Well, good morning ladies and gentlemen. My name is George Buckley. I'm delighted to welcome you to Smiths 108th Annual General Meeting. Before we commence, some housekeeping items, if I may please. Firstly, there's not a fire drill today planned for this morning, so if you hear the fire alarm, please follow the green signs to the nearest exit. Also, just so you are all aware, the meeting today is being webcast to allow others who are unable to join the meeting this morning to view and listen to our discussions. The webcast itself is being recorded and will be available on our website for viewing after we conclude today. The critical role of any board is to ensure that it comprises of diverse and talented directors. I'm delighted to be able to introduce to you two new directors who stand for election today.
Clare Scherrer, who joined us as Chief Financial Officer in April, and Richard Howes as Non-Executive Director who joined us in September. Could you make yourselves known, please? Thank you. I should also mention that Tanya Fratto, who's a Director of ours, will retire at the Board at the conclusion of today's meeting. Unfortunately, Tanya is not able to be with us today because she's unfortunately very seriously ill. On behalf of the Board and our shareholders, I'd like to thank Tanya for her significant commitment to Smiths for the last 10 years, and personally I'm very sorry to see her go. All of your other directors are here today. I should say just one other thing. I want to express my thanks to Mike Maloney, who is our auditor here for what? Five years, Mike? Or thereabout four, was it? So evidently, I can't count.
Thank you very much, Mike. We're glad you're here, and we're glad for your service. Thank you very much. Now, unless anyone objects, I'll take the notice of the meeting as read and now propose all the resolutions set out therein. In accordance with best practice and the company's articles of association, a poll will be taken on each resolution. For shareholders who are not familiar with the poll process, I'll explain that a little later. Now, before I invite questions from those present here today on the resolutions proposed or any other matter relating to the company, I'd like to say a few words to you, following which Paul will give a short update on the business.
The biggest issues, I think as most of us know, that have unfolded for Smiths and other companies in 2022 are first, supply chain shortages, second, inflation, and third, the effects of the war in Ukraine, which has impacted food and energy supply. This set of connected topics is incredibly complex, so many interlocking and interconnecting things. I'll deal with just a couple of these pieces, two pieces of this puzzle, supply chain shortages and related inflation. In any commodity situation, only three factors impact a commodity's price. The first is supply, the second is demand, and the third is inventory. Oil prices, and to an extent, gas too are especially sensitive to an imbalance in supply and demand because most contracts don't actually result in delivery of any oil. Only a speculation.
We know that the war in Ukraine caused energy and food inflation to worsen, but in the longer term, I believe that energy should be a zero-sum game. There will be temporary spikes in oil prices, and we've actually seen that since I first wrote this particular speech, but they shouldn't last, unless suppliers deliberately reduce production to artificially force prices up. There will be incremental cost differences, between oil shipped by sea versus that transported by pipeline. I think that's fairly obvious. Natural gas is more challenging, generally speaking, because pipeline infrastructure from Russia is better developed than LNG shipped by sea. But I hope that softening attitudes to nuclear power could also help in due course. During any economic disturbance, executives face two primary challenges.
The first is to predict how deep it will get and the other is to calculate how long it will last. Without a sensible forecasting model in a decline, you don't know really whether you're falling into a three-foot ditch or off a 3,000-foot cliff. When we speak about a supply chain, we refer to the flow of inbound materials to a company and its conversion into finished goods via a manufacturing process. There's also, of course, a complementary outbound flow of product to the customer. Understanding the behavior of company's supply chain is a problem in dynamics, not in statics. Just like the vibrating string of a violin, when it's figuratively plucked, everything in the supply chain is moving around backward and forward, up and down.
It's a dynamic process we have to monitor. On the outbound side of this process, companies sell through their products through distribution channels, and the forces at work are different in detail here in this particular case, but they all suffer transient disturbances. After all, your outbound is somebody else's inbound. Let's perform a thought experiment in our supply chain. Let's consider a make to stock OEM manufacturer and imagine that there's three or four inventory storage locations in the outbound supply chain. Let's next imagine a reduction in end market demand by, say, 1%, dropping from possibly 3% down to 2%. Let's take a look at what happens in our supply chain when that happens. The management at the inventory location closest to the end market sees demand fall by a full point.
To avoid excess inventory, they say, "We're gonna cut orders by, say, 2 percentage points." The next location up the supply chain sees demand fall by 200 basis points, 2 percentage points, so they cut orders by 3 percentage points and so on. You see this kind of ripple effect which is taking place in the supply chain. The actual numbers differ, of course, depending on the distribution method and the number of inventory locations that a company has. The net effect is an amplification in the supply chain of any fluctuation in end market demand. You always see this problem of there's a blip here, and it amplifies as you go back up the supply chain.
Consequently, make-to-stock OEMs always see demand temporarily fall in my example here by multiples of that seen in the end market. I'm gonna use that as a setting piece for what happens when it goes up. The downstream effect is smaller for make-to-order manufacturers than it is for make to stock. The same amplification factor phenomena also happens when there's an increase in demand. I'm gonna consider shortly the increase in demand case. One case I'm familiar with has an amplification factor of 2.84. Now that might actually surprise you. I don't know if it will. If you have a 100 basis point drop or a 1 full percentage point drop, you see that amplified by almost three in the supply chain. In steel distribution, it's about 4 percentage points or 400 basis points.
In seasonal businesses like bolting that I was involved in the past, it's 1.6 percentage points or 160 basis points. Consumer electronics, which is where we've seen the biggest changes, can be as high as 20 percentage points or 200 basis points. You see very, very short, sharp changes in their demand cycle, in that particular case. The question is, how long will these transit reductions in demand last? If the supply chain were 100% efficient, it would clear the excess inventory in one turn. I think we all know that supply chains are never 100% efficient.
When I was making these calculations early in my career, like any good engineer, I knew it wasn't zero, I knew it wasn't 100, so I chose 50 and that was my working hypothesis, that the supply chain was 50% efficient. The 50% efficiency number implies that a four turn, four i nventory turn company would see a fall in demand lasting 6 months. In other words,two inventory turns. Although the end market has fallen only by 1 percentage point, it feels like your company is selling into an artificially much, much worse market than it really is because of these transient overreactions, shall we say.
The industrial company I mentioned earlier felt like the end market and sales had temporarily fallen by a peak of up to 284 basis points, 2.8 percentage points, not the 1 percentage point that was happening in the end market. Order demand falls until supply and demand come into equilibrium, and in my example, demand returns to a new quiescent value, albeit now 1 percentage point lower than it was at the beginning. This, of course, has important financial impacts because it artificially reduces a company's reported growth. Now let's consider the opposite case, one where there's a sudden increase in demand, which we saw after the pandemic eased, and particularly in the electronic world.
That effect is again, mostly artificial and temporary, as are the associated inflationary tendencies as people overorder to fill an illusory high demand. When there's an increase in demand, it feels like the market is artificially much better than it really is. Now, of course, in any practical company, manufacturing capacity is finite. When there's a sudden increase in demand, the supply chain can't fully respond unless there's idle capacity somewhere in the system. Normally, manufacturers load their factories to around 85 or possibly 90% capacity, for fixed cost absorption reasons. Even if we can increase capacity temporarily, say from 85% to 95%, unless we add new fixed capacity, the time for supply and demand to return to equilibrium is extended. The efficiency of the supply chain is, in this particular case, 85-95, only about 10%.
Some companies may have extra shifts or overtime available, but they might not have trained workers to staff them. With labor shortages being what they are, driven by this excess demand, it still causes problems. Because of the manufacturing capacity limits, efficiency is effectively reduced to only 10%. The recovery time for equilibrium to be reached is theoretically now five times as long as it was when the supply chain was 50% efficient. A company that once experienced a six-month recovery on falling demand could now experience two-and-a-half-year transient event before complete recovery. Now, this is an extreme theoretical case, and naturally, companies take every possible corrective action to reduce the timing.
This partially explains why we have these extended recoveries and shortages in our supply chains that have lasted so long. Now in practice, the supply chain may recover in say 18 months, not 2.5 years, as we engage obviously in countermeasures. Meantime, new fixed capacity is being added by various companies but especially in the semiconductor area where we've seen the greatest shortages. That will help gradually reduce these disturbances times and inflation along with it. Much of it, I mean, the capacity addition might not actually have been needed. Companies must control the temptation to over-order in these circumstances. In this increased demand case, which I'm discussing now, the tendency is to over-correct out of fear of component shortages. After all, you can't ship a car with even one door handle missing.
That new demand temporarily increases a company's growth, but it can have profound consequences, particularly on your inventory pricing. Companies can end up with long-dated orders at much higher than normal pricing, and this is a problem queuing for a very unhappy ending. There's typically one overshoot and one undershoot in a dynamic system like I'm describing here. This artificial and synchronized surge in demand has resulted in shortages of shipping containers as well in some routes. Instead of the historical $2,000 I'm familiar with, on a transit route from China to the United States, container costs peaked at $23,000 in 2021. Went up from $2,000 to $23,000. Today, it's around $13,000.
China's Zero-COVID policy caused delays in East Coast China ports and their factories, compounded by inefficiencies in our own ports in the US and Europe. In part, container pricing is a proxy, could be considered a proxy, for supply chain shortages and inflation, but it has made the artificial demand problem even worse than it would have been otherwise. Now, if you step back and ask what's going on here, clearly the world economy has not suddenly grown from 15 or to 15 or 20% growth. Why have companies experienced this sudden increase in demand? Obviously, we know particularly for electronics. The cause lies squarely in the synchronized economic startup after the COVID pandemic, plus the artificial demand that I mentioned earlier. Although the world's economies have similar periodicity in their economic cycles, they're not normally all in phase.
In the same way that demand fell in synchronism in late 2008, here we've had a synchronized increase in demand made worse by an illusory demand curve that I mentioned earlier. In time, global economies will gradually settle into historical phasing patterns, easing this synchronization problem. Now, some eco-economists argue that inflation has been caused by excessive stimulus packages that crashed headlong into supply chain shortages. The real problem is much more complex than that, but ironically, the solutions are possibly simpler. I hope, as I've tried to sort of explain to you a very, very complex topic, with only words, that you have now come to understand a little bit more about what's been going on in the world and why they've lasted so long. It's important to remember the maxim that the solution to high prices is high prices.
Sounds kind of odd, but it's true. By the way, the solution to low prices is also low prices. Companies redesign their products, resource suppliers, and use low-cost substitutes for expensive materials, which is part of a company's mechanism to control inflation. The U.S. economy is approximately $21 trillion, and the U.S. uses approximately 6.9 billion barrels of oil a year. Each $10 increase in the price of a barrel of oil reduces spending power in the U.S. by about 30 basis points. A $60 oil price increase, as that peaked, you might remember it peaked at $120, went from $60 to $120, reduces spending power in the U.S. economy by 180 basis points. When the economy really only grows about 2.5%, you take a really significant bite out of that economy.
Higher interest rates increase inflation initially and later reduce the cost by cooling demand. Now on the better news, those companies suffering the greatest near-term challenges are those in process industries that use a lot of energy. Smiths does not have that kind of profile. We don't have energy-intensive manufacturing processes. So we, in large measure, sidestep that. Now, the Chinese Communist Party Congress took place in October. I had hoped, as you saw me write in the chairman's letter, that it would ease its Zero-COVID policy. Unfortunately, it didn't. The supply chain transits will, in due course, end naturally with time, though not without some future pain. A reduction in economic stimulus will help. Our reservations that a rapid increase in interest rates may work against policymakers and create recessions in some economies across the Western world.
Together, these factors will reduce labor shortages and ease the pressure on pricing and inflation. Now, not all the news is bad. The problems that Western economies have suffered over the past two years will likely create more manufacturing repatriation initiatives, and over time, that will create new jobs and investments in Western economies. Hopefully that's helped. Thank you very much for your continued support of our company. It's very much appreciated. Now I'm gonna hand over to Paul, our Chief Executive. Paul?
Okay. Thank you, George. You all know where to direct your supply chain or partial differential equation questions, or else they go to the chairman. Let's see. I'm gonna cover three topics this morning by way of business update. First, I will remind you of the strategy that we discussed in this meeting last year. Secondly, I'll give you an update on our progress over the last 12 months in support of that strategy. Thirdly, we'll take a look forward and talk about the potential that's still in front of us. Okay, let's start at the top. What is it that we are seeking to do with our strategy? Simply put, our goal is to create value for all of our stakeholders. Certainly for all of you as shareholders, but our objective, as you can see, is broader than that.
For our customers, we wanna provide innovative and sustainable solutions that help them achieve their objectives. For our colleagues, our employees, we wanna build on our rich culture of learning and inclusion, as these are the foundation of high performance. We want to enrich our communities, where we have lived and worked now for over 171 years, leading through governance and advancing our strong track record of environmental stewardship. For our shareholders, for all of you, we commit to continuous improvement en route to delivering the medium-term financial targets that we unveiled last year and we'll cover again this morning, and then further to our longer-term potential. Our strategy is captured on this slide, which we call our value engine. It connects the three components of our success. On the left, our purpose, in the center, our strengths, and on the right, our priorities.
Our purpose we feel is compelling to improve our world through smarter engineering. This purpose is both timely and timeless. It authentically describes who we've been for years and who we hope to be tomorrow. Our strengths in the middle are unique and compelling. World-class engineering, leading positions in critical markets, global capabilities, and a robust financial framework. Our purpose and strengths in combination are then directed towards the three priorities you see on the right, accelerating growth, improving execution, and doing evermore to inspire and empower our wonderful people. Now, it's been roughly a year since our last general meeting and our global team has accomplished a great deal in that time. Let's begin with growth.
We started last fiscal year with organic revenue growth in the first half of 3.4%, and we built on that in the second half at 4.1%. Later in the summer, we implemented a new operating model for our business in China, and last month, we published our first-ever sustainability report, which is available on our website and details the key elements of our ESG strategy. In support of this, we updated our remuneration plans to directly link compensation to ESG delivery. Just last week, we announced our Q1 of fiscal 2023 organic growth of 13%, and this was our fastest growth since 2008. With respect to execution, we've also covered a fair bit of ground in the last 12 months. We closed the sale of our Smiths Medical business in January, roughly six months earlier than many expected.
Shortly thereafter, we relaunched our Smiths Excellence System. As I'll cover shortly, SES is fast becoming the way we work at Smiths, providing a regular operating cadence, delivering improved results, and accelerating talent development. We meaningfully ramped up new product development, launching 21 new products last year. As we did with ESG, to further align incentives, we formally linked bonus pay to attainment of these new product forecasts. Now, to ensure that future growth is as strong as it was last year, we increased our R&D investment by 14% in fiscal 2022. Thirdly, when it comes to people, I'll highlight just a few of the many steps we've taken together in support of our progress here.
In January, we named our first chief sustainability officer, who's with us here in the front row, and we established a new committee on our board of directors to accelerate progress in science, sustainability, and SES. Dame Ann Dowling, who leads that committee, is also with us today. Now, we announced a number of executive changes throughout the year, well-balanced between internal promotions and external hires, and also nicely balanced in terms of diversity. In August, we put in place our Smiths Leadership Behaviors, and I'll say more about those in just a moment. It's been a busy 12 months of accelerating growth, improving execution, and investing in our people. Here you see the 5 medium-term financial commitments that I mentioned earlier.
Organic revenue growth of 4%-6%, EPS growth of 7%-10%, high teens ROCE and operating margins, and efficient cash generation with conversion above 100%. Across the bottom in the blue row, you see our progress against these targets in fiscal 2022. Organic growth of 3.8% was our fastest in nearly a decade. EPS growth of 18% was our second consecutive year of double-digit performance on this dimension. ROCE was up 30 basis points and operating margins expanded by 80 basis points. Finally, cash conversion has averaged 100% for Smiths across the last five years, but we dipped to 80% last year as we made a number of investments in our supply chain to support the strong growth that we just described.
Now there's more opportunity for us in each of these areas, but we're encouraged by the steady progress that we're making. As mentioned, we continued this progress into fiscal 2023 with a fast start, 13% in Q1, which marked our sixth consecutive quarter of growth. Breaking this performance down by business, John Crane delivered continued steady growth in Q1, although ongoing supply shortages continue to limit the pace of our conversion of orders into revenue. Smiths Detection also had a strong start, as some of our large deliveries for the year were concentrated in the first quarter. This gives us confidence that our detection business will return to growth for the fiscal year here in 2023. Flex-Tek, one of our strongest performers last year, continued its strong pace in Q1, and Interconnect also delivered good growth against a strong Q1 comparator from the prior year.
Now, last year, we committed to returning just over half the cash proceeds from the sale of our medical business to shareholders by way of a GBP 742 million share buyback program. We're now 12 months into that, and just over 80% is complete. We expect to have the remainder done by early calendar 2023. In summary, we have a positive start to the current fiscal year. Now let me say a few words about the work we're doing to reach our longer-term potential. Our fundamental strengths, the middle part of the value engine I showed you, underpin achievement of this potential. We've built many capabilities across our 171-year history, but four stand out in terms of distinctive and lasting competitive advantage. The first of these, of course, is world-class engineering.
Across almost two centuries, we have credibly pioneered progress across multiple technologies, industries, and geographies. We consistently invest more proportionately than our competition, and this has led to our strongest new product pipeline we've had in years. We've earned leading positions in critical markets. For example, today we can be found in over 50% of the homes in the U.S. and over 90% of the world's largest airports. The vast majority of all satellites launched outside Russia and China contain Smiths technology, and we build deep and lasting relationships with all major energy companies around the world. Third on the list is our global capabilities, which are unmatched by competition. Across Smiths Group, we have 1,600 sales reps, 2,000 service personnel, and over 3,000 engineers, collectively representing more than 100 different nationalities.
Fourth, we are fueled by a powerful financial framework characterized by recurring aftermarket revenues that help support the high margins in ROCE I mentioned earlier. These, in combination with low asset intensity, results in consistently strong cash flow. All of this, coupled with the accelerating growth I just described, well illustrates the financial strength of Smiths. Continuous improvement is necessary in reaching our full potential, and the Smiths Excellence System is central to this effort. SES is how we solve problems and deliver results. We have a high-performing full-time team in place of six master black belts who lead the program and 24 black belts who lead the projects. Across fiscal 2022, we made a meaningful investment in time and resources to relaunch this system, and we're now beginning to see a return on this investment.
In addition to SES, on the right side of the chart, you see a number of other initiatives we have underway. For example, in Flex-Tek, we're expanding our presence in specific geographic markets, and in Interconnect, we're optimizing our global footprint to better respond to customer demand. In John Crane, we're streamlining our end-to-end value chains, and in Smiths Detection, we're reducing overhead costs to support operating leverage here as we return to growth. All of these actions combined are helping us continually improve our operational excellence. Last month, we published our first sustainability report. This report details a holistic ESG framework that helps translate our purpose into action. Our ESG strategy centers on the three components you see here.
First, in green, environmental performance, delivering our commitment to net zero emissions from operations by 2040 and commercializing high-value green technologies that enable energy efficiency, green electrification, next-generation fuels, and carbon capture. Second, in orange, social performance, improving safety, health, and well-being, developing talent, and promoting diversity and inclusion. Third, strong governance, including ethics and compliance, effective risk management, and transparent decision-making. The critical importance that ESG plays in reaching our potential is evident as we look at the powerful megatrends which we are uniquely positioned to access. As a result of our broad portfolio, we participate in several, some of which you see on this chart. For example, energy transition, the world's ever-rising security needs, our insatiable appetite for data, and perhaps most compelling of all, sustainability, which as just mentioned, underpins all aspects of our business.
Our four businesses each play an active role in these megatrends, and this provides us confidence in delivering not only the medium growth I just showed, but sustainable longer-term success for us as well. Our people make all of this progress possible. In keeping with this, safety is always at the forefront of everything we do. A recordable incident rate of 0.6 places you in the top quartile of all manufacturing companies, and we have averaged 0.4 across the last 5 years. Lower is better on this dimension, and that means we consistently are among the world's very best in terms of this measure. In terms of development, last year we introduced our Smiths Leadership Behaviors. You see those on the right side of the chart.
This is a way for us to have a unified description of what leadership means at Smiths, as well as a shared commitment to how we will act as employees of this great company. The seven behaviors were selected by a global team through a series of discussions across 21 different countries and 71 different sites. Now if you look closely, you'll see that one of the behaviors is leading inclusively, and we made continued progress last year towards our D&I goals. For example, today, women represent 45% of our board, 31% of our executive team, and 27% of all senior manager roles. We're encouraged by our progress and energized to do even more. As I wrap up my comments today, let me bring us back to fiscal 2023.
We're seeing strong demand in most of our end markets. This is evidenced by order growth above even our accelerating sales levels. Our high-value business model is enabling price capture in excess of input cost inflation. SES and other initiatives are helping deliver value and also helping to de-risk macro uncertainty. We're off to a strong start here in Q1. That said, we're also managing a variety of headwinds. We face ongoing supply shortages across our business, and in particular, in John Crane and Smiths Detection. Wage and input prices remain high, and indeed, in some cases, continue to rise. Macroeconomic and geopolitical uncertainty play an active role every day. Having weighed these various puts and takes, we expect to deliver between 4% and 4.5% organic revenue growth this year, with moderate improvement in our operating margins.
I'll finish with a couple of closing thoughts. First, the value creation thesis that I shared with you this time last year is unchanged. I'm more convinced than ever that we are an intrinsically strong company, purpose-driven, with compelling capabilities and crystal-clear priorities. Second, our momentum, improving execution, and great start in Q1 gives us confidence in delivering the fiscal 2023 guidance that I just described, 4%-4.5%. Third, our fundamental strengths and participation in secular mega trends like energy transition, security, and data, give us confidence in reaching our long-term potential. In summary, we have a strong foundation. We're building momentum. We have even more opportunity ahead. With that, I'll thank you for your kind attention and turn it back to George.
Thank you. Thank you very much, Paul. Now, ladies and gentlemen, before we turn to the vote, I'd like to invite shareholders to raise any questions that they might have on the resolutions proposed for today. For those in the room, if you want to ask a question, please raise your hand and then wait for the microphone to come to you so that those listening on the webcast can hear your question. Obviously, we want that to happen. Please state your name, and if you're a proxy or corporate representative, who's representing. Tell us your name and who you're representing. Are there any questions? Mr. Farmer. Welcome, Mr. Farmer. How are you today? Mr. Farmer, one question and one follow-up, please, question, please.
I actually have several, as you might expect but I'm very willing.
That's why I said one and one follow-up.
To intersperse with other questioners. Answer to your question, I'm slightly fragile, but that's beside the point. Page annual report, page one, Chairman refers to 3.8% organic growth.
Yes, sir.
I'm tempted to say just 3.8% organic growth, particularly because page seven adds that it's the best in nearly a decade.
Yes, sir.
Admittedly, what you've said this morning, which of course I hadn't seen before, affects that. If you've been around for 171 years, surely you should have sorted out your growth prospects by now and believe.
We should have sorted out our what, sir?
Your growth prospects.
Yeah, go ahead.
By now and be delivering a superior performance. I'd link that to your annual report, page 84, total shareholder return graph, which shows 10-year total shareholder return of just 91%, barely more than the FTSE 100. This is not exactly scintillating, Chairman. Would you please give us desirably some more reassurance on what's going to happen from now on?
Of course.
I repeat, I have other questions, but I'm very willing to postpone those with -
Would you like me to take that first one?
Yes, please.
I mean the challenge that any industrial company has is when you're in a market, typically in industrial, Western nations, markets are in the 2.5%-4%. It's not abnormal when you see a company's results, you see numbers in this kind of band. We, according to the way you read that out, marginally beat that. Of course what our plan is now going forward, and Paul is gonna lead that, is to significantly change that.
Because what always happens, Mr. Farmer, if you don't do something to actively intervene in the way that this is going to happen, you know, as you change A, you change B, you do C, and so on and so forth, you will just come out basically growing at that market. In fact it actually may turn out to be worse, because if you've got new competitive entrants that will come along and nibble, you know, they nibble your ankle, they nibble your knees, and then they nibble some low part of your back. It's absolutely clear we have to take determined actions to make sure that we address that market opportunity far wider and broader and more aggressively than we have in the past.
We have a brand new team of people here, and I can tell you certainly from history, but also from recent performance, that that is already changing significantly. Thank you for pointing it out, because I think it helps us highlight the changes that have been taking place, Mr. Farmer, and so I congratulate you for pointing it out. Thank you.
Okay.
We're off to the moon. Maybe. We'll see.
What was that, sorry?
I said we're off to the moon. Maybe.
Thank you.
Nick Stein, a private shareholder. I enjoyed your discussion on supply chains and demands.
Thank you.
I think a lot of thought gone into that. My question really is on legal and compliance on page 53 and the individuals may not always behave as they should be doing. It's a question of probably company culture. You're in 50 countries with lots of different languages, and you have examples of how you control these. The question really is, are these controls desktop exercises or are you sort of visiting places? In particular, how are you sort of going to develop your growth strategy in China, sort of being a single place? The withdrawal from Russia, how's that affecting the staff and so forth, and a possible return to Russia?
Thank you, sir. I think obviously when we're in some scores of countries, you always have in a sense they're a long way from mama. You have to have robust systems in place where you check out that things are not going badly in those places which are a long way from mama. We have two ways that we address that, sometimes even another one at least. We have formal methods which are our external auditors, like the gentleman who I thanked earlier, Mike Maloney, and wherever the other Mike is here. Where is the other Mike? I saw him perhaps here. Mike is our new external public accountant. We have that kind of process.
We also have an internal process which takes place, an internal audit group, which goes out and actively has a plan at the beginning of the year. We actively pursue those kind of concerns and worries to make sure there are no shall we say little ticking time bombs that we don't know about. We're very rigorous and I think thorough in these sorts of things. Of course, there's then also episodic visits by our CFO, by the CEO and other people in senior management positions that constantly keep their finger on this particular pulse. You know, you could always have cases like that where something might happen untoward. Generally speaking, I think we have this particular base very, very well covered.
Thank you for the question. I think you had a second question. Oh yeah, Russia. Yes, leaving Russia.
Russia.
Yes. Obviously sanctions prevented us to continue doing business in Russia. We handled that. We exited those businesses. There was an accounting impact for those actions. There will be, I think it's true, Clare, another one next year, next quarter, I think.
No, we've taken -
We got both them out of the way?
Yes. We've taken a provision. We obviously stopped sales to Russia immediately when we needed to do so. We proceeded to unwind and close down all of our operations in Russia. We are almost complete with that. We took a GBP 19 million. Most of that is a non-cash charge to reflect the fact that we are completely exiting Russia.
Now on the re-entry to Russia, it's one of those questions that nobody knows, h ow it will go on. We don't know what the conditions of the war ending will be. If Russia does something highly unacceptable nuclear weapons, then I think we're gonna be in a difficult position because Russia is essentially, I think, gonna become a pariah nation. I think it's already in a sense become a pariah nation which is really sad for the average people that I've known over the years in Russia, who are just like all of us here in this room. This is a political issue. It isn't about the people of Russia. We can't answer that question with any precision.
We'll take decisions at the time as they come up based on the circumstances we see in front of us. That would be hopefully, I mean, sometime in the future, but we don't know when. Any other questions? Yes, sir.
Good morning.
Good morning, sir.
Paul Castle is the name. Just an observation first that, when you held your AGM at Lords 10 years ago, each of the divisions had a display, sort of display around the refreshment area, and it was quite useful to know what each of the divisions do, especially for new shareholders. The presentations were very good today, but there wasn't much emphasis on what each of the divisions do. My question is about cybersecurity, particularly important as Smiths Detection businesses and security products. I wondered if the board had any training in cybersecurity so they can oversee what the management are doing in that regard.
How often cybersecurity comes up at board meetings and whether all the controls that are put in place, especially for new threats, are monitored and approved by an external company?
Yes, sir. The answer to your question isn it's a very big topic. If you imagine, I don't think very many board meetings have passed where this topic is not discussed. In fact, it actually happened at our board meeting this week. We had a full review of cybersecurity. The people in our various IT departments that cover this came and presented to the board for about an hour. It's under the guise of our Audit & Risk Committee, Mark over here, Mark Seligman. It's taken very, very seriously because I think a lot of us think that, when you stack up all the risks in a company, this may well be one of the very biggest.
There are a few things that companies do to make sure they can reduce that. Obviously, I mean one of the problems is you have very sophisticated attackers, and you have maybe less familiar defenders. They're always pushing the technology forward, trying to find new ways to do damage to entities, not just companies, but to individuals, governments, government departments and so on and so forth. We have a multilayer defense, a little bit like you know, you might think of in a war where you've got multiple defense. We have that and we track the number of attacks on our company, whether they're sometimes driven by economic objectives. Sometimes they're just mischief making.
Sometimes they're done by state actors and sometimes can be very serious. There's a few things which are absolutely vital to do. First of all is to keep your defenses absolutely right at the top of the tree, shall we say, technologically wise. We're careful to always separate our backup systems from the main system, so that if there's a bomb. They call it a bomb. Let's say if a foreign actor plants a bomb in your systems, hopefully you can find it before it detonates, and fix it. If you didn't, at least you have separate backup systems so you can restore your systems and get back up and running pretty quickly.
The other things that nearly always the opening doors to these sorts of things are the absence of patches in the regularly used systems. We're extraordinarily diligent to being on that very aggressively, vigorously to make sure we're constantly applying the patches, to make sure that we have the right kind of. We close off all the back doors, shall we say, into our systems. In the end, you know, there's always a chance you can have these attacks. I will try to reassure you that we have taken very strong steps to make sure the company has relatively low risk in this area. I can't promise you it's zero. I can't. It's we're very aggressive about this.
I might just add for Mr. Castle's benefit, because he did say, "do we have external review?
The answer is yes.
Yes, we do. Control Risks, the firm that reviews it and we're getting good marks.
Any further questions? Mr. Palmer? Well, let me have another one.
First, a quick constructive suggestion, Chairman, from one who, as a diversified shareholder, reads many annual reports. I, somewhat to my chagrin, called at your London office last Thursday.
To collect an annual report for the benefit of being able to read it rather than struggle over the internet. To my chagrin, found everyone had gone home or stayed at home. That's excusable perhaps, there was a strike. My more serious point on the subject is would you please print future annual reports across the page and not in columns and print in black on white avoiding pastel contrasts, because both are irritating to read. I happen to have optician-attested excellent eyesight, so if I'm finding it irks then presumably others are, if they're troubling to read as much as I do. The widespread exhortation nowadays to read online means that if you're printing columns, we have unnecessary scrolling, which is irritating. Can you print across pages, books tend to be. Do you want to respond on that Chairman, before I go on?
Well, it's a conversation we have with you every year, some variant on this theme. I think we listen to you genuinely about this issue of, shall I call it visibility. I think each time you nudge us, we try to listen and do our very best to sort of listen to what you say. I think we also do want something which is attractive. Hopefully, I mean, we'll chat about it afterwards Mr. Farmer, and I don't know what we can do, but we'll see what we can think of.
All right. Thank you, Chairman. Another thing I've wearily repeated year by year is your listing of competitors in the sections on the companies. When I worked in sales, there was a maxim, one didn't advertise the competition. You have retorted that everyone knows who your competition is. I retort, why list them?
Well, I mean we do it internally Mr. Farmer, because we want people to be very much aware. There's a tendency, in my experience over the years, that companies tend to discount their competition. There's always the imagination that you're better than you really are. I think highlighting the competition front and center is a very important part of making sure that you're fully aware who you're battling with. We try to do that. You know, internally, we look at their performance, their quarterly reports, if they have them, if they're a public company and take stock of where they stand relative to where we stand. I think we're pretty diligent.
Especially, I think since Paul came and Clare came, we've done that even a lot better than we once did. I'm sort of unrepentant about citing the competition because it makes it. It at least sends a message that we are aware who we're doing battle with, in a way. I mean we're doing battle with the customer in some cases, but we're clearly doing battle with the competitors. I think maybe I wouldn't agree with you on that point.
All right, Chairman. An arguably more pervasive issue, you have written at length in your annual report, chairman's statement about supply chain.
Yes, sir.
Echoed that in your presentation this morning.
Yes, sir.
I am somewhat bemused that a company of your antiquity should not have sorted this out long ago. Can I urge you to elaborate on the subject? I mean it is intrinsic to a manufacturing company that you be able to get your supplies on time. If you're having difficulty in one day, in one domain, you turn the problem. To what extent is China the nigger in the woodpile? I infer, rightly or wrongly, that you are deriving a lot of components from China, which even this morning is described as a pariah nation, along with Russia. Given half a chance, it will invade Taiwan as Russia has invaded Ukraine, and that will cause acute problem and disruption. Should you not be diversifying your supply chain to sort out what appears to be a problem lingering far too long?
Well there are many pieces to this problem, Mr. Farmer. First of all, you have the dynamics of a particular situation which you're dealing with. Sometimes you may have a relatively stable external market. You see some blip in the end market, and those things are relatively easy to deal with. The kind of actions that we've taken have been to move well away from single source supply, where they might, say, for example, be in China or some other place where we're not particularly positive about.
So now in almost all of our businesses, we have I can't say that we're 100% away from single-source supply, but a major initiative in the company to do that over the past year. I don't think on the, you know, in dealing with the dynamics of the situation, this is so situation dependent, it comes and goes, this sort of thing, and is to make sure that you're properly prepared for it. You know when you have the, there was a very unusual. I tried to explain this in the both in the Chairman's letter and in the speech I made today. We had really 3 major things that came together, maybe 4. We had the Ukraine war and energy shortages and food.
I'm gonna set those to one side. The three things which have driven inflation and driven supply chain shortages is, in the same way that, in 2008, 2009, we had economies sort of collapsing together, synchronously together. When COVID passed, we had economies growing synchronously together. You had this huge input, shall we say, demand. You had this phenomenon which I tried to describe to you, where there's always an overshoot, there's an illusory demand curve above and beyond what the reality is. Of course, companies tend to believe that this is true, and it's not true. Or I should say maybe it's factual but it's illusory. That happens to anybody.
You'll be amazed that in my experience, Mr. Farmer, how few companies actually understand how that works and how to calculate its effect. It's actually a surprising thing to me. We're fairly familiar with it in our company. We actually don't suffer all of it because we are, for the most part, a make to stock company. I was trying to explain what was going on in the world economy. I think that this is the nature of the beast. From my perspective, we have taken really aggressive, Mr. Farmer, steps to make sure that we are not exposed to these. Remember in my Chairman's letter and in the presentation I made to you this morning was, I think there's some sort of good news comes out of this.
Because it's been so traumatic for companies. I think, you know, they're gonna adopt, we have adopted in numerous cases, by other companies that I've worked with have done the same thing, a near to market manufacturing strategy. You don't have these long and extended supply chains. Sell where you make and buy where you make is the policy that we have, generally speaking. This is inoculating ourselves against some of these problems.
All right.
What about just one more question, Mr. Farmer? Just one more.
Just got two more, Chairman. Pages 16 and 17 in the annual report reports the longstanding litigation, it's particularly 16, and the provision made, and somewhere there's a reference to some of the claimants being paid. My question is twofold. What is being done to end this continuing saga? And what justified payments to some of the claimants?
This, the second question is easier to answer than the first. First of all, these are lawsuits, and they are decided by a jury or sometimes by a judge, and they make a ruling. Unless you can find some way to negotiate around that. You have no obligations but to do that. We are lucky to have with us star of stage, screen, and television, our general counsel here, who is an expert on this matter. Would you like to give a correct answer, Mr. Farmer's telephone message, please?
I would say that it's always very, very sad for us when we receive claims from people who have lost loved ones to asbestos, asbestosis, or we meet the people who have the disease. These are very kind of serious and sad events when we receive the claims. We obviously work very hard as a company on all litigation that comes our way. The fact of the matter is that we defend these very rigorously because we didn't manufacture asbestos. We don't, we aren't responsible for any disease that's incurred by these people. You know, they're serious events.
As you can imagine, the way things happen in the U.S., the U.S. litigation system is something of a lottery. There are a lot of law firms out there who fight very hard to make money from these events. Sad as they are for us as a company, we fight rigorously. We don't always win, I'm afraid. This is something that's been happening in the world to many, many industrial companies for many, many years and will continue to do so. It is something that, you know, as a company, we're sorry for, we provide for, but we continue to protect, you know, our shareholders and all our other stakeholders in these matters and, you know, every day, basically.
One of the reasons I'm here, as well as doing lots of positive things for our company and making sure we win business.
We do this in the most vigorous way possible. We do not surrender willingly or easily.
All right, the final question, you'll be glad to hear Chairman, concerns share purchases and this grand if misleading term return of capital. I readily accept that you've divested Smiths Medical. I remain bemused at why you allowed yourself to be bullied by institutional investors into doing so, because it was a source of growth. I referred in my first question to the lack of growth. Why did you not make more of a success of it? More to the point, why are you giving us back all these shares? Because like other informed private shareholders, I have a rather jaded view of share repurchases because they do not always seem to improve shareholder returns as theoretically they are supposed to do, even though the theoretical justification may be clear.
Could you perhaps round off on -
Sure. Of course I could. Yes.
Tell us why you're giving back all this capital -
Well, first of all, you know, when -
Purposefully.
Thank you, Mr. Palmer. Well first of all, when you have a large divestiture, you obviously have a lot of cash. So there's always a discussion about what do you do with this cash. We sought the opinions of our shareholders, institutional shareholders in particular, you're quite right about that. Their view is that they wanted a certain piece. They said, "Look, we think you ought to split this up and let us have, through share buybacks, a certain piece of the puzzle." Now, there's always a sort of a, I don't know, two bookends, shall we say, of share repurchases.
One view sometimes which comes out in share repurchases, and for a long many years, I was in this camp, was that when companies do share repurchases, that tells you they've run out of ideas on how to apply the money and grow. I was very much in that camp for many, many years. Mathematically and financially, there's another bookend to this, which is if you expect rapid growth coming forward, why not buy your shares today at a lower price, and see them inflate. This becomes, it's essentially an investment in your own company and a belief in your own strategic plan. I'm very much a supporter when we have credible plans for growth, which, our management team has shown to us that they do.
Now, of course, a lot of that's about execution. I'm favorably inclined to sort of say, "Okay, this is a piece of the puzzle in our investment strategy." That's why we do it.
All right. I respect the difference of opinion, Chairman, but a prime example of a company that's bought so many of its shares that it should by now, long since have imploded is GlaxoSmithKline, and its performance has been strikingly lacking and one thinks that they would have been better advised to do as you voiced, investing in purposeful growth.
Yeah. My line is if you don't invest in the future, it won't be there when you want it. Thank you, Mr. Palmer. Any last questions? Yes, sir.
Thank you. I just want to support the idea of having divisional displays on arrival. If they'd been there, I would ask Smiths Detection, for example, about biothreats and Flex-Tek about the hydrogen economy and how you were going to move hydrogen and see that.
Sure.
Perhaps those two could be answered.
Okay.
But, uh-
Actually, I might have got better news for you. First of all, we just did a capital markets day presentation just a few days ago, where all of the operating executives were there. They made presentations. They're online, you can take a look at them. I think even maybe one or two of the operating executives are - is Julian here, Gemma? We'd be glad to receive those questions. We really would and entertain them. If you take a look at those presentations, they may answer the questions, but they're actually quite good. You may, obviously because you weren't there, but we got very good feedback on our plans. I think the management guys did an absolutely magnificent job.
The best I've ever seen in my tenure at Smiths. I'm sort of really pleased with the progress we've been making. I'm sure if you have some specific questions on those things, we really would be happy to answer them, find a way to meet with you or speak with you and let you know. Very happy. Okay, I think I'm going to conclude that there are no other questions. Am I right? I think I'm right. Okay, thank you very much. I'm now gonna move on to the formal resolutions to be put to the meeting. I have already declared that resolutions will be voted on by means of a poll, and hopefully everyone has that poll card.
If not, please speak to our registrar here today, who will assist you. If you've already voted by proxy, you don't need to vote again unless you wish to change your vote. The details of the resolutions proposed are contained in the notice of the meeting, copies of which are available as you entered the room today. Please mark the poll card with an X in the appropriate boxes, and please sign your poll card. Please be aware that a vote withheld will not be counted in the calculation of proportionate votes for and against the resolution. Once completed, hand your poll card to the registrar's representatives who are located by the exit. The company has already received proxy votes, which will be included with the votes you cast today.
The final poll results will be announced to the market and published on our website in due course. Given the proxy votes already received, we expect all resolutions to be passed with the required proportion of votes cast. That just about concludes proceedings. I'd like to remind you that the voting will close in about 10 minutes. If anyone has yet to cast a vote, please do so before the resolutions close. It merely remains for me to thank you very much for your continued support of the company and to welcome you to join us for lunch across the hall. Thank you very much, everybody, for being here, spending your time with us. It's really appreciated. I declare the meeting closed.