Jemma Spalton - Director, Investor Relations Andy Smith - Chief Executive Officer John Shipsey - Chief Financial Officer Bill Seeger - Interim Chief Financial Officer

Andre Kukhnin - Credit Suisse Mark Davies Jones - Stifel Nicolaus Alex Virgo - Bank of America Glen Liddy - JP Morgan Jonathan Hurn - Deutsche Bank Robert Davies - Morgan Stanley Sandy Morris - Jefferies

Good morning, everybody. And thank you for joining us today for the Smiths Group 2018 Interim Results.

My name is Jemma Spalton, I am the Investor Relations Director. Just a couple of housekeeping points before we get started.

There are no planned fire drills today. So if the fire alarm does sound, please exit to on the far at the front here.

And also if you could take a moment please that digest and read the disclaimer slide, which is in your packs and behind me. To give you a feel for today’s proceeding, Andy Reynolds Smith will start by taking us through the Group’s H1 highlights.

John Shipsey, our CFO will take us through the performance review before a strategic update and update on our outlook from Andy at the end. And then we will have some time for questions and answers at the end of session.

So it’s my pleasure to hand over to Andy Reynolds Smith, Chief Executive Officer.

Thanks, Jemma and good morning, everyone. Thanks very much for turning it on a Friday.

I am delighted to welcome everyone today. This is a really important for the Smiths Group.

I am delighted to welcome also Chairman, George Buckley and Bill Seeger who some of you will no doubt remember. This is an inflection point for the Group.

We’ve been building hard on the foundations in operations, in innovation and in people to drive sustainable growth above our markets. The outlook for growth in 2018 is reaffirmed.

Our confidence is supported by the improving trends that we see throughout the divisions during the period and importantly, in the start of the second half. As you can see, John Crane is back to growth, driven by the positive trends in oil and gas and further progress accelerating our non-oil and gas activities.

We’ve got a strong order book in both OE and aftermarket. In Medical, I am very pleased the results of our investment in new products and in sales effectiveness are starting to bear fruit with revenue now back to flat on prior year.

After the second half of 2017, it was down 4%. We said that we expected material progress back towards flat for the first half.

And I’m pleased that we’ve done even better as we drive the division back into growth in the second half and for the year as a whole. As expected, detection revenue was down on the prior year.

However, we still continued strong growth of 8% in Air Transpiration despite the mid-teens first half compare to last year. This growth was offset by program facing in other market, but I remain very positive about this business.

The Morpho integration is gathering pace and it was really good to see margin at 16% despite revenue being down in the first half. We saw evidence of our market leading combined product range supporting new business wins such as the recent $50 million order from airport in India.

Smiths Interconnect made continued progress and is refocusing and restructuring. We sold 40% of the business and we’re now targeting six high-tech seeking high growth markets.

Revenues in these markets grew by 3% but they were offset by further tail cutting of products and customers, we plan to exit as we complete the restructuring of the business, positioning it for growth in the second half and the future. Flex-Tek had a gangbusters half with growth of 10% driven by strong U.S.

construction markets, improvement in aerospace and mid-teens growth in heating solutions. Flex-Tek is well positioned for continued strong growth.

Moving to the Group highlights. First half revenue was in within £10 million of last year, so broadly flat.

On an underlying basis, operating profit was down 2%, when it was adjusted for restructuring in the pension admin costs as headline items that we communicated last year. This underlying movement primarily reflects the volume effect of revenue phasing in detection as well as higher R&D costs in Smith Medical, related to the wave of new product launches for the supporting of the divisions return to growth.

We continue our intense focus on cash and working capital improvements. Progress on working capital and inventory turns was slower in the half as we prepared for growth, but the pace of improvement will accelerate again in the second half and ongoing as we drive towards our medium term target of fixed stock turns and working capital at 20% of sales bringing up cash for investment in the business.

This is all underpinned by permanent structural and systemic changes in the business. We also continue to make progress on our portfolio high grading with the low growth, low margin bearings business from John Crane being sold.

And I am pleased to announce this morning the acquisitions of Seebach. Seebach is a £20 million high technology filters business, which is very complementary to our John Crane business with strong growth in margins and is accretive to the Group and accretive to the both the margins and growth of John Crane.

In China, we also announced the JV between Huafeng and Interconnect to move us more rapidly into the country’s fast growing aerospace and rail industries, supplying world class advanced connectors. We expect to continue this portfolio high grading, alongside our focus on organic development and investment for future growth.

I am pleased to announce that the Board has declared an interim dividend of 13.80p, up 1.8%, reflecting the continued confidence in the growth and prospects for the Group. I’ll be back to talk to you a little bit more on the strategy and the continued pace of our transformation.

But now I’d would like hand it over to John to take us through the numbers in a bit more detail. Thanks John.

Thanks Andy. Good morning everyone.

It’s a pleasure to present these results and my first as CFO at Smiths. And as Andy mentioned, the trends are improving and the Group is on track to deliver growth for the year.

Reported revenue for the Group of £1.549 billion was down 4%. On an underlying basis, excluding the impact of FX and of acquisitions and disposables revenue was down 1%.

Operating profit of £247 million was down 11% or 2% on an underlying basis. After adjusting for restructuring and pension admin costs, which as previously promised, are now treated as headline items.

On the same basis, the Group operating margin was down 20 basis points, up 16%. Reported EPS decreased by 11%.

On an underlying basis, it was down 2%. Free cash flow was down, but nonetheless strong with cash conversion of 98% for the first half.

Return on capital employee was 15.2%, reflecting investments and growth but the most notable impact, as expected, coming from the inclusion of Morpho. And finally, as mentioned by Andy, the dividend per share is up 1.8%.

So let’s now review the results in more detail. Starting with revenue.

Underlying revenue was broadly flat year-on-year. Translational FX reduced revenue by £49 million, whilst the Morpho acquisition and four divestitures last year had a net impact of minus £8 million.

Total underlying revenue was down £10 million, driven primarily by detection. Elsewhere, John Crane and Flex-Tek grew 3% and 10% respectively.

Medical was flat and Interconnect declined 3%. Let’s have a look in more detail at the revenue performance by division.

The revenue trend improved from minus 2% in the first quarter to flat in the second. John Crane saw a return to growth and finished the half up 3%.

Aftermarket grew by 5%, accelerating the pace from last year. It now represents 66% at John Crane’s revenue, up 200 basis points from last year.

And importantly, original equipment sales improved were flat. Looking at end market, John Crane’s revenues from oil and gas and non-oil and gas were both up 4% and 3% respectively.

The latter driven by farmer, chemical and pulp and paper. In medical, as anticipated the trends are improving and the rate of new product introductions is accelerating.

11 products have been launched since the start of the year compared with three in the first half of last year. Overall, revenue was flat.

Infusion Systems saw a growth in disposables offset by declines in hardware. In Vascular Access, PIVC was down the sharps safety grew by the launch of the new safety lancet.

And Vital Care was flat with a decline in respiratory care, offsetting growth from all other segments. In detection, revenues declined 11%.

Air Transportation, which now accounts for 66% of Smiths Detection, continued its strong growth, up 8% on an underlying basis despite a very strong comparator. Growth was driven by the ECAP regulations in Europe, as well as important contract wins in India, Canada and the Middle East.

Morpho contributed £91 million in the period. Total revenues from Air Transportation grew to £241 million in the first half -- GBP241 million versus £140 million in the first half of 2017 before the acquisition of Morpho.

However, as expected, cyclical effect in non-aviation segments held performance back. Military revenue was down 75% as some major programs came to an end.

Ports and borders and urban security were also down 26% and 4% respectively due to the timing of contract completions. In part, thanks to Morpho, aftermarket revenues for Detection grew to a cyclical peak of 48% of revenues, which we would expect to moderate in the second half.

At Smiths Interconnect, to complete the restructuring process, we are exiting certain products and customers. The declining sales associated with these exits offset a 3% revenue increase in its six key market segments.

As a result, underlying revenue was down 3%. Flex-Tek revenue was up 10% with growth across the board, including construction up 4% and both fluid management and heat solutions up 14%.

Moving now to operating profit. Underlying operating profit was down 2%.

Let me walk you through the operating profit bridge. As you will remember, we announced last year that henceforward we would report restructuring charges and pension admin costs as part of headline profit.

These charges impacted last year by £19 million and in the appendix, you will find a detailed breakdown by division. Translational FX reduced operating profit by £10 million, whilst acquisitions and disposals increased profit by £4 million.

As a result, on an underlying basis, operating profit reduced by £4 million or 2%. On an underlying basis, the first half margin last year was 16.2%.

Growth in both John Crane and Flex-Tek on a broadly flat performance in Interconnect, were more than offset by medical, detection and the increased investment in innovation in iCute. Let’s now review the profit and margin by division in more detail.

All variances are shown on an underlying basis, including the reclassification of restructuring and pension admin costs recorded as non-headline in 2017. John Crane operating profit was up 5%, up £91 million and the margin expanded by 30 basis points to 21.3%.

This was driven by the recovery in volumes and the favorable mix from strong aftermarket growth. In Smiths Medical, operating profit was down 5% and margin decreased by 90 basis points to 18.1%.

The margin was impacted by higher R&D in relation to newly launched products. It's also worth reminding you here that in the second half of 2017, Smiths medical benefitted from the £6 million one-off device tax refund in the U.S.

In Smiths detection, operating profit was down 13% and margins decreased by 40 basis points to 16.2% as a result of the lower volumes in non-air transportation. This was partially offset by a higher mix of aftermarket and also Morpho synergies.

In that regard, I am happy to confirm that we are on track to deliver the target of $30 million annualized cost savings by year three. In Smiths Interconnect, operating profit was down 1% with margin up 20 basis points to 10.3%, following the disposal of lower margin businesses in 2017.

Gross margin improved as the business focused on high-value end markets. With lower volumes and some further restructuring costs, nonetheless help net margins back.

Flex-Tek operating profit was up 15%. The good growth last procurement and efficiency savings drove margins were up by 80 basis points to 18.6%.

Overall, operating profit was down 2% to £247 million and margin was down 20 basis points on an underlying basis. Moving then on to tax.

U.S. tax reform has a favorable impact on our effective tax rate.

We announced in January a preliminary assessment of the likely impact and the one-off revaluation of deferred tax assets would be reported as part of headline profit. However, in order to align our sales with market practice and because the charge is non-recurring, we have decided to report this as a non-headline charge.

As a result, the headline tax rate for 2018 is now estimated to be in the range of 25.5% to 26.5%. And for 2019, we are estimating a headline tax rate of 22% to 24%, down from the 23% to 25% previously communicated.

Moving on to the important subject of cash. Cash is our life blood.

We manage it actively and spend it wisely. Free cash flow of £113 million was down against prior year, but represented continued good cash conversion at 98%.

CapEx of £46 million was broadly in line with depreciation, reflecting our asset life operating model. Working capital showed an outflow of £18 million.

Working capital is a critical component of our cash generation. Typically, in the first half, it's higher than H2.

And this trend was exacerbated by the strong order book, which required higher working capital at the end of the first half. What is important is that we continue to see improvement.

We have stated our ambition to reduce working capital to 20% of revenues versus 29% today. We have put in place incentives to ensure that this foundation is shared throughout the business and we are adding content.

So that the right motivation is backed by the right capabilities, in every division for every line of working capital, whether that’d be inventory, accounts receivable or accounts payable, customers and suppliers, as well as non-trade items, like tax payments. Our good cash generation continues to support the strong balance sheet and we ended the period with a net debt to EBITDA ratio of 1.5 times.

Our cash flow performance in the first half was good, but there is more to come. Cash is not a battle, it’s a war and we still have plenty of territory to capture.

I’d like now to briefly update you on the pension situation. And here, I should certainly pay tribute to the outstanding work of the team who’ve placed our main schemes one in the U.S.

and two here in the UK, on such a strong financial footing. On an accounting basis, the overall surplus was up to £237 million pounds at the end of January.

In October, the SIPS scheme completed a £207 million buy-in of liabilities. And in December, the U.S.

scheme paid $36 million to members who opted to take lump sums in lieu of annuities. Cash contributions for this year are expected to be around £50 million, down from £105 million in 2017.

We continue to work with the trustees of the UK schemes, the UK schemes in a positive and open way. And we’re currently discussing options with them regarding the next triannual valuation.

We expect to provide an update on this before the year end. Our aim and that of the trustees is to continue funding the three schemes, such that all liabilities can be externalized within the next 10 years.

Based on current projections, we are certainly on track to achieve that. Finally, just a point of housekeeping.

Given recent volatility in foreign exchange, I would like to remind you of our FX sensitivity on a translational basis. In the half, adverse translation of foreign exchange reduced revenue by 3% and operating profit by 4%.

Every $0.10 move on the dollar impacts operating profit by around £30 million on an annualized basis. And every $0.10 move on the euro impacts our operating profit by around £8 million on an annualized basis.

And this current rate prevails for the rest of the year. Foreign exchange is expected to reduce operating profit by about 6% or £35 million.

This set of results demonstrates clear progress against our objective of returning the Group to organic growth. Our outlook for the second half is strong and we are confident that 2018 will mark a year of growth for the Group.

Now, I’ll hand it back to Andy who will cover this in more detail. Thank you.

Thanks John. I really like the passion and quality of thought that you are bringing to the Group, particularly on cash, capital allocation and innovation.

So it is really clear about what we want to be. We’re building a world leading technology company that’s diversified an high performing.

We’re successfully repositioning ourselves in building the capability to execute consistently, develop innovative new products and all driven by our investment in people and leadership. The organic development of the business is our priority I've said many times before number one, two and three.

But the parallel path of non-organic development is also supporting and accelerating our repositioning geographically in technology and with customers in markets. At the same time is improving each of our businesses, we continue to carefully consider and review capital allocation across the Group to ensure that we're able to prioritize the scale and focus of our investments to create maximum value from our assets.

We’re committed to businesses in markets with good, long term growth prospects that match the characteristics that we like; cutting edge technology, including digitization; asset like with high aftermarket and recurring revenues; and all of them giving us flexibility, strong returns and growth. So the most powerful source of sustainable growth, returns and competitive advantage.

We want Smiths to be known for outstanding execution to doing it better than the rest. Our medium term metrics that we laid out at the Capital Markets Day are clear.

They indicate both the financial shape of the business in the future and the important things that we focus on to drive our business. Through operating model, these objectives are used to guide decision making and drive performance.

They're all linked to our management incentives and our ways of working. We're making good progress and we'll provide an update against these at the full year results.

I'd like to talk now in a bit more detail about some of the stuffs that underpins our confidence in the second half. Let's start with John Crane.

We're seeing good momentum in the business. Overall, we're back to growth and margins remains strong with further potential in the coming years.

The first half grew 3%, driven by improving oil and gas market and our strong portion to non oil and gas with particular strength and wins in chemicals and pharmaceuticals. The momentum will continue, expanding our installed base and supported by both strong early order book and further good aftermarket demand.

As I mentioned before, we're focused on building scalable leading positions in our markets. And this is what drove our exit from the bearings business and the acquisition of Seebach that I talked about earlier.

We've also, in John Crane, increased our investment in innovative new products, which operate at higher temperatures and pressures, helping our customers achieve greater efficiency. As the rating of investment in the market begins to pick up, our customers are increasingly focused on getting more output from every dollar of investment in the refineries and the processing plant.

This dynamic is one of the driving factors behind the development of our sense condition monitoring system, which significantly increases our customer intimacy. It allows us to understand how to bring more value to customers through the use of sophisticated analytics.

The number of installations globally continues to increase. Our improving markets and the work that we're doing to develop our leadership position supports our confidence and continued growth momentum in the second half and beyond.

Moving to Smiths Medical. We’re clearly seeing the results of our increased investment in both new products and sales effectiveness.

We’re confident that the business will grow for the year as a whole and with further growth momentum into 2019. You’ll be very familiar with our significant program of 23 new product launches that will refresh more than half of the division’s total revenue.

11 of these products were launched in the first half of the year and the remaining 12 are on track to be launched over the next six months. You can see two of them here.

One, our market leading CADD-Solis pump, is our first wireless ambulatory ear pump and increases our position in the rapidly expanding hospital and home care digital environment. The pump helps hospitals increase efficiency, reduce costs and importantly, allows better patient outcomes.

The NeoHeel, more accurately and painlessly allows blood testing from baby’s feet. The innovative design reduces the number of punctures and the time taken to complete the test and the babies cry a little bit less as well, which is normally a good thing.

Sales from our new products are gradually ramping up and supporting our confidence in the continued improving trend in Medical. Smiths Detection performed as expected with revenue more heavily weighted to the second half with further strong growth in the half in airports.

This good growth of 8% in Air Transportation is expected to continue supported by the now fully integrated Morpho business. As an example, 60% of the European program to upgrade checked baggage to CT is still to come.

And so far we’re doing at least as well as we planned in winning our share. Confidence is underpinned by strong order books in the second half and beyond.

As we’ve reported before, we are in the sunset phase of a key program in our military segment, which will continue until the next generation in around 2020. Roland Carter, who is sitting right back there in the audience today is now in place and driving hard on execution, technology leadership and importantly, accelerating our activities in markets beyond Air Transformation to take full advantage of the strong growth drivers in the threat detection everywhere as it develops at an increasingly high pace.

Interconnect continued with its restructuring, which is now completing. And it was support and improvement and return to growth in the second half.

New business wins was strong and our focus growth market segments, particularly in space and medical, including the Lockheed Martin, Orion Data Network and the Jupiter 3 satellite program. Flex-Tek had a super half, and is really well positioned for continued strong growth for the year as a whole.

Key market is supportive and we’re especially pleased by the progress in heat solutions where the integration of the nearly acquired Osram strong business is on track and already opening new market opportunities, including Chinese aircraft production. In this case, our products are contributing to large improvements in plant efficiency and reliability.

Revenue growth of 10% was more than matched by 15% growth in profitability with good future prospects as we build on our global markets and market positions. I'm sure you know our most passionate technologist.

There's no doubt in my mind that the strongest driver of sustainable growth is innovation and cutting edge technology. I said I wanted to invest more in R&D, but to do it more intelligently and get it to market and convert it into new sales more quickly.

Our focus on R&D continued in the first half and stands at 4.6% of sales. You can see behind me some of the market leading innovative stuff that we've been doing.

Our focus on developing new digital products and solutions is high. The first of our digital forges is now up and running in San Francisco and our Chief Digital Officer is driving our activities across the Group and in the divisions.

Artificial intelligence and augmented reality features strongly across the group, alongside 3D printing, advanced materials and nano technology. Much more to come here as we drive and track our innovation vitality in products, processes, materials and services, globally.

Now, to operational excellence and our Group operating systems. The focus is intense and un-relating to improve speed, efficiency, costs and execution in all aspects of our business.

The Smiths Excellence System is now deployed across the Group and is being used to improve processes, production, share best practice and build the capability of our people to continually improve towards our objective of world class operations. This of course has multiple benefits, including happier customers, who get what they want when they want it, systemically stronger cash generation, profit improvement to pay for the investment in growth and new products coming to market quicker.

It's self-help that brings with it the added critical dimension of better and consistent execution. You’ve seen from our medium-term objectives the working capital and inventory reduction that there's a large potential.

Inventory turns improved to 3.6 times in the first half. As a reminder, one turn is term is worth close to £100 million of cash.

The example behind me is one of the contributors to this program. The Smiths Detection site in Hemel Hempstead that I visited recently that reduced inventory by 35%, product assembly time by 70% and has better safety on its main product through the introduction of a flow line concept.

It's a fascinating location in many ways as it's also our Global Technology Center of Excellence for our chemical and biological detection equipment, which includes nerve agents. Finally to the outlook for the year.

We said 2018 would be a year of growth, and it will be. We expected continued growth in John Crane, a return to growth in medical, a strong second half in detection, improved performance in interconnect, continued strong growth in John Crane and Flex-Tek.

And as John said, we do expect a continued translational FX headwind in the second half. Our relentless focus on operational excellence, self-help and cash generation will continue to be central to what we do.

We’ll also be continuing with our portfolio high grading, both organically and non-organically, with capital allocation disciplines across every investment decision in the divisions and the Group portfolio. The plan for the year and the strategic plans are on track.

Thanks very much for listening. And we’re delighted to take any question, along with John.

It’s Andre Kukhnin from Credit Suisse. Three questions please, firstly on medical profitability.

Obviously, quite high R&D intensity at the moment to go to the four products to launch in the second half, but you expect growth to come back. Could you help us to weigh it up in terms of how the margins are likely to evolve in the second half given that you’re going to launch?

And then what is the potential of that business once that 50% of sales are revamped and all those products are launched. Do you see evidence of what you’ve launched coming in with higher profitability for example if you can give us those examples that would be great?

Secondly, on -- or do you want to go one at a time?

Yes, let me cover that one, because it’s really important one, I think. Yes, you’re right.

I mean this is the largest ever wave of new product introduction that we’ve ever seen, renewing half the revenue of the entire division in the next two, three years. In the first half, we did have higher R&D expense and the amortization starts to come in as the new products are launched, whilst they’re in the gradual ramp up phase.

So the 90 basis points that we saw down in the first half is really associated with that. My confidence in the margins in Medical overall as we’ve said is it’s a 20% plus business.

The hit in the first half will be offset as we move into growth in the second half as it sounds.

And on John Crane deal, could you talk about what you’ve acquired and whether that could be beginning of an acquisition cycle for that business?

Well, John Crane is a very strong business, as you know and it’s a really high quality business. Really the focus of that business is on mission-critical components to help refineries and processing plants run more efficiently.

The business that we bought is a high performance polymer filter business. When I told my kids about it, they had in their minds that this was like the oil filter that fits on your car, it’s nothing like that.

This is a really high performance big unit of this size. They sell on average for about €5,000.

So it’s really a high technology piece of kit. It’s highly complementary overall to and combines very well with our seals business.

In fact, we already have a filters business, which this will be a really good complement too and really put us in a leading position. Although, it’s relatively small, it’s really little business with good growth, good margins.

And as I said it’s accretive to both growth and margin for John Crane.

Are there further deals like this to do?

Well, we’ve got a lot to do organically in crane. I think as we’ve started to push into the other markets, outside the traditional oil and gas markets, we're seeing a lot of opportunity and we're seeing a lot of opportunity geographically as well.

That being said, I would very much like to continue to add and grow that business more quickly where we can find the sorts of things that make sense, that have similar characteristics to the seals. So you put them in the refinery at the beginning and then you replace them very frequently throughout the life of refinery or a plant.

So continue to look at it, organics the priority, but we are continuing to actively look for further options to develop crane.

And last one, just a quick on -- you've made some changes to how you treat various items to essentially improve the quality of earnings, like the restructuring costs and the pension administration costs. Obviously, it's the right thing to do.

But the question is, as you look at what you report, is there more of this to be done, is there anything else that we should be aware of?

I think as you know, we promised that we would move persistence restructuring charges and pension admin up into the headline and that's what we've done. At this time, I don't see any need to make any further changes to it.

I think from my side, the management philosophy of treating those costs up the line is the right thing to do. In my mind, that gives a very strong correlation between the cost and the benefit as stuff gets done.

But we’ll continue to do the right thing in terms of repositioning and restructuring the business. So we’ll continue to have some spends going forwards and focus the business.

Mark Davies Jones from Stifel. A few bits and pieces, firstly on the mix effects.

At Detection and Interconnect, drags on the core of those businesses, but there's bottoming out in there in terms of the non-airport business with Detection the other business?

I’ll separate Detection and Interconnect there. The mix effect with detection in the first half was lower OE.

You’ll note in some of the notes that the aftermarket revenue was at 48% in the first half with detection versus 35% for the whole year last year, that’s partly driven by one was done and the other one was up, but also an increasing trend of more aftermarket service coming through, which is essential because you've got more sophisticated kit coming through the story. Military is the biggest down as you can see and as we said before and that's related to sunset phase on combination of products that the Radseeker in the JCAD, one in chemical, one in nuclear detection.

That's where we expect it to be. It will continue that way but we're also looking at pushing some of those technologies and applying them -- look at those core competencies and applying them more broadly.

For example, some of the things that are happening in the world at the moment, a very applicable to the way we think about stuff.

You only had the step, because that been the run rate now?

There will be some movement in it and just the scale, military about 3% to 4% of total revenue. So there might be some movement in it.

The big headline of 75% in this half, it's running at a lower level, but there'll be some movement in that but it's relatively small in materiality to the whole story. Moving to Interconnect.

What's happening there is the focus around these six key markets that we've talked about several times and effective tail cutting on lower margin, lower growth markets and products that we're seeing elsewhere. We're expecting that restructuring to complete by the end of this financial year.

We're expecting to see Interconnect move back into growth in the second half versus that balance changes, because we're growing in the six, we want to be in and exiting quite quickly and heavily in the others. And then that gives us the platform to moving into next year.

And can I just come back on the medical margin, because those are key one. There are a lot of moving parts there.

But do you think you'll be achieving higher gross margins on the newer businesses to allow you get to the same margin level even with structurally higher R&D?

Right now, it's too early because they're too early in the launch phase. As I said before inherently there should be better margin and support our bottom line margin going forward.

And also give us the ability to withstand pricing better, because there is undoubted pressure more in the commoditized and as the industry, so the more new and innovative stuff that we have the better.

Alex Virgo, Bank of America. So could you perhaps start by just elaborating a little on the EBIT bridge year-on-year, John.

The 19 in restructuring and pension costs, I guess what's accretive that's pension also or is it bit more. How much of its restructuring I guess the first question.

What does that mean in the second half?

15 and 4, 15 restructuring and 4 for the prior year for pension…

And does that mean you're tracking a little bit ahead of where you'd expected to be on the restructuring in terms of spend and therefore what do we think of the second half?

So we did have a larger spend last year in restructuring. So I think it’s £33 million last year.

And so we've just guided to the fact that it will be £15 million on an ongoing basis.

For the full year?

For the full year.

Would you mind just doing a little bit at the same for the medical business specifically? Because obviously, we've gone from 99 to 82, I guess six of it’s the device tax, six of its restructuring some of it must be FX.

But if look at the -- if I just apply your percentage of R&D to the sales numbers then actually you've got lower R&D expense this year in the first half. So how do we think about that in the context of what you said by way of explanation to that profitability?

I’d just clarify that there’s device tax is a second half effect.

Which makes the question even more relevant, I suppose?

So it's really the cost in the first half associated with introducing the new product scaling and getting them up to speed. Overall, we've moved as you know over the last couple of years from about 4% to 6% R&D, which will start to flow through in the amortization.

But our aim in medical and overall is as I said a number of times, we're going to invest more but we're going to offset it and pay for it with improvements elsewhere in the business. And that sounds absolutely for Medical.

The 4 million decline, the majority of that is driven by R&D in Medical higher expense.

Last one just on cash. What term would you expect that to be I suppose at the end of the year if we’ve gone through to 3.6 at the half?

Well, over the medium-term, we want to get to 6. I expect that to be fairly smooth curve of improvement over the next two to three years.

You can deduce back from that that means in the order of half a turn to one turn a year from where we are now and you’ll see some more meaningful progress in the second half on that inventory turn in line with our path upwards.

And then I suppose just to finish on a more positive note. Could you talk a bit about the quarterly progression you’ve seen particularly in John Crane and Medical?

And how we think about that for the second half? Because obviously, the prognosis on growth work is a lot more positive than perhaps the development of profitability so far this year?

Well, the Group as a whole for the first half was down 2% on revenue in the first quarter and flat in the second quarter. There is a fairly similar trend of improvement across the businesses.

Medical now back to flat having been minus 4 in the second half of last year. The business will grow for the year as a whole.

So you can expect to see growth now moving into positive growth throughout the second half. So this isn’t particularly spiky in any of the businesses now in the second half.

Glen Liddy from JP Morgan. On the Medical business, you’ve gone from almost no product launches or one in 2015 to 23 now.

Looking forward beyond this year, are we looking at a similar burden in terms of launch costs for the foreseeable future or is this a bit of a hump and it moderates gradually over the next year or two?

First of all, for all the division we expect around the 6% of sales to be the run rate. There will be some ups and downs from that as we go through coming in the years.

We will expect that continued much higher pace that new product launches in fact indeed across the Group as we move into this phase of better vitality than we’ve had. I think for me the division came from a place of not launching anything to a place of launching a lot.

And the improvement in product launch in program management, in industrializing new product has been really high, it’s still holding down a little bit related to that. But the aim is to be not just launching lots of products, but launch them well and quickly.

So no, I don’t expect that to be a recurrent every time we launch products that holds us back. This is about as it is across the group building and capability to do it well.

And secondly on detection, you’ve seem more confident now about 5% growth for the year as a whole. Firstly, what give you as a confidence that you can deliver that?

And secondly John mentioned quite clearly 48% of revenue in the aftermarket in H1 will moderate against that backdrop. Is there enough leverage and shift in the quality of the business, the OE sales to keep the margins where they are or even higher as we go through in the second half of the year?

Well, just as a reminder the, I see that business as mid-teens plus business. I mean, you recall from a year and a half or so ago that we said we’ve got 20% plus expectation through cycle in crane and medical and mid-teens plus in the other businesses.

I think the detection business in the second half we were really strong in growth in airports, which is about two-thirds of the total now. It was held back, particularly by contract phasing in as this is aside the military business, contract phasing in ports and borders and some of the urban security stuff, particularly ports and borders.

We've got very good visibility of the order book in the second half in those areas. So aside military, we’re expecting Air Transportation to keep going well above the market as it is, and we’re expecting that phasing of the ports and borders and urban stuff based on the order book we can see to drive this where we want to be for the year.

I think our margin overall, if we were growing above-market, the notional 4% to 5% that people view that market to be and we have margins -- we consistently growing and we have margin in the mid-to-high teens, I would be happy man. And I can see the potential for that.

I think the point that John made around moderating the aftermarket percentage in the second half wasn’t so much of negative, it’s just the function of one was down and the other was up, but also more underlying strength. When we bought Morpho, we said that it was a 55% aftermarket business and we were sitting at 30-ish at the time.

And we said we expected that to progress over time into the 40s, which is an important part of the value that we think is there in the business. But just not to expect it to be 48% again in the second half was the point there.

There is leverage in the volumes that are going up to counterbalance the shrinkage in the proportion of highest margin business?

Yes. The aftermarket business, it won't surprise you to hear because a lot of it is software-related, is better margin but it’s also more protectable, because as we said before, you can’t supply the software for my machine, a competitor can’t supply the software for my machine anymore or the image libraries for my machine anymore and that used to be the case to a greater extent.

So this is a good margin business. My focus there really is ensuring it's a strong growth business that we’re really taking advantage of what's going on in the world.

Jonathan Hurn from Deutsche Bank. Just two questions, please.

Firstly, just coming back to John Crane, I think in some of your comments you talked about the OE order book, it seem strong growth in that business in the first half. Can you talk to a little bit about the margin of that order book?

I think, historically you’ve said you’re seeing a lot of OE orders close to cost. Has that pattern changed through the first half of this year?

Not a great deal. I mean, there are several different aspects to that.

The OE business is lower margin than the aftermarket and will continue to be. One of the things that we've said quite early on is, in some cases, the economics of taking a piece of OE business then drives 30 year or 40 year high margin annuity is really good.

So we've been very focused on ensuring that we focus on ensuring that we can fund and take those lower margin OE installations to buy the annuity effectively. We're not seeing too much movement in margin in either at the moment.

In fact, the opposite in after-market, which is up slightly but we’re not really seeing -- I mean there is some program-by-program cases in different parts of the world where there’s more competitive pressure or less. But in general, at least about flat margin wise in after-market a little bit better.

And second question is just coming back your chart where you show essentially 25% of Smiths is on core and you’re may be looking to get out of that. I think probably within that 25%, you could argue that a fair portion is Flex-Tek.

Obviously, you’ve seen strong growth in Flex-Tek coming through. In terms of exiting that 25%, has it been pushed farther out on the back of Flex-Tek performance?

Well, we’ve sold the bearings business and the Crane as you know. For me this isn’t about getting to 100% either this is just about continued repositioning of the business organically and non-organically.

I think there’s actually nothing in Flex-Tek that I think would come out right now. I think as we think about some other parts of the business we have some businesses in a similar position to the bearings business in Crane that are lower growth or further from the top three leadership position that we want.

So I won’t pick any one division there, but I certainly wouldn’t gravitate to it being in Flex-Tek.

Have you considered the impact of potential trade tariffs on the business and perhaps on your end markets?

Yes, I mean we look at the whole political economic, socio-economic environment pretty carefully all the time. And I think overall, Smiths is in by virtue of historical decisions a really good position as far as spread across regions, geographies.

But I think more importantly for me our transactional exposure to that is lower, because on the whole, we make stuff where it’s consumed. We do have some incoming supply chain.

But on the whole, we balanced our costs pretty well with where we’re doing business and where we generate our revenue. So it’s something that we constantly looking at doing better, progressively as we evolve footprint and evolve the business.

But it’s not an area where we’re expecting substantial major impact.

It’s Robert from Morgan Stanley. Just a few questions.

First one is just you mentioned in the release I think of 3% to 4% annual growth target in the medium term. I just guess you could flush out how you’re thinking about that division-by-division, because the growth you’ve mentioned is running about that level at the moment.

Crane is obviously coming off fairly depressed couple of years. Just if you can give us a little more color.

I guess what is the scope to potentially go higher than that and/or are you still thinking 3% to 4% is sensible through cycle range?

Well, the 3% to 4% is what we think are markets overall, are growing through cycle. Our aim is to grow better than that; with Detection, we’re doing that right now; with Flex-Tek we’re doing that right now; with Interconnect and Medical we’re not right now.

So our aim clearly is through being more competitive and more innovative and doing stuff better to grow better than the market that was --. So the basis really is 3% to 4% for the market and us doing better than that.

So we continue to push in that direction.

And then just maybe a little bit more color around the trend you’re seeing in Crane. You mentioned some of the refining and those sub-segments.

Maybe if you flush us a little bit more into -- you mentioned some of these new markets and new areas that’s going to that not entered before. Could you give us a little more color there where you're particularly targeting certain regions, customers, new products?

About half of the business is oil and gas and about half isn't. Our market share typically in non-oil and gas versus oil and gas is about a half or third, now it does defer in different countries and different places.

Chemical plants were pushing very hard on now, because it's not dissimilar to an oil refinery and the way it works and the demands that it creates. Pharmaceutical is really interesting for us at the moment, because the focus on increasing efficiency, getting more out of every dollar of investment in those processing plants is really high at the moment.

One interesting area that we're pushing hard on now is in mining as well, which traditionally had been relatively small -- much lower focus. And the guys were out in Australia recently and were already starting to make some progress there.

The key thing for me is there are parts of non-oil and gas that aren't as attractive, because typically the demands are lower; the temperatures are lower; the pressures are lower; the aggressiveness of the materials that you're processing is different. So we really only focused on the things where the demand is high and therefore it fits the stuff we do and the returns we want to make.

And then just a final one was around I guess digital, particularly with the thought you, you really mentioned I think Interconnect being a division historically that people have said maybe was not as core Smiths as perhaps some of the other divisions. You mentioned big push and that was the core of your digital platform.

How do you think about digital now you put a Chief Digital Officer in that roll out? And I guess broader question is, do you see the current structure at Smiths as the right structure?

We haven't got questions that how do you align these five different divisions all on different growth cycles at different times you deliver 3% to 4%. How do you from a top down view the structure of the Group?

Well, first of all, there's a lot of companies talking about digital transformations now. I think the difference with Smiths is that our model is moving quickly, and if I just pick a couple of examples of that.

We're not trying to create something, there's no pull for. So in Detection, we’re in a situation that probably 5% of our revenue four or five years ago was generated from software.

Over the next few years that will become 30 plus percent. But the sophistication of that software is increasing substantially.

The use of artificial intelligence in that software and image recognition is increasing substantially. And it's not surprising, because if you think about the good old days when you have someone just staring at a screen and hoping to spot something that looked like a gun going past, or a knife going past.

You now I have a thousand of one different examples of things that have to be spotted. It's much more difficult to spot them, because you have people taking component parts of explosives and taking different bottles and different bags.

So this is not really now down to spotting molecular density in different places and correlating it with six different bags that might have gone through half an hour part, but to the same destination. So the AI bit is just simply verging on impossible now for people to do it.

Similarly, in Medical, the digital environment links to electronic medical records, the real time changing of delivery based on your vitals at any particular time and what it should be is changing so quickly, and with it of course data security implications. I mean I wouldn't have to explain the data security implications in airports and hospitals of course.

We've got about 400 software engineers across the Group, but the concern was that they were in pocket. So we have people working on AI, we have people working on data security split across divisions.

So the aim of creating the center of excellence approach through the forges is to bring that together, really create critical mass in some of that thinking to drive this forward overall. As regard to Interconnect, Interconnect really about high-speed secure connectivity in really demanding environments.

When you apply that to aerospace, space, medical, that's the stuff that we really wanted to be focused on not competing in, you run up the mill type connectivity and electronics. So that was what the refocusing of the whole Interconnect business was really about.

As far as the portfolio overall, we're driving to get five growing, five competitively differentiated through operational execution and innovation with the best people. But at the same time, we continue to very carefully consider the pieces of the business that are of higher risk of execution are further from a top three leadership position, which is our objective so that we can prioritize the way we invest and the way we think about realizing the value of the assets.

So I won't go to the overall shape but you can take from that that we're thinking about things carefully.

It's Sandy from Jefferies. Real dumb question, what was actually the R&D charge in the first half?

So the total R&D is disclosed, it's around £70 million.

And then you capitalize less and presumably amortized more. So half-on-half, I'm pretty damn convinced that your R&D charge went up?

Our R&D expense actually dropped in slightly in absolutely terms. That's placed in there.

And I know somewhere it is…

It's actually in the press release, they are under financial review. So the Group invested £70 million in R&D and up the Page 11.

That's the expense as well, because you then…

That's the investment.

Yes, but you then capitalized the chuck, but you capitalized a lot less this time plus the amortization must have gone up. I'm trying to flutter around with that.

But my impression is that the R&D expenses actually gone up for the Group in the first half not down. I guess the spend is done.

I just can't actually find the R&D charge number somewhere?

I don't think we’ve disclosed that.

That’s why I always read the financial review very carefully. And this restructuring thing is slightly upsetting me, it’s just that I can’t quite get it straight because a big chunk of that was fuel for growth.

And that was £33 million last year. I’m assuming the ’19 but you’ve now decided is underlying is really all fuel for growth?

That includes £4 million of pension admin costs.

But the 15 that’s restructuring is all fuel for growth?

Correct, for the first half of ’17. That’s correct.

And you still think you’re going to have £15 million of restructuring costs?

For the full year, not for the half.

For the full year, so it being to wash through basically and stops…

But what I would add Sandy that when changing the treatment, we want to continue and are doing the right things in the business to position and restructure it as necessary. What we didn’t want to do is continue with the large chunk that was taken below the line.

So for example in Interconnect in the first half as part of completing current restructuring, we continue to do things that weren’t characterized in the fuel for growth although, there is still some tail of that.

Yes. I mean, this is just a slight risk that you hide your light under the roof a little bit, that’s all I think light being bit…

I don’t want to do that, Sandy.

And then silly things, I mean, if military revenues and detection went down 34 million, I mean that’s all of the underlying decline more or less, give or take in there…

We were up 8% in two thirds of the business. Ports and borders was also down due to contract phasing on some of the big port projects but it’s a big piece of it, absolutely.

Yes. If you strip out Detection, the rest of the business is up I think 2%.

Yes, which is kind of different way of pitching it if you wanted to be. And then another slightly odd question.

When you’re managing medical and I go through last year’s products ups and downs and then this first half’s products ups and downs. I’m still going all over the shape.

So hardware pumps are still was down, down?

Yes.

And other things like PIVC catheters were up and are now down. And it’s difficult to look at the new products that are coming and saying yes, there is the impact apart from in charts, which turn around.

Yes, it’s actually was up…

So how do you manage it months-to-months if you’re trying to see how these launches are working?

Well, we’ve got a very granular view of that as we would imagine. But I think that you’re going to take it a step further, the 23 products that we’re launching are actually product families as well.

And I think you might recall from the Capital Markets Day that this curve of something moving up and another one building on it, we had some disconnect. So what you’re seeing at the moment is a new product or an old product running down, a new one coming in sometimes with a little bit of disconnect.

So it’s not just replacing you don’t day one from where it should have been. So it does need a lots of attention to manage but we’re extremely confident with what we’re seeing in that trending that we’re back in growth in the second half and will be for the year and then that momentum goes into next year.

But it’s a lot of launch to manage. But it’s not an unusually large amount versus where we should be to be the innovation leader in that business.

[Question Inaudible]

And I think if you look at, we were very strong in infusion consumables and disposables, which is always the great measure on infusion, because it correlates directly with your installed base. Part of it is dedicated sets that go with a pump for example, part of it is stuff that just gets used and thrown away for every patient or every treatment.

So that’s an important litmus test always of infusion, because the infusion hardware does tend to be a big hospital buying a thousand pumps, and those things can be a little bit more lumpy. So I suggest the thing to look out always is how we’re doing on consumables, consumables and disposables.

Well, beaten everyone to death. Well, I really appreciate you taking the time and listening.

I hope you can hear from the way we've been expressing ourselves, we're feeling really confident that the second half is in growth, the year as a whole is in growth and that you can see the trends within each of the divisions that support that. But more importantly, position us for continued momentum in 2019.

So thank you very much. Have a great weekend everyone.

Much appreciate it. Thank you.