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Smiths Group - Capital Conversations

Engineered for growth: value creation through financial leadership

FTSE250 listed engineering conglomerate Smiths has a diverse exposure to markets including medical devices, petrochemicals and security and threat detection. It has been seen by some City analysts as a target for dismantling because of its composition from disparate businesses which some felt enjoyed little crossover. Attempts by the then CEO to offload units were thwarted by factors such as a large pensions deficit, asbestos litigation proceedings, the global financial crisis and government spending cuts in defence and healthcare.

The share had been hit by a number of downgrades and with weaker than expected full-year earnings announced in September the share was off nearly 30% year to date. The CEO revealed, that in addition to forex headwinds and the continuing “challenging trading conditions”, the company “had signed up to a number of contracts that, with the benefit of hindsight, we were foolish to have signed up to”.

It is within this context that we were asked to facilitate a 3 day programme for the top 50 finance leaders globally, a first for the function. The programme followed our bespoke Pathways To BetterBusiness™ process.


Numbers pathway



An excavation of the share revealed that the stock price looked pretty much up with events. EV/Sales ratio of c.2 free cash flow/EV yield around 5%. Yield bang in line with market at 3.4%.

Question: is Smiths ex growth?

  • TSR increasingly driven by yield – but only on a market yield (3.4%) and dividend growth (crucial for long term performance) is restricted by cash flow requirement of pension fund and asbestos?
  • Growth investors disappointed and income investors not yet attracted?

Growth: so where is the upside and what will drive it? A buyer would need to see 15-20% upside – where will that come from? Especially given volume and pricing pressure in the core areas and their best performing division, John Crane now having the headwind of lower oil and gas prices. (significant business is after-market so some defensiveness?)


Business risk – Detection

Medical – consolidation leads to price wars or losing contracts to bigger peers with wider product range?

Management – The issues around for a few years why not dealt with earlier?

Quality: how easy is it to forecast earnings for you let alone investors? Lumpy contracts in Detection? Transaction effect of exchange rates?

Given (repeated) “one-offs” where will next ones come from?



Workshop considering:

  • What is the strategy from here to crystallise value, generate growth and overcome the disappointment?
  • What is the catalyst going to be?
  • What’s the story from here about value creation and growth and how will this be convincingly delivered? As an outsider how will I be able to tell there has been a shift? What KPIS will tell me you are on track?
  • What will give the story momentum….what event will shift perception? What will get the stock going?



Analysis and action shifts required:

  • Where is value created in the divisions?
  • What will you stop doing immediately – what activities are destroying value?
  • What are the mindset shifts and behavioural shifts required to generate value?
  • How aware are you/your team of the cost of capital for the division? How do you flex the cost of capital to reflect the different risks of different expenditure?
  • How do you minimise capital employed?

People pathway



Questions at the heart of the issue:

  • What is financial leadership at Smiths?
  • What skills and behaviours do finance leaders need and how can they create value for the organisation?
  • What do we want finance to be, to stand for, what role does the function play in the company?
  • What are we good at today?



Workshop: “How do we create value?”

The value-creating finance leader:

– leadership mindset and the leadership behaviours

Building capability and releasing capacity:

  • Training and development
  • Individual development
  • Career pathing

Making better decisions:

  • Capital allocation decisions
  • Partnering the business
  • Operational management
  • Data: telling the story



Value creation through financial leadership: investing in people

  • SCARF state neurology
  • Active listening
  • Begin with the end in mine: uncovering the question at the heart of the issues?
  • Creating a Thinking Environment
  • Coaching

The results

The event created a measurable shift in the financial leadership capability of the entire function.  Shortly after the event a new CFO was appointed: arguably, his task in leading the function was enhanced by the fact that his direct reports had connected, at a personal level, to the role the function plays in leading for value creation in its broadest sense.  A lasting legacy of the event lies in the strengthened collective identity the finance function now has: finance leaders, who once identified strongly with their division, now routinely move between divisions.  In addition a functional action plan was agreed incorporating a shift in strategy with regards to training and recruitment.

Where next?

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