturing processes.

1 The energy efficiency ratio is expressed as the MWh energy consumed (excluding renewable electricity produced and consumed onsite), divided by revenue (excluding price growth within the measurement year), and excludes HCP.

2 Scope 1, 2 and 3 GHG emissions calculated in accordance with the WRI/WBCSD Greenhouse Gas Protocol.

3 Normalised for revenue excluding price increases and excluding HCP acquisition.

4 Normalised to reported revenue.

5 Across 10 identified water stressed areas.

We have been tracking our environmental performance since 2007 and set new three-year targets in FY2022. Over the three-year period FY2022-FY2024, our Scope 1 and 2 emissions have reduced by 42% - in line with our net zero Greenhouse Gas (GHG) emission targets which were validated by the Science Based Targets initiative during the year. Also over this period, we improved energy efficiency, around 73% of our electricity now comes from renewable sources and we continue to target additional locations for onsite renewable energy installation.

We have set out new targets for FY2025-FY2027. These include new metrics on supplier engagement in support of our ESG commitments and reporting. In FY2024, we engaged a new third-party supplier management platform - EcoVadis - and launched a supply chain due diligence policy which, together, will help us manage supplier relationships to explicitly support our ESG commitments and reporting.

1 Year-on-year reduction in absolute MWh consumed (target depending on revenue).

2 Scope 1 & 2 GHG emissions calculated in accordance with the WRI/WBCSD Greenhouse Gas Protocol.

People

Safety, alongside health and well-being, is an essential foundation of our success. Our FY2024 recordable incident rate was 0.44 (FY2023: 0.41), with the increase primarily reflecting the acquisition of HCP, where its safety culture is being aligned with that of Smiths following its integration. Our key focus is on sustainable preventative action including active promotion of a safety culture and engagement, safety leadership, skills and designing out risk and this is reinforced on a daily basis through safety leading indicator activities, comprising peer-to-peer observations and leadership tours. A key event in the year was our three-day global Health, Safety & Environment (HSE) conference which covered topics including safety culture, the connection between SES and HSE, and hazard perception and risk assessment. To supplement the focus on our physical security, we are developing a mental health and well-being strategy which will be deployed in FY2025.

To support talent development, the rollout of Accelerate, our bespoke training programme for senior leaders continued. It is now present in 15 countries, with 555 participants in FY2024; 50% of our leaders have now been trained under the programme. Our commitment to fostering diversity, equity and inclusion with our initiatives on this are further bolstered by active employee resource groups (ERGs) such as the Black Employee Network, Veterans Network, Pride Coalition, Women@Work and Neurodiversity ERGs.

Our people are enthused about engaging with and caring for our communities and in June this year, our annual Smiths Day celebrated our culture and our communities, with many employees volunteering their support for local causes. At the Group level, The Smiths Group Foundation has now made its first grants, totalling c.£1m, to more than 10 charities around the world supporting STEM, safety and connectedness and environmental sustainability.

In combination, these initiatives help to underpin an engaged workforce and a healthy culture which we track and measure through the annual My Say Survey. This survey is used to surface issues and more precisely understand what we are doing well and where we need to do better, both at a high level and at the grass roots in individual teams. In FY2024, 85% of employees completed the survey and it was pleasing to see our overall engagement score of 75 was up two points on the prior year.

CAPITAL ALLOCATION

Our highest capital priority continues to be organic growth, followed by strategic and disciplined M&A, and we have a strong track record of returning capital to shareholders, via dividends and share buybacks. In FY2024, we invested £109m in R&D (FY2023: £113m), of which £73m (FY2023: £73m) was an income statement charge, £14m was capitalised (FY2023: £21m) (primarily next-generation hold and cabin baggage screening and further advancements in our defence portfolio) and £22m (FY2023: £19m) was funded by customers. Partly accounting for the marginal year-on-year decline was the relocation of certain R&D projects to lower-cost jurisdictions, resulting in more efficient R&D spend. In addition, there was a further £41m spend on customer-specific engineering-related projects taking the total spend for FY2024 from 3.5% to 4.8% of sales.

To support new product launches and the strong demand for our existing solutions, we increased capex +6% to £86m (FY2023: £81m). This equates to 1.7x depreciation and amortisation (FY2023: 1.6x). A key project was investment in machining capacity and automation at John Crane, which will continue into FY2025 resulting in Group capex of around £110m for the year.

We spent £64m on the acquisition of HCP in August 2023, a US-based manufacturer of HVAC solutions  and post the FY2024 year-end, in September 2024, we announced the acquisitions of Modular Metal and Wattco for £95 million, with up to an additional £15m subject to the performance of one of the acquisitions over a three-year period.

We completed the final £29m of the Group's £742m share buyback programme in the first quarter. In addition, in March, we announced a new share buyback programme of £100m and initiated buying under the first £50m tranche. As guided, we completed the first £50m during September 2024, including £41m during the fiscal year, and £9m during August and September. We have not yet initiated the second tranche.

In line with our progressive dividend policy, the Board is recommending a final dividend of 30.2p, a year-on-year increase of +5.2%, bringing the total dividend for the year to 43.75p (FY2023: 41.6p). The final dividend will be paid on 22 November 2024 to shareholders on the register at close of business on 18 October 2024. Our dividend policy aims to increase dividends in line with growth in earnings and cashflow, with the objective of maintaining minimum dividend cover of around two times.

The Company offers a Dividend Reinvestment Plan (DRIP) enabling shareholders to use their cash dividend to buy further shares in the Company - see website for details. To participate in the DRIP, shareholders must submit their election notice to be received by 1 November 2024. Elections received after the Election Date will apply to dividends paid after 22 November 2024. 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 debt at 31 July 2024 was £213m (FY2023: £387m) with a net debt to headline EBITDA ratio of 0.3x (FY2023: 0.7x). Net headline finance costs for the year increased by £3m to £38m (FY2023: £35m) principally due to a reduced level of cash balances over the year generating lower interest income.  

As at 31 July 2024, borrowings were £659m (FY2023: £654m) comprising a €650m bond which matures in February 2027 and £123m of lease liabilities. There are no financial covenants associated with these borrowings. Cash and cash equivalents as at 31 July 2024 were £459m (FY2023: £285m). Together with our $800m (£623m at the year-end exchange rate) revolving credit facility, which matures in May 2029, total liquidity was £1.1bn at the end of the period.

Since the sale of Smiths Medical in January 2022, the Group has held a financial asset reflecting our equity ownership in ICU Medical, Inc (ICU). During FY2024, we sold 2,030,000 ICU shares (8.34% of ICU's issued share capital), with net proceeds of $240m (£187m). After the year end, we sold a further 415,771 shares (1.70% of ICU's issued share capital) with net proceeds of $59.8m (£46.2m). We continue to own less than 1% of ICU and will exit over time.

STATUTORY RESULTS

Income statement and cashflow

The £111m difference (FY2023: £98m) between headline operating profit of £526m and statutory operating profit of £415m reflects non-headline items. The largest of these relate to the amortisation of acquired intangible assets of £49m, a £26m net charge for asbestos litigation in John Crane Inc and £13m of fair-value loss on the ICU contingent consideration. The statutory operating profit of £415m was £12m higher than last year (FY2023: £403m), reflecting the higher headline operating profit. Statutory finance costs were £43m, flat year-on-year (FY2023: £43m). 

The statutory effective tax rate was 32.5% (FY2023 37%) and includes a non-headline tax credit of £1m (FY2023 £13m expense). Statutory profit after tax for the Group was £251m (FY2023: £232m) and statutory basic EPS was 72.3p (FY2023: 65.5p).

Statutory net cash inflow from operating activities for the total Group was £418m (FY2023: £293m). 

Pensions

During the year, £16m of pension contributions (FY2023: £5m) were made, which relate to funded, unfunded and overseas schemes and healthcare arrangements. Of this, £10m related to the US defined benefit pension plan.

As previously announced, no contributions were made in FY2024 and it is not anticipated that any further contributions will be made to the TI Group Pension Scheme (TIGPS), as the liabilities have now been insured via a series of buy-in annuities. The Group and the TIGPS Trustee are working toward final buy-out of the scheme. The Smiths Industries Pension Scheme (SIPS) is in surplus on the Technical Provisions funding basis, and no cash contributions have been made in the year nor are scheduled to be made. The Group and the SIPS Trustee continue to work together to progress towards the long-term funding target of full buy-out funding.

These two UK schemes and the US pension plan are well hedged against changes in interest and inflation rates. Their assets are invested in third-party annuities, government bonds, investment grade credit or cash, with no remaining equity investments. As at 31 July 2024, 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 US Dollar and Euro. The principal exchange rates, expressed in terms of the value of Sterling, are as follows:

JOHN CRANE

John Crane is a global leader in mission-critical technologies for the energy and process industries and an innovator in rotating equipment, encompassing mechanical seals, couplings, filtration systems and cutting-edge asset management and digital diagnostics solutions. 64% of revenue is derived from the energy sector (downstream and midstream oil & gas and power generation, including renewable and sustainable energy sources). 36% is from other process industries including chemical, life sciences, mining, water treatment and pulp & paper. 72% of John Crane revenue is from aftermarket sales. John Crane represents 36% of Group revenue.

Revenue

John Crane delivered organic revenue growth of +9.8% for the year, as it continued executing against a strong order book. Following double-digit organic revenue growth in the first half, growth moderated to +7.1% in the second half, still a healthy level compared to record-high growth in FY2023. Organic revenue growth was driven by a strong performance in Energy. Aftermarket organic revenue grew +11.1% to make up 72% of sales (FY2023: 71%), whilst OE grew +6.6%.

Reported revenue grew +5.0% to £1,133m, having crossed the £1bn mark in FY2023 for the first time, reflecting the organic growth, partially offset by a negative foreign exchange impact.

In Energy, organic revenue grew +15.9% benefiting from a continued focus on energy security and efficiency, as well as emissions reduction solutions. Regionally, there was a strong performance in the Middle East and Latin America for our advanced seals and gas compression products, as well as service contracts, with an +18.3% growth in aftermarket revenue. Notable contract wins in the year included one with Karachaganak Petroleum Operating B.V. for the provision, service and repair of dry gas seals featuring triple seal technology, and another with a major global energy company in Alberta, Canada to provide industrial seal support services at North America's most efficient integrated hydrocarbon processing site.

John Crane also won several notable energy transition contracts - including one to supply dry gas seals for three supercritical CO₂ compressors of a large-scale blue hydrogen project in the USA, and a significant contract to supply wet seals for almost 100 pumps to a zero-emission electric vehicle battery manufacturing facility, also in the USA. The pipeline of opportunities John Crane is pursuing within energy transition in CCUS, hydrogen and biofuels continues to expand.

In the General Industrial segment, organic growth moderated to +0.3%, with a (5.3)% decline in the second half, following a strong FY2023. Growth in OE, largely driven by water treatment, marine and mining, was partly offset by a small decline in aftermarket sales.

Order intake growth in FY2024 supports our positive outlook in FY2025.

Operating profit and ROCE

Headline operating profit of £263m grew +12.4% on an organic basis, resulting in +60bps of margin expansion to 23.2%. This was driven by the increased volumes and good operating leverage, pricing above inflation, and the benefits from SES, partly offset by a negative mix impact and higher investment in growth. This investment to increase capacity and efficiency, including marketing and commercial, are both key to service the strong current demand and propel future growth.

On a reported basis, headline operating profit was up +7.7%, including a negative 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.

ROCE was 25.3%, up 150bps, reflecting the headline operating profit growth.

R&D and new product development

Cash R&D expenditure was 1.6% of sales (FY2023: 1.7%), with the decline reflecting the relocation of certain R&D projects to lower cost jurisdictions, resulting in more efficient R&D spend. In addition, the business spent a further 3.6% of sales (FY2023: 3.4%) on customer-specific engineering-related projects for a total investment in new products of 5.2% of sales (FY2023: 5.2%). John Crane's continued investment in R&D is primarily focused on gas compression projects and enhancing the efficiency, performance and sustainability of heavy-duty seals and hydrogen compressors.

John Crane is well placed to support energy transition projects with its extreme temperatures and high-pressure sealing solutions and continues to work with universities and customers to develop and bring to market these innovative solutions.

SMITHS DETECTION

Smiths Detection is a global leader in threat detection and screening technologies for aviation, ports and borders, urban security and defence. Smiths Detection delivers the solutions needed to protect society from the threat and illegal passage of explosives, prohibited weapons, contraband, toxic chemicals, biological agents and narcotics - helping make the world a safer place. 52% of Smiths Detection's sales are derived from the aftermarket. Smiths Detection represents 28% of Group revenue.

Revenue

Smiths Detection delivered +11.1% organic revenue growth, converting its strong order book to revenue, with growth across both market segments, and in both OE and aftermarket.

Order intake grew strongly during the year, reflecting the ongoing demand for airport scanner upgrades and the multi-year defence contracts awarded in OSS which will support revenue growth in FY2025 and beyond.

Reported revenue was up +7.0% reflecting the strong organic growth, partially offset by an unfavourable foreign exchange impact.

In Aviation, organic revenue grew +15.4%, with OE growth of 24.8%, reflecting the continued strong demand for Smiths Detection's latest range of 3D-image computed tomography (CT) machines for cabin baggage, CTiX. Smiths Detection continues to achieve a strong win rate globally in aviation, and to date, has now sold c.1,400 CTiX scanners. Notable wins during the year included Australia, Czech Republic, France, Germany, Japan, Saudi Arabia, the UK and the USA. Contracts awarded to date support production through FY2025, and it is expected that airports' upgrade programme will continue for the next three years.

OSS sales grew +2.6% organically, with a decline in the second half after a robust first half, reflecting a strong performance in defence and urban security, partially offset by weaker ports and borders. Order intake in defence was particularly strong with two multi-year chemical detection contracts awarded, one from the UK Ministry of Defence (for an initial £88 million), and another from the US Department of Defense. 

In urban security, Smiths Detection mobile solutions were deployed at a number of high-profile events including security screening at COP28, X-ray screening equipment at the NFL Super Bowl and more than 200 items of equipment at the UEFA Euro 2024 football tournament.

Operating profit and ROCE

Headline operating profit increased +18.0% on an organic basis for the year, reflecting the strong organic revenue growth and favourable pricing, as well as the positive benefits of SES and cost actions. This was partly offset by the expansion in field service engineers to support the high installation activity and reflecting the complexity of the CTiX installations, although operational efficiency on this front improved through the second half. Headline operating profit margin of 11.9% was up 70bps on both an organic and reported basis.

Over the medium term, higher margin aftermarket revenue associated with the expanded installed base from new OE sales, continued SES initiatives and a positive mix impact from the new defence contracts are expected to support continued margin expansion.

On a reported basis, headline operating profit was up +14.1%, including a moderate negative foreign exchange translation, with the difference between statutory and headline operating profit reflecting amortisation of acquired intangibles.

ROCE increased by +140bps to 9.1%, driven by the headline operating profit growth.

R&D and new product development

Cash R&D representing 7.8% of sales (FY2023: 8.4%) supports Smiths Detection investment in next-generation detection capabilities and included £20m in customer funded projects (FY2023: £18m).

A notable component of recent R&D spend has been on a pioneering X-ray scanner utilising diffraction technology, which was pre-launched in April. The SDX 10060 XDi inspection technology allows highly accurate material and substance identification based on an object's molecular structure. This scanner can integrate seamlessly with existing baggage handling systems to support airport customs agencies in screening for a range of contraband items, including explosives or narcotics, and can also be deployed in cargo environments. Commercial deployment within aviation requires regulatory certification, which is currently underway. Modest initial sales are first expected in FY2026, at the earliest.

Smiths Detection also benefits from external R&D funding, and during FY2024, was selected for EU funding as part of a consortium to develop new AI-based algorithms for automatic detection of narcotics in passenger baggage, and to develop a maritime customs border control screening system for portable screening technology for shipping containers. It also partnered with the University of Exeter to explore virtual and immersive technology for training people, to enhance its training for X-ray screener personnel, a crucial part of its customer offering.

FLEX-TEK

Flex-Tek is a global provider of engineered components that heat and move liquids and gases for the construction, industrial and aerospace markets. 80% of Flex-Tek's revenue is derived from General Industrial and 20% from the Aerospace sector. Flex-Tek represents 25% of Group revenue.

Revenue

Organic revenue declined (0.8)% in the year, with growth in H2 of +2.6% showing some recovery following a decline of (4.1)% in H1. Revenue on a reported basis grew +2.3%, supported by +£52m from the acquisition of HCP, which was acquired in August 2023, and despite a negative foreign exchange translation.

In General Industrial, organic revenue was down (3.5)% as a result of a tough comparator last year and US construction market headwinds, which started in the second half of last year and continued through FY2024, impacting HVAC sales. The pace of HVAC revenue recovery in FY2025 will be determined by the pace of market recovery, as mortgage rates moderate and given the meaningful housing inventory deficit in the US.

Flex-Tek's energy efficient solutions for industrial applications expand to the partnership with Midrex to deliver heating solutions that enable the production of commercial green steel. The business has grown and is well placed for future energy-efficient industrial heating projects.

In Aerospace, organic revenue grew +10.9% in the year supported by a strong order book, with the slight moderation in growth in the second half reflecting a strong comparator last year. Demand was buoyant across the year and is set to continue into FY2025.

Operating profit and ROCE

Headline operating profit grew +4.2% on an organic basis. The organic operating margin improved by +100bps to 20.5% despite the decline in revenue reflecting tight cost control, especially materials, in the light of the lower volume in General Industrial and a positive mix impact. On a reported basis, headline operating profit and margin increased +8.1% and +110bps, respectively.

The difference between statutory and headline operating profit reflects the amortisation of acquired intangible assets and the provision for Titeflex Corporation subrogation claims.

ROCE increased +50bps to 26.6%, reflecting the headline operating profit growth.

The integration of HCP is progressing ahead of plan, with increased revenue in the year against the challenging construction market background. The acquisition expanded Flex-Tek's presence in the North American HVAC market by extending its customer base, and broadened its product range, including HCP's patented axial and radial seal duct technology.

In September 2024, we announced two strategic and disciplined acquisitions for Flex-Tek.

Building on the HCP acquisition, Flex-Tek is acquiring Modular Metal, expanding its HVAC presence into the western US market and broadening its product offering to include Modular Metal's sealed flexible duct solution. The transaction is expected to complete in October 2024.

Flex-Tek acquired Wattco, expanding our heating portfolio into a wider range of industrial electric heating products, including medium temperature immersion and circulation heating, which are highly complementary to our existing open coil electrical heating business.

R&D and new product development

Cash R&D expenditure grew in line with sales, remaining at 0.4% of sales (FY2023: 0.4%). R&D is focused on developing new products for the construction and aerospace markets, and new electrification opportunities within industrial markets.

SMITHS INTERCONNECT

Smiths Interconnect is a leading provider of high reliability connectivity products and solutions serving segments of aerospace and defence, medical, semiconductor test and industrial markets. Smiths Interconnect represents 11% of Group revenue.

Revenue

Smiths Interconnect's organic revenue declined (6.5)% in FY2024, reflecting weakness in the semiconductor market and a slower market in connectors, resulting in part from customer destocking. Performance improved incrementally through the year, with a (13.7)% organic decline overall in the first half, improving to marginal growth in the second half.

Reported revenue decreased (8.4)% reflecting a negative foreign exchange impact, partially offset by a £5m contribution from Plastronics which has broadened the semiconductor product portfolio and provided greater exposure to the US and wider industrial end markets.

The performance in connectors reflected a strong base comparator, customer destocking and some weakness with medical and industrial customers. In the semiconductor market, the longer than expected downturn is now reversing, with increased activity levels and growth in orders. This growth, together with good growth in aerospace and defence-related programmes and a robust pipeline of new product introductions underpins our expectation for an improving performance as we progress through FY2025.

Operating profit and ROCE

Headline operating profit declined (17.8)% on an organic basis, resulting in a (190)bps reduction in headline operating profit margin to 13.9%. The decline was primarily driven by the lower volume alongside mix effects, with continued investment in R&D, which more than offset pricing, SES benefits and the impact of cost control initiatives. On a reported basis, headline operating profit declined (20.9)% and statutory operating profit declined (8.0)%.

The difference between statutory and headline operating profit reflects the amortisation of acquired intangibles and acquisition-related costs.

ROCE reduced (290)bps to 10.4%, driven by the lower operating profit.

R&D and new product development

Cash R&D expenditure as a percentage of sales was 6.2% of sales (FY2023: 6.3%). R&D is focused on developing new products that improve connectivity and product integrity in demanding operating environments. A recent success has been the DaVinci 112, the next generation of its high-speed semiconductor test sockets. It is designed for testing some of the most complex functionality of integrated circuits at the highest speeds and is used by leading AI and GPU semiconductor manufacturers.

Product launches during the year included a high-density electrical connector for the medical market and a new series of fixed attenuators and Thermopad® products for use in space, defence and aerospace applications.

Smiths Interconnect also launched the Mini-Lock Connector, the next generation radio-frequency connector which delivers high-reliability performance in mission-critical sectors such as satellite, aerospace and defence.

To address the critical issue of power loss in electric battery systems and solutions, Smiths Interconnect launched its new Hypertac Green Connect™ technology which has improved contact points, creating a more efficient and higher-performing battery.

Space grade products are a key development focus particularly in radio frequency and optical products. During the year, Smiths Interconnect received funding of around £2m from the UK Space Agency to help enhance its Dundee-based Space Qualification Laboratory, which simulates the extreme conditions of space to assure the quality and durability of space components.