19th Mar 2014 14:54
LONDON (Alliance News) - Smiths Group PLC Wednesday said it will expand its restructuring and cost-cutting programme to find more money to invest in its growth areas, after it reported lower profits and revenues for the first half of the financial year due to the downturn in its detection and medical businesses.
The company said pretax profit declined to GBP132 million in the six months to end-January, from GBP166 million a year earlier, as revenue slipped to GBP1.44 billion from GBP1.48 billion. It booked GBP83 million of exceptional charges, up from GBP57 million a year earlier, primarily as a result of restructuring costs and a GBP36 million charge in relation to an asbestos litigation.
Excluding the charges, the company's pretax profit was GBP215 million, down from GBP223 million in the previous year.
The company's detection unit, which makes sensors that detect and identify things like explosives, weapons and radioactive material, has been hit by the slowdown in defence spending, particularly in the US, and that trend continued in the period. Its medical unit, which produces medical devices and products, was hit by destocking by distributors in the US during the six months, while prices also came under pressure.
Revenues also declined at its electrical components and systems business Interconnect, but rose at energy services business John Crane and hosing and tubing unit Flex-Tek
Smiths Group said it expects improved underlying trading in the second half of the financial year, driven by a strong order book in its John Crane business, some recovery in Smiths Interconnect and further growth in Flex-Tek. However, Detection will continue to be hampered by government budget pressures and Medical will continue to face tough trading conditions, it warned.
Smiths also cautioned that the impact of foreign exchange rate movements will worsen in the second half, with current rates having a 4% to 5% impact on its full year earnings.
Still, it raised its interim dividend to 12.75 pence, from 12.5p, which it said reflected its strong cash position. Its free cash-flow fell to GBP30 million, from GBP71 million, but its operating cash conversion excluding exceptional items was 86%.
"We will maintain our focus on investing to drive sales growth in what are attractive long-term markets, and delivering further operational improvements, while providing strong cash conversion and returns," Chief Executive Philip Bowman said in a statement.
The company has been restructuring and cutting costs and then using some of the savings to invest in areas it thinks will drive growth going forward, particularly new products and in emerging markets. It said it would expand its so-called 'Fuel for Growth' restructuring programme, and therefore boost investments.
The programme is now expected to deliver GBP60 million in yearly cost savings for reinvestment in sales, marketing and new product development, and cost GBP120 million by the end of 2017. The restructuring will focus on site rationalisation, organisational effectiveness and uprgrading information systems, particularly in John Crane.
The company incurred costs of GBP12 million in the programme during the half. Previously, the programme had been expected to produce savings of GBP50 million at a cost of GBP100 million.
Smiths increased its investment in research and development to GBP61 million, up from GBP59 million in the previous year. This included company-funded investment of GBP57 million and a further GBP4 million of customer funded investment.
On a divisional basis, Smiths Medical revenue declined to GBP389 million in the first half, from GBP413 million a year earlier, hit by soft trading conditions in the developed-market medical devices sector and by an adverse currency translation impact of GBP9 million. In the US, sales weakened, particularly in the last six months as de-stocking accelerated, the company said. Smiths also noted that the division was distracted by an approach last year to acquire the business.
Revenues in Smiths Detection declined to GBP251 million, from GBP255 million, as growth in critical infrastructure was offset by weakness in transportation, military, ports and borders and emergency responders.
Broker Numis reiterated its Reduce recommendation on the stock, saying that Smiths' progress is limited. While the new targets do not appear particularly stretched, they "suggest that there is little appetite by management to break the group up," said Numis analyst David Larkam.
Larkam also noted the warning about the impact of currencies in the second half, and Numis reduced its estimates for the group's full-year results by around 6%.
Jefferies reiterated its Buy rating on Smiths, saying that results confirmed that "it's not easy out there."
"We believe the restructuring announced today ? albeit flagged last September ? is a more profound exercise designed to take Smiths to a new level in many respects. More particularly, it is clearly not intended to hold the fort against declining demand or to address a division that has markedly underperformed or suffered from poor execution," Jefferies said.
Shares in Smiths were trading down 3.6% at 1,303.00 pence Wednesday afternoon, one of the biggest fallers in the FTSE 100.
By Hana Stewart-Smith; [email protected]; @HanaSSAllNews
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