From a shop selling watches to an engineering conglomerate that developed car speedometers, the autopilot landing and today makes bomb detectors and medical devices, Smiths Group has been the master of reinvention over the past 163 years.
“It’s remarkable the number of businesses Smiths has owned over its history. I don’t think we sell anything today that we sold 50 years ago,” says chief executive Philip Bowman.
The FTSE 100 company is about to mark another milestone in its journey from its humble beginnings as a watchmaker when it celebrates its centenary on the UK stock exchange with an opening trading ceremony on Monday.
Smiths started life in 1851 as a shop in Newington Causeway, London, selling watches, clocks and precision instruments. The company later diversified into making dials for automobiles, before moving into the rapidly growing aviation industry. In more recent decades it has added a medical arm, that played a part in the first test-tube baby, and moved into security.
Its 100-year anniversary on the stock exchange comes as Smiths once again attempts to reinvent itself. One of the last remaining British engineering conglomerates, it has been under pressure for years by investors and analysts to break itself up to release shareholder value.
Investors’ hopes were buoyed when the group appointed Mr Bowman as chief executive in December 2007 because of his history of selling companies. However, nearly seven years later Smiths remains largely the same.
Mr Bowman has instead focused on improving the performance of the business, by growing its non-government business, and increasing its sales in developing markets. But even this has proved difficult.
“That’s been very tough because as rapidly as we’ve been growing our share of commercial business in developing markets we’ve lost government business in developed markets,” he says.
Smiths is still playing catch-up with moving into developing markets. Under Mr Bowman’s leadership the group has increased its share of emerging market revenues from 6 per cent to 18 per cent today.
He has set out new plans to triple the group’s revenues in China, from £100m to £300m, by the end of 2017, and will appoint a group head of China to help the company reach this target.
Another area Mr Bowman believes is crucial for Smiths to improve is the quality of products. “We continue from time to time to disappoint customers because we don’t deliver on time and there is a significant hidden cost to the business because we don’t get things right first time,” he explains.
Two of its divisions – medical and detection – have struggled more than others, with both more reliant on western government spending. The performance of the latter caused the group to issue a profit warning in May, saying profits were expected to be about £25m lower at its unit because of challenging trading conditions.
Mr Bowman says one of the main problems holding the division back is a lack of governments and companies replacing security equipment. “We are starting to see more positive signs but until there is a real improvement in the replacement cycle in western markets it’s going to be a challenging environment,” he notes.
Overall he has improved group sales – up from £2.3bn in 2008 to £3.1bn in 2013 – while operating profit has risen from £381m to £560m over the same period.
However, operating profit margin has varied across the divisions: John Crane, which makes industrial seals for the oil and gas industry, has raised margins from 17 per cent in 2008 to 23.4 per cent in 2013, while detection has fallen from 18 per cent to 10.4 per cent over the same period.
He candidly admits he has been disappointed with Smiths’ share price performance since his appointment. Shares have risen about 20 per cent over that time.
“I set myself a target of £15 when I came in. We’ve been above that but not for very long. I think the reality is when you are . . . in the top decile of gross pension liabilities to market capitalisation that is inevitably going to act as a considerable break on the movement of the share price,” Mr Bowman says.
However, he maintains that his vision – to improve performance and focus the portfolio more – has been “remarkably unchanged” over the period. “It would have been nice to have had a few more positive breaks over the period but it’s been a time where we have faced a lot of challenges.”