Engineering powerhouse Smiths Group is helping conquer space
The speed with which passengers at Washington DC’s Dulles Airport pass through security would leave those at Heathrow struck with envy and awe. They have the world’s most advanced scanning machines – capable of detecting any undesired object – and you don’t have to take off your shoes and belt.
As a Briton always on the lookout for the nation’s technological success stories, it is difficult not to experience a frisson of pride at the brand on the scanner.
Smiths Group may not be the UK’s most famous enterprise, but in the secretive world of airport security it is an international name to be reckoned with. The new scanners will be in major UK airports by next summer.
The tradition of cutting-edge tech at Smiths goes back more than a century. That history is displayed at the FTSE 100 engineering giant’s HQ in a smart square in London’s St James’s.
In a glass case is the Smiths De Luxe watch that Sir Edmund Hillary wore on his ascent of Mount Everest in 1953. It is decades since Smiths, which was founded 172 years ago, last made watches, but it has retained its British roots and its spirit of innovation.
‘We did the instrument panel for the world’s first transatlantic flight in 1919 and the speedometer for the first proper British motor car,’ says chief executive Paul Keel. ‘This is a really cool company.’
More recently it supported India’s successful landing on the Moon’s South Pole by providing components used on board the spacecraft. It also produced the communications module for the Mars rover.
Despite its role in such exciting breakthroughs, the company hasn’t always caught the imagination of investors. Keel, who joined in 2021, was drafted in to change all that.
Shares in Smiths have gone up by about 20 per cent since he took over, but, he says, still trade at ‘around half the value’ of peers such as Spirex, Weir Group, Halma and Rotork.
Under Keel’s predecessor, Andy Reynolds Smith, the company fell out of favour on the stock market. That was partly because conglomerates went out of fashion and partly because frustration set in over long-winded efforts to sell its medical devices business.
Keel pushed through the sale of Smiths Medical, which was finally completed in January last year.
Today, having slimmed down over a number of years, the group is made up of four divisions. The two largest are US-based John Crane, which makes industrial seals, and Smiths Detection, which makes airport security scanners.
Flex-Tek, also based in the US, specialises in the movement of fluids and gases, while Smiths Interconnect supplies products for advanced communications in satellites and aircraft.
A few days ago Smiths bought Heating and Cooling Products (HCP) – a US-based manufacturer of heating, ventilation and air conditioning equipment – in a £65 million deal. HCP will be integrated into its Flex-Tek division.
‘Smiths has now posted eight straight quarters of growth, and the addition of HCP allows us to further build on this momentum,’ says Keel.
Today’s business is very different from the one that started out as Samuel Smith’s jewellery shop on Newington Causeway in Elephant and Castle, South London. Smiths Group now employs 14,000 people and is valued at nearly £6 billion.
Mindful of the long history, Keel is keen to portray himself as a long-termist. ‘We think in quarter centuries, not fiscal quarters,’ he says.
‘Our technology is used in three quarters of all earth-orbiting satellites launched in the US and Europe. That is the sort of thing you earn over a hundred years.’
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The Smiths Medical sale does not necessarily herald a further break-up. Conglomerates with rapacious appetites for takeovers used to be the apex predators of the business world. Now ‘focus’ – concentration on one core business – is in vogue.
To Keel, however, it’s not the structure of a company that is most important, but how well it is run.
He sets a lot of store by techniques such as ‘Six Sigma’, a suite of management method aiming to improve business processes that was all the rage in the 1990s.
Hoshin Kanri – having systems to try to make sure a company’s strategy is actually put into practise – is another catchphrase.
It can sound as though he has swallowed a textbook. But, in a country like the UK, with a huge deficit of management skill, concentrating on how a firm can be better run should not be scorned.
‘That is why the stock is up over the past two years. It has outpaced the FTSE 100 and global industrials,’ he says.
With his wide smile and mellifluous accent, Keel looks and sounds quintessentially American.
He was brought up in a small town called Prior Lake in rural Minnesota, one of six children.
He met his wife Suzanne, a pathologist, at high school, and began his career with food company General Mills, where he was in charge of angel food cake and Boston cream pies.
After a stint at consultants McKinsey and in private equity, he went to US giant GE and then to 3M, the firm behind Post-it Notes. There he met Yorkshire businessman Sir George Buckley, who went on to become chairman of Smiths in 2013. Buckley is stepping down later this year and will be replaced by Alcoa boss Steve Williams.
There is a fad among some heads of London-listed businesses to slag off the City and move the main listing to Wall Street in the hope of a higher valuation.
As an American, with two of Smiths’ four divisions based in the US, has Keel considered such a move?
‘The simple answer is no, not in any serious discussion. After more than 170 years in London and 100 years listed on a London exchange, we would need a very good reason to depart from that.’
He says the route to growth for Smiths is to be ‘a link in an important chain’ in engineering problems that matter to the world.
An example of that, he says, is that its equipment is used in more than 90 per cent of the world’s top 100 airports.
Producing mechanical seals for high-speed rotating equipment used in refineries and chemical processing is another area where Smiths excels.
In common with his peers, Keel sees an opportunity in the transition to greener energy.
Smiths is making seals for a huge hydrogen project in Alberta, Canada, and for the world’s largest carbon-free hydrogen plant in Saudi Arabia.
The company is also working on a large project in Sweden with H2 Green Steel to turn iron ore into steel using hydrogen rather than burning natural gas, which reduces carbon emissions by 95 per cent.
‘Capable companies like Smiths can do just about anything if we put our minds to it,’ he says. ‘But we can’t do everything – certainly not all at the same time.’
The firm has upgraded its growth forecasts despite the gloom over the world economy and it turned in record half-year results earlier this year. Part of that is due to inflation. Profit margins have expanded because it has been able to pass on price rises to its customers. Some is down to playing catch-up after years of sluggish performance.
The big question is whether the growth is sustainable.
‘About a third of it is just good luck,’ he says. ‘I would say another third of it is inflation-related and the remaining third goes back to Smiths’ excellence.’
Shortly after he arrived, he says, his growth ambitions were greeted with ‘sniggers and titters’ by investors and analysts. Now, Keel says, the laughter is ‘for the opposite reason’, because people expect Smiths to achieve much more. It may take time to win over the sceptics, but he hopes to have the last laugh.
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