Smiths Group plc (SMIN) Earnings Call Transcript & Summary

All right. Good afternoon, everybody, and thanks for coming out, those of you who braved the train strikes to be here in person as well as everyone who's tuning in remotely. Just a couple of preamble comments from me, and then we'll just turn it right over for Q&A. I will cover the agenda for the evening. Then I'll hit a couple of highlights from the digital presentations, which are now available on our website. And then a couple of words about the Technology Expo. I think most of you I saw over there, so you'll all be familiar with it. But there is a virtual version of it that's also available online for people who are tuning in that way. Okay. First, running order for today. We budgeted 90 minutes for Q&A. I don't know if we need all of it, but don't be shy in that regard. As you can see, all of the presenters from this year's content are up on stage. We got Clare Scherrer, our CFO. Clare, is battling a little bit of laryngitis. So she's calm and understated by nature, but especially so tonight. Pat McCaffrey leads our Flex-Tek business. Julian Fagge leads Interconnect for us; Bernard Cicut leads John Crane; and Roland leads Detection; John Ostergren is our Chief Sustainability Officer. And as you would expect for any technology-centered event front and center, like the good students they are, we have our Chairman, Sir George Buckley; and Dame Ann Dowling, who is the Chair of our Science, Sustainability and Excellence Committee on our Board of Directors. Okay. So that is it for the running order. After the Q&A, we have a reception back in the Technology Expo. If we don't get to your questions here, catch us there. If for some reason, you don't catch us there, just chase down Jemma or staff, and we'll make it work that way. Okay. A couple of comments on the content, which you can find on our website. So last November about this time, we set out a strategy for Smiths. And if you boil it all down, it's basically to raise our performance better in line with our vast potential. And now 12 months in, we think we are making incredible progress in that direction. We posted our strongest year of organic growth in the last nine years. We did our largest portfolio action in the last 10, and we had our largest return of capital to shareholders in the last 15. There's been six straight quarters of growth, including 13% in Q1 just yesterday. So we feel like we have good momentum, which gives us confidence in the guidance we gave just a few months back for fiscal '23, that being 4% to 4.5% organic local currency growth, with moderate margin improvement. That momentum, though, in the medium term is also helpful because it progresses us towards those five financial commitments that we also unveiled at last fall's Capital Markets event. Now if you look in the slides, you'll see that across those five commitments, we're either at or above, or making steady progress towards the target. So I feel good about that. Now for the Technology Expo: one, we think one of the best ways to understand Smiths is to understand the technology. That's why we put so much energy into that. Hopefully, you guys saw sampling across the four businesses. For instance, it's a very interesting software application from Smiths Detection called iCMORE. If you guys didn't get a chance, you can pretend your security officer at an airport, if that's ever been your aspiration and see in real time what they see. Jerry is smiling. He and I took the quiz together. He did a little better than I did. But it's -- even with a CT scanner, it's tricky to be able to identify all the threat especially if a passenger is trying to hide them. That's where iCMORE comes in. It's a machine learning, AI-based software package that matches a library of images against the image created by the CT scanner, and of course, you can process much more quickly than and you or I can with the naked eye and brain. There's also an interesting demo from John Crane. You can see John Crane Sense digital hydrogen seal. So we talk a lot about the opportunity for energy transition. That's a real-life example of a product we're selling today. We probably have 5,000 hydrogen seals already in the market. So the energy transition future very much already here today. For Flex-Tek, we've talked a lot about a new product that we had coming. We told you this time last year, it would launch before the end of fiscal '22. Pat got it out the door and early orders are strong. That's called Python line sets. You can do a kind of a practice installation, which will allow you to touch and feel the benefits of that product, much, much lighter than copper, much easier to manipulate. It's UV and chemical resistant and far easier to install. And then for Interconnect, have a whole number of technologies, including a virtual satellite. So people are pretty familiar with Interconnect's position with high-profile space programs like the Mars Rover or the DART mission. But the vast majority of all satellites that go up outside of Russia and China have material content from Smiths' Interconnect. So for those of you who can't be with us tonight, again, we've tried to create a digital twin of the Expo. So that's also available on our website and not quite as good as the real thing, but it's pretty good. I think it's worth a look. Okay. I think that covers it for my preamble. If you have a question here in the room, just raise your hand and Carla will get you a microphone. If you would, please give your name and the company you're with so that the people online have a context for it. And wait for the microphone, and as they won't, of course, be able to hear. If you have a question from online, just push the blue button, type in your question, and Stephan Jemma will read those out. Okay. Who wants to kick us off? Andre, that didn't take long.

It's Andre from Credit Suisse. A couple of high-level questions first. On the order book disclosure that you gave and that 5% to 7% growth that you expect for this year, what gives you that level of confidence for that growth for the second year of book-to-bill above 1, and how that's developed in Q1, please?

So order book, in several of our businesses, we have very good visibility. In Roland's business, on the OE side, you can see three years in some cases ahead in the order book. So in John Crane, it's not quite as far out as that. But for the OE portion, we can see months ahead. In the aerospace part of Pat's business, that's a multiyear contracts, and then part of Julian's our long-term contracts. So we have good visibility into the order book. The delta between order growth and sales growth comes down to supply chain efficiency. The gap between orders and revenue growth now is smaller than it was last year. Our supply chains are getting more efficient. But we're encouraged. Orders are still above even our accelerating revenue growth. So those kind of come together to support the confidence we have, Andre.

And in Q1, how did the order intake develop?

We can go business by business, but across the group, it was strong. We had positive order growth in all businesses, positive revenue growth in all businesses. And I think this is true in all cases. Orders were above -- order growth was above revenue growth.

And second question on net price. You showed that you outpaced inflation with pricing in fiscal 2022. For 2023, I presume you're going to have some carryover from price actions of this year and then raw materials likely coming down. So would you expect another positive gap and similar or bigger than in 2022?

On pricing, we try to do two things. So first, we want to cover our input inflation. So not just raw materials, but we cover raw material freight and wage inflation. And then starting last year, we began publishing that for all of you guys so you could have transparency into it. Second thing I would say is price is part of our value proposition. We invest better than 4% in R&D every year, about twice what our peers do. And historically, I think as a management team, we felt we probably weren't asking enough in terms of price for that. Now you have to strike the right balance. We have decades-long relationships with our customers. Now is not a time to be putting your customers in a difficult position. So we try to feather the clutch between getting enough price to cover our costs, represent our R&D investment, but still supporting our customers.

And just lastly on Flex-Tek. I think, in the slides, you showed the assumptions for housing starts, what you've seen historically and then for the next couple of years. And I think it shows minus 0.7% for 2023 and then reaccelerating to 5.5%. I just want to check what's that based on? And is that specifically to multifamily? Or is that mix?

It's a mix. It's both single-family and multifamily. It's also based looking at the markets that we play in, which is in the southern most, which is what our growth and where most housing starts. But you'll see a little bit dip this year, but we feel strong it's going to come back and we feel real good about it.

The chart, Andre, is referring to, if you look in the Flex-Tek presentation, it's a very helpful piece of data. Pat shows his construction business year-over-year growth for the last 15 years against U.S. housing starts for the last 15 years. And there's only been one year in the last 15 when his construction business had negative growth in the financial meltdown of 2008, 2009. So Pat and his team find a way to grow even when the markets aren't. Mark?

Mark Davies Jones at Stifel. That was just the start. So if I can start again on Flex. It's a fantastic long-term growth record, but still 85% of the business is in the U.S. and most of that is in the Southern U.S. So are other reasons in terms of the mix, different types of heating, cooling, why that is the case? Or is it just a big untapped opportunity?

I mean, honestly, first, we've grown, what, 15% the last five years in Flex-Tek. We've grown about 10% over the last 10 years. So we focused on that. Now a lot of it is with the central air systems there where you have more gas, of which are FlashShield, but there are a lot of opportunities with metal ducting that will take us up that way. The Python loans line set will give us a lot of more opportunities to go that way, too. So there's a lot of opportunities for us that's unchartered that we see upsides, and that's why we're very confident of what happens in this market right now. We know the risk of the slowing housing. We know the risk of the higher mortgage rates. But if you look at the new launches, you look at the multi and single-family homes, which we just talked about, you look at the shortage of homes that are out there, we have a lot of opportunities to grow with the products. We've also set up a new site in Texas, which we will take to other places once we get this running and it started very well. So we're very optimistic. Now, we're not going to grow at 26% like we did last year, but we are going to grow. I have no doubt about that. I feel we're all confident that if you take it internationally because we usually get asked in Europe, we have a lot of opportunities to grow there. Forget aerospace is going to grow. We are recovering back to where we were pre-COVID this year, and there's a lot of growth ahead of us on that. We have opportunities with the Midrex that's in Europe that we just landed that's going gained about 250 basis points each year. Exciting opportunities that moves to electric away from gas for most of our products. So I'm very optimistic. I said last year, we'll have a great year. We had our best year. I still feel really optimistic about where we can go.

And the Python product, that's not replacing anything exist -- that's a new market for you.

That is a new market for us. Yes.

So I carry on, just one more for now. One for Julian, maybe. Interconnect has also been performing very strongly. But can you just talk about the portfolio there because it almost looks like another mean you can do within another mini conglomerate. So how do the businesses sit together. I think a few years ago, there was a concern that parts of connectors was commoditizing a bit. Obviously there are newer growth areas within that business. But can you talk about the mix?

Yes, I can certainly get some color. I mean, I certainly don't see it as a conglomerate of businesses. I mean there are some core technologies that run through all the different parts of the business. And actually, it centers around the hyperbole contact that enables really high-performing connections. The spring probe connector, which sits within our connectors business, but also within the semi test sockets. We acquired recently fiber optic capability, which we've added to the SatCom portfolio, and we've recently organically developed this fine wire termination capability that sits within in our medical cables. So core technologies that sit across all the businesses, and that's what glues us together. The second layer of the end markets, so all of our products are typically serving into strong, attractive growing end markets that we feel really good about. SatCom I've mentioned, semiconductor supply chain, again, a strong business and of course, aerospace and defense, where the backdrop for both of those markets is favorable. So the portfolio is sitting nicely and there's plenty of opportunity to grow. Your question on connectors, it's been about accessing new market opportunities with the core products and the core technologies and applying our customization skills to those opportunities. I've mentioned the medical cable. That's new for us. It shifted us up the value chain, not just a connector, but now a full cable assembly. It's a platform product. It's multiyear. We have a technical advantage versus our competition in terms of the number of cycles that the cable can last. And we need more of those. And I think connectors has plenty of those opportunities in front of it. So I don't see it as a stagnating business, mark.

That's very helpful. If I can squeeze one more in. One for Roland on Detection. The lumpiness of detection has always been an issue. First quarter, it looks as though we had a nice lump. So can we talk about whether there are more large projects coming through, through the balance of the year? And whether, over time, there are things you can do to make the performance of Detection a little smoother and less point of surprises?

Yes. Thank you for the question. I mean, the last three years have been incredibly challenging for our customers in our main markets and to a lesser degree, to ourselves. I mean, essentially, the business, I think, has shown its resilience over that period, both through the people and the technology. Yes, the Q1 does reflect the certain programmatic parts of the business. And always part of the business is going to be programmatic. But this isn't about avoiding the cyclicality. This is about creating a business, which can absorb the cyclicality. And I think, over the past three years, we have really started to diversify our customer base and also bringing on other parts of the portfolio forward in terms of technology into the existing customer base as well. So we are seeing the benefits of that technology in those new products. Also, you will have seen the amount of more service that we do compared to three years ago, a substantial change into service, much more predictable, much more stable, and ultimately, better margins for us. I think we are always going to see cycles coming through. The piece here is really to make sure all four markets are delivering value into that. And I think we're just coming into a very strong, unfortunately, for the world, the defense cycle. I think that's a defense cycle that is on the up. We saw that actually expanding energies in ports and borders really started bringing us back from the position. We were into a much more competitive position, and we see that flowing through. And obviously, urban security doesn't really have that cyclicality anyway and that gradual growth within that and with the digital products coming into that is also a very powerful dampener of the cycle. So I can't promise you we're not going to have excellent programmatic business coming through, which I more than welcome, obviously, and we're very capable of delivering, and as a business, enjoy making the world a safer place through those aspects. But the trick is to get those -- all those markets firing and really that's what we've been doing over the past three years. It has been challenging. It has been difficult. You've seen in the numbers. I think Q1 begins to show what this business is capable of. So thank you for the question.

Jemma has a question.

We have a question online, which is can you remind us what the changes are that you've made to the Smiths China operating model? And does this imply more M&A in China?

So Smiths go-to-market model is business led. So the four division presidents have end-to-end global responsibility for their businesses in all countries, and that has served us well. One of our larger geographic market is China, both in terms of revenue contribution, but also in terms of accretive growth, that's been accretive for more than a decade now. Beginning around 2019, before COVID, as macro growth in China started to slow, we saw the same thing in our business. And then there have been other macroeconomic and geopolitical changes, of course, in China, which has made it harder for us to execute that business-led model there. For instance, nobody on the stage has put foot in China now and coming up on three years. So when we went through our strategic planning exercise last year, we had a focus on China. We said, how could we get back to well above market growth for our China business, and we decided to make a change to our model, which was to empower the local team with greater decision-making authority. We put that in place at the beginning of this fiscal year. Too early to tell in the results. They also had a good Q1, but I know I wouldn't put too much of that down to the model change. So we'll see how that plays out. As that pertains to M&A, I wouldn't connect the dots on those two. We'd certainly like to increase the size of our footprint in high-growth markets. China is one of them, but the model is -- wasn't done as a way of accelerating M&A in China. Yes.

Vlad Sergievskii, Bank of America. A few questions. If I can start with the aftermarket revenues and the stickiness. Would you compare the stickiness between the three divisions you have where you're getting those revenues almost guaranteed when the activity happens, and where you have to compete a little more to get those?

I'll give a high-level answer, Vladimir, division president just talked specifically for your business is what the stickiness is. For all four businesses, the aftermarket revenues are highly sticky. They're probably trying to figure out if they can remember an instance where they lost an aftermarket contract, but I'll let them go through that. Some of our business though, part of Pat's business, he'll say this, is not OE after aftermarket in the same way that Roland or Bernard's are. Those are more customer relationship driven on the construction side. But the rest of the business is, in aerospace, in security, in energy, if you install the OE piece, there is very sticky, higher-margin recurring revenue. But maybe just spin through the President, Pat your business maybe aerospace focus on that?

Yes, you pretty much Aerospace, we do have an O&R business that's pretty solid at repairs, and we get advantage of redoing our products there and sending back as our competitors' product. So we have some opportunities. The rest of them is more distributors where we do get opportunities over and over from do-it-yourself and stuff, but that's more just opportunities from that relationship?

Yes. I think we're quite similar. We do have an O&R repair business on our antenna that sit on top of commercial aircraft for Wi-Fi. But after that, really, our strength is about being designed in. And of course, once we're designed in, the repeatability follows.

As far John Crane is concerned, that's a very important part of our business, as you know. And of course, it's based on the installed base, which is important in most of the rotating equipment across the world. But what makes it really successful is what has been built in terms of proximity, service, understanding and network close to the customer premises. And on top of that, it's about adding time after time, new capabilities and new type of service such as reliability type of service contract over type of service contract. So we are really excited by -- and all the customers I had the chance to meet since I joined the group. That's a very important part of the discussion, the credibility, the trust and the relationship.

So with Detection, I've already mentioned how much we've increased the aftermarket within the business. And for me, that's a very good surrogate for market share as well. [indiscernible] Bernard, I mean we've invested a lot in our abilities within service because it is the place where people see us day in and day out. And ultimately, the next OE part of the business when we bid for that service is an important factor in whether they choose us or not. So we've invested heavily in that area. It's a very important part of our sustainability agenda as well because we are renewing and sustaining those machines in the field, usually for periods longer than 10 years. We've seen that stretch, and stretch, and stretch as people are a challenging budget. And it gives us a real opportunity to introduce new algorithms, new base services within that, so adding value to our customers within that. So aftermarket is becoming more and more important with us across all those aspects. So it's a very positive part of our business. And really, if you look at where the pricing power within Detection sits, it is very much in the aftermarket.

That's great. Thank you very much for those details. If I can ask a couple of financial questions for a change.

We're going to test Clare's voice.

Exactly. Exactly. Sorry about that. So if I could start with debt maturities, right? So you have a pretty sizable maturity in the first half of next year, but at the same time, a sizable cash position as well. Do you feel like you can repay this maturity right from the cash you have, or you will need to access the debt markets?

So firstly, I apologize for my voice, but I wouldn't miss tonight for the world. Secondly, to answer your question, we plan to repay the maturing debt in April of 2023 with our cash balance.

Great. That makes it easier, I guess, in the current environment. And the final one is on your dealing with your strategies. There has been, at least, I think, reported in the last full year, a pretty sizable derivative loss. Would you be able to highlight which particular instrument it was related to? Was it FX hedging? Was it interest rate swaps, which I think you're using as well? That would be helpful.

I couldn't hear the first part of the question.

The first part of the question is on your derivative strategies. And if there was a derivative...

Derivative strategy.

Yes, exactly related to this last year, what this derivative loss was specifically related to what type of instruments?

Well, I want to make certain that we're not confusing. The FX loss that was associated with medical, which is offset because we had medical and discontinued operations, and then we also have in the consolidated, it's offsetting. So there was no loss. So perhaps we can pick this up off-line, if that's not what you're referring to, and I'm happy to go into any detail with you.

Why don't we do Christian's in the room and then we'll do Jemma's online.

Christian Hinderaker from Goldman Sachs. Firstly, you've got top three positions in a number of our key markets. Just interested in the areas where you're not top three, what the ambitions are? Is that an inorganic or organic priority? And also, how we should think about pricing power for where you have less of a strong position?

Well, so in all of our businesses, I would say that we have strong core positions in components of much bigger markets. So in each of these cases, there are attractive adjacencies that sit right next to us. And depending upon how many rings out from our core you go, our market shares, of course, get lower. So for example, in Detection, very strong core position in aviation security, pretty good position in ports and borders and urban security. And then you get out into the next sort of ring of potentially interesting places for Roland's business, biological detection we talked about in the past, where we would have lower market shares, and we have an interest in that market. In Bernard's business, similar, very strong core positions in energy, water, pharmaceuticals and chemicals. But then there are other assets within flow control, a better of interest. And there are other service models that go on those assets. These guys talked about the stickiness of servicing their own assets. There's business models we can service other assets. Our market shares in those would be smaller. In Julian's business, very strong core position in semiconductor tests, in connectors and in SatCom. There's all manner of interesting adjacency within those three towers. And so, our first move, how would we penetrate the adjacencies? Our first way of interest would be organically. Is there one of these core technology platforms that we could extend? If we can't do that, then we have good examples in M&A. Pat talked about -- Pat didn't talk about it, but it's in his presentation, moving from his core position in tubing for construction applications into aerospace. That was via M&A. Julian mentioned moving into [indiscernible] was via M&A. So first choice would be organic, but we're looking at a number of deals that would also get us there quicker.

This brings me on to my second question, which is around M&A. I think you looked at 15 deals last year and that obviously didn't come through just interested in the priorities there, maybe beyond what you discussed in terms of the adjacencies that you're looking at, but sort of the financial metrics that you consider and sort of what it might have been that meant you walked away from those 15 deals?

There was a time when I fielded the M&A questions before we heard Clare. Now Clare, I'm going to give that to you.

So we have an exciting organic strategy that we have a lot of confidence in, and I hope that you all do as well, having spent time with us today. This means that we don't need to do M&A, means we can choose to do M&A when strategic opportunities come along. So what we aim to do is look prolifically, but screen very rigorously because we want to make sure that anything that we pursue advantages the businesses further and has strong financial returns. So we're looking for both an operating fit that we are rightful owners of that business and can generate synergies. We're also looking, of course, to more than clear our cost of capital in a reasonable amount of time.

Thank you. Voice again is getting stronger the more you...

Can I squeeze one more in?

Yes, you bet.

Apologies Clare because it's for you, I think, potentially -- just on the inventory side of things, and we have a great slide in the deck on that and sort of specifically how you're planning to work down working capital in the months and quarters ahead. Could you just talk through that briefly?

Absolutely. So the question is around working capital and how and when we can work it down. So what do we see what are we doing and how long do we think the situation will persist. So what do we see? In some of our supply chain, we do see some stabilization. So that's great. What are we doing? We're trying to be very nimble. So when we do see stabilization, we're trying to introduce more discipline because, last year, we made the intentional choice to invest in inventory in order to enable and underpin our growth. However, we equally see some areas, especially in electronics and especially in some specialty polymers, where things aren't stabilizing. And some of those problem areas are going to persist well through FY '23. So we have a lot of initiatives. We have initiatives to decrease our sole supplier relationships. We have some targeted SES initiatives, which we're pursuing across each of the businesses. And the way you should think about what we're doing is, we're trying to think in a differentiated way across each of the businesses when we need to keep the foot on the gas pedal for securing scarce supply, and when we can put the foot on the brake pedal because we can introduce more discipline. So we're really trying to be very differentiated and nimble.

Jemma is dying to ask a question.

We have many coming in online. This question is for Bernard. As you're new to the business, how do you see the energy transition opportunity for John Crane?

So thanks for the question. And I will start by talking about what John Crane is already doing and for many, many years, to support energy in terms of security of energy, in terms of efficiency for the people who are working in, in producing energy, and really based on that experience coming from years and years and innovation coming from years and years in rotating equipment and the way we optimize the rotating equipment, the seal being at the earth of the rotating equipment. So that's the reality of John Crane today. And that reality already applied in energy transition. We already have businesses we've seals in hydrogen. We have seals in hydrogen for more than 40 years. We have seals which are used in carbon dioxide for more than 25 years. We had, just in the past few months, important win with hydrogen project [ NEOM ], being one of the important win in carbon dioxide with [indiscernible] project. And all of that with technologies which are evolving and being developed, you saw that's part of the technical export today. You saw the hydrogen seals, the dry gas seals since enabled. It's also about bringing digitalization to that. Now energy transition is, of course, we'll see an acceleration of a change. And that's a great opportunity for John Crane, a very exciting opportunity for John Crane. It will require new type of performance in the technology, higher pressure, higher speed. It will require new development in filtration, in material, and that's what John Crane will continue to do built on the existing capabilities and new capabilities that we are developing as we speak. So in summary, excellent opportunities, very exciting. And when I meet the people in John Crane in the different parts of the world, there are -- of course, it's about change. So there are questions about how do we change, but they're excited about the opportunity and the contribution that John Crane will continue to have in energy transition and securing that for the world.

Jack has got another question.

This one is on John Crane as well. if we focus on traditional energy for a moment on John Crane and simplistically split the world into four regions: Americas, Europe, Middle East and Asia. Where do you see the most growth opportunities across those four from the traditional energy or traditional business standpoint?

I think that we are talking about different type of opportunities. If we are talking about Asia, there is definitively, for John Crane, I would say, market penetration opportunities in Asia. We have a very strong position in different parts of Asia, but not everywhere in Asia, and supporting the investment, both OEMs investment end user and aftermarket, that's very important for us. Now the nature of the business in Europe or in North America is slightly different. But there are great opportunities there. So I would say, to simplify, we see Asia growing faster in terms of opportunities than what we could see in the very short term, to answer to your question, what we could see in Europe, but we see very strong order intake in the Americas, very strong order intakes in Latin America, and we are ready to deliver on that.

It's Bruno from BNP Exane. I just wanted to go back to Andre's question. On the outperformance of Flex-Tek relative to U.S. housing, residential construction starts. It seems like over the last few years, that outperformance has been more marked, more pronounced. So what do you attribute that outperformance specifically to if you look over the last few years?

First of all, I mean, it's our relationships. We're targeting some really good growing wholesalers, the Watts goes to wins of the [indiscernible]. Our location really helps. And then you look at the launch of our products in construction, where you had the FlashShield plus, which is a game changer out there, which really helped. You have a continued new products. So we are the new product, people, in that industry. And basically, right place, delivering -- building relationship. People buy from who they like. I go to the same gas story because I like them. They come to us because they like us. And that works. And we take advantage of that because we can solve their problems and get them what they want. And I think that's what leads us going forward, to be honest with.

And I was just interested in the pricing model of Flex-Tek. So specifically, how sensitive are your list prices to save raw material prices? Do they mechanically adjust upwards? And in a world where raw material prices are starting to come down, do we see that mechanically adjust downwards, say, for FY '23?

You got different business, but when you talk about construction. Construction business is truly the pricing went up because they can go up to the market. In my opinion, it will not come down quickly because you've got a lot of public companies that let inflation is up to, they want to cover those prices, they've got more costs, and they're going to hang on to that for a long time. And I think -- so I do not -- it's not mechanical. It's knowing the market, knowing your customer base and knowing where you sit. And I see that we're in a pretty strong position to hold where we're at in that area. Plus, we're also putting out new products that are accretive to our growth, which will help us also in that thing. So I don't -- it's not mechanical. It's a balance. We want to stay ahead of inflation, and we have. And I don't see it mechanically dropping. I think the prices will stay pretty strong. Hopefully, that helps.

It does. But on the 26% growth last year, how much of that was specifically price in the construction market?

I think about half -- a little bit over half was price and some volumes. So...

Okay. And of that, how much of that price was linked to raw material pass-through, if you're able to provide that detail?

He's asking do you have pass-through agreements in your supply agreements?

We don't know have pass-through agreements, but we work closely with our customers. And, well, in this market, they can pass through what they get from us. And so it gets passed through and that's kind of how it works. There's not agreements in construction, but there's partnerships.

Got it. And Julian, just one on Interconnect. I think in your presentation, you mentioned that over the next few years, we'd see 70,000 satellites being launched. Just trying to grapple with that. What does content per satellite for Interconnect look like? I guess, could you provide some color around that?

You don't have to give specifics.

No, no, no. And there..

You'll get to a big number faster.

Well, first of all, I mean I think the outlook is there will be many, many satellites being launched over the next few years. And in part, that's the commercialization of space with the SpaceXs, the Amazons of this world launching programs for a variety of different reasons. The satellites certainly in the low earth orbit area will be short-life satellites so they'll probably last two to three years before they burn up and then they'll need to be replaced. In terms of the content, it really depends how the how they are being used. You either put a lot of them up there and they need to only pass through a fairly limited amount of data because there's such a large number of them, where you put fewer up there and then the data demand is a lot higher, right? Now the ones we like are the ones where the data demand is really high because that increases our content, particularly in the area of optical. And our optical transceiver product is really well placed to take advantage for those customers that wanting to go optical. And -- but around the optical, there is also our traditional passive components business, our filters and our isolators and our cables that will also give us a good amount of content on each one. So it's such a good opportunity, but quite hard to be precise, but I hope that gives you some color.

No, it's helpful. And a final one. Paul. I was just wondering, I think in your prepared remarks, you stated that the strong order growth that you expect this year as well provides additional upside to that 4% to 4.5% range that you provided, provided you execute well. So if we assume that you execute impactably this year, could you help us paint a blue sky scenario? So half above that to 4% to 4.5% range [indiscernible].

Boy, Bruno, you're good. I'm sure I said something more careful than that in my prepared remarks. Our guidance for the year is 4% to 4.5% organic local currency, growth with moderate margin improvement. We're off to a good start. We had a good first quarter. Let's not get too far ahead of ourselves. We issued that guidance, what, two months ago. Remember, when we issued that guidance, I had a pretty good sense of what was going to happen for Q1. So that factored into it. As Roland touched on, a good part of that really big Q1 was a nice contribution from Detection. We committed this time last year that Detection would return to growth in fiscal '23. I think we're encouraged that it's returning so quickly and so strongly. But that will not happen every quarter because of the programmatic nature. If the macro environment stabilizes, yes, I think there's additional upside. We don't give a confidence interval with our guidance, of course. We kind of risk adjust it when we put it out there. But we're off to a good start. We feel good about the year and see how it plays out. Jemma?

We have a question online about our sustainability strategy. The opportunity from John Crane, from a sustainability perspective, is very clear. But John, what other opportunities do you see across the business?

Thanks for the question. I see quite a lot of opportunity. I'll try to be brief. Sustainability really is at the heart of the purpose statement for the enterprise. So improving the world, right, through smarter engineering. The trick with sustainability is to turn that kind of general language into something that's practical, tactical and delivers for the business as well as our people, our communities and our customers. So our game with sustainability and the opportunity I see for value creation comes through that lens, if you will. Most specifically, I think just to piggyback off what Bernard was saying, vis-a-vis John Crane, and I think implied in the question. Sustainability, one of the biggest mega trends driving sustainability value creation opportunities is certainly the energy transition. And that is something that's affecting each of our businesses and it's something that is creating opportunities across all of our markets. For us, we see that evolving in three phases. So efficiency, electrification and alternative fuels coupled with carbon capture. Again, you all know the John Crane elements of that story that really cross all three of those waves. To answer the question, through that lens, I would start with Flex-Tek. And if you had a chance to -- if you haven't had a chance to see, I would ask you to check out the Midrex partnership demonstration that is highlighted in the materials over there, and speak with Matt Hargreves and Jordan about the opportunity we have for decarbonizing steel manufacturing or assisting in the decarbonization of steel manufacturing, so green steel production, a great opportunity for Flex. More broadly for Flex, electrification. So this wave of electrification that is coming to all processes and markets is something that -- sure heat, in particular, in TEPCO business within Flex-Tek is -- could not be better positioned to take advantage of. Moving to Julian's business, so Interconnect. We've talked about satellites. We've talked about data. Those are great enabling systems that allow for efficient movement of data and enabling sustainable development around the world. I would be more specific about the opportunities, however, when I think of interconnect vis-a-vis the energy transition. So the connectors business and our fundamental capabilities proven in space, the most challenging environments, I think, that you could imagine, also create great opportunities for delivery of improved performance on the pervasive connections that are required for the electrification of the terrestrial world. So EV charging, while further into the horizon for our commercialization plans, is a really exciting opportunity for Interconnect. Last, certainly not least, Roland's business, I think, tends to be a humble business, my view, and has delivered really remarkable improvements in efficiency in the kit that they deliver to airports and others around the world. And I think it's something that's been traditionally thought of as an add-on sales feature related to the total cost of ownership. Energy does cost money. We are seeing, today, very real, and I would ask Roland to elaborate on this, if you're interested, but very real interest among our customer base for not just the cost benefits of energy conservation, but the sustainability benefits that come along with that. And so being able to reduce the energy consumption in our fundamentally enabling safety systems by 10% to 90%, such as our C6 system, is really quite a remarkable thing and something that our customers care quite a lot about. Sorry for the lengthy answer.

Jemma, you've got another one? Yes?

A question on interconnect. A number of companies have stated their intention to invest in U.S. semicon capacity. What is your market share in the U.S.? And when do you think the order impact will start to be seen at Interconnect?

Okay. Well, thank you for that one. We, a few years ago, started to build investment into the U.S. So historically, our manufacturing was all in China. And we shifted that in part driven by some of the tariffs that were introduced under the Trump regime. We invested into manufacture out of our Tijuana facility in Mexico. So that gave us the footprint, if you like, to better position ourselves for the U.S. market. We historically have customers based in the U.S., but typically, they are working on the design side of semiconductor, whereas the assembly and test of semiconductor chips is nearly all in Asia, where we are well served. So the future will clearly develop as it develops and the CHIPS Act and indeed corresponding movements in Europe suggest there will be more of a kind of localization or self-sufficiency in Western economies, and we are well positioned to take advantage of that, both in our relationship with customers and the footprint that we are -- that we now have. So I think we're going to be okay with this. I think it's a big opportunity actually. And I think we're well positioned for it.

You have another one online?

Yes. So in Paul's presentation, you highlight that John Crane's aftermarket margins are 1.75x OE margins. Is that the same across all end markets? Has the trend we saw pre-COVID of selling some OE low margin to get the installed base now over?

Let me give you my sense and then Bernard will fill in. It doesn't differ by end market. It differs by the type of application. So there's a pyramid to seals from very low tech seals, in some cases, disposable where there wouldn't be an aftermarket component when it breaks in a very simple application you put in an all-new seal. The margins there are very low, and we don't participate -- we frankly don't compete well in that market. We're at the top end of the pyramid in these highly engineered demanding applications. So it's not so much are you participating in energy versus pharmaceuticals versus chemicals versus water. It's where on that pyramid you play. Now to the point about is a different pre-COVID, and today, maybe the third dimension to think about that is the amount of add-on business that comes with the OE sale. So some tenders are very attractive for the seal manufacturer, either their reference accounts, like some of these energy transition, high-profile projects that we've talked about, or they have very clear additional seals and long aftermarket likely sticky sales. Some of our seals are generating aftermarket revenue 30 years after we've installed them. So those are the kind of the three dimensions to how that margin plays out. Where in the pyramid are you? Not so much what the end market is, and then what is the amount of likely additional business that comes with it.

The only point I would add to both dimensions extremely well explained by Paul is also the work that we are always doing on the selection of when to participate and when to just move away. So to the question, is it different now than pre-COVID? No there is still very significant competition each time there is an opportunity, but it's really about understanding the opportunity, understanding how we could contribute and create the return we want to create for the customer and the shareholder and then making the right selection of the project we apply and most of the time we win.

Mark?

Can we stay on Crane for a moment then I think Clare mentioned specialist polymers being one of the areas that's still very tight from a supply point of view. I assume that's principally Crane that's impacted there. So how long do you think that can last? Is there any way you can engineer a way around that? How much of a challenge is that? And I guess the other side of the coin, in terms of growth in your markets, when do you think the real benefits of the changes to the energy system in Europe post Ukraine start to feed through to the business in terms of LNG in particular?

So to the first part of the question, if I may. We had an extremely challenging year from a supply chain perspective in our fiscal year 2022. There is absolutely no doubt about that. We have seen suppliers extending significantly lead time. We have seen suppliers stopping production for a period of time. And frankly, it has also enabled us to do, from an operational perspective, a fantastic job to reduce our exposure to single source. We had qualified more dual source or other local source of supply than what we ever did. We are in a much better position today than what we were just five months ago from that perspective. Now those extended lead time continue to be a reality. So we need to improve our own capabilities in order to still deliver to the market expectation from a lead time perspective. And the other element, which is not just specific to John Crane, which play in other part of the business within the group is that when we have dual source, we very often need to also go through the requalification process of the material, not just internally, but with our customers. And our customers need to recertify the material, which means resources that the customer have to allocate in order to make that happen, and we support them in that process, but it's time and effort from our customer, which then has also put us in the situation where some customers told us, "Yes, John Crane, we will do it. We have placed the order. But by the way, we don't really need that material now. So give us time." So from a service perspective, we will continue to improve the service. We are in a better situation, more stabilization, but we are not over from the supply chain disruption. We are focusing internally on how to accelerate our order book conversion to revenue. We are leveraging some well-known tools, lean approach, Six Sigma approach to improve our processes. And we have already seen some materialization of that -- those efforts in our Q1, and we'll continue to see that as we go along the year.

Another one online?

We have our final question online, which is on Flex-Tek. Historically, you've talked about expanding your business outside of the Americas. Is this still a focus? And how will you do that?

Maybe I'll take the high part of it. Julian, do you want to talk about China a little bit?

We'll talk about China.

So from a high-level perspective, across the all of Smiths, when you have high margins and high return on capital, the highest risk-adjusted return on any marginal dollar is going to be organic. And the -- probably the clearest example of that is in Flex-Tek, where it has mid-teens top line and profit CAGR, whether you look at it 5, 10 or 15 years. For them, they have so much opportunity in their backyard, the highest risk-adjusted return has just happened to be in North America. Absolutely, we think we can do the same thing in Europe and others. But Pat and his team are just so darn busy fulfilling orders right now. But China is an example where I think you guys are making a very specific effort maybe talk about that?

Yes, sir. I remember last year, I got one question. So this has been exciting for me so.

We get paid the same pattern.

We had China and Europe. But China, we're trying -- we have grown their double-digit CAGR for the last five years since we've been there. And not only our heat applications, we're putting machines over from a medical application. We're a leader in the heated wire CPAP hoses and there's a lot of opportunities we're trying to take advantage of this. So we are now actually put machinery in the ground. Also in the automotive segment. We have a great hose that's used for fluids and braking and stuff. We have put machinery over there. We're trying to build on that and complement what Ted's doing in China. We're really excited about it. It's really -- it's been a good leader across midst of our growth, and we think there's a lot of opportunities there. And we also continue -- I'll just touch on Europe. We talked about the electric heat and the opportunity there. We just got a machine there that can make [ FlashShield ] type product up and running there. We've got a great partnership on development work with Airbus. So internationally, has become a focus. As Paul said, we've been focusing on what -- we've executed very well and trust me, I get challenged by that a lot. Okay.

So good. Maybe time wise, we'll wrap it up there. We can continue the discussion back across the way. I do want to thank everybody for coming out. It's kind of a flash back to 12 months ago. And when I think of all that has happened in those 12 months, certainly in the world, but also in Smiths, we feel really good about the trajectory we're on. And we're grateful for all your support because that makes a big difference to what we're trying to do. So thanks, everyone.