Release Date: September 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Smiths Group PLC (SMGKF, Financial) reported a robust financial performance with organic revenue growth of 5.4% and operating profit growth of 7.1% organically.
- The company announced two strategic acquisitions to enhance Flex-Tek's HVAC and industrial heating platforms, indicating a proactive approach to expanding market presence.
- Operating cash conversion improved significantly by 11 percentage points to 97%, reflecting disciplined working capital management.
- Smiths Group PLC (SMGKF) maintained a strong balance sheet with a leverage ratio of 0.3 times net debt to EBITDA, providing financial flexibility for future growth.
- The company reaffirmed its medium-term targets and is optimistic about continued margin expansion and organic growth within the 4% to 6% range for FY25.
Negative Points
- The company experienced a negative 4.3% FX impact, which affected reported growth, bringing it down to 3.1%.
- Flex-Tek's industrial segment saw a revenue decline of 0.8% organically, primarily due to softness in the US construction market.
- Smiths Interconnect faced a 6.5% decline in organic revenue, attributed to weakness in connectors and the semi-test market.
- The company has not yet initiated the second tranche of its share buyback program, citing an active M&A pipeline and upcoming investments.
- There are concerns about potential overcapacity in John Crane due to ongoing capacity investments, despite a forecasted slowdown in growth for FY25.
Q & A Highlights
Q: Can you provide an update on current trading and order trends across divisions, particularly in the second half of the year?
A: Roland Carter, CEO: We've seen consistent performance over the past three years, with strong order book growth in John Crane, Flex-Tek aerospace, and a record order book in Detection. While there were challenges in Interconnect and Flex-Tek, both divisions showed growth in the second half. We remain confident in our medium-term guidance due to the strength of our order books.
Q: Could you elaborate on the slowdown in John Crane's general industrial segment, especially in the aftermarket?
A: Roland Carter, CEO: The slowdown was due to a strong comparator in the previous year. However, we are seeing strength in the John Crane order book, and we expect a return to market growth. Clare Scherrer, CFO, added that the softness was particularly in the chemicals sector, while other areas like food and beverage, pharma, and marine showed growth.
Q: Regarding capital allocation, why hasn't the second tranche of the buyback been initiated despite a strong balance sheet?
A: Clare Scherrer, CFO: We have a clear track record of returning excess capital to shareholders. We are currently focusing on strategic acquisitions, particularly in Flex-Tek, and have an active pipeline across all businesses. Most opportunities are bolt-ons, but we also consider larger deals if they add strategic value. The buyback is on hold as we evaluate these opportunities and the acceleration plan.
Q: How will the shift towards global shared services impact the balance between divisions and the central organization?
A: Roland Carter, CEO: The focus is on empowering businesses by allowing them to concentrate on customer-facing activities. Shared services will handle non-customer-facing functions like HR and finance, building on successful models in IT and other areas. This approach aims to enhance efficiency without significantly increasing central costs.
Q: Can you provide more details on the restructuring program and its impact on margins?
A: Roland Carter, CEO: The acceleration plan focuses on improving efficiency, resilience, and supporting growth. It includes footprint optimization and process improvements, aiming to deliver better margins and scalability. We are committed to meeting our medium-term margin targets, and the plan is designed to support this goal.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
