We drive growth in four ways. We invest in new product development – our lifeblood as a technology business. We expand our presence in higher growth markets such as China, India and Brazil, through investment in sales resources. We improve sales and marketing effectiveness through sharing tools and best practice. And fourth, we make bolt-on acquisitions to add complementary technologies and increase our exposure to high-growth markets.
Revenue grew by 2% on a reported basis benefitting from £98m currency tailwinds. On an underlying basis revenue declined 2% as growth in Smiths Medical and Smiths Detection was more than offset by declines in John Crane and Smiths Interconnect.
Headline earnings per share declined by 1% reflecting flat operating profit performance, a lower tax rate and higher finance costs.
We continue to enhance our attractive margins through further operational improvement, leveraging our scale and IT systems, and focusing on low‑cost manufacturing. These operational efficiencies also provide the fuel to invest in growth.
Headline operating profit margin declined 30 basis points, reflecting lower profitability at John Crane. Margins improved in Smiths Medical, Smiths Detection and Smiths Interconnect.
Based on our headline operating profit, which excludes a number of items that do not reflect the portfolio’s underlying performance.
Building a learning organisation that attracts, retains, develops, engages and inspires our employees is central to our ambition of transforming Smiths into a world-class organisation and supporting our growth ambitions.
We have appointed a new CEO and CFO. We have continued to invest in our leadership development programmes across the Group. More than 600 leaders from across the business have been or are currently participating in these programmes.
We constantly challenge ourselves to have the right skills and competencies to support our growth ambitions and to strengthen our internal talent pipeline. We have improved our recruitment and assessment techniques, succession planning and development and put in place year-on-year improvement plans.
Managing and differentiating performance is critical to ensuring our employees fulfil their potential and deliver outstanding business results. We have created the new Smiths Excellence Awards to reward and recognise the highest level of achievement. We conducted our fourth comprehensive MyVoice global employee engagement survey and achieved a participation rate of 86% across the Group.
We promote a culture of responsibility throughout Smiths Group. This requires us all to work according to our Code of Ethics. We are committed to working in a way that protects the health and safety of employees and minimises the environmental effects of our activities and detrimental effects of our products and services. This delivers real business benefits, while ensuring that we meet our obligations to our stakeholders.
Recordable incident rate per 100 employees (RIR)
|FY2016 v FY2013|
Greenhouse gas emissions
Total non-recycled waste
Our goal is zero harm and we made strides towards this in 2016, achieving our lowest RIR of 0.47. Compared to our baseline year of 2013, we have made good progress in reducing our environmental metrics, with GHG and non-recycled waste already exceeding our five-year goal. During 2016 we achieved reductions in energy, GHG emissions and non-recycled waste while water usage increased slightly.
By emphasising working capital management, particularly our debtors and inventories, we are able to convert a high proportion of headline operating profit into cash.
We also look to optimise our capital structure and secure long-term financing. Our borrowings are mainly through long‑term bonds rather than bank debt. We also closely match the currency of our debt with our assets and earnings.
Operating cash generation was strong with cash conversion at 102% of headline operating profit.
Smiths Group delivers high returns on capital. We achieve this through disciplined capital allocation to the divisions, by enhancing our profitability and through active portfolio management, with a targeted programme of acquisitions and disposals.
At the same time, we actively manage our portfolio of liabilities, such as our defined benefit pension schemes and legacy product liability issues, so that we minimise their impact on our value creation.
Return on capital employed decreased 70 basis points to 15.3% predominantly as a result of lower profitability at John Crane. Further details about return on capital employed can be found in note 28 on page 184.
This is headline operating profit divided by monthly average capital employed, expressed as a percentage. Capital employed is total equity, adjusted for goodwill recognised directly in reserves, net post-retirement benefit-related assets and liabilities, litigation provisions relating to exceptional items and net debt.