Good morning. I'm Roland Carter, CEO of Smiths Group. I'm joined by Julian Fagge, our new CFO. Today, I'm excited to share with you a number of strategic actions that we are taking to unlock significant value and enhance returns for our shareholders. We've made substantial strategic progress and notably improved our operational and financial performance in the past four years. Our strategy is delivery, and we'll continue to do so, but this has not yet been reflected in the valuation of the company. Today's news is a result of an exercise that the board and I have been working on together over the past year to evaluate options to maximize shareholder value and to address this discount, to unlock the real value that we see inherent in our business. We believe these actions will deliver significant value for our shareholders. Let me take you through this in more detail.
First, addressing the portfolio structure. We will focus Smiths on our world-class, high-performance industrial technology businesses, John Crane and Flex-Tek. Smiths Interconnect is to be divested, and Smiths Detection will then be separated by either a demerger or a sale. In parallel, we are increasing our capital return to shareholders. We will increase our buyback program to £ 500 million. And in addition, we are also planning to return a large proportion of all disposal proceeds. As we execute this strategy, we will become a more focused business with a higher quality financial profile and significant potential for growth and future value creation. We are conscious of the impact of such changes on our people, and we'll do so in a manner that is respectful of our colleagues, our customers, and our suppliers, and in the long-term interests of all our stakeholders.
Our priority has been on driving an improvement in our operational and financial performance, and you will have seen that in the results that we have delivered, reflected in the recent upgrade of our FY 2025 guidance. Given this delivery, now is the right time to reshape our portfolio to focus on our world-class performance technologies for efficient flow and heat management. John Crane and mission critical flow control solutions supply highly engineered mechanical seals and support systems, and Flex-Tek providing high-performance engineered fluid movement and temperature management solutions. They have leadership positions in secularly attractive energy and industrial markets, with growth supported by a broad range of energy diversification scenarios. They have a track record of operational and financial performance with strong cash generation. Their operating profit margin and return on capital employed are in excess of 20% and 25%, respectively, notably higher than the current group average.
Critically, they provide a strong platform for continued growth and margin expansion. These businesses will be supported by a streamlined group cost structure, which we'll address through our already announced acceleration plan. We will provide further details on our strategic focus at our interim results in March. Our portfolio actions start now. Smiths Detection and Smiths Interconnect are both attractive businesses in their own right, strong market positions, leading technologies, and close customer relationships, and have delivered significant recent performance improvement. However, the board and I believe the separation of these two divisions is the best strategy for our shareholders. Consequently, Smiths Interconnect is to be divested, targeting a transaction announcement by the end of this calendar year. We will then progress the separation of Smiths Detection, either by way of a demerger in the UK or via a sale. We look to deliver this as soon as practicable.
Alongside the repositioning of our portfolio, we are accelerating execution against our capital allocation policy. We are excited by the future potential of a more focused Smiths and will continue to invest in our businesses organically. Our R&D investment will remain focused on new product development and commercialization, underpinning our organic growth. We will also continue to pursue disciplined and value-creating bolt-on acquisitions in attractive high-growth market adjacencies. Alongside this, we are enhancing our returns to shareholders. We will increase our buyback program to £ 500 million. We will do this as follows. Our current £ 150 million share buyback program has £ 65 million remaining, and we intend to complete this by the end of March 2025, four months ahead of our original target date of July. We will then initiate an additional buyback of £ 350 million. We expect this to be completed by the end of calendar year 2025.
In addition, we will return a large portion of all the disposal proceeds as they are realized. We will undertake these measures while keeping a strong balance sheet, and our intention is to maintain investment-grade rating. So, in summary, starting from a position of strength with good operational and financial performance, now is the right time to set out the next phase of our strategy. As we execute this, we will become a more focused business with significant potential for growth and future value creation. Focusing on our world-class John Crane and Flex-Tek businesses, carefully managing the separation of Smiths Interconnect and Smiths Detection, and enhancing our capital returns will deliver significant value for all stakeholders. We are excited about the opportunity this presents and look forward to updating you on the delivery of this plan as it progresses. Julian and I are now happy to take your questions.
To ask a question, please press star one. To ask a question, please press star one and wait for your name to be announced. To withdraw your question, please press star one and one again. Once again, please press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. We are now going to proceed with our first question. The question comes from the line of Lushanthan Mahendrarajah from J.P. Morgan. Please ask your question. Your line is open.
Hi. Morning, guys. Thanks for the presentation. I've got a few questions, if that's okay. The first is really on timing. I guess why now? It's clearly been an ongoing conversation for years. I guess a lot has happened recently with the activist letter, etc. I'm sure these things don't happen that quickly. But yeah, just getting an update on sort of why now and sort of the timeline to getting here. The second question is just on, I guess, why not go further? I guess what's the rationale for keeping John Crane and Flex-Tek? I know you sort of touched on it, but it'd be good to get a bit more detail around that. And then the third is just on Detection, just in terms of divesting or demerger. I guess what are the factors you're weighing up there in terms of which way you go? Thank you.
Thank you, Lush, for the three questions. Why now? We have strong performance across the whole business, and we have definitely got significant momentum within Smiths Detection and Smiths Interconnect. Since I became CEO a little over nine months ago, we have been very active, and we have been doing a full strategic review of the whole business. We made the decision that this was the path to maximize value, and therefore we thought, as we'd made that decision and as we're a public company, we had to, therefore, update the market. We can certainly provide more detail in March at our H1 results.
To answer your question about John Crane and Flex-Tek, these businesses have and continue to have exceptionally strong operational and financial performance, and we're confident in the growth of the markets that we're aligned to and very confident in our ability to create value with these businesses. As you know, both businesses are exposed to energy and the industrial markets, where we can all see very positive growth trends. They have, as has been often reported, highly complementary business models and financial profiles, and we feel there's much more value we can add to those businesses as we go forward. And we know that the shareholders recognize and appreciate the value of those businesses. Just to reiterate, the presence in attractive markets and leading positions, high margins, returns notably above the group averages and above our target ranges, in fact.
And also, there is M&A potential in growth adjacencies for that as well. Moving on to your third question, the Detection options, demerger or sale. Again, Detection, as you've seen in the results and how we've been updating the market, Detection is in an excellent state with substantial momentum. And we haven't looked at divesting this business before, but in our strategic review of the whole company, we identified that value could be created either through demerger or sale. And we are all about value creation, and we will pursue the route that delivers the most value. We see considerable upside in this business, so we will consider all options. So thank you for those questions, Lush.
Thank you.
Thank you. We are now going to proceed with our next question. The questions come from the line of Christian Hinderaker from Goldman Sachs. Please ask your question.
Yes. Good morning, Roland. Good morning, Julian. And thanks for the opportunity. I wanted to ask maybe about how you see the potential setup across Detection and Interconnect in terms of profile of potential buyer. I guess maybe the demerger element in terms of the Detection decision might be linked to competitive dynamics in that industry, but also security concerns that might constrain a potential trade buyer. Is that a fair assessment, and do you have any color on shape of the prospective buyers?
Yes. Thank you, Christian, for the question. Yes, these businesses do deliver very important and critical products and components. So yes, there will be issues that we will have to deal with, and we've accounted for in our plans about national security and also control issues. So yes, absolutely, we have diligence that as well. From the point of view of the timing of this, we've laid out the timing that we will go into a process. We began the process today for Smiths Interconnect, and we anticipate announcing the transaction, not completion, but the transaction by the end of the calendar year 2025. As for the Detection, after that, we will look at the Detection, and we are on an approach which is either demerger or sale, whatever the best value is at that point.
Thank you, Roland. Maybe a second question. Just want to cover off an update, perhaps, on the cyber incident. If there was some comment on that in the press release, any added color would be welcomed. Thank you.
No, absolutely. Thank you for that question. So as we said in the press release, further to Tuesday's announcement regarding the cyber incident, we continue to manage the response very effectively. And essentially, the impact was very limited to just the company's internal enterprise systems. We have made very good progress with the recovery of these systems, and most of the critical systems are now back online. This is a result of the excellent team that we have here and the proactive measures that we put into place to minimize anything that could happen to us. Obviously, we'll continue to relook at our cyber defenses and analyze how we can improve those. In terms of financial impact, maybe I should add a little bit of clarity around that. Our guidance for the full year, I'd like to be very clear, is unchanged.
However, noting the proximity to our half-year, which is the end of January, that the last week of January, some of those sales will shift into the second half of our financial year. But just to be very clear, that doesn't affect our recent upgrades to our guidance at all. So we're still very committed, and to the full year is unchanged. Thank you.
Very clear. Thank you.
We are now going to proceed with our next question, and the questions come from the line of Martin Wilkie from Citi. Please ask your question.
Yeah, thank you. Good morning. It's Martin from Citi. Just a couple of questions. The activist letter that you or that was published a couple of weeks ago had also talked about the potential for a listing in the U.S. And just to, was that part of the review? Is that something that you have considered? Is that something that could still be considered? Just to hear your views on that one. And then secondly, you talk about returning the majority of the cash. Is that because there were some dynamics, whether it's pensions, taxes, kind of things, or is it to keep some powder dry for future deals in the retained divisions? Thank you.
No, thank you for the question. On the U.S. listing, we're looking at all the levers. And as I said, we did a full strategic review across the whole business. We have reviewed that, and we see that the actions we're taking are the ones that can create most value in that. From the point of view of returning the majority of the proceeds, this is our stated priority to return those proceeds, and we will do that and maintain a strong rating, investment-grade rating on our balance sheet, which is part of that. But just to address directly your questions, which I think are guided towards asbestos and pensions, perhaps, all our liabilities are adequately provided across asbestos. And perhaps, Julian, you'd like to take us through how well we are doing on pensions.
Absolutely, Roland. Sure. So over the last few years, we've been taking all the right actions on our pensions to insure our schemes. I think you know that one is now fully insured. The other is partially insured, and we're well advanced to insure the rest. It won't be done immediately over the next few years, but we're in a good position there.
Yep. And let me address that final part of your question about tax. Because of our structure, our structure allows for minimal leakage, and that's probably the easiest answer there.
Great. Thank you very much.
We are now going to proceed with our next question. The questions come from the line of Mark Davies Jones from Stifel. Please ask your question.
Thank you very much. Morning, Roland. Morning, Julian. If I can just go back to one of Martin's points around the U.S., looking through all this, you're going to end up with two major operating companies, both headquartered in the U.S., the majority of ongoing revenue and profit in the U.S. So doesn't ultimately a U.S. listing make more sense once this transition is complete? And then the second one was just on phasing. Why wait until Interconnect is done before starting a Detection process? Is that just in terms of capacity? The businesses are obviously run very independently, so why can't this be done in parallel rather than in series?
No, thank you for those questions. So your first question, again, is about U.S. listing. So just probably a little bit of sort of realigning on that. The majority of John Crane isn't actually in the U.S., and it actually is headquartered here in the U.K. as well. So just a little bit of alignment on that. So about 27%, I think, of John Crane is actually in the U.S., if I recall the number exactly. So we are a global business, and we have been served very well by the U.K. Stock Exchange since 1914. Is it one of the levers that we've considered? Absolutely, but we feel that the other levers to create value are much more powerful. And there would be obviously a lot of challenges about our current shareholders here in the U.K. as well.
On the phasing, we have reviewed this, and we believe that this timing gives us the best opportunity to create value and ensure that we do create the maximum value for our shareholders. And that's why the timing stands as it is. Yep.
We are now going to proceed with our next question. The questions come from the line of Andrew Douglas from Jefferies. Please ask your question.
Morning, gentlemen, and thank you for the presentation and the Q&A. Most of my questions have actually been answered. However, I would like to go back to the question from Christian on Detection. My understanding was that from a trade sale perspective, it wasn't actually that straightforward, given the competition and given where you are from a market position. And also, can you confirm that a trade sale is possible? And also, is private equity the kind of right owner for this business, given the homeland security and the whole question on that front, please? And I'm not sure I fully understood your answer to Christian's question marks as to how many potential bidders there could be for this business.
Okay. No, thank you for that. And is a sale feasible? Yes, a sale is feasible. Will there be national security challenges and other competitive challenges around that? Yes. I'm not going to comment on particular buyers, but quite clearly, demerger or sale are the options we've got on the table. But thank you for the question. Thanks, Andrew.
Thank you.
Thank you. As a reminder to ask a question, please press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Once again, please press star one and one on your telephone and wait for your name to be announced. We are now going to proceed with our next question. The questions come from the line of Mark Fielding from RBC Capital Markets. Please ask your question.
Yeah, good morning. Actually, just slightly more technical questions around the process then. Just can you clarify the businesses that are being exited? Is the plan, I mean, you haven't got a lot of debt anyway, but to exit them debt-free, are there any specific liabilities that do go with the exited businesses? I'm thinking German pensions, that sort of thing. And secondly, related to that as well, central costs currently around 8% of EBIT. Does that change at a sort of ongoing group level? How do we think about that in terms of what goes with the exited businesses, etc.? Thank you.
Perhaps Julian, you'd like to pick up on that.
Yeah, thanks for the questions, Mark. I think it's a bit too early to comment right now on the future balance sheet structure of the two assets that we are exiting. To some extent, it depends on the buyers, but that's work for us to get into over the next few months. Should I take the question on central costs first?
Oh, yes.
So just to be clear, today we are committing to right-size our central costs. We'll have more details on them over coming months, but to be clear, we will be ambitious.
Thank you.
We have no further questions at this time. I will now hand back to you for closing remarks. Thank you.
Thank you, everybody, for attending. Much appreciated. Have a good day.