Smiths Group plc (SMIN) Earnings Call Transcript & Summary

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 '21 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 '21 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.

Thanks, Paul, and good morning, everyone. I'm pleased to share with you today our full year results. In summary, we executed well in FY '21. We've 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 GBP 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 nonoperating cash flows. Operating cash conversion was 125%, and free cash flow hit GBP 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 '19 and the first half of FY '20. 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're in fundamentally good markets that are recovering at different rates. Construction and semiconductor test set the pace in FY '21. 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're 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 GBP 372 million, up 7% on an underlying basis. Profit was up 14% on a reported basis. This included GBP 20 million of adverse foreign exchange, positive GBP 32 million from lower restructuring and write-downs, and GBP 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 GBP 40 million in the year against costs of GBP 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 6 months behind. To remind you, aftermarket makes up about 2/3 of John Crane's 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 a 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. A 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 industrials 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, and 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 remain 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 result of ongoing operational improvements, which delivered 125% operating cash conversion and GBP 630 million in operating cash flow. But we've also done it by close attention to nonoperating cash flows, which culminated in the GBP 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, disciplined bolt-on acquisitions and a progressive dividend while still reducing net debt by over GBP 100 million to end the year with leverage of 1.5x. 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 in continued collaboration with the trustees. The triennial valuations of the 2 main U.K. schemes have now been completed. Both are in a very strong funding position, evidenced by surpluses on a technical provisions basis. In April, we paused contributions to the TI scheme. And today, we've announced agreement with the trustee to pause contributions to the SIPS scheme also. And as a result, ongoing cash contributions to pensions will half to around GBP 15 million in FY '22 and GBP 10 million thereafter, overall, freeing up GBP 24 million of additional annual cash flow. And so turning finally then to the outlook. The group entered FY '22 with good order book momentum, and we're 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.

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 a 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 of 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 3 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 '21, 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 multilayer refrigeration lines and hydrocarbon management seals, are coming soon. We're aggressively building out attractive adjacencies like methane detection and urban security, both closely align with the important themes of sustainability and digitization. And in addition to our primary focus on 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 4 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 multiyear 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 Crane's 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 Smiths' 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'll do, like exceeding expectations in fiscal '21 for growth, operating margins and EPS; like completing our restructuring program and delivering committed savings ahead of time; like growing operating income by 7% and then converting it to cash at 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'm blessed to work with people of distinctive character and ability, creatively collaborating across more than 50 countries. Now let me give you a quick update on the recently announced sale of Smiths Medical to ICU with an enterprise value of USD 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 4 years following completion, an outcome we view as probable. So as of this morning, total deal value is just north of $2.9 billion or better than 15x 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'll return over $1 billion or GBP 725 million 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 gross and operating margins in fiscal '21. 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 reduced our water usage by 53%, greenhouse gas emissions by 60% and nonrecyclable waste by 63%. Around 60% of the electricity we use today comes from renewable sources. Now in the 4 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've 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 Excellence 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 '21 with strong momentum and are now well positioned for accelerated growth in our industrial technology core. I'm 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're grateful for the strong support we receive 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 Instructions] The first question comes from the line of Andy Wilson from JPMorgan.

I've got 3 questions, quite distinct, so I'll take them one at a time. I just wanted to ask around Flex-Tek. It's obviously been very good, particularly second half performance. And momentum in those, particularly, I guess, the U.S. resi side is very good, and aerospace looks to be coming back. Can you sort of give us sort of some help on what the outlook for FY '22 looks like, just conscious that those markets are seeing quite different trends and are in sort of different phases versus previous peaks? Maybe if you could start there.

Yes, Andy, and thanks for the question. Yes, you're correct, Flex-Tek had a very good fiscal '21. And as you noted, the 2 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 to fiscal '22, I would expect continued growth in Flex-Tek. They're in good markets, and they execute particularly well in the spaces that they play.

And then second one is just on Detection. I guess, clearly, a very different sort of trajectory to some of the other businesses with regard to order supporting revenues, but then obviously, I guess, needing to win more orders on revenues, I guess, that have probably been pushed out by some customers. But kind of notwithstanding that backdrop, I'm interested 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're seeing from competitors, if you feel this sort of [ potent ] market share, albeit that the market necessarily isn't particularly helpful at the moment.

Yes. Flex-Tek has 3 principal markets that they play in, as you know, Andy, the largest of which is aviation security, second is urban security and then the third is ports and borders. And while the customer set differs slightly across the 3, it's the same main players. Smiths Detection does well in all 3 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 '21 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 and macro -- global macroeconomic trends regarding security.

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 your understanding. But there was 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 seemingly associated with that. 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?

Sure. Another positive step forward in the sale of Medical to ICU. As you'll remember from the RNS, a required step in that process to completion is a nonbinding consultation with our French Works Council. That process is now complete. There's only 2 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 15x. So we feel good about where we stand in that process.

The next question comes from the line of Will Turner from Goldman Sachs.

Two questions from me. The first one is on the supply chain issues that you're 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 the situation deteriorating or improving.

Yes. Will, thanks for the question. Yes, we're feeling supply chain pressures, as is everyone else. There's the categories that are well covered at this stage, semiconductor and transportation. We're 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're also a relatively big customer for steel, in particular in our Flex-Tek business. But for the most part, our job is to manage these interruptions and work through them. And we feel good about our ability to do that in fiscal '21 where it's probably the most disruptive supply chain situation that most of us have seen in our career. We have 2 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. 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.

Okay. That's clear. And then just a follow-up question. You talked about how you see significant opportunities to enhance growth at Smiths Group. And obviously, when we look back historically, organic growth is probably one of the things that's lapped. And part of that is obviously the Medical asset, which is now going to be with ICU. But can you just give us a bit more color on where you think there are levers that can be moved to enable faster growth? What could we expect? Is it higher R&D costs? Just a little kind of like hint to the kind of strategic changes you're thinking about to enable that growth.

Yes. Maybe 3 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 multilayer 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 will be launching here in fiscal '22, and we're enthusiastic about the prospects for those. Second piece of the puzzle relates to Medical. So not only was Medical dilutive to our top and bottom line growth, over the last 4 months that I've been here and the 3 years since we announced our separation, it has really consumed an inordinate amount of management time, enterprise resources and additional capital from the business. Just in the months 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'm excited for that. And then the third is the piece you mentioned, the bolt-on inorganic M&A that we use to supplement the core organic engine. And we have a 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 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.

The next question comes from the line of Andre Kukhnin from Crédit Suisse.

I've got 2, please. One is on savings. You've clearly outperformed on the program in fiscal '21 and in the second half, by the sounds of it. And you're calling for it to be a pull-through from 2022. In past experiences, when these kind of faster pace of savings were generated, they, 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 GBP 70 million target. And secondly, just dovetailing into what you're just saying now about the inorganic growth. It's interesting to see a deal coming through already. I wanted to get a talk, please, about potential pipeline there and across divisions, which kind of are the businesses that are most ready to make acquisitions right now.

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

Thanks, Paul. Andre, no, we are committed. We committed and we stick by our GBP 70 million savings for the restructuring program. As you highlighted, we did over-perform in terms of timing. So we were committed to delivering GBP 30 million of savings in FY '21. That was going to be GBP 21 million in continuing operations and GBP 9 million in Medical. We ended up actually delivering GBP 40 million in continuing operations and GBP 7 million in Medical. So yes, definitely over-performance in terms of timing. We stick by our GBP 70 million target for the complete program. As we highlight, the charges are now complete. There's a remaining GBP 23-odd million of cash that will go out in FY '22 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 '21, and that's what delivered the 140 basis points improvement in margin.

And then, Andre, with respect to the M&A pipeline, maybe 3 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, is 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 benefactor of that on the Medical sales side, now at north of 15x, 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 4 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.

The next question comes from the line of Mark Davies Jones from Stifel. [Operator Instructions]

A couple of things, please. Firstly, can I just go back to Detection? Obviously, I understand that it's going to be one of the last things to recover. But in terms of the '22 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 aviation in there and the fact you've completed that regulatory backdrop, what supports that sort of flattish revenue outlook? And in particular, are there any more sort of regulatory drivers or upgrade cycles that we should be aware of within that aerospace piece?

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's 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 months for the core threat detection segment to recover. So it's going to be a balance of those 2 factors, and we'll just have to see how they play out on the plus or minus side there.

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 are some regulatory and environmental pressures supporting spending. But overall, do you think that core market can grow in the way that you've just done in the past?

Yes. I mean we're particularly enthusiastic about our position in Crane. So 2 things are working in our favor there, one in the near term, one in the long. In the near term, as I mentioned, the energy sector is just coming on. Although the last 2 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 '22 and '23, we're expecting that part of the recovery to behave similarly. That will 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 Crane's -- both their distinctive technology, but also the service center, 200 service centers approximately close to our customer sites positions Crane very uniquely to help in that. So we have both near-term, medium- and long-term positive trends going on in that business, and that's why we're positive.

That helps. And if it's not greedy, can I 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, both in terms of P&L impact and cash flow. Can that be continuing? Have you really sort of tidied up all these legacy nasties now? Or is that a one-off this year?

Thanks, Mark. I mean I think I'd draw a distinction on pensions, yes, really positive news. And we are -- with the trustees, we're working very hard to get towards buyout faster than the 2028 target 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 2 main U.K. 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 2 ways. First of all, in terms of the provision, noncash, 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, benefit 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 a normal rate going forward.

[Operator Instructions] The next question comes from the line of Robert Davies from Morgan Stanley.

My first one was just around the medium- to 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, I'd just be curious to hear your thought process in terms of margin sort of trajectory in terms of where you think it can get to and over what time line. That was my first question.

Crane 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, there's 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, to quantify what that might look like. It is a lot of invention that has 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, would be my view.

Okay. And then my follow-up question is 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 backdrop trying to align growth across these different businesses, which all move on different cycles. And 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 or 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.

Yes. Well, I mean, obviously, we announced a major portfolio change just a 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'm 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's 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's opportunity in each of those 4 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.

The next question comes from the line of Edward Maravanyika.

My question is just based -- is based around Detection and more specifically around airport CapEx. Could you sort of maybe just give any indication of the outlook in terms of infrastructure build, but also in terms of kind of upgrades on the security side, [ one screen guard ]?

Edward, are you asking about CapEx for us or CapEx for our customers?

Well, for your customers, which I suppose is the drive of your business.

Yes. Well, 2 -- at least 2 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 that will be -- that is, by definition, a CapEx requirement for our customers when there's 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 expenditure. That's -- I think the world correctly concludes that those investments are appropriate and necessary, and we benefit there as well.

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

Okay. Well, then I'll wrap up by saying thanks, everyone, for tuning in this morning. Fiscal '21 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're 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.