Smiths Group plc (SMIN) Earnings Call Transcript & Summary

Hello, everyone, and thanks for tuning in to Smiths Group's 2021 Capital Markets event. I'm Paul Keel, CEO of Smiths. I joined the company in May, having spent the better part of the last 3 decades at companies like 3M, GE, General Mills and McKinsey, where I accumulated a great many experiences directly relevant to the significant opportunity we have here at Smiths, which in a nutshell is to guide an intrinsically strong business to its full potential. Across our 170-year history, Smith has built distinctive capabilities in product development, commercialization and customer support. We apply these strengths across a balanced portfolio, well positioned in secularly attractive markets. And all of this comes together in a robust financial framework powered by recurring aftermarket revenues, high returns, low asset intensity and consistently strong cash flow generation. In the 6 months that I've been on board thus far, I visited more than a dozen of our largest operations around the world. I've been in the labs with our scientists. I've been in our plans with our engineers, and I've been out in the field with our customers. Few of the people with whom I've met have questions missed potential or our strengths. The fundamental questions I received generally center on 2 main things. First, in light of these many assets, why aren't we closer to our full potential already? And second, what are we doing differently to improve our trajectory? We'll answer both of these questions as we work through the presentations. But before we get to this, let me quickly walk you through the lineup for this event. Now like most things these days, we're conducting this year's conference in a hybrid fashion. As you've seen, the presentations are all electronic. So you can view them in the sequence that best suits you. Now we recommend the order you see here, but have crafted each presentation to stand on its own. I'm going to kick us off by sketching the overall value creation framework, what we call Smiths Value Engine. John Shipsey, our CFO, will then take us through the financial framework that underpins this strategy. Each of our division presidents will walk you through how the value engine is implemented in their respective businesses. Sustainability is a key element across the group, so we have a focused discussion on it, led by Amy Simpson, our EVP of Energy Transition. Q&A and a technology expo will take place on November 18, and details for these have been shared separately. The live events will also be recorded and available for future viewing. Okay. With that as a backdrop, let's get into the details. I've been in the chair just under 6 months now, but a couple of things are already quite clear. First, Smiths is an intrinsically strong company, serious world-class engineering, leading positions in critical and attractive markets, distinctive global capabilities and a powerful financial framework. Second, we have real and tangible opportunity for significant near and longer-term value creation. In my view, the key to unlocking this value is moving with greater pace and urgency and delivering more consistent performance in line with our vast capabilities. Having seen similar disconnects between performance and potential at other companies, I know that closing this gap largely comes down to 3 things: growing faster; executing better; and doing even more to inspire and empower our people. It's as simple and as hard as this. We have a focused plan, the Smiths Value Engine, that connects our purpose, our strengths and our priorities. We'll spend a good portion of our time across this event stress testing key components of the engine and giving real-time examples of how we're propelling forward. When our engine is humming, the output is powerful, recurring revenues fueled by high margins, generating a lot of cash. Let's start to look forward with a nod to our past. 170 years of pioneering progress across multiple technologies, markets and geographies. We built the first accurate speedometer and guided the world's first transatlantic flight. We introduced the first pin controlled ATM, CT baggage scanner and retrofit dry gas seal. Today, Smiths technologies enable air travel, energy transmission and global communications. We heat and cool our homes. We light our cities, and we protect our families. We've been to the southernmost point on the globe, and the highest point on the planet, and now we're even out exploring Mars. For us, improving our world to smarter engineering isn't a catchy tagline. It's a job description. So clearly, a deep and rich heritage. But what didn't make the chart are the times especially in recent years when we haven't fired on all cylinders, opportunities right in our wheelhouse that we failed to capture. As you'll see quite clearly across the presentations, our gap is not one of opportunity. It's mostly one of execution. So let's get to the crux of it: what's working well and needs to be accelerated, and what needs to change to swiftly improve our trajectory. Let's start with the left side of this chart as it's an encouraging list. We have an objectively strong portfolio, made even stronger with the sale of Medical. We built deep customer partnerships across multiple attractive end markets. We enjoy a robust financial framework. And our momentum is building. Our end markets are recovering. Financial performance is improving. And the sale of Medical is coming along nicely, with a good purchase price, quicker-than-expected satisfaction of the U.S. antitrust condition. And just today, our shareholders approved the transaction, a major step towards closing. Now reflecting all this momentum, we just announced that we'll begin share buybacks immediately. So quite a bit is working well. But as I shared at the outset, there's still much to do to reach our full potential. First and foremost on this list is accelerating growth. I'll sketch 4 very actionable levers that we're deploying at pace to up our game. The division presidents then will bring these to life with concrete real-time examples. Second on our list is improving execution. The seabed of this effort is a faster-moving, more execution-oriented relaunch of our Smiths Excellence System. You'll hear much more about this as we move forward. Third is doing more to inspire and empower our people. And we're doing this through a heightened focus on diversity and inclusion and more urgently building on our strong ESG foundation. And all of this needs to come together in a much more consistent delivery of our financial results, which I'll frame up and then ask John to build out. Now let's get to the meat of how we're doing this, with the Smiths Value Engine. As mentioned, it has 3 parts: our purpose; our strengths; and our priorities. Let's cover each in turn, beginning with our values and purpose. We're passionate, customer-focused and respectful. We take ownership for our responsibilities and conduct ourselves with the depth of integrity reflective of our almost 2-century history of doing business the right way. We are pioneers of progress, and we're committed to improving our world through smarter engineering. We'll share with you today numerous examples of how we're doing exactly this. We have 4 fundamental strengths: world-class engineering; leading positions in critical markets; global capabilities; and a robust financial framework. Now with respect to engineering, the time line I showed earlier well illustrates our pioneering past. The ingenuity you'll see in the coming examples bridges to our bright future. With respect to leading customer positions, our products manage airflow in over 50% of the homes in the U.S. And globally, we supply parts to all the major aircraft and jet engine manufacturers. The vast majority of all satellites launched in Europe and North America contain Smiths technology. And we're in over 90% of the world's 50 largest airports. Our global capabilities are unmatched by the competition. Across the group, we have 1,600 sales reps service, 2,000 service personnel and over 3,000 engineers, collectively representing over 100 different nationalities. John Shipsey will take you through the gearing of our financial framework, highlighting the recurring revenues that come from our OEM and aftermarket model, our high margins, and capital returns and our low asset intensity. All of which consistently combines for strong cash flow generation. Which brings us on to the third component of Smiths Value Engine, our priorities. While our purpose and fundamental strengths are stable and unchanging, our priorities focus on the nearer term, what specifically needs to be completed, this month, this quarter, this year, in order to systematically advance our progress and fulfill our commitments, to customers, to employees and the shareholders. We start with accelerating growth, our biggest upside to value creation. Our planned centers on the 4 levers you see here. Given our broad positions, we're now experiencing market recovery across most of our portfolio. In general, the tide is rising, which, of course, is helpful. But for Smiths to continue separating from the pack, we'll need to execute better, accessing the opportunities we've not always captured in the past. As we just saw, new product development has long been a hallmark of Smiths. Our near-term opportunity is to get these innovations to market more quickly and then to commercialize them more aggressively. Level 3 of our pyramid is building out the priority adjacencies. Our Flex-Tek business, for example, has posted a consistent 11% CAGR over the past 5 years, driven by systematic expansion from their core in gas and fluid conveyance. They extended a strong base in construction into aerospace. And now they're working to expand from gas tubing into broader air quality management. Complementing our focus on organic growth is disciplined M&A. Now with mid-teens ROCE and low 30s return on tangible assets, the highest return for Smiths will always be organic. M&A is just a mechanism for us to move with greater pace, like the aerospace example I just gave, accelerated by buying United Flexibles in 2019, or our extension into air quality, quickened with the acquisition of Royal Metals earlier this calendar year. Across the pyramid, these are all activities we know well and have credibly completed countless times. It mostly comes down to how urgently and forcefully we move forward. Now let me go a bit deeper into each layer of the pyramid, beginning with the current dynamics in our customer end markets. Broadly speaking, we participate in 4: general industrial; safety and security; energy; and aerospace. These markets are all huge, 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, and doing so at different rates, which is incrementally helpful to Smiths as it naturally dampens the volatility of each individual market. As Pat McCaffrey, who leads Flex-Tek, will show, parts of Industrial are already quite strong, with U.S. housing starts, for example, at near record highs. Energy and aerospace are in the early stages of what looks to be a multiyear run. Jean Vernet, President of John Crane, will report order growth that is ramping quickly. Julian Fagge will share similar themes for Smiths Interconnect. Conversely, recovery and safety and security, and in particular, the airport segment, is still a few years out, but the megatrends and macro forces underpinning long-term growth in this segment, things like complex and volatile geopolitics and ever-increasing regulatory requirements, dictate that when recovery comes, it will arrive with force. The strong demand we currently see on the industrial side will eventually inevitably subside. Smiths balanced portfolio will allow us to offset this with recovery in detection. Roland Carter, who leads this business, will lay it all out for you. This slide illustrates how our staged recovery is playing out across our portfolio. Broadly speaking, our business falls into 3 camps. Several end markets for Flex-Tek and Interconnect, on the left side of the chart, are more than a year into recovery. Taking good advantage of this, Flex-Tek posted organic growth of 6% in fiscal '21, while Interconnect came in at 7%. John Crane in the middle is in the early stages of what looks to be a promising resurgence in their markets. Crane's top line contracted 5% in fiscal '21. However, we're now in the early stages of an up cycle. And to illustrate this, we're sharing order volume, which we expect to be in the teens for the first half, supporting a solid return to revenue growth for fiscal '22. On the right side of the chart, you see the order trend for Smiths Detection, a similar shape to John Crane's, but without a sharper drop-off nor a steep a ramp up. Yet revenue growth in Detection was down 7% last year, the softest of the group. The positive order momentum we expect for the first half though gives us confidence that recovery is coming. Although with the longer cycle times in this business, it could take several more periods for this to convert through to the P&L. In the same way that our portfolio is well balanced by industry segment, we have a meaningful presence across all major geographies. Because of their faster growth, we have a particular focus on expanding our developing markets penetration. As you see on the right side of this chart, we've made steady progress in this regard, going from 19% in 2017 to just over 20% last year despite all the pandemic-related challenges. Our India business has grown at a compounded rate of around 7% across this period while China has grown over 16%. New product development and commercialization is the second tier of our growth pyramid. As you can see from this chart, we're not short on opportunities, with quite a bit of activity underway. The key, again, is converting this potential into performance by prioritizing our most promising programs, advancing them at pace through our development process, and then confidently resourcing their launch and commercialization. We know how to do this as several of our recent launches are already making meaningful impact for our customers. For example, we launched our CTiX line of computed tomography scanners in 2019. This line of products has fundamentally improved safety and air travel for all of us. It has the fastest throughput levels and highest detection standards on the market. And in just 2 years, it has already grown to over GBP 30 million in annual sales and continues to ramp. FlashShield+ is a multilayer tubing solution used in all modes of construction. It utilizes a metallic shield to handle high voltage risks associated with lightning strikes as well as dielectric jackets for lower voltage household current. With a flexible, lightweight base layer and specially engineered fittings, the system installs up to 70% faster than traditional offerings. This platform has already grown to over GBP 50 million. And as Pat McCaffrey describes in his presentation, we're now extending this exciting technology to other adjacent markets. We have a number of additional programs set to launch this fiscal year. John Crane, for instance, will introduce the world's first fully contained 0 emission gas seal. As you'll hear from Jean Vernet, eliminating methane emission leaks is a game-changing opportunity for both our customers and the broader environment. Seals are absolutely integral to this effort. As John so passionately describes, seals are the heart of a system. Just as John Crane revolutionized their market with the invention of a no friction dry gas seal, we have the opportunity to do this again with our 0 emission program. One more example. Better securing the enormously complex global rail network is an exciting opportunity for Smiths Detection. Every year, 2 billion people travel close to 4 trillion kilometers on trains. Almost 10 trillion freight tons of cargo are moved by rail every year. There are opportunities to take the learnings from aviation and utilize these to augment the security and efficiency of rail transport, and we have new products that do exactly this. Building out priority adjacencies is the third tier of our growth pyramid. Each of our 4 businesses has well scope plans in place to grow beyond their strong core positions. Examples of some of these adjacencies that we can talk about publicly are shown here. All are described in more detail in the individual business presentations. And you'll be able to touch and feel each of these at the live Technology Expo on the 18th. Now in the interest of time, I'll only highlight 2: environmental protection in John Crane and high-speed satellite communications in Interconnect, 2 critical priorities for our customers that we're helping them address. Environmental protection tops the priority list for all customers, but especially for John Crane, who serves water, pharmaceuticals and chemical markets as well as energy. In the near term, this means upgrading existing infrastructure, replacing current components with higher performing tighter tolerance products. In the medium term, it means leveraging sensors and machine learning to monitor networks in real time, preventing leaks before they even occur. At COP26 just earlier this month, world leaders announced sweeping changes to address methane pollution, which has 80 times the warming potential of carbon dioxide. In the longer term, protection means helping the world transition to cleaner energy solutions. While it's still too early to know exactly what this path might look like, we can be certain that it will be paved with technology, with trust and with global reach, the absolute sweet spot for John Crane. High-speed satellite communications is an adjacency of similar scale and scope. We're all familiar with the dizzying rates of data propagation and the accompanying need for ever faster bandwidth. The high-frequency radio signals that carry this data are obstructed by the curve of the earth. Geosynchronous satellites are one way to get around the problem as they transmit at extremely high rates of gigabytes per second per beam, roughly 1,000 times faster than conventional terrestrial networks. Last year alone, 1,200 satellites were launched, the majority in Europe and North America. And as mentioned, a significant portion of these contain Smiths technology. Over time, we've done a good job of continually refining our portfolio to advance our already strong competitive positions. Shown here is what our portfolio looked like previously. It's organized along the axis of financial and strategic attractiveness. The blue bubbles are our core industrial technology businesses and the red ones are dilutive positions. Across the last 5 years, we've divested 11 businesses, the largest of which are shown here. I'll say more about the pending sale of Medical in just a moment. Shown in green are the new positions that we've established over the same period, the bubble size gives you a relative feel for the scale of opportunity. In some cases, we use M&A to accelerate these strategies, like our acquisition of PathSensors to expand our capabilities in pathogen detection or our purchase of Reflex Photonics to accelerate our position in sat comm. In total, we have completed 10 acquisitions in the past 5 years, and John Shipsey, goes into much greater detail on M&A in his comments. A quick update now on Smiths Medical, our most significant portfolio move in over a decade. As you'll remember, we announced the sale to ICU on September 8 for an enterprise value of $2.7 billion. This includes an equity stake in the buyer that has appreciated notably since announcement and is now moving towards the share price threshold needed to reach an incremental USD 100 million earn-out. Should ICU shares reach this level, and we view it to be probable, total deal value will be around $3 billion. Now since the announcement, 2 major conditions precedent to closing have already been satisfied, those being the satisfaction of the U.S. antitrust condition and approval by our own shareholders. There are some remaining conditions and procedural steps to complete, but we now expect the deal to close as early as practical in the new calendar year. As closure is now both sooner and more certain, commencement of a $1 billion share buyback plan will begin immediately. The benefits of selling Medical are numerous. First and foremost, it enables us to reallocate our attention, resources and capital to our much stronger industrial technology core. In addition, we'll further strengthen our balance sheet, bringing our debt-to-EBITDA ratio below 1x. While the cash flows of our business are sufficient to fund the organic growth we're detailing today, retained proceeds will provide additional flexibility for us to move swiftly as opportunities arise. Still more, the sale of Medical significantly strengthens our portfolio. As you see on the right side of this chart, Medical has been dilutive to our growth, returns and cash generation. Medical's revenue growth has trailed the core by almost 4 points and profit CAGR has been around 11 points behind. Capital returns are 200 basis points higher in our core and cash conversion is 4 points stronger. Our Board made the correct decision to separate Medical just over 3 years ago. The process took too long, and it consumed too much energy. But our actions over the past few months demonstrate the pace and execution that our organization is capable of. And speaking of execution, let's turn to that now. Execution is the second critical priority for Smiths as we move more urgently to crystallize our potential. As I mentioned now, a couple of different ways, this is a fundamentally strong business. When the engine is firing and traction is good, we move forward powerfully. The opportunity is to do this with greater pace, urgency and consistency. And all of that comes together with a more focused results-oriented operating rhythm in a word, execution. Execution begins with customers. We serve market-leading global players in critical industries where uptime is everything. When airports, communication networks or energy grids go down, entire communities are disrupted. Our global service network allows us to deliver real-time mission-critical support in demanding operating environment. John Crane, for example, has 200 service locations across 50 countries. Smiths Detection has 100 and close to 20. The trust and confidence that comes with this has helped us build large installed bases, which in turn drive predictable aftermarket revenues, now close to half of Smiths Detection sales and almost 70% of John Crane's. Across my career, the single best mechanism I've seen for building capabilities and culture central to consistent execution are continuous improvement methodologies, like the Smiths Excellence System. I saw the impact of Lean Six Sigma firsthand at both GE and 3M. Now we introduced the Smiths Excellence System in 2018, and it's another good example of where we were pointed in the right direction but not moving quickly enough or with a sufficiently sharp eye towards execution. Over the last 3 years, we laid the groundwork. We launched the SES Academy and certified 70 Black Belts. This is a good start, but it's just the beginning. We introduced Lean, for instance, in 40% of our plants. I've now visited several of these sites, and progress is encouraging. Although in most cases, we're still in the early stages. We're a bit further along with procurement, having centralized indirect purchasing, and we're now capturing good savings as a result. The next step here is to look for opportunities in the larger, typically direct commodity categories, and we're working on that. Now the next phase of our SES journey is all about advancing from learning to doing. Last month, we created a new role on our Corporate Executive Committee, focused exclusively on SES. We named Tony Tielen, a Smiths veteran, with experience at other industrial technology companies, like Honeywell and ABB, to lead the effort. And we're now in the process of establishing specific delivery targets tied directly to our external commitments. Unlike in the past, we'll resource this effort with dedicated full-time resources in key businesses and functions. SES is an outstanding vehicle to develop talent across our organization. This is another enhancement we're building into our new approach. Let me wrap up my comments on execution by noting that margin expansion and cash conversion are 2 pretty good measures of an organization's capabilities. And we're building a credible track record on each. Operating margins expanded by 70 and 50 basis points, respectively, in the 2 years leading up to the pandemic. We picked up right where we left off in fiscal '21 with a 150 basis point uptick from the lows of fiscal '20. We have a similarly good record building with respect to cash, exceeding our target in 4 of the last 5 years and posting an average of 108% across the period. We're now working to strengthen our capabilities in other operational areas, like working capital management, manufacturing productivity and supply chain effectiveness. Now let's turn to our third priority, doing even more to inspire and empower our people. Let me start with a snapshot of who we are: an engaged, experienced expert and inclusive group. In terms of experience, average tenure is just over 9 years and half our team has been with Smiths for 5 or more. We're committed developers of our own people and promote from within more than 80% of the time. In terms of engagement, nearly 85% of us participate in our annual survey, with this year's underway as we speak. In my experience, one of the best indicators of employee engagement is an organization's safety record. And as I'll show in a moment, ours is pretty good. We are experts in our field and invest eagerly in further building our skills. 94% of us have completed Lean training. And we work with Oxford University on Six Sigma certification, having already qualified 350 Green Belts and 70 Black Belts thus far. Each year, we conduct over 50,000 hours of online training and more than 800 employees complete one or more of our leadership programs. We're a diverse team. We're an inclusive team. And 1/3 of our leadership roles are held by women. Consistent with my previous comments, this is a good start, but not yet good enough. Safety is a great indicator of employee engagement as well as operational effectiveness. Smiths recordable incidence rate has been at or below 0.4 for 5 straight years, roughly 20 basis points stronger than even the top quartile of global manufacturers. Our purpose is to improve our world through smarter engineering. Smarter engineering means the type of game-changing innovations that Smiths has contributed across our history and continues to invent today. Smarter engineering means the kind of global capabilities that our customers rely on for their most mission-critical needs. And smarter engineering means helping to solve the toughest problems for ourselves, our customers and our communities. Many of which are environmental, social and governance in nature. We first implemented environmental targets back in 2007. And in the period since, we've reduced our energy usage by 38% and water consumption by 53%. Greenhouse gas emissions are down by 60% and nonrecyclable waste by 63%. Around 60% of the electricity we use today comes from renewable sources. Now in the last 6 months, we've moved swiftly to build on this foundation by signing up to the UN's Race to Zero, committing to net 0 emissions from operations by 2040. We've now 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. With respect to social, in addition to keeping our own people safe, we're playing a frontline role in battling the pandemic. We were a leader in the U.K.'s ventilator challenge, ramping quickly to contribute to the cause. And our direct economic contribution to our communities around the world is GBP 2.5 billion annually. Regarding governance, we have a strong culture of transparency, supported by a global 24/7 speak out hotline that has been in place now for over a decade. We're committed to inclusion, with diverse slates for all leadership roles and active employee resource groups. Our Board sets the tone from the top, with 25% of our nonexecutive directors being ethically diverse and 50% being women. Again, much more to do, but we're headed in the right direction and moving swiftly to build on this strong ESG foundation. Having now met with nearly all of the top 3 layers of our company as well as a solid sampling of our broader global team, I can tell you that this is a talented group. If there's a gap here, it's the risk that inconsistent play in the past might lead some to believe we belong in the middle of the pack. That is simply not the case, and exactly why inspiring and empowering these good people is a foundational element of the Smiths Value Engine. Let me close out my comments with a look at our medium-term financial targets. Operating margins and cash conversion are unchanged from what we shared with you previously as both put us already in pretty good company. We've moderated our ROCE target slightly from 16% to 18% to 15% to 17% as we work to recover from the nearly 5-point drop we suffered during COVID. We replaced working capital as a percent of sales with EPS as we feel this is a more complete measure of our performance. And we're targeting 7% to 10% on this metric with upside from M&A. Finally and most importantly, we're committing to a more specific growth target of 4% to 6% rather than our previous more general ambition of outgrowing our markets. John Shipsey goes into greater detail on each of these metrics in his presentation. Here, you have the full picture of Smiths Value Engine, grounded in our purpose, powered by our 4 fundamental strengths, directed by our 3 main priorities of growth, execution and people, and resulting in the financial commitments we just walked through. Let me leave you with a few closing thoughts. Smiths is an intrinsically strong company, with the potential for significant near- and longer-term value creation. The key to unlocking this value is moving with greater pace and urgency, delivering performance reflective of our vast capabilities. The Smiths Value Engine outlines how we do this by connecting our purpose, our strengths and our priorities. And the financial output of this engine is quite powerful: recurring revenue growth, fueled by high margins, converting through low asset intensity, and resulting in exceptional cash generation. Thank you for investing the time to learn more about the tremendously exciting opportunity we have available to us. I hope you enjoy the rest of the event.

Hello, everyone. I'm John Shipsey, and I'm the CFO of Smiths Group. In this section, I'm going to explain the financial framework that underpins our strategy, how we see a very clear path to creating value and attractive returns, and why we're confident that this will flow directly and tangibly from our 3-pronged focus on growth, execution and people. You heard Paul talk earlier about the intrinsic business strengths that add up to make Smiths a leading industrial technology group. These business strengths translate to financial strengths. And they're the reason why we command good margins and why we consistently generate exceptionally strong cash conversion. Our key financial priority is accelerating organic top line growth because we know that revenue growth, fueled by high margins and low capital intensity, will convert into exceptional cash generation. We also know that we can enhance organic growth further through M&A that's complementary and disciplined. The potential returns from all this are very attractive indeed, and we will reinvest to keep accelerating this virtuous circle of growth. But we will also use our excellent cash flow to reward shareholders with a stronger and more progressive flow of dividends and with share buybacks, where capital is surplus to our reinvestment needs. Let me explain our simple and highly effective financial framework in more detail. You've just heard from Paul how the Smiths Value Engine is powered by 4 strengths: world-class engineering; leading positions in critical markets; some really great global capabilities; and of course, a robust financial framework. And you'll hear shortly direct from the divisional presidents about how we're developing differentiated technology for products and services used in demanding applications where performance really matters, also about proprietary technologies that are founded on decades of R&D investment, and how we've built leadership positions in attractive growing markets, where 50% of revenues come from high-quality recurring aftermarket services. Importantly, these key business strengths translate into financial strengths. Firstly, let's take a look at our margins. Pre-COVID, we were growing operating margins steadily to 17%. Revenue growth improved fixed cost absorption and translated at higher incremental margins to profit, so delivering positive operating leverage. During COVID, our margins proved resilient despite revenue loss and unprecedented disruptions. That's because we moved quickly and took decisive action to protect margins and get our cost structure into better shape. And we delivered promised savings ahead of schedule. Looking forward, we're confident in our ability to deliver operating margins within the target range of 18% to 20%, on the back of a return to top line growth as well as the full restructuring benefits, all while still growing organic investment in R&D to 5% of sales. And indeed, all this was evidenced by the 18% margin that we actually delivered in the second half of last year. And the key point to see here is our ability to convert revenue growth into profit, not just consistently, but faster, while still allowing for reinvestment. It's good operating leverage and a big reason why our financial framework is so effective, so business strengths translating into financial strength. As well as good operating leverage, another financial strength of Smiths, is cash generation. Operating cash conversion of almost 130% and free cash flow of over GBP 300 million in FY '21 was a remarkable, but not an isolated achievement. Over the past 5 years, more than 100% of operating profit has been converted to operating cash by the group as a whole, but also by each and every one of the businesses. That's because each and every business has similar characteristics, IP owning assemblers with low capital intensity that apply group-wide best practices to manage working capital. Although proud of our track record on cash conversion, we're not complacent. We still have plenty of opportunities to improve. With the consistency of execution that Paul mentioned earlier, we're confident that we can continue to deliver a 100% plus operating cash conversion over the medium term. If we then look at returns on capital, you can see how they validate the financial strengths that I've just highlighted. Firstly, return on tangible assets, excluding goodwill, at more than 30%, it clearly proves the high value that can be created from organic growth, but also return on capital employed, including goodwill. It's a critical measure in capturing the return on all investments. And we continue to use it as a discipline on M&A activity. Pre-COVID return on capital employed, or ROCE, averaged over 15%, well ahead of our cost of capital and underscoring the financial strength of the business. ROCE did unsurprisingly dip in FY '20 and '21 as profit was affected by COVID. But for the reasons I spoke about earlier, ROCE should return to our target range of 15% to 17% in the medium term. So again, you can see business strengths translating tangibly to financial strengths. Our financial framework is very deliberately constructed around these strengths. Margins on incremental revenue mean that we have positive operating leverage. Revenue growth converts through the income statement to a higher rate of growth in profit. And low capital intensity means that profit gets efficiently converted into cash, with the result being strong, sustainable free cash flow. Before COVID, we were delivering modest top line growth of 3%, which accelerated to 5% growth in profit. And we converted more than 100% of that profit into cash. But as Paul highlighted in his presentation, a central part of our go-forward plan is to accelerate the pace of top line growth, because we know that we can take top line growth and convert it even faster into profit and cash. And this is the key point, put very simply, turning the handle of revenue growth faster, converting that at a higher rate to profit, and turning that profit into cash, with the output of all this being high and growing free cash flow. And we're also very clear how to deploy this. Our goal is growth, reinvesting to turn that handle faster. So we will use our strong free cash flow first and foremost to reinvest in accelerating organic growth, but also to enhance that growth with complementary and disciplined M&A. And at the same time, we can provide consistently good returns to shareholders. So our key priority in the plan is to increase organic revenue growth, accelerating past the pre-COVID level of 3% and targeting 4% to 6% through cycle, confident that this will convert at high rates to profit and cash. You've heard from Paul and you'll soon hear from the divisional presidents about the exciting tangible ways in which we're going to deliver that higher pace of organic growth, from market growth, from new product development, and from building out adjacencies. And all of that is why we believe we can successfully turn that revenue handle faster. Much of that growth will come from new products and services that our customers value for their differentiated performance in demanding applications. We've grown our R&D investment considerably since 2017. And going forward, we expect to reinvest 5% of sales in order to strengthen and sustain our business for the longer term. So it's primarily an organic strategy, but which we will also enhance through M&A. We will continue to add profitable top line growth each year through complementary disciplined M&A. By complementary, we mean acquisitions that strengthen our leadership positions and deliver access to new adjacencies, geographies and technologies. And by disciplined, we mean acquisitions that create real value, typically through low-risk synergies that are uniquely available to Smiths, and so confidently deliver above threshold returns. And this playbook has been working well for us, as you can see from this list of all our acquisitions over the last 5 years. I'll just pick out 2 examples to illustrate the point. First, the largest acquisition on the list, Morpho. This reinforced Smiths Detection's leading position in the U.S. aviation market. It extended our CT product portfolio, and importantly, brought X-ray defraction technology. Meaning we're years ahead of the competition on next-generation detection capabilities. And then Royal Metal Products, the last on the list, acquired just back in February. It significantly strengthened Flex-Tek's product range in the construction subsegment. And you already have seen in our annual report, that against an acquisition cost of GBP 78 million, it delivered GBP 33 million of revenue and GBP 10 million of operating profit in less than 6 months of our ownership. That's certainly M&A that is disciplined and complementary to organic growth. We will dedicate ourselves wholeheartedly to reinvesting behind organic growth and complementary disciplined M&A. But our strong cash generation means we also have a third use for cash, which is returning to shareholders what is surplus to our reinvestment needs. We've done that via dividends every year for the last 70 years. And we will continue to grow the dividend in line with earnings, whilst maintaining minimum cover of around 2x. The growth strategy underpins our plans to maintain a progressive dividend going forward and one that's even stronger and more reliable. But as well as an attractive dividend policy, right now, we also have a one-off opportunity to return surplus capital to shareholders as a result of the sale of Smiths Medical. The sale of Smiths Medical is a major strategic milestone, creating a higher-performing Smiths Group that is clear to focus on its priorities of growth, execution and people. Back in September, we said that the deal would complete by the end of the first half of calendar '22. However, we've since satisfied the U.S. antitrust condition. So along with Smiths shareholder approval, we've now cleared the 2 major conditions precedent. And we're now confident that the deal will complete significantly earlier than previously expected in the new year. Initial cash proceeds of $1.85 billion. Additionally, Smiths will receive 2.5 million shares in ICU Medical. This is a liquid financial investment structured to allow Smiths to participate in significant synergies that the deal creates. We will seek to maximize the value of this investment, taking into account the tax advantages of holding for more than 12 months and the $100 million earn-out, which is triggered if the ICU share price hits $300 within 4 years of completion. The current value of the deal is $2.75 billion, but with the potential for that to increase to over $3 billion if the earnout is triggered. Given the completion of the sale, will now take place much earlier than expected, the Board has decided to start the return of $1 billion of proceeds to shareholders immediately. We will affect this through a program of share buybacks over the next 18 to 24 months, and we will continue to supplement a progressive dividend with ongoing share buybacks as we generate capital that is surplus to our reinvestment needs. So we have a simple, but effective financial framework that matches the financial strength of Smiths, with top line growth accelerating down through the income statement to profit and then into cash. And that's reflected in the quantified medium-term targets that Paul shared earlier. First, delivering organic revenue growth of 4% to 6% with complementary disciplined M&A on top, then strong margins of 18% to 20% that convert revenue into earnings growth of 7% to 10%. ROCE, including acquired goodwill, will continue to act as a discipline on both organic and inorganic reinvestment with a blended target return of 15% to 17%. And of course, we will continue to set the bar for operating cash conversion at over 100%. It's a robust financial framework with Smiths business strengths translating to the financial strengths that make these targets achievable. Our key priority is accelerating the pace of top line growth as we execute the plan, and we know for sure that revenue growth fueled by high margins and low capital intensity will convert into exceptional cash generation, which, in turn, can either be reinvested in further accelerating growth or return to shareholders if surplus to our reinvestment needs. It's a virtuous circle that we're confident, will deliver our ambitious medium-term financial targets. Thank you. [Presentation]

I'm Julian Fagge, President of Smiths Interconnect. I'm here today to tell you about the exciting opportunities we have to grow and develop as a cutting-edge connectivity company. I joined Smiths Group 8 years ago, and have held a number of positions in the company, most recently as Head of Strategy and Corporate Development. It is with this background that I've taken on the leadership of Smiths Interconnect, where we have a great opportunity to accelerate the growth and performance of this high-quality business. The key characteristic that underpins what we do at Smiths Interconnect is cutting-edge connectivity. It is this that gives us the tremendous opportunity to step change our growth. Over the past 5 years, we have transformed the business. We have repositioned the portfolio to focus on the most attractive market subsegments. And we have restructured the operations to improve efficiency and get us close to where our customers need us to be. We hold strong positions in our market subsegments. These segments have attractive long-term characteristics. They are fast-growing and dynamic as global demand for fast and reliable connectivity increases. We are well positioned to take advantage of this growth with leading products, capabilities and technologies, such as fiber optic components and semiconductor test products. And we have the proven ability to innovate successfully. And we have the operational capabilities, the manufacturing footprint and deep talent in the organization to execute flawlessly. Our products are found in the subsegments of the space, aerospace, defense, semiconductor and industrial markets. We deliver reliable, high-speed performance and control, often in the most demanding applications and environments. The underlying dynamics of our market are similar. They are fast paced where customers need our innovation and partner with us to make connections faster with demanding specifications and tolerances. And they are underpinned by long-term drivers and megatrends that will endure well into the future. We fully epitomize the group purpose of pioneers of progress. Our products truly are at the forefront of science and human endeavor. This is no more evident than in the case of the Mars Rover where highly engineered components overcome most extreme conditions to maintain the signal strength to allow the Rover to communicate. Similarly, our fiber optic transceivers are at the cutting-edge of technology, enabling satellites to communicate at faster speeds with reduced latency and with stronger signals. Our strengths clearly align with the Smiths value engine, and we are focused on the 3 strategic priorities of growth, execution and people and culture. We have a reputation for world-class engineering and highly successful innovation. With over 270 dedicated engineers, we are constantly striving to stay at the forefront of innovation and cutting-edge connectivity. And we have global capabilities in fiber optic connectivity, hyperboloid contacts, fine wire termination and spring probes. And these capabilities have often cross over between applications and end markets. These strengths translate into a high-quality business that commands attractive gross margins and strong cash generation that has averaged over 100% over the past 5 years. We will build on these strengths and capabilities, drive the execution of Phase 2 of the Smiths Excellence System, and we will continue to support and develop our outstanding people and nurture a culture of safety, performance leadership and invention. We at Smiths Interconnect will be pioneers of progress. We have a clear strategy to accelerate growth. We expect our core markets to grow at over 6% per year, in line with the demand for fast and reliable connectivity and communication. We are increasing the rate of new-product launches into our markets. In fiscal year '22 alone, we'll be launching more than 30 new product platforms, the highest number in the past 5 years. To accelerate our growth further, we are investing organically in opportunities that allow us to enter into new product and market adjacencies. An example of this is in satellite communication where we're looking at how we can expand our fiber optic connector capability into wider product applications. And another example is in the medical market, where we have recently developed a next-generation high-density connector using fine wire termination technology for use in a heart monitoring application. And finally, we see an important role for selective acquisitions, to add technologies or capabilities or to expand into complementary adjacencies. We did this successfully 2 years ago when we acquired Reflex Photonics and brought advanced fiber optic connectivity capability into the business. I think you will agree, the growth opportunity for the business is very exciting. Last year, we grew at over 7%, and we're working hard to continue that momentum. As world is becoming more and more digitally connected, the flow and consumption of data is increasing exponentially as megatrends such as the Internet of Things, the Internet of Space, Big Data and Industry 4.0 develop. To illustrate this, the number of connected devices is expected to increase by at least 13% over the next few years. The space market is expected to grow 14% per year, as well demand for our fiber transceivers, radio frequency components, filters and high-speed connectors that enable satellites to process more data and communicate faster. As the demand for data grows, so does the demand for processing speed and power. The semiconductor market is expected to grow at least 7% over the next few years as the demand for next-generation technologies such as 5G, gaming and computing and electric vehicle increases. And finally, demand for our high-specification connectors and Interconnects will continue to grow in our industrial subsegments such as medical equipment and our high-speed trains and vehicles where underlying demand drivers are positive. So you can see the underlying growth drivers across our businesses are strong. They're here to stay and we're in great place to meet them. At the heart of Smiths Interconnect is a deep capability and passion for innovation, technology and engineering. We have a full pipeline of sustaining a next-generation new products across all our end markets. I would like to talk to you today about 3 opportunities. The space and satellite communications market is witnessing explosive growth, as the demand for communication and data transmission increases exponentially. In 2020, over 1,200 satellites were launched, nearly triple the amount launched in 2019. This growth trend is expected to continue. There are 24 global programs with over 40,000 satellites currently being planned. SpaceX alone are launching a total of 12,000 satellites as part of their Starlink program. Constellations of satellites in low earth orbits are expected to be particularly fast growing, enabling solutions such as Internet connectivity to underserved and remote regions. Much larger, higher orbit or geosatellites provide communication services to major population areas, each using many spot beams to cover a larger region. Smiths Interconnect has a range of products serving this market. Our optical transceiver technology has enabled satellite communication speeds to nearly triple with data rates of up to 28 gigabytes per second and are able to operate in the harsh environment of space, where extreme temperatures and radiation can disrupt the performance of electronic components. These products put us at the forefront of performance. And our customers, many too shy to be mentioned, choose to work closely with us as a supplier of choice.

Hello. I'm Leo Farhat. I'm a component engineer in the EEE components section at ESA, the European Space Agency. I support the selection and procurement of passive components that include connectors and RF passive products to all ESA missions. ESA provided to Smiths Interconnect their first space qualification in 1975. And over this almost 5 decades' journey, we have worked together in several space missions, including scientific missions to Saturn, Mars and soon to Jupiter. We use Smiths Interconnect products because they have designed and developed reliable solutions that meet our demanding requirements, especially when it comes to mechanical loads and electrical performances. I'm thinking of their reliable connectors based on the awesome and innovative hyperboloid contact technology and of their RF products, such as circulators, isolators and loads that we have also procured on several ESA missions. Smiths Interconnect has proven to be a trusted business supplier with a broad portfolio of interconnectivity solutions, with the reputation in the industry and the high degree of application expertise. We are looking forward to the new and innovative and interconnectivity products such as the next generation of the high data rate connectors and the new ESCC ESA space qualification of the high-density connectors. We believe that these developments will address the challenges of the next generation of the space missions.

Another exciting opportunity is in the semiconductor market where we're one of the leading suppliers of advanced test socket solutions used by customers to ensure that semiconductor chips are functioning correctly before they're installed into end-use products. The pace of innovation in this market is incredibly fast, often less than 6 months before a chip is replaced. Demand for next-generation technologies, such as 5G, AI, deep learning and self-driving vehicles makes this a big growth opportunity. Our engineers are at the cutting edge, constantly updating our products to meet ever-changing customer specifications. We typically operate at the more complex end of the product spectrum, designing solutions for the fastest, more advanced chips, for example, in gaming and computer applications. Our DaVinci test socket performs at speeds of up to 112 gigabytes per second. And we're already working on the next generation of products that will ensure even higher speed, efficiency and accuracy. My final example is in the commercial aircraft antenna market, where we design and manufacture systems for satellite communication and onboard WiFi. Our KU antenna is used by Southwest on their Boeing 737 aircraft to provide in-flight entertainment and WiFi. In the business jet sector, the importance of size, weight and power is even more critical. The antenna unit needs to be small and lightweight and consume as little power as it can to operate, yet still deliver uninterrupted fast broadband to passengers wanting to stream video, play games, video conference and browse in real time. These units must be sufficiently robust to withstand extreme conditions of vibration, altitude, temperature and humidity. To meet this significant engineering challenge, we have designed a tail-mounted antenna system. The system has been improved for use over the Inmarsat Global Xpress network and with further certifications in progress. You have seen today the enormous potential we have in Smiths Interconnect and the tremendous opportunity to accelerate growth over the next few years. We are well positioned to take advantage of this opportunity with our world-leading products, know-how, technology and leadership in innovation. And we have the capabilities to win. And most importantly, the passionate and-driven employees of Smiths Interconnect to make it all happen. We have ambitious plans, and the future is really exciting as we continue our work to deliver cutting-edge connectivity. Thank you. [Presentation]

Hello. My name is Roland Carter. I've worked with Smiths for over 30 years in several divisions and geographies, and I have been President of Smiths Detection since 2018. Today, I am absolutely delighted to be able to show you our growth plans for Smiths Detection. Every day at Smiths Detection, our people and our technology help to make the world a safer place. We are a global leader in the development, manufacture and management of threat detection and screening technology. We are fundamentally a strong and high-quality business. And you can judge this quality by looking at our key strengths as we enter the COVID period, a very strong order book and our significant aftermarket revenues. These gave us continued momentum and resilience through a challenging period. And this meant that we outperformed our competitors, as well as maintaining our leadership position in attractive, long-term markets. We are looking forward very positively as our markets are recovering from COVID-19. It may take a couple of years for full recovery in such areas of civil aviation, but our market strength means we will be in a great position relative to our competition. Now we are focused on rebuilding our order book and on accelerating our growth, and we are very excited at how and where we can do this, as I will show you. We are planning to expand our geographical reach and adjacent end-user markets. We're developing the best next-generation products and we're excited at how we can use our sustainability and our digital agendas to retain and attract customers. Let me show you in more detail. We're driven by very powerful megatrends, the ever-increasing number of people, the ever-increasing desire to travel, an ever-increasing amount of trade and ever-increasing need to keep those people and that trade safe and secure. We're a clear industry leader. We have the best technology, the best brand and the largest in-store base, any of which singly are difficult to replicate, but together are an awesome combination. As you've just heard, Smiths Detection serves our customers in 4 markets: Aviation,Ports & Borders, Urban Security and Defense. Our solution capabilities are unrivaled, and not only provide security and peace of mind, but also help protect the free flow of trade upon which we all depend. They can be found in nearly every country and in more than 90% of the world's major airports. We are the trusted partner of more than 100 governments and their agencies, including customs, borders and defense forces. Aviation is our biggest segment where we enjoy favorable regulatory tailwinds. This segment is mainly driven by airport infrastructure investment and to some degree, by passenger numbers. Urban Security is our second largest segment of 14% of revenue. Demand is certainly set to grow because of an increasing range of threats. There are 3 important subsegments: critical infrastructure, public venues and logistics. In Ports & Borders, which contributes 7% of our revenue, the growth of global trade is expected to increase the demand for security and screening equipment, including digital solutions to improve inspection efficiency. The final 3% of revenue comes from Defense whose clear purchasing cycles provide relative certainty. Here, emerging threats are generating global demand for mobile and adaptable detection equipment for chemical agents and for biological threats. As a division of Smiths, we are fully aligned with the Group's overall ambition: to serve our customers; to create leading technology, which improves our world; to prioritize sustainable growth; to be excellent in our execution; and to look after those people who make this an outstanding company. The fundamentals of our business are very strong. We are a clear market leader. We are passionate about technology and team work. This helps us develop new hardware and software solutions to both address our customers' problems and maintain our brand-leading position. Smiths Detection is well known for our unrivaled domain expertise and innovation. And we always work with our customers to develop solutions that address their specific requirements. These solutions can then be offered to the rest of our customer base. To maintain our position and reputation, we make significant investments in R&D with 7.4% of our revenue invested in financial year '21, over GBP 500 million in the past 10 years. The strength of our position is reflected in our unparalleled installed base with equipment almost every country in the world. Our incredible 800-plus service team across the globe provide the best service in the industry. But we don't rest on our laurels, and we are committed to constantly improving our service offering. The most recent example of this is the launch of a dedicated digital service management system. And as mentioned, we have demonstrated resilience during this challenging time, thanks to our strong order book and aftermarket revenue. Today, as we are beginning to recover from the impact of COVID-19, we are very excited by the emerging opportunities and are focused on rebuilding our order book and accelerating our growth several key areas. Specifically, we are focusing on growth, both geographically and in new market segments. We are well established in Europe and the U.S.A. and are continuing to expand in growing markets such as India and China where localization is a key part of our strategy. We are pursuing opportunities to increase revenue from markets beyond aviation, which will help us consolidate our position as a leader in the detection industry in all sectors. We will continue to develop new products rapidly so that we can offer new solutions and enhance capabilities to our customers and strengthen our relationship with them yet further. Digital solutions will be a major focus in our technology development, bringing operational and security advantages to our customers without the need for frequent replacement of original equipment. This has the positive effect of lengthening the amount of time our equipment is in use. The digital development relates directly to our sustainability agenda where we will bring value to our customers and savings to the business through product renewals and upgrades. New platforms such as biological and chemical detection will enable our growth in adjacent segments. Finally, any acquisitions and new partnerships will be made strategically to bring new capabilities and technologies in-house, offering more to existing customers while broadening our market appeal. Like most other sectors, ours was impacted by COVID-19, which led to lower spending by all customers. However, as we have highlighted, our strong order book enabled us to outperform competitors during this time and sets us up well as the market returns. We continue to be propelled by powerful fundamental drivers of our business, increasing threats and threat levels, international trade and increases in the number of people who wish to travel. As our customers recover from the pandemic, they will be looking for solutions that provide high levels of security while reducing their operating costs. We have those solutions today to meet those needs, automatic threat recognition and centralized screening. We expect growth in the aviation sector to return to pre-pandemic levels in 2024 with our other segments recovering in line with global GDP. As demand returns, we are ready to support our customers and rebuild our order book to maintain our industry-leading position.

My name is Scott Dullard. I'm the Head of Aviation Operations and Security at Melbourne Airport. We've been partnered with Smiths Detection for a little over 10 years, working with them to deploy technology around our airport for security screening. We choose to partner with Smiths Detection for 2 key reasons: one, their technology and how that solves the security problems of now and into the future; but two, their commitment to understanding the customer, taking on our feedback, understanding our values and priorities and ensuring that that is part of their offering and their future developments. A great example of this was when we partnered with Smiths to deploy the 6040 CTiX within our passenger screening point. That started with the trial, one of the first trials with Smiths in the world and certainly the first trial in Australia for the rollout of the CTiX equipment, working together to test the equipment to ensure it met key outcomes for us of improving security and experience, delivering on increased customer experience and finding operational efficiencies. This was done through the technologies ability for people to leave their laptops, their liquids aerosols, et cetera, in bags, so making it easier for the passenger to get through the process, but also the technology, reducing false alarm rates, giving better data or information to the screeners to make security-based decisions and then lastly, data for us as airport management to make sure that we've got the right resources on the screening points to deliver on those outcomes. We're very proud and grateful for our strategic partnership that we have with Smiths Detection. We're very confident into the future that we'll continue to solve problems together aligned with those core principles for us of success, which is the security outcomes, the passenger experience and operational efficiencies. We're confident that we'll continue to solve the future problems together.

We see many exciting opportunities both in our core markets as well as specific geographies and subsegments. We're looking to expand our non-aviation business by focusing on adjacencies and developing our offering to deliver products that respond to customer requirements. These are a digitally centered x-ray product built, specifically for the urban security market, biological threat detection for mail rooms and improved screening systems for rail. We're also developing alternative business models, so we can supply more large-scale, short-term events in selected markets and adapting our ways of working to suit our customers' requirements. We're already growing our aftermarket revenue significantly through digitization, our sustainability agenda and expanding our training offering. Our continued expansion in high-growth markets such as India and China is important for future growth. This depends on strategic partnerships and localization. Therefore, we are developing and manufacturing products on a market-by-market basis. This allows us to take advantage of national initiatives to build products in specific countries and support our working capital and sustainability targets. As always, technology leadership is core to our future. All recent and future product launches across our segments are aimed at providing customers with advances and efficiencies. Let me take you through some in more detail. We have a great reputation for developing platform products with enhanced capabilities that solve our customers' problems, working closely with them to develop the solutions and transforming these solutions into global offerings. A good example of this is our rail cargo screener. This uses very powerful x-rays to screen moving railcars and wagons for both contraband and dangerous items. At the request of the U.S. Customs and Border Protection Agency, we enhanced this technology for faster screening to make freight delivery safer whilst improving logistics to keep freight moving. We can now x-ray 300 millimeters of steel traveling at 20 kilometers an hour while providing better image quality and the ability to screen continuously for 30 minutes. This allows freight trains to be screened without interruption. This development has led to Smiths Detection being named as 1 of only 3 companies able to bid for rail scanner contracts with this customer, a body that has up to GBP 275 million to spend on this technology over the next 5 years. We received an initial order of GBP 10 million, and now we're confident we will win more of this. Having made this enhancement for one customer, we can now provide the same benefits to other customers and offer this product to other rail networks throughout Europe, Asia and Americas. Moving on to sustainability. This is absolutely central to our agenda, focused on reducing our impact on the planet as much as possible while being commercially more effective, which means keeping our equipment in service as long as possible while maintaining security and equipment operation at an optimal level. We achieved this in 3 ways: by considering product sustainability at the earliest stage of design, by improving energy efficiency and by improving product longevity through repair and renewal. Our commitment to the customer care allows us to maintain and repair equipment. And we leverage our digital service offering to improve our speed of response to the customers. We renew and extend the life of our products through midlife upgrades, to keep them in operation even longer while also bringing new technology capabilities to our customers, which helps maintain their utilization of our product. We see enormous potential for refurbishment and for passing the benefits on to our customers and thereby, strengthening our relationship with them. Already as of today, 10% of our spare parts are refurbished for future use. We're also repurposing more equipment for use in the rental and leasing markets, which helps us appeal to new markets where the price of the original equipment may be a barrier. By maintaining close relationships with our customers, we ensure that we are around to remove the equipment when it finally reaches its end-of-life and provide them with new solutions as well as the responsible disposal of the old equipment. There continues to be a growing need for the detection of biological and chemical threats that risk both lives and revenue. We're already a niche player in this field, and we are now looking to expand our capabilities to address more customers' problems and to enter new markets. Our successful acquisition of PathSensors has allowed Smiths Detection to broaden its capabilities within the biological spectrum. This is both relevant to our existing customers and also allows us to open up adjacencies, notably in agriculture and food safety. At the same time, we're working closely with customers in the defense field to adapt technology and to provide more capability and to protect people from the emerging threats. For example, we recently developed an adapter to improve the capabilities of our portable chemical detector, LCD, to detect for narcotics and a broadened library of explosives. This makes the product more attractive to customers outside defense, such as first responders and law enforcement. To summarize, we are very excited at the future in front of us. Smiths Detection is a clear leader across the globe with incredible people, leading products and best-in-class customer care. Our unrivaled position has been exemplified through our strong order book and aftermarket that saw us through the worst of the COVID-19 pandemic. As we prepare for the future growth, we are dedicated to developing the best next-generation products for our customers, expanding our geographic reach yet further, developing our activities in adjacent markets to expand revenues and leveraging our sustainability and digital agendas to retain and attract customers. As we do all this, we remain focused as ever on our mission to make the world a safer place. Thank you.

Hello, and welcome. My name is Amy Simpson. I am the Executive Vice President of Energy Transition. And I'm here to share with you a snapshot of Smiths journey on sustainability and how our approach, our actions and our commitments around the environment, social responsibility and governance have evolved to address the challenges we face with our important stakeholders. We are at the cusp of the greatest societal, environmental and industrial change since the beginning of the industrial revolution. Smiths has every intention to not only support this, but participate in it fully. Huge opportunities will emerge. And while we already participate in some important areas, we intend to expand this and seize this opportunity with both hands. This is a tremendous responsibility for our company and the wider business community, and it represents an important opportunity for Smiths to grow and support our customer needs for the foreseeable future. Firstly, a bit about myself. Like many at Smiths, I'm an engineer by background. I studied chemical engineering at the University of Michigan. I was influenced by my father and my teachers who encouraged me to excel in science and math. At university, I chose engineering not just based on my interest and the broad range of opportunities, but there were professors and other role models who either looked like me or went out of their way to encourage my development. Early in my career, I worked offshore in the Gulf of Mexico on oil rigs. And I was typically the only woman or one of very few. As a result, encouraging other women in STEM is something that I care very deeply about. This is just one example of ESG that is important and one that we are passionate about at Smiths. Our Chairman, Sir George Buckley, recently wrote in his Chairman's statement that we are firmly committed to doing our part, to contribute to solutions in each part of E, S and G. At Smiths, our business is built upon a solid foundation and long-standing commitment to: first, protecting the environment through sound policies, risk management practices and through our process improvement and technology innovation; second, a socially responsible approach, ensuring the health and safety of our employees, their training and development, programs to promote a more diverse and inclusive workplace and a culture of excellence in customer service performance; and third, strong governance, transparency and policies to support ethical business practices. These are Smiths' fundamental underpinnings. And what Sir George affirmed is particularly meaningful to me. In my role at Smiths, I'm responsible for business development related to the global transformation toward a net zero carbon world across the energy supply chain. The energy transition applies to our energy customers, of course. But it also applies to general industries such as petrochemical, mining, water treatment, security and defense and transportation, among others. The need for energy transformation cuts across all sectors, especially those harder to abate, and it's critical to mitigate climate change. It is inextricably linked to our own and our customers' environmental conservation needs, and we are privileged to have strong relationships through our long history of preventing and fixing leaks in the energy sector and helping customers be more efficient and providing solutions to prolong the life of their assets. I spend a lot of my time listening to our stakeholders and engaging with our teams, our customers and the broader scientific community, our partners in the innovation ecosystem, such as academia, NGOs, industry experts. And there is no question as to the vital importance of sustainability. We know we must collectively and urgently heed the call to action now within this decade if we are to have a chance to stay below 1.5 degrees Celsius of warming. As a company, we understand this through the challenges our customers face to meet rising energy demand and resource needs with higher efficiency, minimal emissions and lower carbon footprints. Given our deep expertise in solving problems, we see this as an opportunity, an important opportunity to help our customers meet this moment and to multiply influence and commitment through our supply chain. We see this as a growth opportunity across all our divisions. And I will share more about our continuing commitment to ESG today and our plan to further drive ESG throughout our business tomorrow and on our roadmap to net zero in a few moments. But first, let me reiterate that Smiths is a purpose-driven organization and no stranger to charting the course for advancements and innovation. It speaks to our rich history in which we have played a meaningful role in some of history's most notable achievements. Our purpose also bridges to our future, as we continue to world through smart engineering. When we think about our strengths and priorities to realize the full potential of our value engine and accelerate growth, it becomes apparent that ESG courses through every fundamental element, and that's driving for best-in-class in ESG will enable us to service customers from a world-class talent pool of engineers with an unmatched level of operational excellence. And given our global capabilities, it's clear that a more inclusive culture where each and every one of us can enthusiastically strive to be the very best versions of ourselves our people can outperform. It is this culture that has fostered and inspired progress on our environmental goals over the past couple of decades. So what have we done to reduce our footprint and manage our environmental risks? Well, we've made significant and sustained progress toward environmental targets for the past 15 years across divisions of Smiths. Overall, we've reduced our energy use by nearly 40% while reducing greenhouse gas emissions by 60% and increasing our share of renewable electricity to 58%. We've also reduced water usage by 53% and increased recycling while decreasing our nonrecyclable waste by 62%. Our teams are proud of this achievement. I find that in roundtables and team meetings, there's more dialogue on sustainability and the environmental efforts in particular, supported by a company-wide nurture campaign to encourage thoughtful participation where we live and work. In parallel, we have also stepped up our approach to manage and reporting risk, building upon our strong safety systems and rigorous approach to risk management, we have aligned with the task force on climate-related financial disclosure to report our risks related to climate change in recent years based on analysis over 5- and 20-year time horizons. And in April of this year, we finalized our targets and next steps for the short, medium and long term in our roadmap to net zero for our operations by 2040, making our Scope 1 and 2 net zero commitment public. What do we mean by smarter engineering? At John Crane, it means innovating to help customers reach new levels of efficiency, one of the most significant steps required to stay below 1.5 C warming. At Detection, it means detecting evolving terror threats and ensuring safety and security as the pandemic begins to ease and more people travel. It means building and leveraging economies of scale and scope the way Flex-Tek has, helping more customers more efficiently heat and cool buildings and homes, commercial aircraft and enabling cleaner medical processes. And finally, at Interconnect, smarter engineering means embracing digital solutions and connectivity to improve product and service performance in critical applications even in outer space. It means designing with sustainability in mind and extending the same through our supply chain. But most of all, Paul will tell you that smarter engineering means helping to solve the toughest problems for ourselves, our customers and our communities, many of which concern the environment. Since Paul joined Smiths, we have swiftly built on our 15 years of progress, reaching a new level of commitment to ESG. We have aggressive plans to accelerate our environmental progress and meet our commitments as we hit the ground running on our roadmap to zero. In addition to the targets we set, we are assessing a promising list of locations for on-site renewable energy installations. We've added 10 water reduction projects. And while we implement our design for sustainability assessments into our new product development process in all divisions in fiscal year '22 and establish our packaging baseline, we are targeting 8 packaging reduction projects per year as we work toward developing a more circular mindset. In the recent months, we have analyzed, modeled and mapped out our approach, signing on to the science-based targets initiative and the business ambition to 1.5 C, the part of the UN raised zero pledge where business do the heavy lifting. We see this as an important step to multiply our influence through our value chain and drive Scope 3 emissions reduction. We have added an ESG metric to our long-term compensation program to incentivize the leadership team to deliver on our ESG strategy, targets and time horizons. We recently established a new Science, Sustainability and Excellence Committee of the Board, providing guidance and supervision of our sustainability strategy at the Board level. And our newest executive team member will be a dedicated Chief Sustainability Officer, who will own the corporate strategy for ESG and support the divisions on their journey to design for sustainability while developing stronger, more visible communications around our plans and as we make progress on our road map and boost reporting. It has been such a pleasure working and learning from our 3 ESG advisers, Sir Kevin, Mel and Tim, for the past few months. They are the backbone of our efforts and provide the team with sound guidance. And I have been thrilled to see how each and every one of our leadership team genuinely cares about ESG in his or her way. They are completely aligned on the fundamental business importance and advantages of ESG. And they promote and encourage sustainability through their teams and our support functions and through all divisions. Our newly established Science, Sustainability and Excellence Committee is chaired by Dame Ann Dowling. She is joined by 3 passionate ESG supporters and leaders who, together, have begun to offer their insights and unique perspectives on sustainability, helping us to think more critically about our strategic plan. With our new leadership commitment and renewed energy in our ESG approach in our operations and with our customers, we've come to realize the tremendous potential for growth in each of our divisions. We can see that a purposeful approach in each division through best-in-class ESG will allow us to solve even more challenging problems for ourselves, our customers and our communities. We endeavor to lead the way in pioneering new advances in clean energy, electrification, artificial intelligence, clean air, clean water, safe food and advanced telecommunications, to name a few of the vital technologies for the future. Our team in John Crane is working to attack the most urgent short-term problem at hand, that of reducing methane emissions. We are creating a one-stop shop to help customers find, fix and monitor for leaks such that they can meet near-term energy demand with affordable, low-carbon, certified energy. Paul, Jean and I were recently together with our technical team at Morton Grove in Chicago to view progress on our zero emission sealing technology as well as novel materials that enable us to push the envelope and address the challenges inherent in blue hydrogen and carbon capture, where we have significant experience on greater than 80% of all carbon capture capacity and some of the largest blue hydrogen projects out there as well as to address even greater challenges ahead in production, compression and safe transport of green hydrogen made from renewable energy. These energy transition, products and services, combined with our products aimed at efficiency, conservation and recycling, form a rich and comprehensive portfolio to meet the moment. Our talented engineers are proud and excited to be an important part of this growing innovation ecosystem. In our Detection business, we are broadening our abilities with new virus detection technologies where we are finding applications outside the core explosives detection business. We've been working for several years on breakthrough technologies unlike any seen before and aim not just at explosives, but also contraband detection more generally. With applications for technology and food safety, increasing crop yields, along with smarter systems for efficiency cooling, detection is a superb source of technology for the entire Smiths portfolio. With the purchase of Royal Metal in February, Flex-Tek has the ability to contribute to cleaner and safer environments inside homes and offices. And our teams are also working to apply Smith's ion mobility spectroscopy, chemical weapons sniffing technology to sniff for harmful contaminants. Flex-Tek teams are also innovating to improve jet engine efficiency as well as air quality in homes through smarter engineering and novel, low-carbon green steel building materials. Finally, and perhaps in our most advanced technology business, Interconnect, we see the huge expansion in the semiconductor business as a great platform for growth given its myriad applications across critical communications, electrification and smarter systems to support more sustainable modern cities, where more significant populations now live. In closing, I want to leave you with a few important takeaways which demonstrate that Smiths is shifting gear in its approach to ESG to accelerate growth and help our customers meet this moment through smarter engineering. We are reenergized with Paul's leadership, a new CSO coming on board, and we are intent on achieving best-in-class ESG performance. We are proud of the progress we have made and recognize our responsibility to amplify our commitment and influence in order to reduce scope 1, 2 and 3 emissions. We have a new board committee in place to supervise our sustainability strategy and we have long-term incentives on ESG targets in place. Our businesses are aligned to key long-term ESG themes and trends in our global markets. Combined with our strategic approach, we see tremendous growth opportunities in serving our customers' sustainability needs, notably in the energy transition. We are firmly committed to doing our part to contribute to solutions in each part of E, S and G and look forward to sharing our progress with you in the near future.

Flex-Tek produces high-performance engineered components and solutions that help fluids and gases and efficiently. Our flexible hosing and rigid tubing distribute gas and conditioned air in commercial and residential buildings and route hydraulic fluids and jet fuel around commercial and military aircraft. We're also one of the world's largest manufacturers of open-coil heating elements for a broad range of applications. Customers like doing business with us because of our segment-leading product innovation and high level of responsiveness. So what's driving our growth? In industrial, rapidly growing house building increases the demand for our construction products, while customers' desire to improve performance and protect the environment is also increasing the demand for more efficient industrial heating solutions. In Aerospace, we are well placed as aircraft production recovers and as we increase our content on existing platforms and continue to grow market share. Across all end markets, we are focused on expanding internationally, bringing our leading products and service to even more customers. Flex-Tek is on an exciting growth journey with significant opportunities ahead.

Hello, everyone. I'm Pat McCaffrey, President of Flex-Tek division. I started with Smiths 25 years ago. I've spent my time focusing on customers in operation and business leadership roles within the Flex-Tek organization. Today, I'm really excited to share a brief history of Flex-Tek, the markets we serve and especially our growth in future direction. At the end, I want to help you to understand while I believe we sit in the best position today for future growth than we ever have in our history. The key things that I'm going to show you is that we have high confidence in our growth prospects. We have a strong track record of growth and profits, 5-year revenue CAGR of 11% and a profit growth of 12%. We enjoy great positions in multiple attractive markets. We're a leading innovator in our segments with significant opportunities to expand internationally. And the key to our success is our people and our culture of high performance. All this is making us very confident in our future. Let me explain in more detail. Flex-Tek is a strong business with great positions in very attractive markets. What we do in Flex-Tek provides safe and efficient movement in heating of liquids and gases. We operate in very diverse markets. About 55% of our products go to the construction markets. We make flexible ducting for delivering clean air into the home, corrugated stainless steel tubing to safely transfer gas and we produce heat kits to help provide efficient heating of a home. About 25% of our products go to the Industrial segment, where we produce a broad range of flexible hoses for medical and automotive applications and open coal heating for industrial use. About 20% of our products serve the aerospace market, where we provide specialized tubing to safely and efficiently move hydraulic fluids and fuel to engines and airframes. About 60% of our aerospace tubing serves the commercial sector, while 40% supports the defense sector. We finished fiscal year '21 with a very strong financial performance. We had over GBP 500 million of revenue, with a headline profit of GBP 97 million and a 19.1% operating margin. Both our return on capital employed and our cash position are also very strong. Our market growth drivers for our business includes a high demand for new housing; the aerospace industry returning to pre-COVID levels by 2025 with further growth beyond that; there are growing demand for medical devices, including CPAP machines and ventilator machines, which we produce hoses for; and the global need and desire to reduce emissions is providing us new project opportunities. So you can see, a really strong business, attractive financial metrics and powerful market drivers. At Flex-Tek, we are pioneering progress for the markets we serve. We're being the leaders in innovation, we're delivering safe and efficient products to our customers and we're making a difference. Flex-Tek has some great fundamental strengths, which are really valued by our customers. We put our customers at the heart of everything we do. Our strength starts with our people and technologies they develop. We have a world-class group of engineers that work with our customers to develop innovative solutions to help solve their problems. Some of these solutions include our FlashShield+ product for gas piping; our floating core [indiscernible] product, which reduces the amount of insulation required; our heated wire medical hoses that improves patient safety; and our [ NZT wire ], which is a proprietary alloy for heat kits. We pride ourselves on strong customer intimacy. Everything we do revolves around our customers. We've built strong long-term relationships with many customers, which have partnered with us for decades.

Hello. My name is Paul Johnston, and I'm the Executive Vice President of Watsco, Inc. Watsco is the largest HVAC distributor in the Americas with revenues exceeding USD 5 billion. We have 675 locations throughout the U.S., Canada and Mexico. Our relationship with Flex-Tek goes back many years. And when we first began, it was under $5 million worth of purchases. Today, that number is going to exceed $100 million. We work with them in a very transparent manner, sharing customer information on sales as well as inventory and forecasting, and we began doing this well before the pandemic and before all the supply chain disruptions had occurred. Our relationship is very deep and long with the organization, and we have conversations with Flex-Tek management concerning things such as new product introduction as well as competitive needs in the marketplace. I feel that it's a very high integrity organization to do business with. We enjoy our collaboration, and I look forward to many years of successful growth. Thank you.

Being strong in North American markets, Smith global capabilities can help us to expand internationally. We are currently expanding into APAC with heat, automotive and medical products. We are also expanding into Europe with our CSST gas delivery product. In Flex-Tek, we have a strong financial model. We're in highly competitive markets, so we've developed a good discipline to maintain efficiency and cost control. This model has helped us to deliver a strong operating margin, a lean operation that operates with an SG&A of 8% and a strong performance of cash and value creation. All this puts us in a great position for the future. Another reason we're confident about the future is our impressive track record. Flex-Tek is a division that has a proven history of continuous profitable growth. Our growth in the last 5 years has been a CAGR of 11% and a profit growth of 12%. Organically, we have grown at 4% revenue CAGR and 5% in profit. Our operating margin was over 19% in 2021, and our trade working capital was 21.4%. So you can see a very impressive track record. But we are planning to accelerate this further as you can see on the next slide. Our plan to accelerate growth is built on maximizing the growth opportunities from our underlying markets, the addition of exciting new products in building attractive adjacencies and adding strategic value creative bolt-on acquisitions to our business. Let me cover the first of these. As I stated earlier, we are confident about our key markets. We play in some very attractive growing markets. In the first chart, it shows that aerospace recovery has begun, with commercial aircraft production expected to return to pre-COVID levels by 2025. This is a strong indicator of increased demands for our aerospace products. The next chart shows the growth of housing from 2017 to 2021. We are at a point where housing inventories are at a historic low and there is greater than a 5 million home deficit versus demand. The demand for new house builds as well as increasing demand for commercial construction is closely correlated to the demand we see in the construction parts of our business, which is running a really red hot at the moment. The weighted underlying growth of our markets across construction, aerospace, industrial segment is expected to be 5% over the next 3 years. And we also see plenty of opportunities to expand geographically and increase our end-use markets. Let me explain. In 2021, 84% of our revenue came from North America. Our plans to expand internationally are focused on Europe, with CSST gas piping, which represents an opportunity of approximately GBP 150 million of revenue. Add in China, where we experienced rapid early growth of our product launches of medical hoses and automotive hoses through our [ Changshu ] China operation, which represents a 50 million opportunity for us. To support these initiatives, we've been adding manufacturing capabilities in the existing sites in Europe and China and regional capacity in the U.S. to get closer to both our markets and the customers we serve. We believe new product launches and innovations are what separates us from the competition. Let me discuss a few. FlashShield+ has been a huge success. We have the most cost-efficient, most user-friendly solution and the safest product in the market. In our fiscal third quarter, we will be launching a new product for refrigerant line sets. Based on product demonstration, the wholesale customers are very excited to get this product when it comes out. We're also developing a number of aerospace hoses that will reduce weight in aircraft. And based on our position in the HVAC system and our relationship with the wholesalers, we are in great position to launch new products in the area of energy efficiencies and indoor air quality as we work closely to understand the needs of the market. Our current new product pipeline represents approximately GBP 75 million of annual revenue opportunity over the next 5 years. I want to share a perfect example of the strength of our relationship that we have with our customers, especially a wholesale customer in this case. Based on a new product request from our customer to replace copper tubing lines in HVAC system, and then building on our Gastite multilayer pipe technology, we have developed a product that offers the customer several advantages. First, much greater price stability than copper tubing. Secondly, it is easy to install, it is a very familiar system to our Gastite customers. Thirdly, it eliminates a kinking problem which causes flow blockage and leak issues. And finally, it reduces the risk of job site theft. We had targeted to launch this product in Q3 of this fiscal year. And we expect this to be a GBP 150 million revenue served market. The product is designed for full-size split HVAC systems, but will be adapted to many split systems as well. We also believe this multilayer product could replace other rigid pipes and other applications. Another project that we recently become involved in was development of a system to use hydrogen in the processing of steel which would significantly reduce CO2 emissions. This process would use one of our large format high-temperature heaters. Our product helps in the direct reduction of iron, which makes it cleaner going into the blast furnace. We are working on this project for a pilot plant. And if successful, it would be duplicated in the use of other steel plants throughout the world. We have already successfully showed that we can accelerate our growth by acquisitions. Our most recent acquisition is Royal Metal Products. This adds metals ducting to a line of HVAC offering. We paid $107 million for it. It's performing very well since we acquired it in February with a fantastic return of investment. Also with this acquisition, we've picked up new key wholesaler accounts. We're now expanding Royal Metal's operations to our existing Thermaflex sites, and we will soon be able to deliver both metal and flexible duct to the customer on the same truck from all of our sites. This is a huge advantage for our customers. This has been a great acquisition for us and is delivering ahead of plan. In closing, I want to emphasize that we are very confident about continued growth. We have a proven track record of consistent growth and margin expansion. We're well-positioned with strong relationships in attractive markets. We are driven to innovate and to expand internationally. And we're underpinned by a lean structure with an incredible culture of great people. We have a great future ahead. Thank you.

John Crane is a global leader in the design, manufacture and installation of mission-critical flow control solutions for increased efficiency, emission reductions and energy transformation. This includes mechanical seals, seal support systems, power transmission couplings, specialized filtration systems and digital monitoring. The primary purpose of a mechanical seal is to prevent leaks, keeping the product in, contaminants out and reducing any emissions. Mechanical seals are used in a wide range of industries, including energy, chemical processing, pharmaceuticals, water treatment and pulp and paper. Our products improve efficiency and reliability and reduce the environmental impact of our customers' operations. Our competitive advantage comes from our technical expertise, global presence and the strength of our customer relationships. We have an efficient and agile operating model, real digital capabilities and a focus on innovation. Our large installed base in energy and industrials drives over 2/3 of our revenue, which comes from aftermarket services. And our global network of more than 200 sales and service locations in over 50 countries means we can respond quickly to our customers' needs. A number of things are driving our growth. In the short-term, demand in the energy market is recovering from the oil price shock and the COVID pandemic. We are also seeing increased demand for our products and services across our other end markets, with all customers focused on enhanced efficiency and cleaner processes that John Crane Solutions support. And over the long-term, energy transition is going to create the need for more demanding flow control solutions as we grow a more diversified and cleaner low carbon energy ecosystem. John Crane is at the heart of this transition, pioneering progress for over 100 years.

Hello, everyone. I am Jean Vernet, President of John Crane. I will spend the next few minutes talking through the positive current market dynamics, highlighting what makes our company great and sharing with you our priorities for accelerating long-term growth. Our starting point today is that we have a really good business because we have predictable high-margin sticky revenues, because we are a technology leader with scale to deploy globally and because we are leaders in attractive market segments. And also, we are so vital to our customers, we really matter to them, and that value delivers high margins. And then we have a key strength. More than any of our competitors, our products are certified and specified by all the key end users around the world. All of this places us in a very strong competitive position. However, I think our business will get even better as we already see this in the short-term as we benefit across the board from post-COVID recovery over the next 2 to 3 years. We will also gain traction from secular growth, especially in emerging markets. And we are expanding our presence in non-oil and gas industrial segments. But it's more than the short-term. We have a very exciting story to tell about our growth after the next 5 years to 2030 and beyond. We see a massive continued growth in global energy demand over the long-term. John Crane has so much to offer. We chat away the global energy market plays out because our core competencies are needed across all energy sources. We can provide the next-generation technology enhanced by the power of digital, we can support our customers as they seek greater efficiency and as they look to decarbonize by 2050. And we have an exciting, innovative set of new products for non-oil and gas industrial segments. Let me share all of this with you in more detail, starting with John Crane as a business. Our revenues are well balanced. 2/3 come from stable aftermarket services, where our focus is on the reliability of customers' plans, and that's the reason behind our stable profit margin. We operate across 8 industry verticals, with roughly 60% of our revenue coming from energy while 40% comes from a variety of industries, such as chemical and pharmaceutical, or primary resource segments, such as water and mining. We have a number of key strengths. First, we are a pioneer of technological progress. Since John Crane's first invention in 1917, our company has been a pioneer of progress, defining and redefining the industrial seal over and over again. John Crane invented packing seals in the 1920s. Then the industrial seals right after the second world war, allowing for massive industrial scaling in developed economies, which supported the post-war recovery. In the 1970s, we invented the dry gas seal, an engineering prowess, the realization of an engineers ultimate dream, a device that required no lubrication and could last forever. Few people know this, but the continued supply of energy, power, clean water, food and safe medicine would not be possible without a reliable seal. Second, a product of vital. The seal is like the heart in the rotating equipment. It is embedded deep into a pump oil compressor and it's very hard to displace. A seal is a primary safety mechanism. And if anything goes wrong with a rotating equipment, if it is not operated near its optimal curve, this is instantly felt by the seal. This sensitivity made us experts at optimizing the operation of all types of pumps and compressors with the goal of increasing reliability and uptime. And the traditional way we grow share is to partner with all EPCs and pump and compressor OEMs when a plant is being newly designed. Our customers see us as the technology leader and as a trusted adviser. Winning these key strategic projects with OEMs is what grows our installed base in the aftermarket, resulting in annuity-like revenue streams over decades. We have global capabilities. For over a century, our business philosophy in the aftermarket was to operate close to the customer plant wherever it is in the world, offering a 24/7 aftermarket proximity service under any circumstances, we never let the customer down. Through our network of over 200 sites around the globe, our footprint is second to none. John Crane's internal network of talent extends across 50 countries with more than 2,000 expert engineers. We are a company of intuitive, entrepreneurial self-starters, who like to solve complex problems under pressure and are dedicated to their craft. Over the last 100 years, John Crane has built the largest installed base and our products equip most plants globally. Our track records of 90% aftermarket customer retention throughout the plant life cycle is testimony to the bond of trust we have built with our customers.

Hello. My name is Gabriel Lancaster, and I'm a principal machinery engineer at ExxonMobil Research and Engineering. For over 20 years, ExxonMobil has worked and partnered with John Crane with a focus on maintenance reliability. We choose to work with John Crane because of their commitment to excellence, their ability to globally standardize processes and procedures to support our business and partnerships with key original equipment manufacturers.

And finally, Being part of Smiths Group gives us access to a competitive advantage we would not benefit from as a stand-alone business. When it comes to digitizing our products, we have leveraged the Smiths' digital forge world-class capabilities in detection, digital technology and artificial intelligence to develop a suite of digital products with our customers. I am very excited by our drivers of growth. We see 4 main ones. First, we sell more of our products to more customers by expanding geographically and into other non-oil and gas industrial segments. Second, we sell more value to our trusted customers by addressing their evolving needs and stepping up core technology and innovation. Third, we expanded beyond our existing services by leveraging Smith's core capabilities in measurement technology and asset reliability to address urgent needs, such as reducing methane emissions. And fourth, we will continue to grow inorganically to support our business strategy. Now, let me share our view on the rapidly shifting market dynamics which will redefine our future and how John Crane is well-positioned under any energy transition scenario. Our customers are facing 2 conflicting trends which will define the markets over the next several decades. I believe the energy sector is at the heart of the solution to climate change. And our customers are key to the future of a low-carbon world. On the one hand, the first trend is that there is a significant and sustained global pool for a continued large increase in primary energy demand over the long-term, driven by population growth, urbanization and higher living standards. The growth all comes from emerging markets and China, and today's energy systems cannot cope with the demand. The only way to meet long-term demand is through a sustained and relentless quest for efficiency in the supply and use of energy. With our sustained yearly efficiency gain, primary energy supply would have to grow 60% by 2050. The second trend, on the other hand, is that there is a climate crisis that could spin out of control, imposing pressure on our customers that will boil up exponentially. Our customers are often designated as the culprits, but they are the leading agents to a cleaner world. There is no silver bullet to reach a 0 carbon world. Investments in several renewable energies need a massive scaleup, while in the midterm, cleaner, nuclear energy and natural gas, as long as it eliminates its methane emissions will be a critical bridge toward a 0 carbon future and to support intermittency of wind and solar. At the same time, the digital revolution, still in its early stage, will be a brutal disruptor and a formidable enabler of the energy transition. Because of the large deficit of investments into the energy systems that are required to reach a 0 carbon world, the transition will be a series of expensive and painful crisis with an increasing level of urgency. We believe John Crane is very well-positioned to help our customers under any energy transition pathway because we have existing technology and services to more efficiently and sustainably meet the demand growth in conventional energy. But we also have the technology to support the transition towards low-carbon energy sources. So those are the very positive current market dynamics. And let me now talk about how we are going to grow our top-line. Our first focus is to sell our current products to more customers by growing geographically and into non-oil and gas customer segments. Geographical expansion is driven by high-growth and high-volume segments, where product costs and lead times are key elements of success, especially in emerging markets. We are leveraging innovative material science and manufacturing technologies to reach a lower product cost point. We also benefit from our leading expertise in existing country footprint to accelerate local content and expedite growth in these geographies while maintaining strong margins. The same applies to non-oil and gas verticals. We have developed fit-for-purpose derivative products from our existing product families with higher performance at lower cost and shorter lead times by using proprietary diamond coatings, unique filter media and additive manufacturing. These derivative products help us gain share in selected nonenergy verticals, particularly in the segments driven by secular super trends such as mining, petrochemical, pharmaceutical and clean water. Our second priority is to bring innovative new products to market and create more value. By July 2022, we will have introduced 24 new products over 3 years, with revenue opportunities of GBP 100 million in 5 years. For example, we introduced a full range of innovative seals for midstream pipelines which extends the average time between repair by a factor of 3 and can ensure no impact to the environment in the event of a catastrophic failure of the primary seal in very remote places. We also offer fit-for-purpose products that solve long-standing customer problems within extreme operating conditions at very high pressure and speed. In 2022, we will launch a high-performance 0 emission seal that will eliminate methane emission from natural gas compressors, which currently generates 15% of oil and gas fugitive methane. Similarly, across multiple customer applications, our dry gas seals have proven they can withstand the high heat, high speed, abrasiveness and pressure conditions needed for CO2 capture and storage. Another example of innovation is John Crane Sense, our digital platform, starting with instrumented dry gas seals for compressors, an industry first. We are the first to provide customers with a powerful solution that embeds sensors inside an advanced seal to monitor the health of the seal and of the asset. Our commercial launch of John Crane Sense digital products in FY '22 will expand over a full range of products, seals, filters, couplings, by placing sensors inside the seals and the other physical devices. Sense generates never seen before unique data sets and analytics. When combined with the artificial intelligence capabilities of the Smiths Digital Forge, our platform creates asset-specific signatures for which we've built unlimited bespoke applications. We have run over 1 million hours with digital seal field trials at customer sites where they help us prioritize software applications using agile development. Applications provide insight for predictive maintenance, asset optimization, benchmarking and health management to prevent failures, maximizing efficiency and minimizing downtime. For example, thanks to Sense Turbo, our solution for compressors, a major LNG player avoided $4 million of production losses on a critical compressor train through accurate prognostics and proactive recommendations from our digital algorithm. John Crane Sense Pumps allows detection of suboptimal operating conditions with failure mode prognostics and self-healing, increasing equipment uptime and life expectancy while enabling the avoidance of redundant backup assets. And then John Crane Sense monitor offers a scalable, easy-to-deploy, wireless, high-frequency, real-time industrial IoT platform, building unique asset signatures and condition-based maintenance applications driven by our world-class AI capabilities. Another key R&D priority for growth is the energy transition. We are dedicated to helping a faster path to a net 0 carbon world and have allocated a significant share of our 5-year R&D investments into low-carbon technologies. These efforts build on our core expertise in high-performance flow control, which we extend through external partnerships. This makes John Crane a trailblazer in the field of hydrogen, carbon capture at scale, renewable fuels, solar and next-generation nuclear power. For example, in the domain of carbon capture and storage, the challenge is to be efficient at scale and bring the cost of blue hydrogen from the current $2 per kilo down to $1 per kilo. Part of the problem is the stickiness and the abrasiveness of CO2. The durability of our seals and their ability to handle debris extends the average time between failures and is the reason we are now equipping 80% of the carbon capture and storage projects around the world. Our third growth driver is expanding to a broader scope of services to meet our customers' evolving needs, such as their quest for higher asset efficiency in the aftermarket, with a particular focus on methane emission reduction. Fugitive methane represents 15% of the gap to a net 0 carbon world. Over the past couple of years, we have been testing a well-to-wheel one-stop shop methane remediation service that gives customers quantified methane maps to their infrastructure. We will then offer abatement services, prioritize on largest impacts. For example, upgrading all leaking compressors with our new 0 emission seals or deploying methane capture and recycling systems and fixing leaking valves. We then propose post-remediation, permanent monitoring industrial IoT solutions. We expect that within 3 to 5 years, ESG reporting requirements could impose quarterly emissions disclosures for our clients, making our services a repeat business with increasing technological differentiation as leaks get fixed and become harder to detect. When it comes to efficiency, producing more with less is imperative for our customers to meet global energy demand. But with climate change becoming center stage, the value case for asset management has grown exponentially. Energy efficiency can bridge 1/3 of the gap that society must close to reach net 0 by 2050. Waste avoidance in the use of primary energy resources is the most effective path to a lower carbon world. Over the past decade, we have championed an outcome-based engagement model with our customers, increasing their plant reliability where we are incentivized to maximize equipment uptime. We have now expanded the model into a condition-based maintenance service called John Crane Asset Management that spans beyond pumps and compressors and look at entire plants. Producing more output with fewer, more reliable assets provide huge opportunities to increase energy capacity sustainably. In closing, I would like to leave you with a few simple facts. John Crane is a very attractive business today with predictable, high-margin and sticky revenues. We are the technology leader with mission-critical products and services at global scale, benefiting, in the short term, 2- or 3-year horizon from post-COVID recovery and growth opportunities across geographies and secularly attractive industrial markets. We have exciting opportunities to accelerate growth to 2030 and beyond due to the massive increase required in the global supply of energy and a relentless focus on efficiency. And finally, John Crane is perfectly positioned across any energy transition pathway now and well into the future. Thank you.

Okay. Thank you, everyone, for your time and attention. I hope you enjoyed the event and go away with a better understanding of the significant opportunity we have available to us as well as greater confidence in our ability to capture this value. I'll just leave you with a few key takeaways. Smiths is an intrinsically strong company. We have a real and tangible opportunity for significant near- and longer-term value creation. We've demonstrated time and again across our history what this company can do. The key to unlocking this value is moving with greater pace and urgency, delivering performance reflective of our vast capabilities. The Smiths value engine outlines how we do this. And the financial output of the engine is quite powerful, recurring revenue growth, fueled by high margins, converting through our low-asset intensity model into exceptional cash generation. The Smiths value engine connects our purpose, our strengths and our top priorities of growth, execution in people. Our purpose is compelling. We're pioneers of progress, improving our world through smarter engineering. Our strengths are fundamental: world-class engineering, leading positions in attractive markets, distinctive global capabilities and a robust financial framework. And our priorities are crystal clear. First and foremost is accelerating growth. You've seen the 4 levers of the pyramid, and you've seen multiple concrete examples of how we're bringing them to life. Second is improving execution. A faster-moving, more results-oriented relaunch of our Smiths Excellence System is an important component of this. And third is doing more to inspire and empower our great people. We're doing this through a heightened focus on diversity and inclusion and more urgently building on our strong ESG foundation. We commit to the following financial targets, working from right to left, operating margins and cash conversion amongst the very best. High teens ROCE made possible by the strong margins, coupled with our low asset intensity model. EPS growth of 7% to 10% with upside from M&A. And the gear that turns the rest, the flywheel that makes this engine really hum, 4% to 6% organic revenue growth. I'd like to close by thanking all Smiths employees for the hard work and dedication that makes all of this possible. In the same way, we're grateful for the strong support we enjoy from our customers and shareholders. Take good care, everyone, and we'll speak again soon.