Earnings Transcript for SMIN.L - Q4 Fiscal Year 2021

Paul Keel : Good morning, everyone, and thank you for joining us today. With me in London this morning is John Shipsey, our CFO, who you all know well. In terms of the running order, I'll offer a few thoughts to set the stage, hand it over to John to take us through the numbers, and then come back to share some of my thoughts from the first few months on the job before opening it up for questions from all of you. Let me start by saying what an honor it is to be leading this great company. Across our 170-year history, Smiths has played a meaningful role in some of the world's most notable advances, exploring space, ensuring safe passage. And as we sit here today, playing a frontline role in battling a pandemic that continues to impact far too many. Precious few organizations can match such depth and this speaks to our resilience and creativity woven deeply into the fabric of Smiths. I joined the company in May, because I saw in Smiths a fundamentally good business with meaningful upside both in the near and longer terms. And as you saw in this morning's announcement, we have good evidence of this in our fiscal 2021 results. Highlights include an accelerating top line across the year and a return to growth in Q4. Operating profit up 7% and EPS up 8% and operating cash conversion of 125%. In total, these demonstrate the intrinsic value-creative characteristics of our balanced portfolio and integrated business model. Fiscal 2021 was a solid year for Smiths, and as important, there are clear and tangible things we must continue to do to improve our performance. I'll say more about these in just a moment. But for now, let me hand it over to John to walk us through the results.

John Shipsey: Thanks, Paul, and good morning, everyone. I am pleased to share with you today our full year results. In summary, we executed well in FY 2021. We put our cost structure in better shape. We've expanded margins. We’ve delivered more free cash flow than ever, and we've returned to growth. Top line revenue strengthened throughout the year, down 2% at £2.4 billion, but back to flat in the second half and in growth for the last quarter. Conversion of this revenue into profit was strong. Operating margins were up 140 basis points and operating profit up 7%, and that reflects decisive actions to improve our cost structure. And as a consequence, earnings per share grew 8%. And then on cash, it's been another year of excellent cash generation. Thanks to ongoing improvement programs that target operating and non-operating cash flows. Operating cash conversion was 125% and free cash flow hit £383 million. So in summary, good delivery from top line revenue through to profit and cash. And we carry positive momentum into the New Year, supporting our confidence for the future. Reflecting that confidence, the Board is proposing to increase the total dividend for the year by 8%. Let's now look at the full year performance in more detail, starting with revenue. This year more than ever, it's important to understand the half-on-half trajectory, and the slide here helps to explain that. You can see that pre-COVID, we were delivering stable top line growth in FY 2019 and the first half of FY 2020. Then COVID struck, but our top line was still resilient, an annualized decline of only 4% versus a 7% decline in global industrial production over the same period. And since then, we've seen a strengthening top line, flat for the second half, and back to growth in Q4. We are in fundamentally good markets that are recovering at different rates. Construction and semiconductors test set the pace in FY 2021. Energy and industrial markets are now coming back well. And threat detection, although not likely to show recovery this year, is anticipated to improve thereafter. Overall, we are exiting the year with positive momentum and are well placed to deliver pre-COVID levels of growth in 2022. So, positive top line trends. And another highlight of last year was the strong profit conversion. The Group delivered operating profit of £372 million, up 7% on an underlying basis. Profit was up 14% on a reported basis. This included £20 million of adverse foreign exchange, positive £32 million from lower restructuring and write-downs and £9 million from bolt-on acquisitions. Every division increased its operating margin in the second half by more than 200 basis points to grow Group full year margin by 140 basis points. The strength of profit conversion reflects decisive actions to put our cost structure in better shape. An important part of this was the restructuring program where we successfully delivered benefits of £40 million in the year against costs of £21 million. So let's look next at the operating results of each division where you can clearly see common themes developing of a resilient top line performance, forward momentum as markets recover, backed up by strong profit and cash conversion. So starting with John Crane, where we're seeing end-markets recover positively, with aftermarket leading the way and OE about six months behind. To remind you, aftermarket makes up about two-thirds of John Cranes’ revenue. The improving trend is most immediately visible in orders, which grew 4% in the second half, with aftermarket up 5% and OE flat. But it's also visible in revenue, which was down 10% in the first half, but flat in the second, showing plus 3% for aftermarket and minus 5% for OE. Both end-markets of energy and industrials strengthened in the second half. Energy improved from minus 16% to minus 4% and industrials accelerated from minus 1% to plus 8%. Operating profit was slightly down, but we strengthened operating margin up 80 basis points for the full year and 270 in the second half, reflecting improved aftermarket activity, as well as cost actions. So positive momentum in John Crane as end-markets recover. And importantly, we're well placed to meet new demand for products that drive environmental improvements for our customers. For example, the Aura Dry Gas Seal that has prevented millions of tons of greenhouse gases from leaking into the atmosphere since its introduction. Turning next to detection. This is a good market and we're leaders in it. It's underpinned by secular growth from security upgrades, infrastructure expansion and global mobility. But as you know, the market has been hit hard by the COVID pandemic and is not yet showing signs of recovery. Despite these challenging conditions, detection performed well and protected profitability. Revenue was down 7% for the year with OE down 10%, reflecting completion of some important pre-COVID program wins. You’ll recall detection entered the COVID crisis with a record OE order book. Tenders subsequently slowed significantly, but actually, order intake still matched revenues. And recovery will come first in urban security, and then in other markets. Meanwhile, we continue to maintain a strong win rate. In the year, there were new wins for cabin baggage, at Heathrow, Milan, Kuwait and Qatar; for hold-baggage in the U.S., Korea and Russia, as well as for border forces and stadiums around the world. And we're very well placed with new technologies when end-markets do recover. Aftermarket was down 4%. It constitutes more than 45% of Detection’s revenues. And here we saw an improving trend with decline of 6% in the first half, reducing to 1% in the second. Aftermarket provides a solid platform of recurring revenue at good margin, growing as the installed base itself grows. Looking at margin, it was an impressive performance by Detection to maintain operating profit and grow margin by 70 basis points in the year and 370 in the second half, despite lower volumes, all underscoring the success of cost actions. Moving to Flex-Tek, which delivered another very strong performance, decline of 1% in the first half was followed by growth of 13% in the second to leave full year revenue up 6%. We achieved very strong revenue growth on the industrial side. To remind you, that's the largest part of Flex-Tek accounting for over 80% of revenue. It performed extremely strongly and grew revenue by 15% in the year, outperforming even the very strong U.S. construction market. There were also improving trends in the aerospace side of the business, which was heavily impacted by COVID. Here, revenue was down 20% for the year, but up 2% in the second half as we made market share gains and increased content on existing platforms. All this meant Flex-Tek grew operating profits by 13% and improved margins by 110 basis points. Included in the Flex-Tek results is a maiden contribution from Royal Metal, which we bought back in February. It exemplifies the disciplined bolt-on M&A with which we will continue to enhance our organic growth. Then Smiths Interconnect, which also delivered very strong results. Revenue was up 7% for the year and we saw high growth in semiconductor test, as well as in space and defense. Headline operating profit increased by 54% and margin was up 450 basis points reflecting both higher volumes and cost actions. Turning to Smiths Medical. As you know, earlier this month, we announced the sale of Smiths Medical to ICU. Paul will talk more about the sale in a moment. During the year, underlying profit after tax improved slightly, thanks to restructuring and tight cost control. But margins remained significantly below historical highs. Smiths Medical is undertaking remediation activity to address the findings of an FDA audit and it has also written down the value of capitalized R&D relating to its large volume pump. Turning next to cash. This year, we demonstrated once again the ability to outperform on cash generation. In part, the results of ongoing operational improvements, which delivered 125% operating cash conversion and £630 million in operating cash flow. But we've also done it by close attention to non-operating cash flows, which culminated in the £383 million of free cash flow that you see here, up 40% year-on-year, thanks to across the board improvement. Strong cash flow enabled us to fund organic growth, discipline bolt-on acquisitions and the progressive dividend, while still reducing net debt by over £100 million to end the year with leverage of 1.5 times. And on top of this, we have more good news to come, which takes me on to pensions where we've made further significant progress and continued collaboration with the trustees. The tri-annual valuations of the two main UK schemes have now been completed. Both are in a very strong funding position, evidenced by surpluses on a technical provisions basis. In April, we posed contributions to the TI scheme and today, we've announced agreement with the trustee to pose contributions to the SIPS scheme also. And as a result, ongoing cash contributions to pensions will halve to around £15 million in FY 2022 and £10 million thereafter, overall, freeing up £24 million of additional annual cash flow. And so, turning finally then to the outlook. The Group entered FY 2022 with good order book momentum and we are seeing recovery in our end-markets balanced at different rates. COVID, economic uncertainty and supply chain challenges continue. But subject to managing those challenges successfully we expect Group revenue growth to return to around pre-COVID levels in the coming year and we aim to deliver further operational efficiency and good cash generation. And with that, it's my pleasure to hand back to Paul.

Paul Keel: Thank you, John. As I mentioned earlier, Smiths is a good business with strong fundamentals and the results that we just shared illustrate this. We have distinctive technology, deep customer relationships and a large installed base, coupled with recurring aftermarket revenues and a good track record of supplementing our primarily organic engine with bolt-on M&A. The financial framework of this company is also solid. High margins, good cash flows and a strong balance sheet, and underlying all of this is a world-class organization both in terms of capabilities and also global reach. All this points to a significant value creation opportunity. So what needs to be done to enhance our performance, particularly with respect to growth? In the few months that I've been on board, I physically or virtually visited many of our key sites and teams around the world. I've been in our labs, our plants and our service centers. And I've been in the field and worked with our customers. While I've heard from a diverse chorus of voices, the themes have been remarkably consistent, building an even better Smiths, principally centers on three main things; growing faster; executing better, and further empowering our people to do what they do best, improving our world through smarter engineering. Let me say a bit more about each of these today. And then we'll have plenty of time at our Capital Markets Event in November 17 and 18 to go more deeply. I'll start with growth, as that's where our biggest upside lies. As John just shared, we have built some good momentum. You saw improving growth trajectory across fiscal 2021, but negative 2% for the fiscal year and flat for the second half is clearly not enough. We need to grow faster and I see this coming in a number of areas. Previously launched platforms are now beginning to scale quickly. Several exciting new launches such as multi-layer refrigeration lines and hydrocarbon management seals are coming soon. We are aggressively building out attractive adjacencies like methane detection and urban security, both closely aligned with the important themes of sustainability and digitization. And in addition, to our primary focus organic growth we're layering on accretive acquisitions like Royal Metal, which is performing quite well. The longer term picture here is similarly encouraging. A healthy portion of our revenues come from four major customer end-markets, Industrial, Energy, Aerospace, and Security and Defense. These markets are all large, global, and populated by sophisticated demanding customers who choose Smiths because of our differentiated technology and service capabilities. Each of these markets is benefiting from the world reopening, albeit at different rates. Parts of industrial for instance are already quite strong. U.S. housing starts are at multi-year highs and you just saw how Smiths benefits from this in the strong growth numbers we reported for Flex-Tek. Energy and Aerospace demand are also ramping and you saw how Smiths benefits here from the numbers we showed on John Cranes’ order book, as well as interconnect’s top-line performance. Security and Defense is driven by infrastructure spend and regulatory upgrades and recovery here is further out. But it will come and when it does, Smiths Detection will participate meaningfully, which at the Group level will balance normalization in the more quickly recovering markets that I just mentioned. It is Smith’s balanced portfolio balanced by industry, geography and technology that uniquely enables us to access opportunities of such diversity and scale. Next on our priority list is operational excellence, which directly supports our growth agenda. In the broadest sense, better execution means consistently doing what we say we will do, like exceeding expectations in fiscal 2021; for growth, operating margins and EPS; by completing our restructuring program and delivering committed savings ahead of time; by growing operating income by 7% and then converting it to cash at a 125% rate; and like fulfilling our commitment to separate medical, which I will comment on shortly. Our third main focus in continuing to improve Smiths is our people and our culture. My many conversations with colleagues customers and partners have left me no doubt that among Smiths’ many assets, these are our most valuable. I am blessed to work with people of distinctive character and ability creatively collaborating across more than fifty countries. Now let me give you a quick update on the recently announced sale of Smiths Medical to ICU with an enterprise value of US$2.7 billion. Part of the purchase consideration comes in the form of ICU shares, the value of which has increased over $100 million since announcement. In addition, we'll receive another $100 million should ICU shares appreciate 25% or so from today's levels in the four years following completion, an outcome we view is probable. So as of this morning, total deal value is just north of $2.9 billion or better than 15 times the U.S. GAAP EBITDA number for Smiths Medical that ICU shared in their announcement. Upon completion of the deal, which we expect in the first half of calendar 2022, we will return over $1 billion or £725 million pounds to shareholders and further strengthen our balance sheet in support of the growth and operational priorities that I just outlined. At our core, we are an engineering company and the essence of engineering is working smarter, not just harder. Smarter engineering means bending curves for greater efficiency as demonstrated by our expanded growth and operating margins in fiscal 2021. Smarter engineering means supporting customers with decarbonization and embracing digital solutions to improve product and service performance. Smarter engineering recognizes that the most inclusive organizations are also the highest performing, and maybe most importantly, smarter engineering means helping to solve the toughest problems for our customers and our communities, many of which concern our environment. Since 2007, Smiths has made good progress in this regard. We've have reduced our water usage by 53%, greenhouse gas emissions by 60% and non-recyclable waste by 63%, around 60% of the electricity we used today comes from renewable sources. Now in the four months that I've been on board, we've swiftly built on this commitment by signing on to the science-based targets initiative, the UN race for zero and we publicly committed to net zero emissions from operations by 2040. As you'll see, at our General Meeting in just a few weeks, we've added ESG metrics to our long-term compensation programs and we've established a new Science Sustainability and Excellent Committee on our Board of Directors. You can see clearly in our purpose statement that Smiths is committed to improving our world through smarter engineering. And all of these are tangible examples that we take this commitment very seriously. Let me wrap up by saying that this is a very exciting time for Smiths. We exited fiscal 2021 with strong momentum and are now well positioned for accelerated growth in our industrial technology core. I am confident that we're headed in the right direction and our focus now is squarely on acceleration, acceleration of growth, acceleration of execution acceleration of value creation. I'll close by thanking all Smiths employees for your hard work and dedication that makes this performance possible. In the same way, we are grateful for the strong support we received from our customers and shareholders. With that, I'll pass it back to the operator for any questions that you might have. Thank you.

Operator: [Operator Instructions] The first question comes from the line of Andy Wilson from JPMorgan. The line is now open. Please go ahead.

Andy Wilson: Hi. Good morning, everyone. Hopefully, you can hear me, okay? I’ve got three questions, and quite distinct, I’ll get it one at a time. I just wanted to ask around Flex-Tex, it’s obviously been a very good to key second half performance and a momentum in both, particularly, I guess, the U.S. resi side is very good and aerospace looks to be coming back. Can you just give us a sort of some help on what the outlook for FY 2022 looks like? Just conscious as those markets are seeing quite different trends entering for the different pace versus previous peak, maybe to start there.

Paul Keel: Yes. Good morning, Andy, and thanks for the question. Yes, you're correct, Flex-Tek had a very good fiscal 2021. And as you noted, the two principal customer end-markets are industrial with a big exposure to construction and, in particular, U.S. construction and the second half is aerospace. So Flex-Tek benefits from a balanced portfolio in the same way that the broader Smiths does. While the U.S. housing market is red hot right now, and Flex-Tek is actually growing more quickly in that segment than the overall industry, we don't expect that to continue forever, of course. The balance to that is the aerospace side, which has been under some pressure recently, but starting to come back. And as that segment continues to grow, Flex-Tek will benefit there. So looking into fiscal 2022, I would expect continued growth in Flex-Tek. They are in good markets and they execute particularly well in the spaces that they play.

Andy Wilson: And then second one is just on Detection. And I guess clearly a very different sort of trajectory to some of your businesses with regard to all the supporting revenues, but then obviously, I guess, needing to win more orders on revenues I guess that are probably being pushed out by some customers. But kind of notwithstanding that backdrop, I mean just in terms of the competitive dynamics and you mentioned a number of contract wins in the year, I guess interested in terms of what you are seeing from competitors if you feel this sort of end market share will be at the market necessarily isn't particularly helpful at moment?

Paul Keel: Yes. Flex-Tek has three principal markets that they play in it. As you know, Andy, the largest of which is aviation security, second is urban security, and the third is ports and borders. And while the customer set differs slightly across the three, it's the same main players. Smiths Detection does well in all three of those markets. And while the overall aviation security market will take now maybe a year or more to recover, we continue to get more than our fair share of wins. As John mentioned, we had big tender wins in fiscal 2021 across some very important markets. We see a little more activity on the urban security side, a little bit different customer set or a competitive set there. But that market is recovering a little more quickly. And then the ports and border piece behaves independently because that's principally driven by government decisions in macro - global microeconomic trends regarding security.

Andy Wilson: And maybe, if I can ask, I guess just a third one. And it's really just to clear up and I guess help me a little bit with understanding. But I believe a separate release this morning in terms of talking about exercising the put option with regards to the Medical transaction. I know that there were conditions similarly associated with - I mean, it's probably a very simple broad question. But can you kind of clear up the implications of that release and sort of what we need to take away from that?

Paul Keel: Sure. Another positive step forward in the sale of Medical to ICU. As you'll remember from the RNS, a required step in the process to completion is a non-binding consultation with our French Works Council. That process is now complete. There is only two steps remaining to the completion of the transaction, which we expect in the first half of next calendar year, that's approval by regulators and approval by our shareholders. So that's coming together to be a very nice outcome in the sale of Medical. As I mentioned in my comments, headline value of $2.9 billion, all-in value as of today north of $2.9 billion and a purchase multiple better than 15 times. So, we feel good about where we stand in that process.

Andy Wilson: Great. Thanks for taking my questions.

Paul Keel: Yes. Thank you, Andy.

Operator: Thank you. The next question comes from the line of Will Turner from Goldman Sachs. Please go ahead, Will. The line is now open.

Will Turner: Good morning, everyone. Two questions for me. The first one is on the supply chain issues that you are experiencing. You didn't speak to - into too much detail. I just wondered if you could just highlight how this is impacting you. And how you're mitigating these challenges and whether you see this situation deteriorating or improving?

Paul Keel: Yes. Good morning, Will. Thanks for the question. Yes, we are feeling supply chain pressures as is everyone else. There is the categories that are well covered at this stage, semiconductor and transportation. We are participants in those, as well and feel that. And there are some other more specific categories for our mix of businesses, specialty materials, for instance. We are also a relatively big customer for steel, particularly in our Flex-Tek business. But for the most part, our job is to manage these interruptions and work through them and that we feel good about our ability to do that on fiscal 2021 where it was probably the most disruptive supply chain situation that most of us have seen in our career. We have two built-in advantages I think in this regard. The first is our balanced portfolio. We participate in a lot of different markets and a lot of different end customer segments. So no one particular raw material input is - represents a big part of our revenues. The second part of this is we're well diversified geographically operating in more than 50 countries. And for the most part, our supply chains are architected such that we source locally, manufacture or assemble locally and deliver locally. And so there isn't the sort of longer supply chain interruptions that you can see getting manifested when you have a hiccup in any one particular part of the world.

Will Turner: Okay. That's clear. Thanks. And then, just a follow-up question. You talk about how you see significant opportunities to enhance growth for Smiths Group. And obviously, what we look back historically, organic growth has probably been one of the things that’s lapped. And maybe part of that is obviously the Medical asset, which is now going to be revised to you. But could you just give us a bit more color on why you think there are levers that can be moved to enable faster growth? What can we expect to this higher R&D costs? What - just another kind of like, hint to the kind of strategic changes you're thinking about to enable that growth?

Paul Keel: Yes. Maybe three thoughts, Will in this regard. So, the first, we are absolutely an organic growth engine. High margin business, high returning businesses and for us, the highest return on any incremental dollar is always going to be in the core. And as I mentioned in my comments, we already have some platforms that have been introduced recently that are scaling nicely. Our multi-layer tubing systems in Flex-Tek are a good example. We have some very interesting technologies that have launched in Detection, like a chemical detection platform that we have and all of those are gaining good traction. That will continue now as we have more resources to invest in commercializing those. Incremental to that then is the new product engine. John mentioned a couple of the platforms that are in the pipeline that we’ll be launching here in fiscal 2022. And we are enthusiastic about the prospects for those. Second piece of the puzzle relates to Medical. So not only it was Medical dilutive to our top and bottom line growth over the last four months that I've been here and the three years since we announced their separation, it has really consumed an inordinate amount of management time, enterprise, resources, and additional capital from the business. Just in the month since we announced the sale to ICU, you can already feel a tangible shift in our attention. And that's going to yield a big benefit. That was the overarching rationale for separating Medical. So I am excited for that. And then the third is the piece you mentioned the bolt-on inorganic M&A that we used to supplement the core organic engine. And we have decent track record there. Royal metal is a really nice example. A $100 million purchase. We did it in February and we were thoughtful about which business to invest in and in which end-market that lines up well with the industrial growth that I mentioned in Flex-Tek. And so that business is well ahead of plan. So, I think we have a lot of levers here to accelerate growth moving forward.

Will Turner: Great. Thank you.

Operator: Thank you. The next question comes from the line of Andre Kukhnin from Credit Suisse. The line is now open. Please go ahead.

Andre Kukhnin: Yes. Good morning. Thank you very much for taking my questions. I've got two please. One is on savings. You've clearly outperformed on the program in fiscal 2021 and in the second half, sounds good and then you are calling for it to be pull-through from 2022. In past experiences when these kind of faster pace of savings are generated I think at least in some cases led to over-performance on the whole program overall. So I just wanted to check with you your thought process on that whether there is upside to that £70 million target. And secondly, just dovetailing to what you're just saying now about the inorganic growth, it's interesting to see a deal coming through already. I wanted to get talk please about potential pipeline there and across divisions, which kind of the businesses that are most ready to make acquisitions right now? Thank you.

Paul Keel: Thank you, Andre. I'll ask John to take the first one. I'll come back and say a little bit about our M&A pipeline.

John Shipsey: Thanks, Paul, and good morning, Andre. Now, we are committed. We committed and we stick by our £70 million savings for the restructuring program. As you highlighted, we did overperform in terms of timing. So we were committed to delivering £30 million of savings in FY 2021. That was going to be 2021 in continuing operations and nine in Medical. And we ended up actually delivering 14 in continuing operations and 7 in Medical. So, yes, definitely overperformance in terms of timing. We stick by our £70 million target for the complete program as we highlight. The charges are now complete. There is a remaining 23 odd million of cash that will go out in FY 2022 to complete the cash restructuring. But yes, we're very pleased with how that restructuring went. It was part of a wider effort, good operational management throughout FY 2021 and that's what delivered the 140 basis points improvement in margin.

Paul Keel: And then, Andre, with respect to the M&A pipeline, maybe three things I would - I'd have for you on that. First, I'd just reinforce our main focus for growth moving forward is organic with high margin, high return businesses like ours that's always going to be the highest return on capital invested. The pipeline is strong. One of the benefits of having such a diverse portfolio both in terms of industry segment, but also geography that you operate in a lot of markets and you see a lot of opportunities. So, we have a lot of M&A candidates coming our way. I feel right now, it's particularly important to be extra disciplined. Values are high. Money is moving quickly. And while we were a - been a factor of that on the Medical sales side, now at north of 15 times, we like much lower multiples when we're on the buy side of those deals. Third thing I would say is, we'll talk about the adjacencies that we're most interested in here in our Capital Markets Day coming up in a couple of months. Good core positions in the four markets I mentioned in my comments. A lot of interesting adjacencies around those, urban security, methane detection, energy transition. And that M&A there will play a role helping us accelerate our penetration of those adjacencies.

Andre Kukhnin: Thank you.

Operator: All right. The next question comes from the line of Mark Davies Jones from Stifel. [Operator Instructions] Please go ahead, Mark.

Mark Davies Jones: Thank you very much. Morning both. A couple of things, please. Firstly, can I just go back to Detection, I obviously understand it's going to be one of the last things to recover. But in terms of the 2022 outlook, are you comfortable you can hold revenues broadly flat? I think John said orders were tracking in line with revenues at least. Given the weighting of the aviation in there and the fact they completed their regulatory backdrop, what supports that for the flattish revenue outlook? And particular are there any more sort of regulatory drivers or upgrade cycles that we should be aware of within that aerospace piece?

Paul Keel: Well, thanks for the question, Mark. As you know, we don't give revenue guidance at the division level. But I think your sense is right. There is a nice balance in Detection across some of the end-markets recovering a little more quickly, coupled with the strong order book that we had coming into the pandemic that gives us some tailwind. But up against still another 18, 24 plus month for the core threat detection segment to recover. So it's going to be a balance of those two factors. And we'll just have to see how they play out on the plus or minus side there.

Mark Davies Jones: Okay. And perhaps a slightly longer term one, in terms of the organic growth outlook for Crane. Do you think we can expect a normal cyclical recovery in activity given the diversion of capital away from the hydrocarbon sectors at the moment? I mean, clearly, there were some regulatory and environmental pressures supporting spending. But overall, do you think that core market can grow in the way that it’s just done in the past?

Paul Keel: Yes. I mean, we are particularly enthusiastic about our position in Crane. So two things are working in our favor there. One, the near-term, one in the long. In the near-term, as I mentioned, the energy sector is just coming on. Although the last two years have been anything but normal. The shape of that recovery in energy looks similar to what we've seen in the past. So, as we look forward to 2022 and 2023, we are expecting that part of the recovery to behave similarly. That'll be constructive for us. The second piece is the energy transition that you mentioned. Right now, every energy company on the planet is focused in the same way that Smiths is on minimizing their impact. And a lot of that comes around to leaks in their infrastructure. Methane leaks, et cetera. So, Crane can help them right now. And then as they move to cleaner energy sources, hydrogen and others, Crane is even better positioned because these are very complicated transitions, higher pressures higher risk for instance in hydrogen and its Cranes’ both their distinctive technology, but also the service center, 200 service centers approximately close to our customer sites positions Crane very uniquely to help them at. So we have both near-term, medium and long-term positive trends going on in that business and that's why we are positive.

Mark Davies Jones: Thanks. It helps and if it's not greedy, can I ask a follow-up with one for John? Excellent progress on the pension side. But I see also on John, Crane, the asbestos payments have reduced quite materially, but in terms of P&L impact on cash flow. Can that be continuing if you really sort of tied it up all these legacy – piece now? Or is that a one-off this year?

John Shipsey : Thanks, Mark, and good morning. I mean, I think I'd draw a distinction on pensions, yes, in a really positive news, and we are with the trustees. We're working very hard to get towards buy out faster than the 2028 targets for both schemes. So, on pensions, we don't see unless circumstances change, we do not see the need for any further cash contributions to either TI or SIPS the two main UK schemes. So that's kind of drawing a line under those in my view. On the John Crane Asbestos litigation, I think it is slightly different. We did benefit this year in two ways. First of all, in terms of the provision a non-cash, but the discount rate that we apply to that liability, the discount rate went up and therefore the present value of the liabilities went down. That just happens through the cycle. We did secondly benefited in a cash way, because the U.S. courts were working at significantly reduced capacity. And therefore, the number of trials and our defense activity, which makes up the largest part of the spend was significantly reduced in line with that. That I would say is a temporary COVID effect and we are not relying on that to continue. We would expect all other things being equal a return to the normal rate going forward.

Mark Davies Jones: Thank you. That makes perfect sense.

Operator: [Operator Instructions] The next question comes from the line of Robert Davis from Morgan Stanley. Please go ahead, the line is now open.

Robert Davis: Yes. Thanks for taking my question. My first one was just around the medium term, longer term margin potential for Crane. Obviously with the pressure we've seen in oil and gas and you mentioned the recovery looked similar to previous recoveries. Just be curious to hear your thought process in terms of margin trajectory in terms of where you can get to and over what timeline? And that was my first question. Thank you.

Paul Keel: Cranes is a scale business. So it benefits from economies of scope and scale. And for the reasons that we just walked through on the previous question is as that industry recovers and the growth momentum continues with natural built in efficiencies that come with that. Longer term, I guess it's reasonable to assume that investment will be required as we help our customers transition to these alternative energy means. Difficult as we sit here today that to quantify what that might look like. There is a lot of invention that has to go - to go with this. But at its core, Crane very good business. Secularly attractive market. Very well positioned and we expect good things to continue. I guess it'd be my view.

Robert Davis: Okay. Thank you. And then my follow-up question was just really around the bigger picture view around improving growth sustainably over the medium to longer term. Just be curious, historically Smiths has had, I guess, a challenging backdrops trying to align growth across these different businesses which all move on different cycles. I am just be kind of curious if you're thinking about - are you thinking of realigning the business around specific end-markets? I mean we've seen one acquisition this morning. Is there a change in direction of portfolio of focusing around the current divisional structure or certain end-markets that you need to bolster? Just be curious of what your longer term vision is for the company. Whether it's an end-market or business structure? Thank you.

Paul Keel: Yes. Well, I mean, obviously, we announced a major portfolio change just few weeks back and the centerpiece of the decision to separate Medical was to redirect attention, resources and capital to the much higher performing, more strategically aligned industrial technology, core. And I am excited that that announcement has been made and we now have the benefits of that portfolio realignment to go after. So, that's going to be our main focus here in the near term. There is many opportunities in those markets that frankly, we haven't accessed deliberately or quickly enough in the past, because I think we were distracted by the Medical situation. There is opportunity in each of those four core businesses and we're excited to now have the freed up attention resources and capital to go after them. So that's going to be our focus here moving forward.

Robert Davis: I see. Thank you very much.

Operator: Thank you, Robert. Next question comes from line of Edward Maravanyika. Please go ahead Edward. The line is now open.

Edward Maravanyika: Thanks very much. Good morning both. My question is just based around Detection and more specifically around CapEx. Could you sort maybe just give any indication of the outlook in terms of infrastructure builds, but also in terms of upgrade on the security side.

Paul Keel: Edward you are asking about CapEx for us or CapEx for our customers?

Edward Maravanyika: Well, for your customers out - for your customers, which supports the drive of your business.

Paul Keel: Yes. Well, two - at least two things drive the underlying demand in the threat detection space. The biggest end-market that Smiths detection is exposed to. The first is technology upgrades that are mandated by the regulators going from X-rays to computed tomography. Going from CT to the next-generation that we're working on and we'll talk more about at our Capital Markets Day coming up. And so, be that will be – that is by definition a CapEx requirement for our customers when there is a mandated change in the technology they use, we benefit from that. The second is the global view around threat levels. And that's very difficult to forecast, of course. But when these unfortunate events happen, that leads to capital expenditures. That’s I think the world correctly concludes that that those investments are appropriate and necessary and we benefit there, as well.

Edward Maravanyika: Okay, okay. Thank you.

Operator: And no further question at this time, Paul, please go ahead.

Paul Keel: Okay. Well, then I'll wrap up by saying, thanks everyone for tuning in this morning. Fiscal 2021 was a good year for Smiths and provides a solid platform on which we can build. We've established good momentum, margins and cash flow are strong, and with the sale of Medical, we have a much more focused core of well-positioned industrial technology businesses. We are very much looking forward to getting into greater detail on all of this in just a few weeks at our Capital Markets event. And until then, take good care everyone and we'll speak again soon. Thank you.