Smiths Group chief warns over independence vote's enduring impact

Smiths Group boss weighs in to Scotland independence as company reports drop in revenue and profits

Philip Bowman, chief executive of Smiths Group
Philip Bowman, chief executive of Smiths Group Credit: Photo: BLOOMBERG

Politicians “throwing around last-minute sweeteners” to woo undecided Scots unsure of how to vote in the referendum will only cause further problems for businesses, according to the boss of blue-chip engineer Smiths Group.

Speaking as the conglomerate on Wednesday reported annual results that showed revenue fell 5pc to £2.95bn and pre-tax profits were off 11pc at £445m, chief executive Philip Bowman warned of the long-lasting impact of the vote, whatever the outcome.

“Smiths derives only 4pc of revenue in the UK so it won’t have much day-to-day impact on us,” said Mr Bowman, who previously led Scottish Power. “But the doubt will continue, especially considering the sweeteners the British government is throwing around at the last minute.

“It creates uncertainty and markets don’t like and nor do the people who run businesses.”

Mr Bowman, an Australian, said Scotland could learn from his home nation which in 1901 voted for a federal government joining six colonies into a single country.

“They realised it would be tough to go it alone and it’s a system which has worked largely glove in hand for almost 120 years,” he said. “They had far more different priorities – such as different climates and geography – and they made it work.

“England and Scotland should be able to co-exist: they are greater as a whole rather than separate,” Mr Bowman said, adding that the Yes campaign had “been run on emotion”, something their opposition had failed to deal with.

A strong pound contributed to Smiths’ woes over the year to July 31, with translation costs knocking £43m, or almost 8pc, off headline profits. However, Mr Bowman said he believes sterling is unlikely to remain at current levels.

“The US remains our biggest market with 60pc of revenues there and it remains the biggest economy and is growing,” he said, adding that sterling has been boosted by Bank of England Governor Mark Carney’s “flip-flops” on interest rates. Continuing problems in the eurozone have also given the pound an artificial boost, he said.

Smith’s detection unit, which comprises 17pc of the business and produces sensors that identify explosives, weapons, biohazards and drugs, suffered an 8pc drop in revenues to £512m over the year, with operating profit down 58pc to £25m. A new management team had conducted a “drains up” review to identify problem contracts and issues, Mr Bowman said, but added that the market remains tough.

“Governments are not buying detection equipment as they do not have the money, meaning that there is an oversupply in the market and strong competition,” he said. “We face an interesting dichotomy [because] we remain under pressure from them to develop products that can identify a wider range of threats and in smaller quantities.”

He said the Smiths spends 8pc of its revenue on research but is confident orders will come eventually as governments need to upgrade equipment to meet new threats.

Revenue at the medical business declined £46m to £804m with all but £4m of this relating to currency translation the company said, though the division returned to growth in the second half of the year, having faced the impact of reforms to the US medical system.

The John Crane unit, which provides equipment for the energy and chemical industries and makes up almost a third of Smiths Group’s sales, reported revenue down 5pc at £941m, but boosted margins by 150 basis points to a record 24.9pc. Revenues at Interconnect, which makes electronic components, fell 3pc, to £445m, while Flex-Tex, which makes hoses, slipped 1pc to £250m.

Mr Bowman dismissed questions about the prospect of divisions being sold off, saying the company – which pays more than £150m a year into pension and legal liabilities – cannot “shrink to avoid liabilities that consume cash... it would be harder for a smaller company to fund them”.

The company said its 'Fuel for growth’ cost-saving programme delivered £10m of savings in the year, with an annual savings target of £60m by 2017.

The company raised its full-year dividend by 2pc to 40.25p, payable on November 21.

Analysts were pessimistic about the outlook for the business, with Investec warning “the muted outlook statement suggests that this will be another year of hard work, with payback likely over a longer period”.