Chairman’s statement
After a year of economic turmoil, it is gratifying to report that Smiths Group has emerged relatively unscathed. A combination of management initiatives, geographically diverse markets and largely defensive businesses has resulted in a resilient performance under truly challenging circumstances.
In the 2008 statement, I deliberately sounded a note of caution when looking at the prospects for the year. However, few people could have envisaged the sheer severity of the recession which thankfully now appears to be easing. Fortunately, under the management of Philip Bowman, your company had already embarked on a 'self-help' restructuring programme that has gone a long way towards mitigating the worst effects of the downturn. Operating in markets with long-term underlying defensive traits helps. Terror threats remain real and present. Global energy demands show few signs of abating over the long term, and advances in healthcare are still needed to meet the growing needs of ageing populations. Innovations in wireless communications emerge almost daily.
However, government spending priorities, radically revised in response to the global crisis, have taken their toll on Smiths Detection in particular. It has experienced repeated contract deferrals which have put pressure on the order book. Nonetheless, we remain confident that this sector will soon return to long-term growth and that Detection will benefit from its leadership in the roll-out of the next generation of security systems.
So amid today’s economic and financial uncertainties, our focus remains firmly on what is within our power to manage or influence. A corporate restructuring programme to cut costs and improve performance is on track towards its savings targets. We have reorganised into five divisions headquartered close to their markets and overseen by a streamlined corporate office in central London. A performance-driven culture permeates the entire Smiths Group and I am confident that the early positive impact of the reorganisation will rapidly accelerate when trading conditions recover.
However, we have not neglected to prepare for the eventual economic upturn. Our product offering and geographic reach have been expanded through a number of bolt-on acquisitions, half of them in Asia Pacific. Equally, innovation and R&D have been the lifeblood of Smiths for well over a century and this remains the case, particularly in Smiths Detection and Smiths Medical. We will continue to support the launch of new products which will in time drive higher margin sales growth.
The Board is also pleased with the Group's steady progress in environment, health and safety. These areas are addressed at the top of the agenda of every management meeting and business review. Our safety performance has exceeded the tougher targets we set ourselves last year. This is, in part, because we are now monitoring near misses as well as incidents and therefore can get closer to their root cause. On the environment, three-year targets were set in August 2007 to be achieved by July 2010 for greenhouse gas emissions, waste disposal and water consumption. Each of our key indicators shows improvement, currently beating our goals. Our Code of Business Ethics has been revised and strengthened and is now available in all our main operating languages. Since its launch a year ago, almost all staff have now been trained in its 12 core principles.
I would like to acknowledge the contributions made by our non-executive directors; in particular Peter Jackson, who will retire after the AGM in November. I want to thank him for his role in the success of Smiths Group over recent years. The Board has benefited from his wisdom, guidance and perspective. I am delighted to welcome a new non-executive director, Anne Quinn, who joined us on 1 August. I look forward to working with her in the coming years. The Board takes its corporate governance responsibilities very seriously and undertakes regular evaluations of its performance. To reinforce this approach, the directors have decided to offer themselves up for re-election on an annual basis with effect from the 2010 AGM, rather than triennially as is current practice.
The next 12 months will continue to make great demands on us all. The economic outlook, while less bleak than a year ago, remains extremely challenging. Pressure on sales and margins is intense. We will continue to focus on the restructuring 'self-help' initiatives that are underway, on improving our business systems to drive efficiencies and improve decision-making, and on consolidating the business through targeted acquisitions.
Overall, I believe that Philip, his team and all the staff, deserve our thanks for what they have achieved during an exceptionally tough year. Operational improvements across the divisions are firmly on track. Combined with our performance-driven culture, they will provide a solid foundation to deliver enhanced value to shareholders.