Categories Earnings Call Transcripts, Industrials

Smiths Group PLC (SMGZY) Q2 2022 Earnings Call Transcript

SMGZY Earnings Call - Final Transcript

Smiths Group PLC (OTC:SMGZY) Q2 2022 Earnings Call dated Mar. 25, 2022.

Corporate Participants:

Paul Keel — Chief Executive Officer

John Shipsey — Chief Financial Officer

Analysts:

Andy Wilson — JP Morgan — Analyst

Will Turner — Goldman Sachs — Analyst

Andre Kukhnin — Credit Suisse — Analyst

Mark Davies Jones — Stifel — Analyst

Denise Molina — Morningstar — Analyst

Edward Maravanyika — Citigroup — Analyst

Jonathan Hurn — Barclays — Analyst

Robert Davis — Morgan Stanley — Analyst

Bruno Johnny — Exane BNP Paribas — Analyst

Alasdair Leslie — Societe Generale — Analyst

Presentation:

Paul Keel — Chief Executive Officer

Okay. Good morning everyone and thank you for joining us today. With me here in London this morning is, John Shipsey, our CFO. In terms of the running order, I’ll offer a few thoughts to set the stage, hand it over to John to take us through the numbers and then I’ll come back to talk about the strategic progress we made in the first half. As always we’ll close with your questions.

Now, knowing that it may be top of mind for many of you, let me begin with an overview of our activities in Russia and Ukraine. Like many of you, we are shocked and appalled by the tragic events unfolding in the region and we join in the broader international community in calling for de-escalation and peace. To give you a sense of scale, our business in the region represented less than 1% of sales last year. Over recent weeks, our priority has been ensuring the safety, security and well-being of our colleagues in the region. All are safe and continue to receive full support from Smiths in response to the invasion we have suspended sales into Russia.

Moving now to results. Our first half performance demonstrates that we are executing well against our strategy. Organic revenue growth accelerated to 3.4% and we converted that into even stronger profit and EPS growth up 11% and 14% respectively. Our growth was underpinned by strong demand across most of our end markets and order books continue to build. In January, we successfully completed the sale of Smiths Medical, several months earlier than expected. This was an important milestone for us, as it further focuses our portfolio. We now have four higher performing, more strategically aligned industrial technology businesses always similar commercial, operational and financial characteristics. We are using the proceeds of the sale to invest in growth to further strengthen our balance sheet and to return capital to shareholders by way of a buyback which is already 25% complete. The early completion and rapid capital return are examples of the faster pace and better execution that are fundamental to our plan.

The Smiths Excellence System is a central component of this and we’re making good progress on the next phase of SES, having set clear priorities with leadership and resourcing in place and settling into a tighter more disciplined operating rhythm. We’ve also heightened our focus on ESG to multiply our sustainability influence and to maximize the accompanying growth opportunities that come with us. So we’ve had a good start to the year. That said we face many of the same headwinds as the broader market, including supply chain challenges, rising inflation and ongoing geopolitical and macroeconomic uncertainty. We’ll go into greater detail on each of these points in the coming slides.

At last fall’s Capital Markets event we laid out a plan to deliver performance in line with Smiths substantial potential. The plan is summarized on Slide 6, in what we call the Smiths value engine. It connects three key components of success; our purpose, our strengths and our priorities. As a technology company that has had a hand in a number of the world’s most meaningful advances over the past 170 years, our purpose is crystal clear. We are pioneers of progress and we are committed to improving our world through smarter engineering. We leveraged four fundamental strengths that create distinctive and compelling competitive advantage. World-class engineering, leading positions in critical markets, global capabilities and a robust financial framework of which John will say more in just a moment.

Our purpose and our strengths are then directed towards advancing three key priorities; accelerating growth, improving execution and doing more to inspire and empower our wonderful people. We measure our progress by tracking five medium-term financial commitments; organic revenue growth, EPS, ROCE, operating margins and cash conversion.

Slide 7 details our performance in the first half against these commitments. We have included results from the same periods in the two prior years for reference. As you can see we’re making good progress. Organic growth of 3.4% approaches the 4% to 6% range we’re aiming for longer-term. EPS growth was even more pronounced at 13.8%, a steep acceleration versus the same periods in both 2020 and 2021 and above our longer-term target of 7% to 10%. ROCE climbed 370 basis points to 14%, while margins expanded 150 bps to 15.9%. And operating cash conversion of 93% is a solid result for us, in light of our investments in growth as well as the supply chain constraints that I noted earlier. We’re encouraged by our performance in the first half and I’m grateful to my 14,000 colleagues around the world who make it happen. There is still much to do to reach the still higher levels of performance of which we’re capable, but we’re pointed in the right direction and we’re clearly making progress.

Let me now hand it over to John to walk through the results in greater detail.

John Shipsey — Chief Financial Officer

Thank you, Paul, and good morning everyone. I’m pleased to be able to talk you through a good set of H1 results. Let me begin by referring back to what I said at our Capital Markets event in November. Our key financial priority is to accelerate topline growth, because with our strong financial framework, if we can turn the wheel of topline growth faster, it will drive even higher profit growth and that profit growth will in turn drive strong cash flow. Cash flow, which we can use to reinvest in future growth or indeed return to shareholders if it’s surplus to our reinvestment needs, and that is precisely what we did in the first half accelerating organic topline growth to 3.4% and almost GBP1.2 billion of revenue. Converting this into double-digit growth in operating profit up 11.1%. 110 basis points of margin expansion, underlying EPS growth of 13.8% and continued good operating cash conversion of 93%, an increase of 5% in the interim dividend reflects the Group’s strong performance and financial position. So, as Paul just highlighted, with topline growth of 3.4% we achieved an important step up on last year and this was driven by a strong performance in three out of our four divisions as I’ll come on to in a moment.

We did see a minus 3.3% adverse ForEx impact but we more than offset this with a 3.7% contribution from the Royal Metal acquisition. And as you know, our firm intent is to continue to enhance organic revenue growth with value creative bolt-on M&A. And we converted that revenue growth even faster into profit, up 11.1% to GBP189 million as we increased operating margin from 14.4% to almost 16%. You can see on the slide how we did this. First and foremost, we drove higher volumes. We continue to reap the benefits of our restructuring program. We also effectively managed price and inflation as well as ongoing supply chain challenges, whilst at the same time continuing to invest in future growth with R&D investment up 8%, and you can also see the positive impact of bolt-on acquisitions.

And it’s the same picture at the EPS line. Up 13.8% on an underlying basis, driven by the twin benefits of revenue growth and margin expansion. EPS was further boosted by accretive M&A, the absence of restructuring charges and the start of the share buyback. Overall EPS of 30.6p was up 18% on a reported basis, notwithstanding adverse FX. So you can see the Group financial framework in action. Organic revenue growth complemented by accretive M&A driving even stronger profit conversion which in turn drives strong cash flow.

In the first half we generated operating cash flow of GBP175 million with 93% cash conversion. It’s a good result, particularly given the challenging supply chain environment. We took the decision to increase inventory and prioritize security of supply, even if this does mean a temporary increase in working capital. Below the operating level, we saw the benefits of lower pension contributions and going forward we’ll also benefit from early repayment of the $400 million bond which was completed just after the end of the first half. So all in all continued good cash generation. So that’s the overall picture. You’re seeing a stronger, more focused Group. Each division well-positioned in attractive growth markets. Albeit with those markets at different stages of recovery.

John Crane has shifted up a gear and is back in growth. Detection is managing challenges in Aviation OE and that market will not start to see recovery this year. On the other hand Flex-Tek and Interconnect both continue to show strong momentum against the backdrop of favorable end market conditions.

Let’s look at each division in more detail. Starting with John Crane which delivered growth on all fronts. Revenue of GBP416 million was up 5.1%. Growth was primarily driven by energy, which was up 7.5% and aftermarket which grew 6.6%. Aftermarket accounted for 69% of John Crane revenues in the half, but we were also encouraged to see later cycle OE return to growth up 1.8%. Operating profit grew 6.3% and margin improved to 20%. Achieved despite an increase of GBP3 million in R&D and headwinds from both inflation and supply chain disruption. John Crane has good commercial momentum with strong order book growth in the first half spread evenly across aftermarket and original equipment and including a large number of projects that are critical to the ESG goals of its customers, especially in relation to emission reduction and energy transition.

Next, Detection, where it’s important to set some context. Delivery of pre-COVID wins underpinned revenue in fiscal ’20 and ’21, but many of these programs have now completed. Subsequent tender activity has been much reduced, especially in Aviation OE as customers have delayed capital investment. Order intake did start to recover in the first half, but we don’t expect this to translate into revenue growth until calendar ’23. Nonetheless the fundamentals of the business remains strong. And we’re well positioned for when recovery does come. Detection revenues were down 7.2% to GBP313 million in the first half. Within the underlying decline of GBP24 million for the division, Aviation OE was down GBP34 million for the reasons that I just highlighted. On the other hand, it was encouraging to see aftermarket back to growth in both end-market segments of Aviation and other security systems which meant that aftermarket made up 54% of Detection revenues in the first half and other security systems was also in growth, with revenues up 8.1% driven by a good performance in ports and borders. Operating profit was down 13% to GBP36 million against the backdrop of both lower volumes and significant supply chain challenges, particularly in relation to electronic components. Managing the supply chain continues to be a key focus of attention in the short-term. Looking further ahead and more positively we did see order book growth in the first half and Detection is well positioned and in better shape for the recovery in demand in Aviation OE which we expect to begin to see in 2023.

Moving to Flex-Tek, which grew strongly in the first half and is firing on all cylinders. Revenues were up 10% to GBP297 million, reaping the benefits of a very positive US construction market, but also the aerospace business has turned around and was back delivering good growth of 16% in the half. Overall operating profit was up 18.3% to GBP62 million. You can also see a very strong margin story reflecting effective action to offset cost inflation and on top of this Royal Metal’s profitability was well ahead of plan. Looking forward, Flex-Tek has good reasons to be confident about the future. We see positive medium term indicators for the US housing market and the commercial aerospace market will continue to recover, plus there is an exciting pipeline of new products, which Paul will be referencing in a moment.

Then Interconnect, which delivered another impressive step up in performance. Revenues were up 12.9% to GBP166 million with good growth in all its end markets, particularly semiconductor test, space and defense. Operating profit was GBP28 million, an increase of nearly 60% and margins jumped to 16.9% reflecting strong volumes and the realization of restructuring benefits. We continue to see strong order momentum across all Interconnects’ end markets. Differentiated technology is winning us high levels of orders across key markets like space and semiconductor test.

So you can see in the first half results, a stronger, more focused Group. In January, we completed the sale of Smiths Medical and so the half year includes the profit on disposal of GBP1 billion. And to remind you, we also have a liquid financial investment in ICU Medical with the current market value of GBP0.4 billion and there’s further potential value to come from a contingent earn-out of $100 million. All of that combined with immediate cash proceeds of GBP1.35 billion means that we have a strong balance sheet. And we are proceeding at pace with the return of surplus capital. We’re already more than a quarter of the way through the share buyback and at the current run rate our average shares in issue for FY ’22 will fall to 387 million and we will complete the program in early calendar 2023 with around 350 million shares remaining in issue.

So the key point from these first half results, is that we’re demonstrating the Smiths financial framework in action, turning the wheel of topline growth faster, converting that into even stronger profit growth, delivering free cash flow that we use first and foremost to accelerate organic growth, but also to add complementary M&A and to return to shareholders. You should expect to see this blend of capital allocation continue even after we complete the current program. So, although this is just the first checkpoint in our new strategy, we are on track.

I’d like to finish by taking you through the outlook for the full year. As you’ve seen, we’ve delivered well in the first half, in spite of supply chain challenges. Looking forward, there are strong positives. We’re seeing good demand in most of our end markets. We have a clear strategy, which we’re executing well. We will continue to deliver positive operating leverage. And we’re excited by further new product launches to come, but at the same time we can’t pretend there are not real challenges in the external environment. We expect the Aviation OE market to be more challenging in the near term. We also expect inflationary pressures to increase amidst continuing supply chain disruption and all of the above is made more complicated by the geopolitical and macroeconomic environment. That all said, we expect to continue to make progress and to deliver on our clear strategy and we are maintaining our guidance of 3% organic growth for the full year.

So with that, let me hand back to Paul who is going to talk about how we will build on this foundation going forward.

Paul Keel — Chief Executive Officer

Thank you, John. Smiths’ is an intrinsically strong company capable of a great many things. In the past, sometimes led us to try and tackle too much and consequently delivered too little. We’re now tightly aligned on three key priorities; growing faster, executing better and doing more to inspire and empower our great people. These keep us laser focused on what specifically needs to be completed this month, this quarter and this year in order to advance our progress and fulfill our commitments to key stakeholders.

Let me bring this to light with some examples from the first half, starting with accelerating growth, our biggest upside to value creation. The faster growth we delivered in the first half came from four levers that you see here. First, strong execution. To access the high demand we’re seeing across most of our end markets. Layered on that more aggressive new product development and commercialization, leveraging the strengths, I noted previously to solve our customers’ toughest problems. Third, building out the many attractive adjacencies that our strong core positions make uniquely available to Smiths. And topping the stack disciplined M&A to supplement our primary organic growth model.

Let me say a few words about each of these levers, beginning with market growth. Now, broadly speaking, we participate in four global end markets. General Industrial, Safety and Security, Energy and Aerospace. Our organic revenue growth in General Industrial was nearly 6% last period. This was driven both by first fit and aftermarket growth for John Crane in sectors like water, paper and mining. And demand for Flex-Tek, construction solutions and Interconnects semiconductor test products was stronger still. In safety and security, we were down 3.5% as the aviation security sector continues to work through the impacts of historic air travel contraction during the pandemic. While Detections order book did grow in the period, several of these wins are future dated, underlying our view that this market is still a year or more away from recovery.

Now conversely energy market expansion continues at a high rate. We grew 7.5% in this market during the first half with strong demand across most geographic and end-user segments. Our fastest growing market in the half was Aerospace where we were up almost 17%, as increased aircraft builds drove strong demand for Flex-Tek and Interconnect Solutions in the segment. Each of our four main markets is benefiting from a world reopening, albeit at different rates, which is incrementally beneficial to Smiths. Our balanced portfolio and broad market exposure dampened specific volatility in any one market. And we saw this play out in our half one performance. Fast growth in Aerospace with consequent benefit to Flex-Tek and Interconnect. Strong demand in energy markets, supporting accelerating growth for John Crane and expected challenges in aviation security, leading to a decline for Smiths Detection. The aviation security market will return to growth as longer term macro forces remain quite strong. And conversely, our fastest growing markets represent may eventually moderate. It’s the breadth and balance of our portfolio that makes the difference. Our strong positions in multiple large global critical industries is a distinctive long-term advantage for Smiths.

Our second lever for faster growth is improved new product development and commercialization. In support of this, we launched a number of high impact new products in the first half. For example in Smiths Interconnect, we introduced new connectors and transceivers for high speed satellite communications. In John Crane, we introduced a novel solution for demanding pipeline applications and in Smiths Detection a high volume faster throughput system for cargo screening. Equally exciting, as you can see on the right side of Slide 28 we’re set to launch a number of additional programs in the second half. These include John Crane’s Zero Emission Seal, the first of its kind. Potentially game changing innovation in the world’s united effort to contain methane emissions. Also due to launch is Flex-Tek’s Python platform of multilayered refrigerant lines, designed to replace cumbersome copper tubing in HVAC systems. To fuel our growing new product pipeline, we invested more than GBP50 million in R&D in the first half a year-on-year increase over 8%.

In the same way that we’re strengthening our new product capabilities, we’re moving more quickly to build out priority adjacencies, several of which we featured at last fall’s Capital Markets event. Two specific examples to illustrate. iCMORE is a Smiths Detection platform that uses advanced algorithms to automate suspicious item detection in cargo, baggage and paladin goods. Earlier this month we launched iCMORE currency to detect rolled or stacked bills of multiple denominations and origins supporting the fight against global money laundering. John Crane Sense is a digital platform that leverages technology first developed in Smiths Detection. The system uses sensors and machine learning to monitor customer networks, flagging potential failure points before they occur. In H1, we launched Sense Turbo, a sensor enabled extension of our market leading dry gas line of engineered seals. These are, but two of the many examples of how we’re improving our world through smarter engineering.

Our fourth growth lever is using disciplined M&A to augment our organic growth focus. Our most recent acquisition is Royal Metal which we purchased in February of last year for $107 million at a valuation just under 8 times trailing EBITDA. Royal Metal is a provider of residential and light commercial HVAC products primarily on the East Coast of the United States. The deal is off to a good start with revenue growth of 45% and profits more than doubling under our ownership. The strong growth is being driven by synergies with our Flex-Tek portfolio, good sourcing and price management and the healthy construction market that I mentioned earlier. We have a solid pipeline of similar M&A opportunities across the Group that we’re actively working.

Having given you a flavor for what we’re doing on the growth side. Let me now say a few words about execution. In my experience, a common denominator amongst many high performing companies is a strong, continuous improvement culture. Our approach to this is centered around the Smiths Excellence System. While we’ve had the foundations of SES in place for a couple of years, we need to do more to translate theory into action and action into results. In support of this, we launched the second phase of SES last autumn, grounded in specific delivery targets aligned to the same three priorities we’re walking through now. With respect to growth, we’re leveraging SES to improve new product development, to build on our strong quality framework and to improve customer service.

On the execution front, we have projects underway in operationally intensive areas like our factories and distribution centers and as regards people, we’re taking advantage of the launch to accelerate talent development. In addition to a Group SES leader who reports to me, we put in place Master Black Belt in each of our businesses, hard lining to the division Presidents. We launched over 40 new Black Belt projects in the last six months and are already beginning to see the benefits of this work here in the second half.

Let me give you an example of a typical project. Over the last five years we’ve reshaped our Interconnect portfolio to focus on the products, technologies and end markets where we’re best positioned for profitable growth. Our leading semiconductor test business is one example. Several of the largest chip manufacturers names, you’ll know well are customers of this platform. As the business has grown, we’ve had success automating our manufacturing processes. This has helped us reduce process variability, expand capacity and lower cost. This particular Black Belt project was a continuation of that effort. Automating the test procedures that take place prior to customer release. Previously, this was a manual process which resulted in longer cycle times and lower yields. So we chartered a project, resource the effort and systematically worked through a Lean 6 Sigma process. The project yielded the following results. Sorting times were cut by 75%. Cash times were reduced by 90% and customer acceptance levels increased to 99.99%. The project took about six months to complete and is representative of the sorts of high impact results-oriented work, enabled by the Smiths Excellence System. We’re now steeply ramping the number of such programs underway across the business.

Certainly SES is helping us execute better, which in turn supports the improved performance you saw in the first half. A good portion of continuous improvement comes down to leadership. Another powerful element of our SES plan, by putting talented leaders into full time Black Belt and Master Black Belt rules, we accelerate development of our people. When they then re-enter into business leadership roles, we cement the cultural advances needed to sustain and amplify the gains. This brings us to our third key priority people. Topping our list in this regard is safety. Smiths has a strong safety culture with recordable incidence rates in the top quartile of all manufacturing companies. And as mentioned, we’ve had a particular focus recently on the safety and well-being of our colleagues impacted by the conflict. We’re supporting the International Red Cross and the vital work they’re doing for the people of Ukraine.

Slide 35 illustrates a number of other actions we took in the first half in support of our people priority. In the interest of time, let me highlight just a few. Our latest employee survey demonstrated progress across multiple categories including our innovative culture, being a great place to work and excitement about the future of Smiths. Consistent with the ramp up in SES activity that I just described, we trained 30 new black belt and over 50 more green belts. In the first half. In support of our commitment to diversity and inclusion, we conducted D&I focus groups with over 800 colleagues in 11 language and across 21 countries. And we established and extended leadership team comprised of the top 200 leaders in our company with a third of this Group being female.

I’ll wrap up my comments today with an update on our heightened ESG focus. Sustainability is central to all of our priorities. As those of you who followed us over time will know Smiths first implemented environmental targets back in 2007. Since that time we’ve reduced water usage by 53%, greenhouse gas emissions by 60% and non-recyclable waste by 63%. Our energy usage is down almost 40% across that period and over 60% of the electricity we use today comes from renewable sources. Building on this strong foundation we took four additional meaningful steps in the first half of fiscal 2022. We established a Science Sustainability and Excellence Committee on our Board of Directors. This Group oversees new product development, environmental stewardship and continuous improvement. We put in place our first ever Chief Sustainability Officer who sits on our Executive Committee. We added rigorous ESG metrics to our compensation programs and we published specific 2024 environmental goals, an important step towards delivery of our net zero greenhouse gas commitment by 2040, aligned with this we signed on to the Science Based Target initiative and the UN race to Zero pledge.

Now on the right side of this chart, you can see a number of specific ways these commitments are contributing to grow. John Crane is playing a frontline role in helping our energy customers navigate the all important transition to a zero emission world. Flex-Tek is engaged with customers on solutions for cleaner air and lower emission heat. Electrification is at the center of much of many of our customers decarbonization plans and Smiths Interconnect powers the types of systems that makes this possible. And Smiths Detection is absolutely central to the safe passage of people and products around the world.

I’ll wrap up with a few closing thoughts. At last fall’s Capital Markets event, we laid out a plan to bring Smiths’ performance better in line with our vast potential. In the first half of fiscal ’22, we demonstrated good progress in this direction with organic revenue growth of 3.5%, operating profit growth of 11% and EPS growth of 14%. In the same way we’re building capabilities aligned to our three main priorities of growth, execution and people. New product momentum is building. SES is up and running and our commitment to building an ever more diverse and inclusive team is unwavering. Alongside all this, we’re taking swift and decisive action to accelerate our progress on ESG.

In closing, I’d like to thank all Smiths’ employees around the world for the hard work and dedication that makes this progress possible. At the same way we’re grateful for the strong support we enjoy from our customers and shareholders.

With that I’ll pass it back to the operator for any questions that you might have.

Questions and Answers:

Operator

We’ll begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Andy Wilson from JP Morgan. Please go ahead.

Andy Wilson — JP Morgan — Analyst

Hi. Good morning everyone. Thanks for taking the questions. I’ve got three questions [Phonetic]. So maybe if I take them one at a time. Just on John Crane, excuse me, in the order development and I guess expectation of the order development. I’m just trying to understand a little bit how current events in Russia, Ukraine, what you sort of see that meaning for longer-term demand for John Crane on top of obviously everything you talked about at the Capital Markets Day. And then I guess the expectation on the timeline for seeing potentially some of that benefit. I guess what I’m trying to understand is that might all be positive but does it take a little bit of time to come through and what should we sort of expect in terms of orders turn into sales. So maybe quite a broad question on John Crane or the dynamics?

Paul Keel — Chief Executive Officer

Sure. Thanks for the question, Andy. With respect to Crane’s order development, so more generally, as you’ve seen, it continues to ramp. At Capital Markets in the fall we shared details on that with an expectation for the first half basically high teens order growth, and that’s exactly what we saw play out. Now, specific to Russia, I would say in the near term it’s not helpful, but as you indicate in the medium term, it should be a net benefit. In the near term, the impact will come twofold. First, as you heard we have suspended sales into Russia, so that has an impact. And then secondly, most of our large energy customers have activities in Russia. So as they divert energy attention and resources to focus on managing that that takes away attention from other programs who might have underway with them. And in addition, they are all ramping up their non-Russian capacity which might lead to near-term delays in scheduled maintenance. So near term consistent with what we said in our prepared comments, uncertainty has been increased here in the second half.

Now, medium and long term, it should be helpful in a couple of ways for us. First is, in the same way that our customers are ramping up near term supply on the non-Russian sources, they’re adding capacity that coupled with the increase in energy prices is sustained rising tide here across energy markets and as we’re a big player in support of that we’ll benefit. Additionally while of course, Russia is a big contributor to the global energy markets and we’re well positioned there, our penetration is even higher in some other markets. So as supply shifts from Russia to other parts of the world, we’ll do even better. So near term unhelpful, medium to longer term favorable.

Andy Wilson — JP Morgan — Analyst

Perfect. I wanted to also follow-up on John’s comments around capital allocation and just M&A and sort of given the success particularly of Royal Metal which obviously you can see in the numbers. Interested, kind of what that pipeline looks like. And I guess if there is sort of more of Royal Metal type businesses and obviously another one is attractive is that would be good, but just in terms of pipeline and kind of thoughts on vendor expectations and whether they are shifting maybe becoming a little bit easier or not?

Paul Keel — Chief Executive Officer

Yes, three thoughts. The first is Royal Metal is unique, not a lot of deals grow 50% and double their profit in the first year of ownership and we bought at the right time there, it was a proprietary deal. We knew the seller well and paying 8 times trailing for a business like that was really, really good — really worked well. So that would be point number one. Point number two is, there is a good pipeline of businesses similar to Royal. The rightsize synergies with our existing portfolios and an opportunity for us to grow either in a geographic area like what Royal does for us on the East Coast or in a particular end-user segment and we’re looking at a number of deals both in Flex-Tek but across our portfolio. Point number three then is on pricing. We are continuing a very disciplined approach to doing bolt-on acquisitions, of course, values are up and while we generated a lot of synergies from that transaction, again a big piece of the success is, is buying right. So we’re going to stay disciplined. I think we have a good process in place to make sure we do that.

Andy Wilson — JP Morgan — Analyst

And then the final one. Just on the vitality index number that you gave, I guess I’m interested and apologies if this has been talked about pharma I might have missed it, but do you sort of, do you have a target for what that vitality number should look like? I appreciate there must be a sweet spot in terms of the amount that you’re spending in terms of R&D and how much practically revenues you would expect from I guess recent product launches. But I just wonder if there is a target level of what you see is kind of the right level for a group like Smiths?

Paul Keel — Chief Executive Officer

Yes, we think about it on three levels. So at the highest level what matters is organic revenue growth. So we have multiple contributors that we walk through here to it. We think new products is one where we can do even better. The second level then is, as you know the vitality index that is the proportion of our period revenues that come from products introduced in the previous five years and that number is — was good in the first half and we feel going forward, it should continue because of those new product launches I talked about in half one and even more coming here in half two. But the third piece of the puzzle Andy is erosion. So it’s, what proportion of your new products no longer contribute to the revenues and that’s a piece that we’re trying to work on as well and didn’t talk about in the call. So in some of our businesses, lifecycles are very long. When you introduce a high impact seal system like dry gas sales is a good example where it’s been decades of benefit to John Crane, and we expect the same with our Zero Emission Seal platform as that now starts to gain installed base.

Conversely some of the programs at Interconnect have shorter lifecycles. They will be specific to a customer need and because the electronics world moves so quickly, the generations can be shorter there. So it’s really the combination of those two things, the vitality index, how much is going into the pipeline and then it’s erosion, how much you lose and the net result we care about most is organic revenue growth.

Andy Wilson — JP Morgan — Analyst

Perfect. Thanks, Paul.

Operator

Thank you. Next question comes from the line of Will Turner from Goldman Sachs. Please go ahead.

Will Turner — Goldman Sachs — Analyst

Good morning, everyone. I have a handful of questions. But first of all, I’ll just follow-up on John Crane. Just interested how much exposure just John Crane have to LNG terminals. I know obviously it’s predominantly the biggest exposure is that [Technical Issues] three refineries but is LNG terminal is a big market and opportunity for John Crane?

Paul Keel — Chief Executive Officer

Yes, good morning, Will. Yes, indeed LNG and particularly our [Technical Issues]. So we do [Technical Issues] issue with LNG terminals is that they take an awfully long time to [Technical Issues] recent events. So, we will participate in that, but it will be a matter of years ahead, not months ahead.

Will Turner — Goldman Sachs — Analyst

Obviously, some very strong results from that division but this is — this has been one of the divisions where historically it’s been a bit more difficult to forecast with a relatively high degree of lumpiness. [Technical Issues] growth and the margins and then in terms of your customer order, which resulted in such a strong [Technical Issues]

Paul Keel — Chief Executive Officer

[Technical Issues] business revenues are principally in three areas. There’s the semiconductor test business I gave an example of [Technical Issues] there is the fiber optics business which contributes to some of those high-speed satellite communications advances that I mentioned and then the third part of their business is the general connectors business, which benefits from broader electronics growth. All three of those categories are doing well for us right now.

In terms of forward visibility we were awarded a number of sizable contracts in the first half and those will take months and even in some case years to service. So while the near-term performance of Interconnect is quite strong, our outlook for the second half and heading into the next fiscal year remains quite robust as well. We feel good about that business.

Will Turner — Goldman Sachs — Analyst

Okay, great. And then just a final question on cost inflation. Obviously it’s super challenging environment and certain cost items are moving, can be pretty rapidly in the last couple of months. I’m just wondering what are your thoughts on consultation [Phonetic]. Are there any risks here, profitability, how comfortable do you feel with managing this and what are the initiatives that you’re taking to help manage this environment?

Paul Keel — Chief Executive Officer

Yes. So as you saw in the first half, we had a good result in that respect. While we are impacted by the same general inflationary headwinds as everyone else, the delta between our price performance and our inflation both raw material and wage inflation was a net positive in the first half and that’s because the business has got after it early. Of course we knew inflation was coming as the world started to reopen and demand across our portfolio increased. It’s only a matter of time before that played out in the supply. So we got after it quickly.

Now moving forward, we expect to see continued ramping of inflation, a number of countries now are tightening their money supply that will hopefully damp down inflation, but that balanced with the Russia situation. Certainly for the second half we think inflation will be even higher. So what are we doing to combat it? For us, our suppliers and our customers were all on both sides of this equation. We are both facing supply inflation for what we buy and we’re all working collaboratively with our customers to try to strike a balance in terms of what we can attract for our offerings. So, the first way that you focus on this is making sure your operations are running as efficiently as possible. So there’s less waste in the system for suppliers, for us and for customers to try to absorb. The second way you do it is, having very open communication lines up and down that supply chain. Again with those from whom you buy and those to whom you sell, we’re all managing the same two things. And if you do that in a collaborative way you can steer through it.

And then the third is you need to have very good disability — visibility. You need to have systems that let you see specific raw material changes and you need to have good visibility into what the net pricing is for your products and then you need to have a process in place where you review it and manage it consistently. That’s all the kind of better execution that we’ve talked about now for a couple of months here.

Will Turner — Goldman Sachs — Analyst

Okay, great, thanks.

Operator

Thank you. Next question comes from the line of Andre Kukhnin from Credit Suisse. Please go ahead.

Andre Kukhnin — Credit Suisse — Analyst

Good morning. Thank you very much for taking my questions. Can I start with one on Detection, just to follow-up on your comment of order book starting to be rebuilt but not to see benefit this year. Obviously, clear that the benefits for 2023, but could you give us some idea of where the orders are running now versus the sales level. And hence, should we think about 2023 is a recovery year, or sort of this the rate of rebuilding the order backlog or more of a stabilization year?

John Shipsey — Chief Financial Officer

Good morning, Andre. So what I can say is that the order book did grow in the first half, so orders recovered. And we actually took more orders than we depleted in sales out in the first half in Detection. So I think that’s encouraging and it’s consistent with our view that there are signs of recovery. The aftermarket is probably the leading indicator. Whether you look at John Crane or whether you look at Detection aftermarket will recover first, and we’re seeing that — we saw that in the first half with 4% growth, both in Aviation aftermarket and in — both in growth aviation aftermarket and other security systems. It will take longer, it takes longer in John Crane, it takes longer in Detection, but we expect that we will see — sorry, we won’t see recovery this year, but we expect that we will see it in calendar ’23.

Paul Keel — Chief Executive Officer

Andre there is three leading indicators that we’re encouraged by in the aviation security market. So, the first is, as John mentioned, the underlying OE order book that’s growing. The second is aftermarket service which as we mentioned in our comments also growing and then the third is the broader security markets that John just referenced ports and borders, urban security, etc also growing. So the leading indicators are now all turn to the positive and that is certain to drive the underlying OE demand here in the coming calendar year.

Andre Kukhnin — Credit Suisse — Analyst

Great, thank you. As you said, very encouraging indeed. Could I have another two questions on John Crane. One is, and sorry to dig into the detail here, but on the kind of drivers of margin and operational leverage there. Thank you for the number on R&D acceleration of GBP3 million, but against that we should have had some portion of I think around GBP10 million to GBP12 million of restructuring savings coming in as well. So if I were to take these sort of the three versus maybe six for savings than it does imply that there’s not a huge amount of operational underlying kind of gearing in John Crane and growth which is a little bit surprising given us coming from aftermarket which is supposed to have decent drop through ratios. So I just wanted to check through these numbers and see if there’s anything else that we’re missing in there? And more importantly, how do you expect that to play out for the second half? Is that kind of GBP3 million step up in R&D is the run rate or should we think about a different number?

John Shipsey — Chief Financial Officer

Sure. Thanks, Andre. So on John Crane, the restructuring benefits actually we got pretty much all of the restructuring benefits in John Crane immediately in FY ’21 and we’ve actually over delivered on our target of the restructuring benefits. That’s because we took action at the end of FY ’20. So the — you’re right though that we should see operating leverages as volumes recover, we’ve already taken the restructuring benefit, but we should see the volume effect of positive operating leverage in John Crane. What as offset that is not just the R&D that I spoke to the GBP3 million, but also we have incurred higher costs in managing the supply chain challenges. So that in John Crane, it’s less about electronic raw materials. It’s more about critical surface technologies polymers, etc and incurring freight. So that’s the reason why perhaps you’ve seen less operating leverage in the first half and clearly, what’s important to us going forward is to take out that inflationary and supply chain cost and deliver that operating leverage going forward.

Andre Kukhnin — Credit Suisse — Analyst

And R&D is that sort of similar GBP3 million step up in the second half…

John Shipsey — Chief Financial Officer

Yes. So as I think you know Andre, we are investing heavily in our digital product offering and in fact quite a broad range of new product launches coming out of John Crane, much more than we’ve seen in the last five years. And although we are increasing the level of spend, we are still around 2% or 3% in John Crane as a percentage of sales.

Paul Keel — Chief Executive Officer

At the enterprise level, Andre, the gearing is so strong 3.5% topline growth driving 14% EPS growth that we are in a good position to be investing for the future. So you’ll see that in R&D, you see that in resourcing of key priorities like SES and ESG and you see it in terms of the pipeline that we’re commercializing. So we’re in a good spot right now, the first half was strong and we have an ability to fund future growth and that should continue to accelerate here over the medium and longer term.

Andre Kukhnin — Credit Suisse — Analyst

Indeed, indeed. Yes. And on John Crane, just final question I have is, on that kind of role that has to play in energy transition that you talked about at the Capital Markets Day and I think we’re all looking forward to more details on and specifically on that we’ve seen some hydrogen projects going ahead recently and including a particularly large one in Dubai. Could you comment on whether you are getting work on those projects and how does that compare to your kind of normal shipset value or sort of content density, if we can think about it that way on say more standard oil and gas related work?

Paul Keel — Chief Executive Officer

Yes. The energy transition is a clear benefit to John Crane, short, medium, long-term. In the short-term, all energy companies are upgrading their infrastructure, having them run more efficiently, fewer leaks etc., all that plays to our advantage. And then as we mentioned, the situation in Russia will further contribute to that. In the medium-term, the focus on methane emissions is quite pronounced and Crane is ideally positioned to help customers with that this Zero Emission Seal, we’re going to launch in the second half is the first of its kind on the market. And that will be a game changer for our customers. And then in the longer term, there is transitions to other energy sources, like the ones you referenced with hydrogen. Many of those are more sophisticated solutions, operate at higher pressures and have requirements for more of highly engineered solutions. All that plays directly into John Crane’s benefit. So we’re quite encouraged about energy transition. Sure. In terms of how that benefits our own business, but really in terms of the opportunity to help customers. This is at the very top of every energy companies priority list around the world.

Andre Kukhnin — Credit Suisse — Analyst

Great, thank you very much to both of you.

Operator

Thank you. Next question comes from the line of Mark Davies Jones from Stifel. Please go ahead.

Mark Davies Jones — Stifel — Analyst

I’m very sorry. This has coincided with our weekly target on tests. I’ll get on the question quickly. Detection, can you talk about the medium-term outlook on the OE side, because I can quite see we should see some recovery through next year as passenger numbers recover and airports get back to life and so on. But on the OE piece you’re also fighting the headwind of the end of that big upgrade cycle in Europe on the move to CT. So what’s coming down the pike in terms of the next technology cycle that gives you comfort over the medium term growth prospects. I’ll get on to mute.

Paul Keel — Chief Executive Officer

You want to take this one.

John Shipsey — Chief Financial Officer

Sure. Yes. Thanks, Mark and I hope it is just a fire drill and nothing more serious. So yes, very good question on Detection OE. I mean we — as I said earlier, we are seeing all the right leading indicators coming through in terms of aftermarket first, shorter cycle ports and borders also coming through and then longer term Aviation OE. And just to stress as I spoke to Andre, we are seeing order recovery in the first half. It’s just that for OE that cycle is longer. We are very confident about the long-term fundamentals of this business. We feel it’s very strong as a market long-term and our position within it. We are the leading provider of Aviation security and we are continuing to invest in our technology, the technology that supports today’s products and the technology that supports the next generation. There isn’t a cliff edge on regulatory upgrades, so we have had when we are through for example, most of the regulatory upgrade for hold baggage in Europe, as you know Mark, very well, for example, we’ve had a big delivery in these last 18 months, a big program with iron ore in Spain, and that is coming towards conclusion.

But what we also see is different waves either by geography. So for example, in Asia or in the US, different cycles of upgrade and across both checkpoint. So as an example, you all have seen our big win with Heathrow on CTX on the passenger checkpoint which hasn’t yet translated into deliveries of sales but will in the near future. So we see wave upon wave of either regulatory driven upgrade, so step change upgrade in technology or replacement cycles in other geographies. So for us, more what we have seen, is less about a regulatory cliff edge. It has been much more about depressed activity over the past two years in airports which has forced our customers to postpone capital investment programs that they want to do, but which they have had to push out both in terms of tender and in terms of delivery. Encouragingly and when you look at aftermarket, we see that tide turning but it will take, as I say, through to probably calendar ’23 for that to really start flowing through into the sales.

Mark Davies Jones — Stifel — Analyst

Thank you. That’s very helpful. And I haven’t been incinerated. If I can add one further one. On the M&A side and the bolt-ons, would it be fair to think that most of the opportunities there might sit in Interconnect and Flex-Tek given the size of the current market positions you already have in areas like Crane and Detection. It’s harder to see quite as many opportunities there. Is that fair or are there still opportunities even in the bigger divisions?

Paul Keel — Chief Executive Officer

No, I wouldn’t take that away if I were you. We have strong positions in all four businesses. Indeed, our two largest businesses of course, we would like to allocate, commensurate amount of M&A capital too. So we’re pursuing M&A pipelines across all four businesses. It’s the Royal Metal example from Flex-Tek being so exceptional. I think that has a lot of people thinking there is a longer term fundamental shift M&A to Flex. We’d like to invest in all four of these businesses.

Mark Davies Jones — Stifel — Analyst

Great, thanks very much.

Operator

Thank you. Next question comes from the line of Denise Molina from Morningstar. Please go ahead.

Denise Molina — Morningstar — Analyst

Thanks so much for taking the question. I just wanted to follow-up on the CT demand and the differences in the cycle globally. And just maybe ask for a little bit of color, I know it’s just one half, but a little bit of color on the order book you see in terms of the geographic spread and I have to say that, just anecdotally, I was just in US, a couple of weeks ago and I was in a smaller city St. Louis and I saw one of your scanners at the airport and was kind of surprised that it went that deep on a very busy airports earlier hub [Phonetic]. So just wondering if there is any competitive differentiation or advantage you might have in getting the US orders. And then my second question was, do you have an equivalent process to SES for green lighting R&D spend. You have a lot of different markets, you have different opportunities, but unique one that is a growing market and one where you have a differentiated product. So what’s your thoughts on that?

Paul Keel — Chief Executive Officer

Okay, So a lot of questions in there. I think the first was about Detection in the US. Is that correct?

Denise Molina — Morningstar — Analyst

Yes, that’s right. Just kind of what you think your competitive edge is there, if possible?

Paul Keel — Chief Executive Officer

Substantial is what I would say. We’re the largest player in the US Aviation security market as we are in most large markets. And our competitive advantages is cemented in three areas. The first is Technology. So many of the big technology breakthroughs in aviation security market were led by Smiths overtime. First one to introduce CT scanning and we’re working on next-generation product right now in partnership with one of the bigger, more secure airports in the world, using a technology called the Fraction. So technology big advantage for Smiths. Second big advantage is the installed base. The largest of the competitive set, and not only does that give you strong reference for winning additional tenders, it has the aftermarket stream that John referenced earlier. Now, more than half of Detections revenues come from that aftermarket stream. And the third is the service infrastructure. We have the largest service network globally, because we need it with that big installed base. And so we’re in airports, everyday working with our customers. So I’ll have to get to St. Louis and see what you found there, but we’re doing well in the US.

Second question about your date process…

John Shipsey — Chief Financial Officer

SES…

Paul Keel — Chief Executive Officer

SES, yes.

John Shipsey — Chief Financial Officer

Equivalent for R&D, yes.

Paul Keel — Chief Executive Officer

So we have three important processes for how we allocate resources and they’re all similar, they’re all gate processes. So SES is for operational Black Belt projects and we’ve talked a lot about that. For R&D there is a rigorous gate process where you advance from concept to scale up to launch etc and there are deliverables for each of those gates and you make a decision whether to continue investing in that program. The third process with similar characteristics is our M&A process, where we have gates going from strategic assessment of the opportunity and then engagement with potential target and then moving to negotiating a potential transaction and then integration and execution of the plan. So strong process in place for R&D and I think that contributes to what we talked about here in the first half, and I’m looking forward to the fall when we talk about the second half launches, because we have some pretty big programs here that are set to go.

Denise Molina — Morningstar — Analyst

That’s very comprehensive. Thanks so much.

Operator

Thank you. Next question comes from the line of Edward Maravanyika from Citigroup. Please go ahead.

Edward Maravanyika — Citigroup — Analyst

Thanks very much. Good morning, Paul. Thank you for just talking through kind of Flex-Tek and where the sort of points of strong activity are and the outlook. Could you please just do the same for Interconnect? Or I think about the other way around actually. You spoke on Interconnect, could you just please do the same on Flex-Tek, because that you had a double-digit strong first half for the year?

Paul Keel — Chief Executive Officer

Yes, so as I mentioned Interconnect, three pieces, all in growth. Flex-Tek two big pieces, the Construction business and then a smaller Aerospace business. Now importantly we sometimes conflate our Aerospace businesses. We have an Aviation Security business, detectors in airports, and then we have an aerospace business where we sell components to our commercial military aircraft, and then also to satellite systems for communications. Flex-Tek competes in the airframe piece of that. We sell components to airplanes for fluid and gas convenience. Right now the largest piece of that Flex-Tek business is the construction business and very strong growth and amplified by the Royal Metal acquisition that we’ve now talked about a couple of times. The smaller piece of that business sits on our fastest growing segment in the first half. Our aerospace portion of Flex-Tek is growing even more quickly than the construction part. So as eventually the US construction growth moderates, these are typically multi-year builds on the aerospace side. That’s why I think somebody asked me what I felt — how confident I was in the future of our two fastest growing businesses, both Interconnect and Flex-Tek have current and forward visibility for continued growth. So we feel good about both those businesses.

Edward Maravanyika — Citigroup — Analyst

All right. Thank you very much.

Operator

Thank you. [Operator Instructions] And the next question comes from the line of Jonathan Hurn from Barclays. Please go ahead.

Jonathan Hurn — Barclays — Analyst

Good morning, guys. I just had a few questions please. Firstly, can you just come back to Interconnect. Obviously, if we look at the end markets there, defense is one of the end markets. Could you just give us a feel for how important that is for Interconnect? Also which [Speech Overlap]. And essentially what the growth outlook would be?

Paul Keel — Chief Executive Officer

Defense is a small piece of Interconnect. Interconnect is a small piece of Smiths in total. They are important customers and we have some very nice programs multi-year in some cases decades long programs that we participated in. And we want a couple of tenders in the first half. So small part of our overall business, but like everything else in Interconnect growing nicely right now. In terms of the future prospects for the defense industry, regrettably, I think they’re probably pretty good right now in the world.

Jonathan Hurn — Barclays — Analyst

That’s very clear. The second one was just on John Crane, obviously, it’s good to see that the OE side of the business is starting to pick up. I think historically the OE contracts there have been sort of secured at sort of quite low margins, is that still the case or are you starting to see better margins for your sort of OE wins now?

Paul Keel — Chief Executive Officer

Well, there are probably narrower margins for John Crane, but we still make good money on the OE first fit business for Crane. Our strategy there is to — is not to be penny-wise and pound foolish. The first conversation is always doing the right thing for the customer. What is the solution? Of course, price plays into it, but if we can help important customer on a critical OE component, that’s going to lead to many years of attractive aftermarket. So we’re seeing growth both on the OE side, as you noted, and then even stronger growth on aftermarket. With the situation in Russia and the implications that we mentioned earlier for that the focus on methane reduction and Zero Emission Seal coming and the longer term energy transition opportunity that’s going to be a lot of OE business opportunity, and even more aftermarket.

Jonathan Hurn — Barclays — Analyst

And then final one, just on inflation, sorry if I missed this, but, if we kind of look at the input inflation across the divisions, is it easier to pass on that inflation of certain divisions than others?

Paul Keel — Chief Executive Officer

Yes. So it comes down to two things. First, it’s the supply agreement. In some contracts it’s a straight pass-through that we don’t take risk on the underlying commodity costs. So we just communicate what it is and there is no discussion. Some of those contracts exist in Interconnect some exist in Flex-Tek, those are probably an example there. The other question then is, in terms of your ability to value price. So where do we have a relative stronger competitive position in terms of our technology installed base service offering. And while we don’t typically have specific — as many specific pass-through contracts say in Crane or Detection, our technology market position and service networks are particularly strong in those two businesses. So that gives us some value pricing advantage.

Jonathan Hurn — Barclays — Analyst

Okay. Thank you, guys.

Operator

Thank you. Next question comes from the line of Robert Davis from Morgan Stanley. Please go ahead.

Robert Davis — Morgan Stanley — Analyst

Thank you for taking my questions. Had a couple. The first one was just, you mentioned something earlier around the older products within your portfolio. Just to be curious, do you have any sense of what percentage of your group sales are coming from I guess of more dated or legacy products. So I’m just trying to figure out the potential growth uplift from exiting some of these older legacy products. Is that an opportunity to help sort of push your growth above and beyond the incremental R&D spend you’re putting in right now?

Paul Keel — Chief Executive Officer

Do you know John in specific to answer.

John Shipsey — Chief Financial Officer

Yes, hi, Robert. Tough to answer and probably specific to individual divisions even if I take it, John Crane, we — our business model is to install a seal and potentially to — in a refinery to service that for 40 years, even 50 years. It’s a very long-term, it’s a very sticky installed base. At the other end of the spectrum, the cycle for Interconnect products are very, very short and we constantly invest in technology to improve and deliver the next generation. So I’m probably not able to answer your question with a direct number, but what I would say, the important thing about what we do as a total Group is that we are investing in organic R&D led growth and it’s about taking advantage of market recovery, but also as Paul highlighted, it’s about delivering these exciting new product launches to replace older technology and deliver more value and more performance to our customers and that’s what we’re continuing to do across every division.

Robert Davis — Morgan Stanley — Analyst

That’s great. Thank you. And then my second one was just on some of those longer-term projects or contracts that you have, do you have sort of hedging in place or cost escalation clauses on multi-year contracts. I guess just the obvious question is on the back of inflation I mean, if it’s a book and turn business, you can put prices up relatively quickly and I saw that you’ve done that on sort of net positive basis on — in your bridges, but just on your longer-term contracts are there sort of price escalation clauses if raw materials creep up and it is being delivered over say two, three, four year period?

John Shipsey — Chief Financial Officer

Yes, indeed. So we’re focused on wide variety of different contracts. As Paul referenced, some of them, for example, if there is a very high value commodity in them, we have straight pass-through. We don’t take a risk on that commodity. We are clear about what it costs in terms of the product and we passed the benefit if it goes down, but the cost if that goes up through to the customer. We then do have a number of long-term contracts that might renew, for example, every three years or longer, and those will typically have an inflation-based uplift within them. And if they renew at the end of three years, then we’ll be looking at taking advantage of the three-year inflation for the next round.

Robert Davis — Morgan Stanley — Analyst

That’s great. And then maybe just one final one, just on the Crane business, we can see what’s going on in the market in terms of publicly listed companies and their commentary around sort of capex and the impact of oil prices, but just interesting, how have you — is your involvement with some of the national oil companies and just be curious there what the feedback is in terms of their intentions and spending plans. Do you see any sort of obvious differences or divergences in the national oil companies spending on the publicly listed companies?

Paul Keel — Chief Executive Officer

In general, right now, the story is the same. It’s early days of a sustained energy market recovery, the oil price increases, the situation in Russia-Ukraine, all those things are adding to an already buoyant market. Any nuances between state-run or publicly listed would be overturned by that just the broader rising tide right now.

Robert Davis — Morgan Stanley — Analyst

Okay, that’s great. Thank you. That was all my questions.

Operator

Thank you. Next question comes from the line of Bruno Johnny [Phonetic] from BNP Paribas Exane. Please go ahead.

Bruno Johnny — Exane BNP Paribas — Analyst

Thank you for taking my question. I was just wondering whether you could flesh out, talk about more recent trends, touch upon what you’re seeing on the ground or heard from customers over the last six weeks and seen customers more hesitant to place orders or now or conversely, are they pulling forward orders as they’re concerned about securing supply. So, really what have you seen over the last six weeks, and how does this compare to what you were seeing in the first two months of this calendar year?

Paul Keel — Chief Executive Officer

Yes, I would say two things in that respect. So our higher performing customers right now have an answer to your question similar to what we said on the call. There’s this balance between very strong demand, they are seeing good execution that they’re delivering, improved accelerating growth that they’re finding and they feel good about that. But they read the same newspapers as you and I and so they look ahead in all the same things that John talked about in our outlook. They see it. Now the flip side is, some of our customers need us more right now that they’re having some challenges operational or competitive or otherwise. And I would say the balance there tips more to the cautious if they’re already losing before uncertainty went up this amplifies their concern.

Taking a step back, I would still say 60-40 of the world is more encouraged than nervous right now, because of the underlying macro effects that drive the demand that we’re seeing through most of our portfolio. Similar to what we said on the one hand numbers are generally pretty good, demand is strong, world continues to open up. On the other hand, you have Central Banks tightening, macroeconomic and geopolitical uncertainty, inflation and so people are feathering the clutch a little bit.

Bruno Johnny — Exane BNP Paribas — Analyst

Got it. I’d just be interested to get some further color on really what underpins your confidence that you’ll still be able to deliver 3% underlying sales growth this year in light of the current macro and geopolitical uncertainty that you just touched upon. Is it order book strength. If so, could you talk about how much of H2 revenue is currently covered by the order book today?

Paul Keel — Chief Executive Officer

Yes, I’d say it’s two things. So first is, we’re now halfway through the year, we grew 3.4% in the first half to deliver 3% for the full year, of course mathematically would require a bit less in the second half. So we’re already ahead of the game. Secondly, the work that’s underway to deliver the 3.4% and 14% EPS growth will continue. All of those efforts were beneficial whether the underlying macro economy continues at a very brisk pace or just a fast pace. The third is the point that you mentioned the order books in all of our businesses, they are strong and in some cases continuing to get very strong.

Though I’d break them into three categories for you, Flex and Interconnect very strong, strong near-term visibility. We expect them to have a very strong second half. Crane demand growing, accelerating and that’s going to be a multi-year cycle of expansion for them and then Detection, Detection is going to have continued pressure here in the second half, probably the first half of our fiscal ’23. But the longer term fundamental characteristics for that market, they are very clear and all of those leading indicators we talk — we spoke about, that’s just straight math. We’ve seen this model before. So we’re encouraged by that. And when you put those three categories together it comes back to why we feel so good about the current portfolio for Smiths. Frankly, I wouldn’t want each of our four businesses all at the same point in the cycle, because that would not pretend well for when those markets turn. We have four different businesses all benefitting from recovery all at different rates across a balanced portfolio where you have strong positions in each that’s going to serve us well.

Bruno Johnny — Exane BNP Paribas — Analyst

Got it. And just a quick clarification on Flex-Tek and Interconnect, if I may. And so you talked about strong near-term visibility. Does that mean we should expect a typical H2 over H1 seasonal uplift despite the very strong growth that you’ve just seen in H1.

Paul Keel — Chief Executive Officer

We don’t give forward guidance by division. They are going to have a bigger second half than first half.

John Shipsey — Chief Financial Officer

I think what we’re saying is that we see continued performance from Interconnect and Flex-Tek. They — Smiths as a whole tends to have a bigger second half than the first half. That’s not actually particularly driven by Flex-Tek and not so much driven by Interconnect. So I think my message would be continuation of growth in Flex-Tek and Interconnect broadly.

Bruno Johnny — Exane BNP Paribas — Analyst

Got it. Thank you, guys.

Operator

Thank you. Next question comes from the line of Alasdair Leslie from Societe Generale. Please go ahead.

Alasdair Leslie — Societe Generale — Analyst

Yes, thanks and good morning. So I think you’ve been very clear about your kind of view on the full-year organic growth. I’m just wondering if you could calibrate maybe a little bit more your expectations for the full year margins maybe with some more color around some of the divisions, particularly, because I guess what we’re seeing is both positive and negative surprises across some of your businesses in H1. So kind of fundamentally are we still kind of confident of a strong improvement in H2 in terms of margins relative to H1? Thanks.

John Shipsey — Chief Financial Officer

Yes, thanks very much Alasdair. So yes, I mean you all have seen in the first half that we did deliver a very strong margin performance, very encouraging 110 basis points underlying with the benefit of Royal Metal, actually 150 basis points on — including M&A on a reported basis. So we do still expect to continue to improve margin in the second half. We don’t give guidance at a divisional level, but at a Group level, we are — we still see — you will see that we have a volume growth that’s our whole financial framework is if we can drive that topline, we know that we will convert it faster into operating profit growth and then into cash. So growth will reinforce our margins as a general rule, and so if we deliver growth of 3% for the full year, you should see beneficial impact in operating profit and we feel good about that.

The one thing I would also draw attention to just while we’re on is I’m talking about underlying organic growth. Clearly, you’ve seen the reported growth and the benefit we got from Royal Metal in the first half. Royal Metal will drop out of the reported comparison and move into underlying in the second half, because we bought it right at the start of the second half of FY ’21.

Alasdair Leslie — Societe Generale — Analyst

Okay, thank you. And maybe just on Detection, I suppose. I think perhaps we were sort of thinking about 100 basis points of year-on-year improvement in the margin this year. So despite obviously the market headwinds or being at near the bottom of the cycle, is that sort of still feasible, should we still think about sort of underlying margin improvement of around about 100 basis points there for this year?

John Shipsey — Chief Financial Officer

Again, we can’t guide to specific divisions. What I would say is that we have done — we’ve done significant restructuring in Detection, which has delivered very positive benefits that’s been against and in H1 it’s been against a very strong headwind of twofold headwind. First of all, lower volumes, and clearly operating leverage does work both ways as Detection turns to recovery in calendar ’23 then we will see the benefit dropping through into margin, but right now with reduced volumes in the first half that clearly was a significant headwind for them. And then secondly, right now, we do have significant supply chain challenges, electronic components, particularly in Detection as I highlighted that has had an impact on margins in the first half. So that’s what I can talk to if you like, I think in a macro sense, the important thing is that Detection is in a good market and it is a leader in a good market. As volumes recover, then automatically, we will see those margins back and growing.

Alasdair Leslie — Societe Generale — Analyst

Perfect. Thank you. Thanks, John.

Operator

Thank you. There are no more questions. I’d like to hand back over to the speakers for final remarks.

Paul Keel — Chief Executive Officer

Okay. Thanks everyone for joining us today. On balance we feel very good about the first half performance. Lines up very nicely with the strategy we laid out in the fall, accelerating growth, improving execution and investing in our people. And you saw nice elements of all three here in half one, almost 3.5% topline growth, organic topline growth. Very good conversion of that into strong operating leverage, and then a number of investments in our people and in our future and we expect to continue along this path here in the second half and moving into fiscal ’23. So thanks for your interest and I think I’ll leave it there.

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