Morning everyone, thanks for joining us. With me in London today is our CFO, Clare Scherrer. In terms of our agenda, I'll make a few opening comments before turning it over to Clare to walk us through the numbers. I'll come back and provide an update on our strategic and operational progress, and then we'll open it up to all of you for Q&A. By way of overview, we saw continued improvement in the first half, resulting in meaningfully higher performance. We posted record organic revenue growth of 13.5%, which translated to nearly 26% on a reported basis. We've now delivered 7 consecutive quarters of accelerating growth as we capitalize on strong underlying demand in most of our end markets. Our earnings conversion was stronger still as we also delivered record EPS growth of 52%.
Given this strong momentum, we have once again raised our full year guidance, now to at least 8% organic revenue growth. Operating margins grew 20 basis points, reflecting strong volume as well as continued investment in future growth. ROCE expanded by a point. Our Smiths Excellence System is the centerpiece of our stronger execution, and the impact of SES is now visible in our financial statements as we're on track to deliver over GBP 25 million of annualized operating profit from SES. Our people make this progress possible, and we have a number of initiatives underway across our company to advance our inclusive and high-performing culture. Our ESG plan is also progressing at pace, as detailed in our inaugural sustainability report, which is available on our website.
In summary, we delivered another period of higher performance, enabled by our strategy of accelerating growth, improving execution, and investing in our people, the focal point of our Smiths Value Engine, which I'll recap on the next slide. Our Value Engine connects the three components of our success: our purpose, our strengths, and our priorities. We are grounded in our purpose of improving the world through smarter engineering. This has been the North Star for Smiths for over 172 years and continues to guide and inspire us today. Our strengths are unique and compelling. World-class engineering, leading positions in critical markets, global capabilities, and a robust financial framework. You'll see evidence in the coming slides of how each of these is contributing to an ever stronger Smiths.
Our purpose and our strengths are then directed towards advancing the 3 priorities I mentioned on the previous slide: accelerating growth, improving execution, and doing even more to inspire and empower our wonderful people. We first shared this slide with you in November 2021, my first capital markets event with Smiths, when we laid out 5 medium-term financial commitments by which to measure our progress. This chart provides a summary of how we're tracking. We're making good progress on organic growth, and for the first half, we're well ahead of our 4%-6% committed range. About half our growth is coming from volume and the remainder from price, which we expect will subside at some point as the world eventually returns to more normalized inflation levels. As mentioned, we're also having good success converting revenue to EPS.
We commit to 7%-10% earnings per share growth over time and are tracking above the range here as well. Higher profitability naturally supports higher ROCE, and you can see this in our 120 basis point gain, which brings us into our 15%-17% range. Operating margins were up 20 basis points in the half on top of the 150 basis points expansion in the same period last year. We see further upside available to us in this category as we'll continue to progress into the 18%-20% range moving forward. The only area where we did not post year-over-year improvement was operating cash conversion. We continue to see record demand across several of our end markets, and we're naturally supporting this growth with investment.
Cash generation has long been a calling card of Smiths, with 100% cash conversion over the past 5 years. We expect to return to these levels as growth and supply chains normalize. With that as an overview, I'll turn it over to Clare to walk us through our first half results in greater detail.
Thank you, Paul. Good morning, everyone, and thank you for dialing in. I'm pleased to share the half year results. A half which provides more evidence of the progress we're making. On revenue, as Paul said, we delivered record organic growth of 13.5%, with FX increasing reported growth to 25.6%. We generated GBP 241 million of operating profit, which equates to organic growth of 12.7% and a margin of 16.1%, up 20 BIPS over the same period last year. EPS growth of 52.1% was a record for Smiths. Cash conversion was impacted by investment in working capital, and I'll talk later about the actions we're taking to drive improvement. ROCE expanded by 120 BIPS, reflecting our increased profitability.
As planned, we're rebuilding our dividend cover post the sale of Smiths Medical and are recommending an interim dividend of 12.9p, an increase of 5%. In the first half, we returned GBP 241 million to shareholders, including both our share buyback and the FY 2022 final dividend. Looking at the results in more detail and starting with our record organic revenue growth. We've posted 7 consecutive quarters of organic revenue growth, and both Q1 and Q2 delivered growth in excess of 13%. First half growth was driven equally by price and volume, and we delivered growth across all divisions, geographic areas, and major customer end markets. Revenue for the half also surpassed our pre-COVID revenue, up 12% compared to the first half of FY 2020.
As per our guidance, this revenue growth translated into moderate operating margin improvement of 20 bps to 16.1%. We delivered 60 bps of margin expansion from increased volume and 50 bps of margin improvement from the targeted savings projects which we announced at the full year, primarily in John Crane and Smiths Detection. These programs remain on track with expected benefits for the full year of approximately GBP 15 million and annualized benefits in line with our previous guidance of between GBP 25 million and GBP 30 million. On pricing, we more than offset cost inflation thanks to the positive pricing actions that we took throughout last year and going into this year. FX translation had a positive impact on margin of 30 bps. SES projects in this period primarily focused on pricing, customer service, and productivity, and generated GBP 5 million of incremental profit.
Offsetting these gains were three headwinds, supply chain disruption in some key parts of the business, resulting in 10 bps of impact. Overall, we did see supply chains trending positively. We continued to invest in growth to support increasing demand, which had a 90-bp impact. The largest impact on margin was mix, reflecting rapid growth in OE in Smiths Detection. This will support future growth from the associated aftermarket services, and the final impact in Flex-Tek was from product mix. This strong profit performance drove record EPS growth up more than 52%. The largest contributor to this was organic profit growth, which drove roughly a third of the increase or 5.1p. Our share buyback, which was 88% complete at the half, had a 4.6p benefit on EPS, about a quarter of the total.
Weaker sterling through the first half had a positive FX translation impact of 4.3p. Our effective tax rate reduced 200 basis points to 26%, resulting in a 1.4p benefit on EPS. We also had reduced interest expense as a result of repaying our $300 million bond in February 2022. All of these drivers resulted in basic EPS of 46.6p for the first half. Smiths has a strong track record of delivering over 100% operating cash conversion over time. Our operating cash conversion during this half reflects the impact of both strong customer demand and our continuing investment to secure supply.
Two of our fastest-growing businesses in the half were Smiths Detection and John Crane, which accounted for over 85% of our GBP 106 million working capital outflow and 60% of our GBP 36 million of CapEx investment. These investments not only ensure that we meet customer demand, but also underpin the large order books that both businesses have going into the second half. Working capital also reflects where we have secured supply to overcome specific supply chain challenges for critical electronic components in Smiths Detection and for elastomers and ceramics used in some John Crane products. That being said, while we continue to prioritize customer delivery, at the same time, we're taking targeted reduction actions where we can. These targeted plans and SES projects include improving demand planning, optimizing our global network, and continuing to reduce sole source supplier positions.
We know that we have a hard road ahead on inventory reduction. We remain committed to our medium-term target of 100% operating cash conversion, and we're confident that the actions we are taking now will put us back on this path. Let's now look at our divisional performance in more detail. Starting with our largest business, John Crane, which delivered accelerating growth and strong operating leverage. Organic revenue grew 14.6%, driven by strong demand across all parts of the business. OE and aftermarket grew in both the energy and industrial segments. We've improved order-to-revenue conversion as the actions we've taken to manage the supply chain have had a positive effect. Operating profit grew even faster than revenue, up 24.6% to deliver margin expansion of 200 basis points.
This was achieved as higher volumes drove good operational gearing and our pricing actions more than offset inflation. Looking ahead to the second half, John Crane's order book remains very strong, with order intake in the first half of 14.2%. We're excited by the critical role that our products play in supporting energy transition, particularly in methane emission reduction, carbon capture, and hydrogen applications. We're well-positioned in these areas with over 40 years experience in providing sealing solutions for hydrogen and with an installed base today of over 5,000 units. Key wins in the half include multiple orders supplying the largest hydrogen project in Canada and dry gas seal upgrades in Oman. We'll continue to deliver against a strong order book, and our margins will benefit from SES and productivity programs.
Next to Smiths Detection, which has solidly returned to growth, up 14% and with revenue growth in all segments. Aviation was up 10.3% and other security systems up 22.9%. It's especially good to see the return to growth in OE. Although this has a near-term impact on margin, it puts Detection in a strong position in the medium term, given that aftermarket revenue directly results from growing our installed base. Operating profit increased 4.5% with margins of 10.5%, reflecting the fact that lower margin OE was up 20.7%, while higher margin aftermarket was up 8.4%. Again, this OE investment will be margin accretive in the aftermarket going forward. Order book conversion is also improving in Smiths Detection, although supply chain constraints continue, especially with some electronic components.
We also took action in the first half to simplify our organization, which will improve efficiency and reduce cycle times going forward. Looking to the second half, our order book includes a number of airport CT checkpoint upgrades. At airports which install CT at their checkpoints, passengers will no longer need to remove laptops and liquids from their carry-on luggage. An example of this is in New Zealand, where we won the contract for its 5 major international airports. We also won a contract with DHL in Australia for centralized air cargo screening. Increased security needs is a mega trend driving not only strong demand in aviation, but also in other security systems, with 39.2% OE revenue growth in the first half and good wins across all segments, including port screening in Japan and the provision of X-ray screening for the G20 Summit in Indonesia.
Flex-Tek built on its consistent track record with another period of strong growth. Revenue was up 17% with double-digit growth in both industrials and aerospace. Operating profit was up 9% to GBP 77 million, a record, driven by increased volume and price offsetting inflation. Operating margin remained high at 19.5% and included new product launch costs and the ramp of a new ducting facility in Houston. Mix impacted margins here as well as we saw especially strong volumes in our industrial tubing product. A few weeks into the second half, we are beginning to see slowing in our U.S. construction business as we expected. However, Flex-Tek's diversified end market exposure and new product launches are supporting resilience and continued growth in this segment.
Aerospace was up 14.8% in the first half, driven by increasing aircraft builds and our expanded product offering, will continue to benefit from aerospace growth in the second half. New product launches are also ramping well. We received our first Midrex H2 Green Steel purchase order, our Python flexible refrigerant line platform is growing quickly. On to Smiths Interconnect, which, as expected, saw more modest growth of 3.3% in the first half following a record year in FY 2022. Operating profit of GBP 32 million reflects pricing actions to offset inflation and an increase in R&D to support new product development. At Interconnect, we have a good pipeline of next generation products which will support future growth, as will the strategic acquisition of Plastronics, which closed in January.
Plastronics is a leading supplier of test sockets which complement our existing product range. It's a great example of an accretive and strategic bolt-on acquisition. We are beginning to see the expected slowdown in the semiconductor end market, although this accounts for less than 3% of Smiths Group revenues. Underpinning our accelerated growth is a strong and flexible balance sheet. Net debt to EBITDA was 0.8 times at the end of January. This is after the return of GBP 241 million to shareholders in the first half, which consisted of our share buyback and our final FY 2022 dividend payment. We also expect a reduction in gross debt in the second half with the repayment of our EUR 600 million bond. Our capital allocation policy is unchanged.
First, we look to maximize organic opportunities through investment in R&D, sales and marketing, and capacity expansion. In the first half, we invested GBP 77 million in R&D and CapEx projects. Second, we want to implement this organic strategy with complementary and disciplined M&A, such as the acquisition of Plastronics. Third, we look to return capital that is surplus to our reinvestment needs. We have a progressive dividend policy and have recommended a 5% dividend increase. Through the first half, we continued to repurchase shares under the GBP 742 million share buyback program, which is now 90% complete. By staying true to these three pillars of our capital allocation policy, we're confident we can deliver our medium-term financial targets. In conclusion, as a result of the strong first half and recent trading, we're once again raising our guidance for the full year.
We now expect organic revenue growth of at least 8% with moderate margin improvement. This is supported by a number of tailwinds, such as the strong order books, particularly in John Crane and Smiths Detection, coupled with a good pipeline of new products. SES projects will continue to deliver growth and strength in execution, and targeted cost actions will improve our speed and operating leverage. Moderating this, we have stronger top-line comparators in the second half, and OE growth will continue to have a mix impact as our installed base grows. Geopolitical and macro uncertainty remains high, and we're actively managing supply chain challenges that persist. While a couple of our smaller end markets are showing signs of softness, momentum in the rest of the business remains strong. Balancing these various headwinds and tailwinds, we remain confident of delivering a second half of further progress.
With that, I'll hand back over to Paul.
Thank you, Clare. I'll now provide a strategic and operational update organized within the framework of growth, execution, and people. We'll begin with growth. New products are clearly playing a role in our accelerating growth. Our new product vitality index, which measures the proportion of revenues from products launched in the last five years, was just under 30% for the half, up 90 basis points year-over-year. The vast majority of our new products are developed to support specific customer needs, and as such, they are well aligned with key global megatrends like energy transition, ever-rising security needs, or the world's insatiable demand for data. On this slide, you can see examples of new platforms launched already this year in support of these trends. Collectively, new launches delivered GBP 32 million of revenue in the half or just over two points of growth on a gross basis.
To continue fueling our strong new product pipeline, we increased R&D investment by almost 14% in the period. In addition to strong new product performance, we're making good headway building out priority adjacencies like those you see here. Energy transition describes the $100 trillion multi-decade transformation of the world's energy supply from fossil-based to zero carbon sources. John Crane is ideally positioned to help our customers along this journey with our leading installed base and our global service network. We're currently engaged in over 40 active hydrogen and carbon capture projects around the world, and have seen our opportunity funnel more than double over the past 12 months.
For example, in the first half, we won 100% of the gas seals, couplings, and filters tendered to date for a $1.6 billion blue hydrogen facility being built in Edmonton, making it the largest ever in Canada, producing enough liquid hydrogen to power every public transit agency across the province of Alberta. The surging demand is propelled by a number of market and regulatory forces, such as the Inflation Reduction Act in the U.S. and similar programs in other parts of the world. For Smiths Detection, in addition to double-digit growth in aviation, we expanded our presence in other high security markets like ports and borders, defense, and urban security. Our business in these adjacencies grew 23% in the first half behind major customer wins in markets like the U.S., Japan, and Indonesia.
Flex-Tek is helping customers meet their sustainability goals in a number of ways. In October, we announced a strategic partnership with Midrex Technologies and H2 Green Steel to build the world's first zero-emission steel plant in northern Sweden. Midrex provides the hydrogen reduction process that powers the facility, and Flex-Tek provides the high-temperature electric elements that superheat the hydrogen. As Clare mentioned, we completed the bolt-on acquisition of Plastronics in January, leveraging cross-sell and new product synergies with Smiths Interconnect and extending our leadership into attractive adjacencies in connectors and testing. Having shared some updates on growth, let me say a few words about our progress on the execution front. The Smiths Excellence System is the framework through which we're building a more aligned, consistent, and higher performing culture here at Smiths. SES improves results delivery and accelerates talent development.
We relaunched SES around this time last year, initially putting in place 5 full-time Master Black Belts to lead the program and 20 Black Belts to lead the projects. The first wave of projects have now been completed, contributing roughly GBP 5 million to the bottom line. The impact of SES is scaling quickly. Our initial target was to generate GBP 20 million in annualized benefit, based on the good start in first half, we're now tracking to just over GBP 25 million. Encouraged by our progress, we've added an additional Master Black Belt and 5 more Black Belts in key commercial and operational areas around our company. SES is fast becoming the way we work here at Smiths. To give you a feel for how this plays out on a day-to-day basis, we thought we'd share a typical project.
I'll quickly frame the effort and then turn it over to the project team to walk you through the details. I mentioned on a previous slide that demand for electric heating solutions is growing quickly, driven by the same mega trends we just touched on. Flex-Tek supports customers in this area in a number of ways. The green steel program I mentioned is one example. Another is our electric heat kits used in residential HVAC units. Around this time last year, high demand coupled with supplier constraints resulted in surging back orders in this part of our business. We pointed SES at the problem, and over the span of roughly 6 months, increased our capacity by a quarter, cut lead times in half, and fully eliminated the customer backlog. Now, let's hear from Dane, Justin, and Kevin, who led the project.
Hey, I'm Dane Owen. I'm the VP and GM for the Heat Solutions Group with Flex-Tek, and we're located in Cookeville, Tennessee.
I'm Justin Robertson. I work in the TUTCO division of the Heat Solutions Group of Flex-Tek, located in Cookeville, Tennessee. I'm the planning and inventory manager, and I will be the process owner of the Black Belt process that came out of this project.
I'm Kevin Modrall. I'm the Black Belt for the Heat Solutions Group under the Flex-Tek group. I came through the engineering role before I entered into the Black Belt. I've been very familiar with TUTCO and the Heat Solutions Group.
The Heat Solutions Group is a myriad of companies, about $250 million in revenue. We have plants in, USA and Mexico and in China.
Basically, if you have a heating unit outside of your house in the U.S., there is a heating element that goes in there. The heating elements heat up, and they blow air across it. Anything with electric heat that air blows across with elements that heat up, TUTCO can pretty much find that solution for you.
When we talked to Dane and he told us the area that he needed the help with, it looked like a mountain.
The problem we were facing, due to COVID, we had serious, component issues, and our late list, which is historically, half a million dollars to $1 million, grew to an astonishing $13 million. To me, the way I look at Black Belts is, what is my greatest pain point? There was not a greater pain point than having a $13 million backlog.
Supply chain was an issue. China was shut down. The Ukraine and the Russian war had actually started, there was all these outside influences that were influencing the supply chain.
Kevin walked into a firestorm and just jumped right in.
One of the solutions that we came up with was the dashboards.
Our teams are starting to see those dashboards. They're starting to recognize what they're doing for us and what they're telling us. Also on the purchasing side of things, we have exception reports now, which is something we never had before.
We went to Dane, and we went to the team and said, "Look, this is what the data's showing." Within a week, we had another line set up. We didn't have to add cost to that line, but we added another line to set up, and we started producing more heat kits. We increased, heat kit, capability 23%.
It really allowed us within about six months to take this $13 million backlog and reduce it down aggressively to about $1 million. You can imagine the excitement from the group from Mexico all the way to Cookeville, our location, seeing the results and seeing how quickly we all connected and also seeing the solutions that came out of that, not just in getting us down to a minimal backlog.
The other thing was obviously the big thing was on lead times. Our lead times when we started the project was around 4-6 weeks. We are now back down to 2 weeks, which is fantastic.
To not only, hitting head-on the problem, but also digging deep down and finding, oh my goodness, there are so many other things now that made us better because of this.
Thank you, Dane and team. A terrific project. As growth accelerates across Smiths, we see variants of this opportunity in a number of areas and are quickly replicating the project, learning and building with each successive result. Our people priorities are focused in 4 areas: safety, leadership development, diversity and inclusion, and engagement. Recognizing that a picture is worth 1,000 words, we thought we'd share a few photos from some of the many powerful initiatives we have underway across our company. If we get a 1,000 to 1 leverage with photos, hopefully the following video will further bring to life the wonderful culture that we're advancing here at Smiths.
Safety is the measurement of the heart. Safety is about people.
Our aim, zero harm. Zero harm to people, zero harm to environment, as well as our communities.
I'm so pleased to welcome Pam Cheng.
We push the boundaries of technology at Smiths. You know, you think about detection, we're keeping the world safe. How do you improve the world? By technology and innovation.
I found the Accelerate training really interesting and really valuable because it really underpins the meaning of what it takes to be a leader.
As much as I'm developing myself, I want to carry people along because you can only go as far as the people around you.
I'm truly honored to be here today to introduce our first ever celebration of Black History Month as a group.
I'm delighted to introduce you all to, title only once, Professor Dame Ann Dowling.
Equity, yes, being fair and just, and it means we've moved on beyond just to trying to treat everybody equal. We're recognizing that everyone is an individual.
I'm Tony Tielen, Group SES Director, and I'm so excited to be hosting the first Excellence Awards sponsored by the SES team.
It's a true honor to be part of the awards this year and have the chance to recognize some of the biggest impacts we're making to improve the world.
Sustainability. It plays an important role in our growth, execution, and people priorities. On the growth front, in addition to energy transition programs that I mentioned earlier, we have multiple green new product platforms in development. With respect to execution, we're accelerating emission reductions at the same time that we're growing our business. We're tracking ahead of plan on our three-year targets for water, waste, renewable electricity, and greenhouse gases. In terms of people, this is the first year where delivery of concrete ESG commitments are part of both our short and longer term incentive comp at Smiths. You can find a good summary of our sustainability strategy from John Ostergren, our CSO, if you visit the capital market site on our webpage, and you can find even more detail in the sustainability report, which is also available for download in the same location.
Sustainability is an area of both strength and competitive advantage for Smiths, please do have a look. Just a few comments by way of summary, then we'll open it up to all of you for your questions. After a record start in the first half, we're well on track for a strong FY 2023. Our growth is good, 13.5% in organic terms and over 25% reported. Order books and current trading remain strong, as such, we have once again raised our full-year organic revenue guidance now to at least 8%. Our execution is continually improving, allowing us to deliver year-over-year gains in four of our five medium-term financial commitments, including EPS, which was up 52%. SES is playing an important role on this dimension, encouraged by our progress, we're scaling the program accordingly.
Our people enable all this progress, and I want to thank and recognize my 15,000 colleagues around the world for doing what we do best, improving our world through smarter engineering. By aligning behind our people priorities of safety, development, D&I, and engagement, we're advancing the wonderfully inclusive and high-performing culture of Smiths. As a 172-year-old company, we think as much in quarter centuries as we do in fiscal quarters. We're encouraged by the progress we've made over the past 6 months and carry strong momentum into the second half and beyond. Thank you for your attention and support. With that, we'll turn it back to the operator to open the Q&A.
A reminder to ask a question, you need to simply press star one one on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star one one again. Listen back will come after the Q&A roll check. This will take a few moments. Now we'll take our first question. The first question comes from the line of Christian Hinderaker from Goldman Sachs. Your line is open. Please ask your question.
Paul, Clare, good morning, and thanks for the opportunity to ask questions. Very strong set of results. Forgive me for starting on one of the rare negatives in the print. Can we talk a little bit about inventory, up from 22% of sales year-end, 24%? Not unusual in terms of the industrial market that we're seeing at the minute, and obviously you've got good reason for that because of substantial growth. You talked about targeting plans, including SES projects, to reduce that inventory. Just be great to put a little bit more clarity around that, as well as how we should think about inventory kind of in days or percentage of sales developing through this year and into the following. I'll come back to the other two.
Yeah, thanks for the question, Christian. As Clare mentioned in her comments, about 85% of that inventory increase went into John Crane and Detection. What you'd like to see if you broke that down was the components of inventory lining up with the growth. We look at inventory, you know, by the three big categories: raw materials, work in process, and then finished goods. In John Crane, the largest percentage increase came in work in process. These are orders that came in, materials that are moving through the factory, and those will now, you know, progress on to customer sites. We're further along on the Detection side, where the largest percentage increase was in finished goods.
These are, you know, large detection systems that now are fully assembled, and we're just waiting for the customer to receive them. That'll work through naturally here as the business progresses forward. For us, we think of it as an investment. You know, in the same way that we're willing to trade near-term margin on OE for the higher margin recurring aftermarket, we're willing and in fact excited to use our strong balance sheet for competitive advantage to support this kind of growth. I don't know, Clare, if you had anything you wanted to add to that.
I think that's a terrific explanation of where our cash conversion in the half reflects our investment in inventory, and it reflects our belief that that will in turn support medium-term growth. Nothing has structurally changed about our ability to generate cash conversion consistent with what we've done in the past.
Thank you both. Secondly, I wanted to ask about Flex-Tek. We're seeing a bit of a softening in the housing data, both in terms of starts and now year-on-year in terms of pricing. Can you talk about the positioning of the Flex-Tek business within the U.S. housing market and what you're seeing in terms of the demand conditions today on the ground? I know that 67% of division sales are now HVAC related. That may provide a buffer, perhaps in terms of spending towards energy efficiency as general DIY investment spreads to your products.
You know, Flex-Tek is a fabulous business. Over time, it grows, regardless of what's happening with its underlying markets. You know, it has double-digit 5, 10, 15-year top-line CAGR, and even better, earnings CAGRs over that same period. We have been anticipating this, you know, the well-understood slowdown in the U.S. housing market would have impacted Flex-Tek sooner. Flex-Tek came in stronger than, you know, many people expected. We do see, as you pointed to, those macro indicators on the U.S. housing starts. While it didn't impact us in the first half, in the first 6 weeks here now of the second half, we are starting to see evidence of that.
You know, Flex-Tek will continue to grow as it always has, just not at those same record levels we saw in fiscal 2022 and then here in the half. They have two businesses, you know, balancing that, the construction impact that we just described. You noted one of them, aerospace. Order growth in aerospace was in the double digits in the first half, and that business will continue to grow here moving forward. The second is the electric heating business that we touched on in the call. The demand for electric heating elements is, you know, all businesses like ours have made net zero commitments. A place you look early is on your process heating.
We're getting a, you know, strong inflow of questions, how we can help our customers convert from fossil-based heating to electric heat. We feel pretty good about where we're at with Flex-Tek.
Thank you, Paul. Linking to my second question and in fact your comments on the net zero ambition, I wanted to ask if you're seeing any signs of incremental demand from some of the policy announcements we've seen. For example, the CHIPS Act , which might help Interconnect, you flagged the U.S. IRA earlier on the call. Just wanted to think about how we should calibrate the impact of those policies on demand for your business.
Well, you know, energy transition is one of these giant global megatrends. $100 trillion the world will invest over the next 20, 30, 40 years, you know, as we get to net zero, whether that's in 2040, 2050, we'll have to see. This is now playing out in our business in a number of ways. We gave the example of the blue hydrogen facility in Canada. It's a very clear example of that. The H2 Green Steel partnership in northern Sweden, another clear example of that. Legislation like the Inflation Reduction Act and parallels of it in most major economies, all help accelerate that tidal wave of transition that is coming. We find that supportive. Absolutely.
Thank you, Paul.
Thanks, Christian.
Thank you. Now we will take our next question. The next question comes from line of Andrew Wilson from JP Morgan. Your line is open. Please ask your question.
Hi, good morning. Thanks for taking my question. on John Crane, I'm interested in terms of what indications you're getting from customers with regards to the demand. I mean, the orders in the first half I think you said were up 14% year-on-year, so clearly very strong there. I guess I'm interested in terms of how much of that is a, is a catch-up in pent-up demand. The supply chain has obviously been challenged, et cetera. How much of it is real genuine underlying, we're obviously expecting energy markets probably to be pretty strong for maybe the next year or two at least. I guess interested in terms of what the customers are actually telling you.
Interested in both sort of, I guess we'll describe traditional markets, but also the newer markets as well in terms of the second half and maybe into FY 2024.
Thanks, Andy. It's a good question. Crane is seeing strong demand both on the order front and on the revenue conversion side across all of its end markets. Seeing it both on the OE and the aftermarket side. There's three pockets of customer demand. Yes, the traditional energy business right now is seeing very strong demand. Part of that is post-COVID, part of that is the increased demand for supply of non-Russian sources. The second piece, remember, John Crane also participates in a number of non-energy segments: water treatment, pharmaceuticals, chemical. All of those businesses, demand is strong. The third piece of it is this energy transition wave again, which, you know, we had been thinking about as the future.
That future is very much here right now. You know, 40 active hydrogen, carbon capture, projects underway right now. Our opportunity funnel more than doubling and then some very big projects, you know, like the Canada project and then last year we had a very large, neon project. It is a good time in John Crane. Incrementally exciting for us is, there's good reason to believe for Crane that near term demand will extend into the medium term, for all of the reasons I just described. Then this long term tailwind from energy transition, provided that we can respond to the demand both in terms of operations but also in terms of new product and service offerings. We should be well positioned here for some time to come.
Thank you. I guess the second question is actually something similar I guess on the detection side. It's a couple of aspects to it. Obviously, the first half was very encouraging in terms of that order conversion coming through. I think you've been very clear in terms of what we should expect for the second half on a slower growth rate. In terms of the visibility that you're getting with customers and the visibility that that's providing you with in terms of the profitability, I'm interested if you've been able to, I guess, make any progress with regards to the sort of better understanding the profile of the business going forward.
Historically we have seen it being quite volatile, and it has been quite challenging, I think, at times in terms of trying to understand what we should be expecting. Clearly within the context of the group targets, Detection has to contribute to that. It's a very broad question, I appreciate. Just in terms of your sort of confidence and visibility around what we should be expecting in Detection, again, over the next 12 to 18 months.
Well, you know, we think of detection in kind of a two-by-two grid. You have aviation security, you have other security systems, you have the OE part of the business, and then you have aftermarket. On the OE side of the business, you tend to have good visibility. The order book in detection tends to be multi-year. You can see forward across many quarters of what the OE side should look like. Attached to every OE order is typically a committed service period. That service piece has both scheduled maintenance as well as break fix. You can see the scheduled maintenance and model that out. What you can't see as well is how fast these adjacencies grow.
We have a pretty good feel on the aviation side, but the adjacencies we're moving into, you know, other security systems had very rapid growth in particular on the OE side in the first half. You know, that's a little bit more difficult to predict. Then again, the other security system side of that business also has the defense piece. Those tend to be very large orders. When those come in or those roll off in a comparable period, that tends to introduce a little bit of volatility.
Paul, I might add, we entered the second half with our largest order book ever in Smiths Detection, which is up double-digit versus a year ago and up high, single-digit percent growth in order book versus the start of the year. I think that positions us well. As you mentioned, Andy, it is a programmatic business, so quarter-to-quarter things don't always advance in a smooth fashion because we do need to wait for customers to be ready to receive delivery. Overall, the order book that we entered the second half with positions us well for sustained growth in that division.
That's really helpful. Thank you both, guys.
Thanks, Andy.
Thank you. Now we will take our next question. The next question comes from the line of Mark Davies Jones from Stifel. The line is open. Please ask your question.
Thank you very much. Good morning both. If I can start with a broad one and then a couple more specifics. The broad one is obviously now you've roughly doubled your expectation of organic growth for the full year. If you are isolating particular parts of the business that have driven that, is it more about stronger demand, and in which case what part of the business, or is it more about better availability as you deal with some of the supply chain issues? Maybe take that one first.
For, well, call it 18 months now, demand has exceeded supply. Right now, both on John Crane and Detection, you know, they have such strong order books that demand is still, you know, above our ability to supply it. We have been scaling supply in both Crane and Detection, both in terms of CapEx adding capacity. Also SES is, you know, as you saw a good example there with the FlexTap project. You know, we're getting more supply out of existing capacity. On both fronts there, that's supportive.
Okay. Thank you. This wave of OE we're seeing in Detection, what typically is the lag between one of those OE waves and the aftermarket coming through? There's a period of time when the aftermarket is expected to increase in sales versus. How long is that lag?
Yeah. For Detection, it can be anywhere from 6 to 18 months for an order to get converted to revenue on the OE side. It's shorter, more typically 3 to 6 months for a aftermarket order in Detection to convert to revenue.
Okay. perhaps one quickly to Clare. Obviously a lot going on on the balance sheet. In terms of the benefit of seeing a lower finance cost coming through, can you give us some indication of timing and scale of that?
Yes. Thank you for the question. We're planning to repay our EUR 600 million bond when it comes due in April. We'll have an interest reduction from that repayment. When you think about the other bond which we will have, which will remain outstanding, which doesn't mature until 2027, half of that is swapped to floating. You should think about right now the effective interest rate that we pay on that remaining bond of around 4.2%.
Thank you very much.
Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star one one on your telephone keypad. To withdraw a question, please press star one one again. Now we'll take our next question. The next question comes from the line of Andrew Connery from Credit Suisse. Your line is open. Please ask your question.
Hi. Good morning. Thank you very much for taking my questions. I'll go along with the timing as well. Can I start with the Smiths Excellence System that's clearly delivering results? You've outlined very clearly what to expect for the second half, and then the increased annualized benefit of GBP 25 million. Beyond that, should we think about SES as something that is a continuous process and think about that similar level of annual savings that you generate in obviously 2024 with full annualization and beyond that? Is this something that you are still ramping up reactively and it's something that has got potential to actually deliver substantially more than its current run rate?
SES, you know, as you see in other businesses that have deployed continuous improvement methodologies across the enterprise, it brings you two primary things. It improves your execution, your project management, the predictability with which you can solve problems. The second thing it does for you is it accelerates development of talent. Certainly the Black Belts and Master Black Belts who are in full-time roles in the program. All of the project participants, you know, learn that same problem-solving methodology. Over time, you improve your culture. You get used to better execution and it becomes the norm. You can point that capability at a lot of different things. Across the first half, we principally pointed it at customer service.
You know, because of because of Mark's question regarding demand and supply. With demand exceeding supply, we have our SES teams focused on customer service. Also helps of course on productivity front. While we more than cover input inflation with our own price, there's still more margin to be captured. Moving forward, we're using a few more resources on the productivity side. As we get through that piece, I think you're gonna see more emphasis, as Clare mentioned, on the working capital side. Start to bring our cash conversion numbers back up into that 100% range that you guys are used to from us.
SES does a lot of things for the company and you can point it at a lot of different problems.
Great. Thank you. I guess maybe to expand that a little bit. I know it's multifaceted, but, you have some companies that talk about kind of a minimum level of productivity to be delivered every year. Some of them talk about 3%, 4%, 5% at the highest. Is that maybe a way for us to think about Smiths going forward with SES being the tool and being flexibly applied to different kind of trigger points?
I mean, of course, you like to see productivity both on your cost line, you know, in your factories, you like to see SG&A productivity. We look at both. We had good SG&A productivity in the first half. I think if you look at SG&A as a percent of sales, it was down 70 basis points or something like that. If you look at our margin walk, you can see examples of that factory productivity coming in. Yes, productivity on both sides is absolutely something we're focused on.
Thank you. If I may, just a couple of quick ones on John Crane.
All right.
One, very excited to hear about, see some numbers on the new energy. Is there any chance you could give us an order of magnitude of potential value of those, say, 14 projects? I know you wouldn't give it for an individual, contract award, but just for us to have an idea what those 14 kind of projects could mean in terms of potential revenue, even in a sort of a rough ballpark.
Yeah.
Second one. Or, yeah.
At this stage, no, we couldn't give you an accurate answer. It is growing so quickly, it is tough to know what that growth rate will look like moving forward. If the current rate continues over several years, it'll be a big part of our business.
Great. Maybe I'll follow up on the final one. Just on the margins for John Crane, clearly strong performance in H1, and you normally have quite healthy seasonality in the second half. Can that happen in this year, or should we get feel we're excited on that kind of sequential potential improvement in margins both from already healthy levels in H1?
I mean, all of our businesses have scale economies. You put more volume through factories, you get longer runs, you get fewer changeovers. All of that shows up in the gross margin line. You saw that in John Crane. Secondly, of course, is the, you know, the SG&A efficiencies. You put more revenue over the same cost base, you get margin expansion from that. John Crane's high watermark is still north of where we currently are. If we continue to execute as we have been, yes, we believe there's additional upside to Crane moving forward.
Great. Thank you very much.
Thank you. Now we're going to take our next question. Please stand by. The next question comes from the line of Bruno Gjani from Exane BNP Paribas. Your line is open. Please ask your question.
Hi. Thanks for taking the question. My question relates to orders and the order outlook. I recall back at the Capital Markets Event a couple of months ago, you indicated that 5%-7% organic order growth was possible in FY 2023. I was hoping you could share what organic order growth was in H1, and I was wondering whether you still expect to deliver 5%-7% organic order growth this year, or whether your expectations have evolved since then.
Yeah. Thanks for the question, Bruno. We shared the number for John Crane, the 14% order growth. That business remains strong. We expect similar kinds of levels moving forward. In Flex-Tek, you know, the order growth is most relevant in the aerospace part of that business. We're seeing low double-digit order growth for Flex-Tek. Detection, Clare mentioned, it's a programmatic business, so looking at order intake growth probably isn't as helpful as looking at total order book growth year-over-year. As Clare mentioned, that was double digits here heading into the second half.
The one business where we had negative order growth was Interconnect, and that relates to the slowing in semiconductor tests that we knew was coming, as well as a little bit in our telecom business. Some of our customers have delayed projects. We think they will come, but in the first half, they were delayed.
Okay. That's helpful. I guess I have another question just on investments and growth and the impact that has on the bridge. Could you help us think about how we should be thinking about sort of development year-over-year in H2 in terms of the dilution to margin? Am I right in thinking that the year-on-year headwinds in H2 2022 was more pronounced, and so therefore this year, you know, when we're looking at that year-over-year impact issue, less pronounced as you started to ramp up investments more meaningfully towards the back end of last year or the last fiscal year? Just a shade would be useful.
I guess just on the mix element as well, was there anything exceptional that was delivered in H1 that weighed down that margin, particularly that might not be seen in H2? Would you expect mix within revenue for H2 2023 to be largely similar to that of H1, so a similar kind of mix headwind?
For the full year, we expect to continue seeing moderate margin improvement. It'll be the same trade-off that we talked about for the first half. We could goose margins more. We could back off on our R&D investment. We could be more discerning in terms of our OE tenders. Our current posture is that we'll continue to prioritize growth. Tenders that play to our strength, that value technical differentiation, that value strong service using our global service networks, we're gonna continue to invest in the OE piece, knowing that it's a near-term margin impact, because we have decades of evidence that it leads to higher margin recurring revenues.
I think it's gonna be, you know, the same sort of dynamic here in the second half as we talked about for the first.
Sure, sure. On Detection, I guess we're seeing more airports install or rather order CT technology on the cabin baggage side in Europe.
Yeah.
Could you perhaps talk about the upgrade opportunities that exist, I guess, in Europe? You touched on it in terms of New Zealand. What that opportunity might look like for you over the next two to three years?
Yeah. There's two sides of that business. Of course, the checkpoint and the whole baggage. Whole baggage conversion to CT in Europe is largely complete. It's the checked baggage that's now going country by country, and it's different in each part of the world. The UK has mandated CT out of the checkpoint here, I believe, by the end of 2024. The U.S. is just starting. You know, there's only one purchaser in the U.S., that's the TSA. For all intents and purposes, their major tenders right now are all for CT. It's going, you know, country by country at a different pace. The furthest ahead is Netherlands, for instance. They're nearly complete on both whole baggage and checked baggage.
Sure. Just finally on Flex-Tek, so you noted that you're seeing a slowdown. Does that relate to just volumes or is pricing starting to roll off as well, in your construction market exposure?
I would say you should expect a slowing on both sides. We did not see price come off in the first half. We had good volume and price for Flex-Tek. In particular on the construction side, our customers are asking more questions around price than they did, you know, previously. That goes with demand. When demand is strong, they ask you, "When can you deliver?" They don't ask you at what price. As that demand on the construction side is normalizing, price comes into play.
Sure. Got it. Well, that's been very, very useful. Thank you very much.
Yep. Thank you.
Thank you. The other participants, as a reminder, if you wish to ask a question, please press star one one on your telephone keypad. If you wish to withdraw your question, please press star one one again. The other participants, we'll give you just a few moments so that if you would like to submit your last questions. There seems there are no further questions at this time. I would like to hand over the call to the management team for any closing remarks.
Okay. Well, thanks everybody for tuning in. You know, as I think you heard on the call and you saw in the release, very strong momentum in the business right now. That's seven consecutive quarters of accelerating growth, punctuated with record organic revenue growth, record reported revenue growth, and record EPS growth. Also unique in that all four businesses, all parts of the world and all customer end markets were in growth in the first half. We feel good about the momentum we currently have. We would balance that with, you know, an observation of macro uncertainty, which remains at a very high level. The things that we can control, we expect to continue progressing in the second half. Uncertainty's pretty high.
You put those two together and you get the increased guidance for the full year of at least 80% organic revenue growth, which is our second raise now in 2 months. Thanks again for your interest and we'll be talking to all you guys here in the coming days and weeks. Bye for now.