Smiths Group plc Q3 Interim Management Statement

In the nine months to 3 May 2014, underlying revenue at Smiths Group was slightly weaker than the prior period as growth in John Crane and Flex-Tek was more than offset by weakness in Detection, Medical and Interconnect.  The full year outlook for headline operating profit is in line with expectations for all businesses except Smiths Detection where profitability is now expected to be £25m lower due to a combination of working capital adjustments, reduced volumes and contract mix on lower margin contracts and additional programme delivery costs.  The headwind from foreign exchange translation for the Group overall is in line with previous guidance and, at current rates, is expected to be an adverse impact of c. 5% on full year earnings.

In the first nine months, John Crane delivered revenue growth at constant currencies supported by a growing order book, which continues to be at record levels.  Demand remains strong from mid- and downstream energy services customers particularly in the USA, Middle East, Asia and Brazil.  The upstream energy services business continues to face some headwinds.  Underlying headline operating profit also grew on the back of productivity gains and favourable mix.  As a result, John Crane is expected to grow in line with the outlook given at the half year results in March.

Smiths Medical saw a return to underlying growth in third quarter revenues as the impact of US distributor destocking subsided, although year to date underlying revenues still remain below the prior period.  Headline operating profit in the first nine months has been constrained by operational gearing effects related to the lower volumes, continued tough trading in developed markets and the introduction of the US medical device tax.  The outlook for the full year is still expected to be below the prior year, as previously guided, although we continue to anticipate a stronger trading performance in the second half than the first.

Smiths Detection faced further challenging trading conditions during the third quarter.  Underlying revenue declined in the nine months primarily reflecting weaker demand from cargo screening and transportation, albeit against a strong comparator period.  During the quarter, following an assessment of all major contracts and programmes, we concluded a review of working capital requirements.  This review, combined with the adoption of new divisional policies, will result in a full year charge of around £12m for the associated adjustments to inventory and receivables.  Full year profitability will also be impacted by c. £9m from lower volumes and adverse mix from lower margin contracts and by around £4m of additional programme delivery costs from certain long-running large contracts.  Although our drive for operational improvements and manufacturing efficiencies continues, full year headline operating profit will be adversely affected by these additional costs.  A new divisional president was appointed this month and his immediate priority is to focus on addressing the shortcomings in programme delivery and on improving revenue and margin performance in line with the operating ranges already set out.  These initiatives to address low margin programmes and other ongoing productivity initiatives are likely to take another 18 months.

Smiths Interconnect saw an improving trend during the third quarter, with greater profitability and a slowing rate of underlying revenue decline.  Year to date revenue and headline operating profit are below the prior year at constant currencies.  Underlying revenue growth from commercial markets such as telecommunications in Microwave, semiconductor test in Connectors and data centres in Power has been offset by weaker demand from defence customers across all business units.  Looking to the full year, the improving revenue trend is expected to continue, with strengthening margins benefiting from productivity gains.

Flex-Tek has made good progress growing underlying revenue through a strong performance in US residential construction and in specialty heating elements.  Headline operating profit and margins improved strongly as a result of the higher volumes and efficiencies.  The outlook for the full year remains positive driven by the aerospace order book and US housing.

At 3 May, net debt was £895m, slightly reduced from the £901m at 31 January 2014.