Earnings Transcript for SMIN.L - Q2 Fiscal Year 2021

Andy Reynolds Smith: Thanks very much indeed, and good morning, everyone. Really appreciate you taking the time to join the call today. Very much hope also that you and your families have been managing to stay safe and well. I'm joined here today by John Shipsey, our Chief Financial Officer. I wanted to talk about three things today. First, the strength of our results in the first half. Second, some of the highlights of the continued progress that we've made positioning the Group in the best possible way to ensure growth in the future, and that we're strategically, operationally and financially strong. And finally, are confident that we're poised and ready to take full advantage of market recovery as it takes place, and to seize the growth opportunities which emerge. John is then going to take you through the numbers, then I'll be back to talk about the transformed position that we believe Smiths is now in ahead of the separation of Medical, and the exciting and ambitious story for Smiths of the future. We're very pleased to have delivered a robust first half performance despite COVID related disruptions and significant impact in some of our principal markets. This clearly demonstrates the strength of our market positions and our business model. We've remained focused through all of this on the safety and well-being of our people, as our priority, whilst ensuring we're able to support our customers without interruption. Thanks to the incredible work of our people around the world and our Group-wide operating model, we've responded well to the challenges. My sincere thanks to the amazing Smiths team. We had good profit conversion with margin down only 20 basis points on the prior year, due to the many actions we put in place and our strategic restructuring program, which is on track and will support the delivery of underlying margin improvement of 200 basis points as we move into financial year '22. Once again, the fundamental quality of Smiths structural cash generation really shone through with an excellent 130% cash conversion, as the benefits of the Smiths Excellence System continue to bite. Most importantly to me, we have some great contract wins across the Group. And I'm delighted to announce this morning one of the largest wins ever for Detection, which has secured 100% of the Heathrow integrated checkpoint system upgrade, including smart lanes. Installation will begin later this year. This is state-of-the-art technology, putting Heathrow ahead of the latest EU standards. As we move into the second half, we are seeing increasingly positive trends in our order books overall, and the number of our principal end markets. I'd like to talk about some of those. In oil and gas, investment sentiment and the OE and aftermarket order book activity have improved markedly in the last few weeks, driven by a range of factors, including the oil price, and daily barrels of oil consumed increasing to 96 million versus pre-COVID highs of just over 100 million. In Detection, we delivered a standout performance in Aviation in the first half. Aviation as you know represents two-thirds of the business. It was up 4% versus the prior year. That was -- thanks to the strength of the order book and our service model, which supports revenue irrespective of passenger numbers. The increases in air cargo recently have also played an important part. Very positively Flex-Tek finished the half close to flat on revenue, having entirely offset the continuing weakness in commercial aerospace, with a very strong performance in military aerospace, construction and heat solutions. This trend has continued in the last couple of months, with additional wins in aerospace and strong order books across much of the business. In Interconnect, we delivered a strong first half performance with revenue up double-digit and profit coming along with it. This was driven by strong demand in semiconductor tests, and more broadly, satellite applications and connectors for general industrial. This trend is continuing. Overall, we've continued to move with purpose, investing in innovation, improving end market positions, embedding our excellent system, and most importantly, developing our people. Smiths is well positioned to deliver market outperformance, united by a common purpose to make a safer, cleaner and more efficient world. I'd like to talk to you a bit more about this later, after John runs through our first half performance in more detail, and how this sets us up for success in both the short and medium term. Over to you, please, John.

John Shipsey: Good morning, everyone. And thank you for joining us. I'm delighted to share with you today our half year results. Above all, they show the strength of the Group being proven out in extraordinary times. We've had a good start to the year. We delivered well, and we've met or exceeded expectations. Our top-line was resilient, down only 5% against a pre-COVID comparator. This resilient performance is due to the quality of our businesses and of our people. What's more our conversion of revenue to profit was good because as a group we took actions, managing the lower level of volumes very well, managing the cost of COVID and delivering on or ahead of plan with the strategic restructuring. So we were able to take that top-line and deliver operating profit down 6% and earnings per share down only 3%. And our cash conversion was excellent, indeed a new record at 129%. Free cash flow of £188 million, further underlines the Group's financial strength. And reflecting our confidence in the Group's performance and financial position, we are declaring an interim dividend of 11.7 pence, up over 6%. So let's now look at the first half performance in more detail, starting with revenue. The top-line shows the Group's defensive resilience, down only 5%. It's a good top-line performance in tough market conditions. John Crane performed robustly despite challenging energy markets. £410 million, falling 10% as anticipated. But we saw underlying revenue from industrials only marginally down and good growth in chemical processing. Aftermarket now represents 68% to John Crane revenue. And while it declined 9% in the first half, as customers postponed maintenance because of economic uncertainty, we can be positive because previous cycles suggest these postponements typically last only six to nine months. So, we expect there to be pent-up demand for our large installed base and leading service position, and we're now starting to see this in a growing order book. Detection delivered a strong Aviation performance, actually increasing sales to this heavily impacted market. It's really a remarkable achievement, driven both by a very strong existing order book, as well as aftermarket agreements that span the next 5 to 10 years, and also by the underlying driver of regulatory-led upgrades. Underlying revenue from Other Security Systems declined more sharply, down 27% for two reasons. First, because of the timing of order completion, and the comparator on the programmatic ports and borders business. And secondly, because of a much shorter order cycle in urban security markets, such as stadiums, public buildings and large events, which have been directly and immediately impacted by the pandemic. Overall, Detection's underlying revenue fell only 6% to £350 million, a resilient performance driven by its market position and its leading technology. In Flex-Tek, we saw one of the standout performances of the half. Industrials account for around 80% of Flex-Tek revenue, and here we achieved further very good growth, reflecting really strong performance from our U.S. construction products in particular, and so offsetting most of the downturn in the smaller aerospace segment, where like others, we were down 35%. As a result, Flex-Tek revenues were broadly flat at £238 million. Interconnect had a really strong first half with sales of £152 million, up 11%. We saw strong demand for semiconductor test as well as growth in the space and defense segments, and we won significant orders for our products with space exploration and satellite applications. So, across the Group, resilient top-line performances, especially given the challenging market conditions. But what's also important is how we took this top-line and converted it into profit. A key feature of these results is the strong profit conversion. Despite Group sales down £57 million, operating profit was only down £12 million or 6% on an underlying basis. This good profit conversion was a result of operating efficiencies by managing our fixed cost base well. For example, we reduced central costs by further £7 million in the period by mitigating the extra costs caused by the pandemic, and by successfully delivering cost savings, all underpinned by continued progress on the strategic restructuring program, which meant that the Group's underlying operating margin was down only 20 basis points. John Crane still produced a very healthy operating margin of just under 20% and underlying profit of £81 million despite the loss in volumes, demonstrating impressive resilience through the cycle. Detection’s margin was lower at 12.7%, but there are positive reasons behind this. First, there continued to be a high proportion of OE, which comes with a lower upfront margin but will convert into a strong and steady stream of aftermarket revenue. Secondly, aftermarket revenues were down only 6%. But the drop through on marginal revenue and aftermarket is very high. So, we did well to limit the profit impact. Flex-Tek continued to produce strong margins, 18.5% and profit of £44 million, with lower volumes successfully offset by good cost control, meaning we actually increased underlying margin slightly despite weakness in the aerospace market. And finally, Interconnect significantly increased its profitability, raising its margin to 12.1%. And profits were £18 million on the back of higher volumes, and the recent successful restructuring, continuing its trajectory back to mid-teens margins and beyond. So as a whole, we achieved healthy margins despite volume headwinds. And the big point to me is that we are well positioned for margin growth when volumes return, and markets start to recover. And Smiths Medical continued to strengthen ahead of separation in the fourth quarter of this financial year. Revenues grew for the fourth consecutive half up 0.2% to £427 million. We saw good growth in Infusion Systems and Vital Care. But in Vascular Access, fewer elective procedures offset higher demand for syringe and needle products in support of COVID-19 vaccination. And the business continued to build margin, increasing profit to £89 million. There is a clear path back towards the higher margins that the business previously delivered. And the key point here is that Smiths Medical is on a flight path through separation to achieving its full potential. I spoke earlier about our good profit conversion and referenced strategic restructuring as a contributing factor. I just want to give a bit more detail here. This is a program we are managing across the whole Group to support the goal of delivering operating margins of 18% to 20%. We have made good progress. The program is delivering and it's on track. We're two-thirds of the way through in terms of the P&L charge, and one-third in terms of the cash costs. Costs and benefits will be broadly neutral this fiscal year. And we will deliver the full annualized benefits of at least £70 million next year. So, we're really pleased with the progress, and there's more to come. Turning next to cash flow, one of the key features of these results. We as a group achieved an excellent level of cash generation. And it's all about operational delivery. The first half numbers are compelling. Group operating profit was £234 million. We delivered £301 million of operating cash flow and that's after £55 million of capital investment. Profit after tax was £171 million. We delivered £188 million of free cash flow. And we've reemphasized our focus on free cash flow as the all-in measure of cash delivery. It's now included into the metric in our long-term incentive plan to ensure full alignment with shareholders. And we still want to do more to drive free cash flow because we know we can be even better. In that context, let me turn next to pensions, another area where we have made good progress. We have two legacy defined benefit plans in the UK. Both are in a strong funding position evidenced by surpluses on a technical provisions basis. The Group has been contributing £24 million a year with the aim of making them self-sufficient by 2028. And we’ve just finalized the triennial valuation for one of the plans with very positive results. Barring unforeseen events, we expect to reach a full buyout of the TI plan well ahead of our 2028 objective, but without any further cash contribution from the Company. As a result, pension contributions are expected to fall by £4 million this year and £12 million in FY '22. This is a really important milestone, achieved through close cooperation between the Company and the trustee over many years. The triennial evaluation for the other main UK plan is still being finalized. And I look forward to updating you in due course. Before I conclude, I'd like to cover the outlook. Yes, there is uncertainty externally. And the world is clearly not out of COVID yet. But we have increasing reasons to be positive. First and foremost, the results you've heard today, but also improving order books, further restructuring benefits to come and continued strong cash generation. We are well positioned to benefit as markets and volumes do recover. It all means we are confident of meeting market expectations for the full year. This of course assumes no deterioration in the global health situation. So in conclusion, these results are further evidence of the Group’s strong fundamentals. We have taken a resilient top-line and delivered good profit conversion and excellent cash conversion. Our restructuring program is delivering on track. And the strong financial framework underpins our ability to invest in the future. We are in good shape to outperform as our markets start to recover. With that, let me hand back to Andy.

Andy Reynolds Smith: Thanks very much, John. Very clear. In 2016, we set a new direction for the Group to return it to growth and then deliver sustained market outperformance. It's a transformation and capability, market positioning, investment in innovation and R&D, our culture and our dream. Our strategic, operational and financial strength has supported our resilience during the crisis. And we are now poised to accelerate growth and returns as markets recover. And we take advantage of the growth opportunities in front of us. I'd like to take you through what I see is the fundamental strengths of our business. And how as a group we can maximize value through our shared operating model, which we're using to accelerate our growth and leverage our strengths. Smiths is focused on businesses with the same characteristics. I am unapologetic for showing you this again, as I fundamentally believe it is what explains the core of our strength, resilience, and underlines our potential for the future. We focused the Group on businesses that are technology leaders with strong digital capabilities to ensure we're at the forefront of our markets. And we've invested accordingly. We invest in businesses that are capital-light and can be sustainably competitive with a high proportion of aftermarket and service. As a reminder, around half of our revenues for the Group come from aftermarket. This way, we maximize our flexibility to react to change, bring resilience, continuous improvement and secure recurring earnings from our aftermarket services. We have a purpose-driven vision for everything we do, innovating for a sustainable future, making a safer, cleaner and more efficient world. We've continuously honed the portfolio around businesses that are leaders in markets with attractive long-term growth drivers. More than 90% of our businesses are now well positioned. John Crane is a high quality energy asset, with over 70% of its revenues derived from high margin aftermarket, but 40% of its revenue comes from other process industries with similar demands, such as chemical, pharma and mining. It's important to note that Crane's products and services are also widely applied and critical to energy transformation programs including hydrogen. And on the energy transformation journey to sustainable sources, we're also well positioned on the energies which are seen as transition or bridge entities, such as gas. Across all of our markets, John Crane's core capabilities are trusted to support critical industries with enhanced safety, efficiency, performance and sustainability through an unmatched global service network in more than 200 locations around the world. In Smiths Detection, our products are supporting safety, security and freedom of mobility. And in many cases, this is in highly regulated and difficult to enter markets. As our first half results have shown, Smiths Detection is not directly correlated to air passenger numbers, but instead to record order books, long-term service and maintenance contracts, and to regulatory upgrades driven by the evolving threat environment. Similar to John Crane, Detection is inherently resilient, with half of its revenues coming from the aftermarket services, and the world's largest installed base. Its products are built on digital analytics and smart sensing hardware, many of which are integrated into the broader security ecosystem of our customers, and in many cases, national intelligence systems. This brings real strength of incumbency and deep trust with our customers. These leading technologies are then applied to multiple end markets beyond aviation, where advanced sensing and data processing can improve safe mobility and threat detection. Flex-Tek’s strength is derived from its intimate long-term customer relationships to enable the application of innovative technologies. These solve problems for customers allowing the safe and efficient movement of fluids and gases across industrial and aerospace markets. All of them find new ways to make products easier and lower cost to install, lighter weight, highly reliable and energy efficient. Interconnect solutions for high speed secure connectivity put them at the forefront of markets including semiconductor, aerospace and space where leading technologies reliability and safety for demanding applications in really tough environments is critical, and most importantly, valued by our customers. All of our businesses have been positioned to be leaders in their markets, with execution taking place through the three pillars of our operating model, the Smiths Excellence System. This is in place across our business globally. It's about ensuring strong execution and continuous improvement in our plants and our business processes to create value. People and culture are everything at Smiths, and it enables us to develop, attract, retain, engage, and inspire the very best people, who collaborate and share and drive for excellence in everything we do. Operational excellence is at our core. Consistent execution and continuous improvement helps us move faster, constantly improve and deliver solutions, which customers value. We share centralized support functions with a high focus on cost efficiency. As an example, central costs are down one-third since 2017. We also approach high-growth regions, such as China and India as one group, leveraging our size and scale to support our ambitious growth plans in these regions. Innovation and technology are driving the future for Smiths. Our Group-wide innovation framework is at the heart of our disciplined future-focused culture, aligned to our purpose and strategy. Supporting this, we've substantially increased our investments in innovation, which are up 34% over the last five years. A great example of this is our Digital Forge in San Francisco, which now sits at the center of a global network of physical and virtual digital centers of excellence around the world, and is driving the development of leading-edge capability, supporting solutions in all of our divisions. We have businesses, which are well-positioned in markets with long-term global growth trends. Trends, which are shaping the future towards a safer, cleaner and more efficient world, that is our purpose.Importantly, we have the core capabilities, which can be, and are being applied to these growth trends of our markets, and building on our existing positions, which give us a right to play, and the right to win. The COVID crisis has in some cases accelerated and brought focusto many of these global trends, which are key across Smiths, including a return to safe mobility, increasing biological detection, clean air, efficient use of fossil fuels with lower emissions, process industry efficiency and energy transformation. And of course, digitalization spans all of these and is accelerating at a dizzying pace. Smiths has the capabilities and positions across an environmental portfolio to bring technical answers to many of these challenges, which we all face around the world as we strive for a sustainable future, and we're driving them in a coordinated way. These trends are in many cases driven by increasingly legislation and regulation, which is a business environment in which Smiths is very well versed. Our approach is driven by a triple-pronged attack with three vectors. The first is our core organic growth plan, built on market-leading positions across the Group. The second, Group-wide accelerators, addressing large scale opportunities, which present significant growth potential, require intelligent investment muscle and benefit from Group-wide leverage of core capabilities, including unique Smiths technologies. And thirdly, continued, focused and disciplined M&A to drive faster progress on technology development, customer and end market access, and geographic expansion. All three of these growth vectors come together in a highly complementary way to drive a long-term, sustainable growth plan and competitive advantage. A very good example of this thinking is the global growth megatrend for clean, safe air and biological detection, which in Smiths terms, spans everything from a methane emissions reduction program to pathogen detection in air to smart deducting in Flex-Tek, which can detect health threats in our distribution systems. This example is being driven on all three growth vectors. In the Crane example, we’ve built on an incredible reputation and installed base of customers. A recent investment in a California drone-mounted methane detection company, and joint development of software monitoring with the Smiths Digital Forge to win business in monitoring and resolving methane emissions from refineries for our customers. In Detection, we have taken the recently acquired biodetection technology and combined it with Smiths’ existing chem-bio abilities to commercialize and industrialize technologies. We’ve built the portfolio of biological detection products targeted in three main areas

Operator: [Operator Instructions] Your first question comes from the line of Andy Wilson from JP Morgan.

Andy Wilson: Good morning, everyone, and I've got three if I can ask them, I guess, quickly. First couple on Detection, I guess the strength of the Aviation part of Detection is -- was certainly a big surprise to me, [indiscernible] alone in that. Can you just provide a little bit of help I guess in terms of quite how you've been able to achieve that? And I guess secondly just, it sounds fairly reassuring message in terms of the second half in Detection, [indiscernible] Aviation question, it doesn't feel like you're expecting to see a big drop off in sales as we go through the second half. That's probably the first one if I [indiscernible]?.

Andy Reynolds Smith: Yes, I mean we were really pleased, because I think to some extent, the performance of the Detection Aviation business was a little bit counterintuitive for some people, when they look at the passenger numbers and the number of flights going. I guess there were two main features for me. First, we are in a position of global leadership, with the broadest installed base, which means that, wherever activity is happening, it's happening for Smiths, which I think is, which is a one feature. The second is, we went into the disruption with an extremely strong record order book, as you know, north of £1 billion, strongest ever. We have been burning off against some of that but nevertheless -- because there has been a slightly slower intake of new bids and new bid activity. However, that's been a real supporting feature, because people still have to meet the regulatory demands of the market. In the future, they've got to be ready for borders and airports opening fully again. So that activity has continued. And I think, partly demonstrated by the success of the Heathrow in which team has done an absolutely amazing job there. Two tough years of competition to secure one of the most important global airports was great. I guess the final feature for me is the, what we call framework agreements, which are essentially the major agreements which provide the service, maintenance, digital, software upgrades that are constantly required, irrespective of the speed that the airport or the line is running. And as you've seen, that gives a level of resilience in terms of our revenues, which is really very good. So I'm expecting to see, continued performance in Aviation. Obviously, there are some signs that things are going to be opening up again, as we go into the second half and beyond, but really pleased with the way that's gone. On the downside, of course, in the first half the fact that urban security, which largely serves crowded places, which have not been crowded, was substantially down. We are expecting as crowded places start to get busier again, whether it's subway systems or sports stadia, that is going to really pingback. And one of the reasons for me talking so much about some of those opportunities is, we're well poised with the technologies that can get crowded places and people mobility going again.

Andy Wilson: Perfect. I guess, so tightly linked, maybe to that final point is the same question. Just it seems on Detection, obviously, the acquisition of PathSensors has helped, but it's complemented what was already a pretty strong portfolio, it seems in terms of kind of chemical and biological. It seems that obviously in the kind of new world that we're in, and however that develops, there seem to be an enormous opportunity for these kind of products. I mean material to the size of Detection, which, even if it takes a bit of time to balance, it's been very well positioned to benefit from. And if you can just sort of help me understand this. If I'm overestimating that, it just feels like it really could be very, very significant.

Andy Reynolds Smith: No, I don't think you are overstating it at all, Andy. I mean, one of the areas that we really had a spotlight shown, I think, for us, as you rightly say we were already leaders in chemical, biological detection, but it was predominantly around military and defense applications. But nevertheless, that core technology, we were well versed with -- the addition of the acquisition of PathSensors and the combination of Smith's ability to industrialize and commercialize stuff in a way that appeals to different end markets is really the key to this. So this is a very big push for us. I mean, the three vectors or the three things that I talked about are, as we're most excited on our food safety, and this really applies to detecting pathogens, listeria, e-coli, salmonella, in simply hundreds of small and medium food processing plants around the world with a really good commercial solution, which also brings with it a lot of consumable. So, essentially you've got a [disk] [ph] that goes into the machine that needs to get replaced every time there's a positive every day. So, there's a nice typical Smiths high margin consumer stream there. Mail safety so this is actually sniffing the air as parcels are going by and [lessors] [ph] are going through to see whether there are threats or dangers. And then there's the broader virus detection, which we've got a number of units running. So, this is an endless market. As I said, I'm hesitating to quantify it exactly, but it's very large, and we believe that the technologies that we've got, if they can be applied in a commercially attractive way because this is quite different to the sort of regulated environment that you see in airports and can be hugely successful with Smiths having a lot of unique capability.

Andy Wilson: Okay. And maybe final one just a slightly different area I guess just around the cash flow, which, I mean, again, it’s super strong in the first half but it's been a trend, the recent results of -- the cash has been very good. Anything that you just sort of caution against is assuming that, I guess, the free cash flow profile is going to continue to be good through the second half and then into next year, just anything I guess [indiscernible] to think about?

Andy Reynolds Smith: Thanks, Andy. No caution other than say that 129% was a record. So, we're not saying we'll repeat the 129% throughout the coming half. But we are definitely, we will deliver consistently 100% plus that is what our benchmark is, so really strong first half and would certainly be above 100% going forward.

Andy Wilson: Perfect. Thanks very much guys. Appreciate it.

Operator: Your next question comes from the line of Mark Davies Jones from Stifel.

Mark Davies Jones: Thanks so much, hi Andy, hi John. Couple of things, if I can. Can we talk a little bit more about medical because it's obviously not very long until July now? Can we get a few more details on the process around that separation? So, let's see, can I clarify, you'll still sort of looking at a dual track on this, even at this late stage of the possibility of a sale or demerger. And then assuming we do go with a demerger, can you give us any early indications what you're thinking about in terms of balance sheet structure, and the technicalities of how you build two new entities out of that? Or if not, can you give us some sort of timeline on when you will be communicating that? Thanks.

Andy Reynolds Smith: Okay. Okay. Hi, Mark. So, we've been very clear from the beginning I think that we were running a dual track process, and the demerger piece of that was moving on when we hit the pause button last year because of COVID although separation work streams associated with the merger in full flight at the moment, you're right in a relatively close to the, to the time here, but everything is on track as necessary. But we also said, and it is still very much the case, we continue to evaluate opportunities to see whether we can do better from a value perspective when we think the merger is an extremely good route and strong route both of business and for investors. But we remain committed and continue to look at all opportunities to do more. John, if you do want to comment on.

John Shipsey: Hi Mark. Just in terms of the modes of technicality. So, we would be listing on the UK Stock Exchange, we would be looking at -- medical is a very cash generative good debt capacity business, we would think that two and a quarter times debt to EBITDA advices that's certainly not a stretch something of that order. And medical would then take away with the existing dividends would be split broadly in proportion to the earnings and cash capacity of the relative entities. So, we're pretty advanced on that.

Mark Davies Jones: Any sort of tax implications, or things that we should be aware of?

John Shipsey: No, just a tax clearance, which we don't anticipate any problems with that. That's again, also very advanced.

Mark Davies Jones: Okay, great. Thank you very much. Last one more question around the M&A, obviously some interesting little bolt-ons coming through now. Is that something you think you will do more of other opportunities out there and might interconnect be an area that you want to build up again having strong back to a core referring that space? Is that very much focused for M&A?

John Shipsey: Yes, that's really the question mark. So, from the beginning here, the biggest challenge we had, was to reignite organic growth, and make that our primary objective. That's taken some work over the last four years, four or five years in terms of investment, and organic remains our priority. I talked about the three vectors of growth earlier with it without organic core plan being the base within though calling out these areas that we're calling accelerators. So, these areas of significant growth opportunities that demand investment and focus, like some of the biological detection, and also methane detection, for example, for emissions reduction in fossil fuels. As sizable material, big opportunities for the future, that the third vector then is continuing disciplined M&A to speed our progress. When we think that there's ways to move more quickly forward on technology where even we may have written global geographic challenges, or also customer or market challenges. I think we've demonstrated that we've been quietly doing an awful lot of M&A activity over the last few years. I absolutely expect that to continue the balances swinging towards acquisition versus divestiture now I think just by definition of the fact that we're largely well positioned now versus our start point so that there aren't another 10 businesses to be sold. There's maybe one or two more than in due course, will go. So, that balance will swing towards the acquisition but still in, still in a very disciplined way to keep us moving quickly. When around interconnect, I mean interesting, guess interesting question. We were increasingly excited about this high technology connectors business and we've really demonstrated, I think, with this quite small acquisition to Reflex Photonics that really brought us market leading ruggedized fiber optic connector technology that applies to satellites in low earth orbit satellites, particularly. Are the others that might apply in that area? I think so, but the small, there are large acquisitions that sit there, but is there another Reflex Photonics in the sort of the tens of millions very possibly.

Operator: Your next question comes from the line of Andre Kukhnin from Credit Suisse.

Andre Kukhnin: Yes, good morning. Thank you very much for taking my question. I'll start with one on John Crane. Could you just talk about the kind of cadence of growth rate there as you went through the first half and how you exit this compared to the average? And maybe, if you could comment on where we are right now, given that we're pretty advanced and into toward the end of March right now?

Andy Reynolds Smith: Well, I think one, one point of calibration is, I'm not sure if you've had a chance to throw away the numbers yet. But in the first half, John Crane was down almost 10% in the first half, but the non-oil and gas piece was flat. So chemical was good, pharmaceutical was particularly good. So really, the reduction was all in oil and gas, not surprisingly, with demand being down the way it was an investment sentiment the way it was. Over the last few weeks, we've seen a market pick up and I mentioned in my script that we've seen demand backup to within 5 million or 6 million barrels a day of pre-COVID peaks, which I think is clear surprise to quite a few people given the gap with aviation going back to full speed is bigger than that. So investment is sentiment, it's notably picking up at the moment. What open, and we've got significant activity around order book for both aftermarket, which is John said, tends to ping back pretty quickly. But I think it's fair to say that it is balanced towards the fourth quarter, that order pick up rather than instantaneous for the third quarter that we're in right now, as far as trend. But it's giving us increasing confidence as we move into FY '22, for sure.

Andre Kukhnin: And I wanted to follow up on pathogen detection quite excited about this potential opportunity there as well. Maybe, could you give us some more detail on how long those trials were last of the 60 BioFlash machines? And what kind of unique value can we think about that even in the very rough ballpark figures? So that we can then maybe start thinking about some adoption rates and potential time estimates?

Andy Reynolds Smith: I mean, as far as testing, so we've got a number of the in test settings, as I mentioned a bit earlier on, but we're also selling units as well. So, we've had our first unit to go out into mail, settings, sorting office settings, important office buildings in the U.S. I'll let you guess which ones they are, but government buildings. So, if defense effectively sniffling whether there's anything nasty in that comes in. So, the testing is underway, units are now being sold. We're developing the use cases because this is it's really sensitive to use case because this is broadly as I said not regulated. So, you don't have the same drive that you do in airports. So, the installation of the unit and then the consumable that comes afterwards, like the CD that you slop into the unit is a really important point of how quickly we can get adoption rates to run. You forgive me at this stage, and we'll be ready very soon, but if at this stage, I stay away from the price point positioning because that's something we're working through with the customer base at the moment. And it's obviously a point of pretty high competitive sensitivity. But we'll be by the time we get to the Capital Markets Day, which we're planning for probably fourth quarter of this calendar, as we've gone through the medical separation, we'll be coming back to this in a lot more detail. I'm enormously excited by.

Andre Kukhnin: In terms of the way it works, it's a kind of a passive detection machine?

Andy Reynolds Smith: Without going into businesses, I mean, it's absolutely fascinating, but without going into staggering detail on it, essentially it's about the protein markers. So what so what you do is you have what's called an essay, which is the cells that sit in the detection desk, and they are a really unique combination of cells, human cells, but these are cultivated human cells. And also by luminescent cells from various animals that I won't disclose that by bioluminescence cells, these are then cultivated, so once the sample is there, this isn't an issue of animals here. And then when you get the pathogen that mixes with it, and triggers an event that creates a protein and then you use a unique vision system or an optical system to spot that and essentially. Here is what's called a photomultiplier tube. So basically this bioluminescent effect of the pathogen coming into contact with it gives off photons he is a photomultiplier. It booms that you get this avalanche effect of more photons and you can spot this as an infection for some description, so in absolutely fascinating technology and team's done amazing job on it.

Andre Kukhnin: So it's a labor but this machine, do you need to kind of have people assist in the breathing to do detection or can it be to sit in the corner of the reception room and flush out sign?

Andy Reynolds Smith: There essentially two alternatives at the moment. One of them is the unit sits and it draws in air from the environment around it looks for concentrations of virions or pathogens more generally. The other alternative is you've got something and it's not quite like the swabbing that happens to your bag at the airport, but something which actually touches onto the surface of which is more common for the food processing type applications. So when the swab over your bag and see whether you've got anything bad in it at the airport sometimes.

Andre Kukhnin: So in theory, every hospital reception room should really have it if proven entirely.

John Shipsey: Yes. I mean, I tried to reign back a little bit because once you start thinking about the applications and the scale of these applications. If you can get the use case, right, and there's the commercialization of this right, is just huge. So yes, so I mean, you clearly understand that.

Andre Kukhnin: Thank you. We'll look forward to Capital Markets Day. If I may just very quickly. On the TSA CT hand baggage scanning, second RFP, I think that's in progress, could you update us on how that's going given that you want to I think all of prior or the first one?

Andy Reynolds Smith: John, do you want to go on that one.

John Shipsey: Hi. I guess it's for me, sorry. I'm afraid we don't have any updates that the tender is in process. We don't have the results.

Andre Kukhnin: Got it. Thank you for your time.

Andy Reynolds Smith: Thanks Andre. Thank you very much.

Operator: And your next question comes from the line of Robert Davis from Morgan Stanley. Please ask your question.

Robert Davis: Hey. Thank you for taking my question. I have three. The first one was just around the detection business. You mentioned the support you had in the early part of this year from the launch order book. You mentioned a number of a billion or so. Just curious heading into H2 what that order book was standing at the moment.

Andy Reynolds Smith: So, good morning, Robert. I don't have the precise number for the order book to disclose. But what I would say, as kind of qualitatively is that, we have grown on the order book and you refer to his original equipment and off to market, going out multiple years. What we have seen over the past few half is a very high level early in aviation. And consistent with what Andy said, we do see that tenders and actually installations, we see them moving to the right. But they are underpinned by, the regulatory upgrade and we have been significantly cushioned by this very strong order book that we entered with. But what gives me confidence for the future is that, we're going to see some offset. So we have, as I mentioned in my piece, we've seen us lose the top slice of aftermarket revenue during the pandemic. And that's unfortunately, that is quite high marginal drop through and passenger starts to travel again, and we are going to see that soft market revenue recovers. And in fact, possibly even a bump as machines that haven't been switched on or switched back on and need a full service to get them back into operational condition. So that will offset, and then, just frankly also all of the OE equipment that we have won and that we've seen being implemented over these past couple of years, that starting to move through now into aftermarket, out of warranty and into aftermarket. And then finally, the other, the other piece that gives us confidence is, as Andy said, those crowded places become crowded again. We should see urban security recover as well.

John Shipsey: Yes. I mean, perhaps, I won't give the precise level that it sets out at the moment. But normally, the record order book would replenish at the same rate that it depleted, and that hasn't been the case in this period of lower activity. However, the large proportion of that order book is still there. So, this isn't a matter that it's depleted heavily. So the large proportion, so this has taken the top off of it and it just hasn't filled back in yet. But then you've got the Heathrow stuff and others that are in prospect at the moment that we've got increasing confidence that, the replenishment rate will start to recall the hope depletion rate again very quickly.

Robert Davis: Thank you. And then my two remaining questions. First one was around Crane in the aftermarket business. Just be curious if you get a bit more detail what's going on there 9% organic growth trends, quite sharply down it was, it was kind of more resilient than that, if I remember right, in the second half of last year was only sort of flattish or very mildly negative, just wondered how much of that drop was sort of side access related issues that you expect to sort of imminently reverse how much of it is sort of delays in kind of maintenance that customers have taken on drone code? Or just a bit more color what's going on Crane at the market if we can?

Andy Reynolds Smith: So, yes, you're right, that both of those factors were involved. I think what's important, what we're seeing, is an aftermarket thing that this is a standard cycle. And John Crane sits now 68% of revenue is, is aftermarket, and we are thinking sequentially, order recovery. So, it is normal for us to see double digit decline in orders initially. And then we're seeing that now moving through when we expect that to move through to positive territory. And particularly, as Andy said, that will that will be Q4 and FY '22, but we see it as a normal six to nine months, maybe nine months of a lag. But the aftermarket will come back. And we're very well positioned given our -- we've invested very consistently in our network and in our customer service and in our technology. And we think we're very well positioned to take advantage of that as the pent-up demand returns.

Robert Davis: Thank you. And then my final question was just, I guess the bigger picture question really just sort of looking back over the last five, six years, the top line growth group level is still being sort of relatively flat despite a lot of the portfolio changes. I guess, you just mentioned, you were sort of quite far down the road now in terms of potential disposals, I know you've sort of changed the relative weightings over the last few years, bolstering protection, bolstering the Flex-Tek divisions, you do feel from a sort of top down level that you've got roughly the right weightings and contributions across all the four businesses they're all still sort of for is there a certain division you'd like to, bolster further, you mentioned sort of potentially now looking at M&A. I just be curious in terms of you've obviously kind of targeted organic growth acceleration as a kind of key part of your strategy is just to be wondering, where do you have greatest confidence that growth is going to come from within the next few years?

Andy Reynolds Smith: Well, I think the there's a good balance now, as you rightly say, across the portfolio as a whole in terms of positioning, both from alignment with market trends, but also the competitiveness and the level of investment in each of those businesses for R&D and in particular. I think the nice thing is that right across the business, we've got this a lot broader alignment with our purpose based approach on safety and efficiency, whether that is, emissions reduction, return to safe mobility. There's some really good longer term trends we've got some unique solutions for we are going to continue to focus as organic as our priority but there's a signal there is going to be an increasing stream of a very disciplined bolt-on M&A to complement it. We've got a really good pipeline as of that. And I think we built a pretty good record now of doing it well, not paying too much integrating well, as we've gone through the last few years. It's really looking and as you can probably hear increasingly confident. I mean, as you say about the sales line those that we, Smith have grown for years, when we started this journey in 2016. And a number of you will remember. We stepped up the investment, we started repositioning the business, we're really about half of which was well positioned. We went back into growth in 2018. We continue that trajectory in 2019. And first half of 2020, we were well set to improve further on the growth, pretty good first half, and then COVID hit. So, very easy to look back and say, if it wasn't for that we'd have been in a different place, but we would have been in a different place in 2020 and now which is what gives me the confidence that the fundamental foundations of that good growth are sitting there, waiting to happen now, both as markets recover, and we do more on these organic accelerators.

Operator: And your next question comes from the line of question Christian Hinderaker from Liberum.

Christian Hinderaker: Yes, good morning, everyone, and thank you for the time. Two for me please. Firstly, you talk about a major contract one at Heathrow detection just interested perhaps you might elaborate on the Qatar contracts and in particular sort of new UV technology and any considerations or rather conversations that you've had around that, given the COVID backdrop? And then my second question is on Interconnect and the strength that you saw in the sort of semiconductor testing channel. We all know the semi cycles can produce strong long tailwinds in the past few quarters, just interested to understand the linkage between underlying semi cycle demand and semiconductor customer spend as it relates to your order book and revenues? Thank you.

John Shipsey: Well, I'll take two pieces of that and the first on the on the UV question. We set out to have what we call a range of COVID hardened or viral hardened products including the UV treatment on baggage trays. I don't know the precise number that are now out there and being sold and installed. But it's in the hundreds now around the world, which is really good news. I mean, the teams have responded incredibly quickly there. As far as Qatar, I mean, Qatar set out to set itself up as a real regional hub. And in doing that have a gold standard reputation for safety and security, which of course, Smiths plays very well into because of our equipment capability, which is the CEO would say this, but it's the best in the world, frankly, so really pleased about that Qatar win as such an important global hub. As far as semiconductor, I mean, it's pretty well written at the moment. I mean, there's definitely a supply demand challenge at the moment, which particularly seems to be occurring for various reasons around the world political, economic and otherwise, but Smiths Interconnect is primarily focused in high end chips particularly around graphics chips. So there's a really high demand right now. So, Nvidia being a big, big customer, probably, if you've tried to buy a graphics card recently, realized quite how high the demand is, a lot of that is going into crypto mining at the moment, which is written about quite a lot. And essentially, we provide what's called a test carrier. And so, you install the test carrier and then these chips go into it for final test. So they're in and out robotically placed in an out. But then we've got a nice consumables stream, as the pins are replaced in the test carrier over time. So we sell a unit. And then I've got an ongoing stream of repair, let's call it or refurbishment until it gets replaced again.

Christian Hinderaker: Thank you. Can I just ask maybe a follow-up just on the detection piece and urban detection? Is there any sort of regional just interested in the regional mix of that business given the COVID backdrop?

Andy Reynolds Smith: Not sure. I understood. So the regional split of the detection aviation business or the detection business overall? Maybe I misunderstood the question.

John Shipsey: I think is there a regional split of urban security markets? Is there are there any major regional differences? I wouldn't so much say that there is a significant regional difference in urban security. There are parts of the world moving in and out of lockdown, I get the different rates that you would be aware of. But within urban security, it's quite a diversified market, not just geographically actually, I would say, but there are there are particular sub markets that we seek to address within urban security. And I'd say that's probably the greater diversity.

Operator: Our next question comes from the line of Edward Maravanyika from Citigroup.

Edward Maravanyika: Just wanted to just ask on John Crane particularly in the oil and gas side of things. Just on a regional breakdown, what's the trend you'll see by sort of country or by geography?

Andy Reynolds Smith: Okay. Well, the biggest trend right now is investment being made in refining capacity in Asia and the Middle East to supply Asia. And that's really related to a rebalancing of global supply and demand for oil barrels that get burned because an awful lot gets shipped to Asia at the moment rather than being refined locally. So, that's probably the megatrend that's at play. So the short-term trend is at play is in parts of Asia right back to record levels of activity right now. I mean there are some spikes happening here and there, but in China is running very, very hard at the moment versus some of the continuing impact that we're seeing elsewhere. But overall, that demand level, I think, has confirmed it quite a few people being back to within 5 million barrels a day of peak, pre-COVID. So, megatrend move to Asia, probably in the next 10 or 15 years of investments will be largely in Asia for refining capacity with some variation around that, it's maybe 80

Operator: We have no further questions. Please continue.

Andy Reynolds Smith: Okay. Well, thank you very much, everyone for taking the time to listen in and also the really good questions. Much appreciated, very much appreciate your continued focus and learnings on the Smiths story, and you can hear, we are increasingly confident that we're headed in one direction and that's a good direction right now. So, looking forward to getting to talk personally to some people before, too long, I hope, and thanks again for joining. Take care.