TIDMSMIN
RNS Number : 1335I
Smiths Group PLC
31 March 2020
Smiths Group plc: Trading update & delay to the separation
of Smiths Medical
London, Tuesday 31 March 2020
Smiths Group plc ("Smiths" or "the Group") releases a trading
update covering good growth for the six months ended 31 January
2020 ("HY2020") and the current impact of COVID-19; and announces a
delay to the separation of Smiths Medical. This announcement
contains inside information.
Smiths was ready to publish its interim financial results today.
However, it is complying with regulatory guidance to all UK-listed
companies not to publish results before 6 April 2020.
The key focus remains the safety of staff, business continuity,
and actions to ensure resilience in the context of market
uncertainty.
Good growth in the half
-- Continuing Operations(1) delivered underlying(2) revenue
growth for the 4(th) consecutive period, up +3%. Reported revenue
increased +8%, including the acquisition of United Flexible.
-- John Crane revenue was up +6% on an underlying(2) basis, with
Original Equipment ("OE") up +8% as we continued to invest in
growing the installed base.
-- Smiths Detection revenue grew +4% on an underlying(2) basis,
with OE up +8% as we started to deliver previously announced
contract wins.
-- Flex-Tek revenue increased +3% on an underlying(2) basis,
with growth in both aerospace and industrial end markets.
-- Smiths Interconnect revenue declined (7)% on an underlying(2)
basis, driven by previously communicated market weakness and a
strong comparative period. Lower volumes, plus the relocation of
production capacity, temporarily impacted margins.
-- Smiths Medical(1) sustained its return to growth, with
revenue up +1% on an underlying(2) basis.
Financial strength and resilience
In HY2020 the Group again delivered strong cash generation,
driven by operating cash conversion of 98%.
The Group has a strong balance sheet. At the end of HY2020;
-- Net debt was GBP1.3bn (including GBP134m of leases following
the adoption of IFRS16). The ratio of net debt to EBITDA was 1.8
times. The average debt maturity is 4.6 years, with no maturities
until October 2022 and no covenant obligations.
-- Total liquidity headroom was in excess of GBP850m, including
c.GBP250m of cash and an undrawn Revolving Credit Facility ("RCF")
of $800m (c.GBP600m), which does not mature before November 2023.
The RCF carries one financial covenant: interest cover equal to or
greater than 3 times (HY2020 13 times).
It is our understanding that Smiths should also be eligible to
access up to GBP600m in funding via the Bank of England's Covid
Corporate Finance Facility (CCFF).
The Group's pension plans are well funded, hedged and invested.
Taken together, the two large UK defined benefit plans (3) had a
surplus of GBP343m on an accounting basis at the half year, and
were fully funded on a technical provisions basis at the last
valuation.
Smiths also benefits from a purposefully resilient business
model;
-- Leading positions in attractive markets
-- Capex-light, with a significant proportion of recurring aftermarket and service revenues
-- A flexible cost base with c.60% of cost of sales being materials and other variable costs
-- Serving critical industries with sustainable growth characteristics
-- Operational excellence
-- High structural cash conversion and strong balance sheet
COVID-19
Smiths activated its central crisis management team in January
2020 to drive the Smiths response, first in China and now
globally.
People
The health and safety of our people is paramount and we have put
measures in place to ensure that they remain safe. These measures
include working from home for employees who can, alternating shift
schedules and infection controls in manufacturing sites.
Impact on trading year-to-date
Group trading to the end of March was affected to some extent by
early COVID-19 disruption, which is now accelerating. In HY2020
only the Chinese operations of John Crane and Interconnect were
disrupted. Orders that were due to ship in January slipped into the
second half. All our sites in China have now reopened and are
operating at close to normal levels.
For the 8 weeks ended 28 March 2020, percentage revenue growth
for Continuing Operations and for Smiths Medical was mid-single
digit.
We have adopted measures to reduce cost and conserve cash
including h iring freezes, cancellation of discretionary
expenditure and postponement of non-essential capex. We have
reinforced controls around receivables and payables, including cash
tax (corporate, indirect and payroll).
Demand
We are now seeing generally weaker demand, but with some
mitigating factors;
-- Some customers have temporarily closed their facilities and
have not been able to accept delivery of equipment and
services.
-- Together with lower oil prices, energy customers have
announced reductions in capital expenditure. John Crane is not
exposed to upstream oil & gas and has a very strong order book,
two thirds of which is aftermarket.
-- Passenger airports are closing or operating at significantly
reduced capacity, with knock-on impact on both OE and aftermarket
revenue. However, Smiths Detection has a record order book.
-- Smiths is making a significant contribution to meeting the
global demand for ventilators and other critical care devices.
Smiths Medical is contracting with the UK Government for a
significant ramp-up in production of its paraPAC plus(TM)
ventilator.
Supply
We have experienced some disruption to supply chain and
production;
-- As of 30 March 2020, sites accounting for more than 90% of
manufacturing capacity were open. However, because of infection
control measures, sites are not running at full capacity.
-- We are pre-emptively obtaining government authorisation for
sites to remain open where applicable, given the critical nature of
our products.
-- A central coordination team is working in real time with
operating units and suppliers, to identify and resolve potential
operations and supply chain issues.
Forward guidance
We are moving decisively on a number of fronts to address the
near-term challenges. Although we believe that we are in a strong
position, it is too early to assess the full impact of COVID-19.
Therefore we are withdrawing forward guidance for FY2020.
Delay to the separation of Smiths Medical
The previously announced separation of Smiths Medical was on
track to be delivered by the end of the first half of 2020.
However, it is simply not practicable to complete the separation in
current circumstances. Moreover, Smiths and Smiths Medical need to
focus on navigating the external challenges - including the
delivery of ventilators and other critical care devices. Therefore,
the Board has decided to delay separation until conditions improve.
The intent to separate remains unchanged.
Dividend
We remain confident in the strength of the Group's financial
position. However, a t this time of unprecedented uncertainty, the
Board considers it prudent not to declare an interim dividend for
HY2020. Recognising the importance of the dividend to shareholders,
the Board will review this decision again later in the financial
year as trading conditions become clearer.
Strategic strength
Beyond the near-term challenges of COVID-19, the Group is well
placed to deliver consistent outperformance;
-- Businesses well-positioned in long term, attractive growth markets
-- Products and services differentiated by market-leading, innovative technology
-- World-class operational excellence
-- A culture of innovation, entrepreneurship and relentless execution
-- Organic growth complemented by disciplined M&A
Andy Reynolds Smith , Group Chief Executive, commented:
"I have been inspired and am so proud of everything our people
are doing around the world as we navigate Smiths through these
unprecedented and challenging times. Smiths is a strong and
naturally resilient business and we will come through this period
well positioned for the future. Our business benefits from
financial strength, flexibility and a strong balance sheet with
significant liquidity. We are keeping our customers running, whilst
staying safe and looking out for each other through the disruption.
I'm very grateful to our global team for all their efforts."
Definitions
(1) Continuing Operations exclude Smiths Medical which is
accounted for as 'discontinued operations - businesses held for
distribution to owners'.
(2) Underlying modifies headline performance to adjust prior
year to reflect an equivalent period of ownership for divested
businesses, and excludes the effects of foreign exchange and
acquisitions.
(3) Smiths Industries Pension Scheme (SIPS) and TI Group Pension
Scheme (TIGPS).
Contact details
Investor enquiries Media enquiries
Marion Le Bot, Smiths Group Deborah Scott, FTI Alex Le May, FTI
+44 (0)20 7004 1672 Consulting Consulting
+44 (0)75 8315 4386 +44 (0)20 3727 1459 +44 (0)20 3727
marion.lebot@smiths.com +44 (0)797 953 7449 1308
smiths@fticonsulting.com +44 (0)770 244
3312
smiths@fticonsulting.com
Legal Entity Identifier (LEI): 213800MJL6IPZS3ASA11
Photography
Original high-resolution photography is available to the media
from the media contacts above or from
http://www.smiths-images.com/
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. Nothing in this document
should be construed as a profit forecast. 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.
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END
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