Business Q&A: Smiths Group’s research developments

What for you were the highlights of these results?

This has been another strong year for the Smiths Group, with good organic top
and bottom line growth and very good cash generation. We’ve also increased R
&D spend, which is the growth vehicle for the future for sales, and we’ve
also moved more into low cost manufacturing. All of these factors combined have
allowed us to yet again increase our dividend for the 36th year.

Smiths has traditionally seen good levels of cash conversion, but how
sustainable is this going forward?

Firstly, let me explain that cash conversion for us is operating profit
converted into operating cash. We have a target of a minimum of 75% conversion.
I’m delighted to say, that we achieved 80% last year.

Will you need to increase your R&D and capex going forward to
maintain this growth?

There are two questions there. The level of R&D firstly; I believe R
&D for the Group will actually decline as we move forward. We’ve had a peak,
particularly in Aerospace with three major programmes and that will start to
decline. We will however see an increase in both Medical and Detection.

The second part of your question was on capital expenditure. We will continue
to invest for growth, as we always have done.

You haven’t made any really big acquisitions this year and I see net
debt has gone down a touch. Is debt a constraining factor here?

No, not at all. Our interest is covered nine times. We have a good credit rating
and we do convert our profits into cash, which drives down our debt. We actually
have the firepower to make acquisitions as well. It’s finding the right
acquisitions, at the right price.

You have been looking to sell TI Automotive for years now. What’s
going on there?

Firstly let me just remind you we don’t own the company. We have an investment
in preference shares in TI Automotive. We’ve taken a look at the deteriorating
market conditions for automotive component suppliers, particularly in North
America, and as you will have read this morning in the announcement, the Board
has taken a very prudent decision to write down the carrying value of those pref

Turning to pensions and I’ve always understood that Smiths is
something of a rarity in that you have a fully-funded pension scheme, so why the
need to pump another £61m in this year?

We do have a funded pension scheme. This year we consolidated two minor schemes
and we agreed with the trustees that we would help make good the deficit on
those two schemes; hence the £61m, which is a one-off.

A one-off. So you’re saying that there won’t be any more of this kind
of measure going forward?

No. We have a fully-funded UK scheme now. In fact we have two schemes in the UK,
both fully-funded. Globally, we had a deficit the year before of around £105m
and this year it’s a surplus of £79m, so we’re in a good shape.

The medical section of the business grew by 6% over the last year but
R&D spending only rose 3%. This R&D spending is lower than other
businesses and is not going to gain you market share. Is this saying that the
market is unsure?

R&D spending is not necessarily linked to growth prospects. We have a
strong sales and marketing focus on medical and we are focusing the R&D more

We also have the opportunity to use our global distribution network to move
outputs into other markets, which will lead to further growth.

Is capitalised R&D going to remain stable for the rest of the

Year-on-year the spending will not be there because under IFRS R&D is
capitalised. The thing is that as products are released you get the
amortisation, so ultimately it is all balanced out.

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