Smiths Detection
|
2009 |
2008 |
Reported |
Underlying |
Sales |
233 |
222 |
5% |
(11)% |
Headline operating profit |
24 |
35 |
(32)% |
(45)% |
Headline operating margin |
10.2% |
15.8% |
|
|
Statutory operating profit |
24 |
35 |
|
|
Reported sales grew 5%, or £11m, driven by currency translation. Excluding the currency translation benefit of £39m, sales declined 11% on an underlying basis. As previously signalled, this reflects the increasingly variable nature of the order flow of this largely government contracting business. The sales performance is driven primarily by declines in the ports and borders segment which benefited in the prior period from a large Russian contract. This decline has been partly offset by good growth in the military area, particularly from increased sales of JCAD, the advanced chemical point detector. The reduction in sales volumes (£14m) combined with adverse currency transaction (£5m) has squeezed margins with underlying headline operating profit down 45%, or £19m. Excluding the impact of currency transaction, underlying operating profit margins would have been 12.2%. We have continued to invest in the business with company-funded R&D investment increased to £15m and £6m of investment in a new ERP business system. This reflects our confidence in the long-term growth prospects of the business which continues to see a healthy level of tender activity and new business interest.
Underlying sales in transportation were in line with last year which reflects good growth in the US, while sales in EMEA were down. US sales have benefited from the introduction of a new generation of airport checkpoint explosive detection systems. Unlike conventional X-ray systems, this equipment captures multiple views of carry-on bags in a single sweep. The system also includes software algorithms that help the operator detect potential threats and it can easily be upgraded to meet future threats. Airports in Europe have been slower to adopt the new technology while trials are still underway and the current economic situation has caused governments to review the timing of some projects.
The ports and borders market has seen a decline in sales following a strong performance in the first six months of last year which benefited from a large contract in Russia. Average contract size has increased over recent years as governments have become more co-ordinated in their approach to border security and customs revenue protection. As a result, the sales profile in this business has become more variable and the working capital requirement has also increased. Our leading-edge technology leaves us well placed to benefit from long-term growth prospects. For instance, the US has mandated that 100% of arriving cargo be scanned by 2012. We continue to tender on some substantial projects in several markets. The European Commission has announced a full investigation into concerns about unfair competition from China in the EU market for advanced cargo-screening systems. This will examine whether the Chinese company, NucTech, has been dumping on the EC market and undercutting prices to a degree that precludes free and open competition.
Military sales delivered good organic growth through the ongoing JCAD programme. We received further orders from the US Department of Defense amounting to $65m during the period, taking the total orders to date to $122m. The lightweight JCAD is an advanced chemical point detector designed to help safeguard troops by automatically detecting, identifying and quantifying both chemical warfare agents and toxic industrial chemicals. We have also won a $19m contract from the US Army for Meteorological Measuring Set-Profiler (MMS-P) systems, which takes the total programme value to over $89m to date. The MMS-P gathers real-time meteorological data using satellites, ground sensors and weather balloons to assist with accuracy in military operations. The military production facility in Edgewood, Maryland, is being expanded by almost 50% to meet the demand created by several Department of Defense contract wins over the past two years.
We have also reorganised the business into Security & Inspection, which will focus on airports, ports and borders and critical infrastructure, and Military and Emergency Response. A new Chief Operating Officer post has been created and Chris Gane has joined us from Thales to drive improvements in operations management and efficiencies in manufacturing and logistics.
The implementation of a new ERP system began during 2008 following 18 months of planning and preparation. This single system will replace 14 legacy business software systems and provide a common information platform to support data-driven decision making. 14 sites representing 50% of sales have now gone live with the new system. The project is expected to conclude by the end of calendar year 2009. Investment to date has been £20m, with a total budget of £22m. We anticipate that once complete the project will generate efficiencies in working capital of £11m and annual cost savings of £8m.
Research and development
Smiths Detection has maintained its leadership in the sector through a consistent commitment to product innovation developed by in-house R&D, government-funded research and through partnerships and licences. Company-funded R&D increased by 2% to £15m or 6.5% of sales (2008: 5.9% of sales). This includes £5m of capitalised projects. Smiths Detection actively seeks customer and government support for R&D which totalled £7m in the period (2008:£4m). Total R&D spend was £22m (2008: £17m) or 9.4% of sales.
X-ray screening continues to be a focus for our investment, supporting the development of a new generation of cargo screening. We have also continued to invest in the development of our airport checkpoint explosive detectors particularly to address new threats. Trials are currently underway on the software that would allow automatic detection of suspect liquids in carry-on baggage. We have launched an advanced people-screener which for the first time uses electronic, real-time imaging in a standard checkpoint layout to detect weapons or explosives concealed under layers of clothing without physical contact. The new system, called ‘eqo’, is based on patented millimetre-wave technology which reveals a far wider range of weapons and hazards than is possible with traditional non-ionising technologies. The system offers a fast and efficient way of scanning people as they enter airport checkpoints, high profile buildings or other facilities that require protection.
Diagnostics continues to be an area of focus with development of a portable biological detection system that enables veterinarians to carry out rapid on-site diagnosis of animal diseases. Field trials will begin shortly for a foot and mouth test with the UN Food and Agriculture Organization while tests for bird flu are about to start laboratory validation with two government veterinary agencies. The same technology is now being developed for clinical applications such as the detection and identification of MRSA, clostridium difficile and other infectious diseases.
Outlook
The full year results are likely to be affected by the variable order profile although some improvement is expected in the second half, subject to our winning some of the large contracts currently under tender. At the same time, we have identified opportunities to reduce costs which will begin to support margin improvement. Looking beyond the next six months, we believe that the sector is set for sustained growth and Smiths Detection will benefit from its leadership position and the roll-out of new products.