Smiths Aerospace has been a rising star of the UK aerospace industry with success in the USA. But has 11 September changed that? John Ferrie, Smiths group managing director Aerospace, talks to Alan Peaford.
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Q: What impact did the events of 11 September have on the Smiths business in terms of your forecasts and your staff numbers, and how are you positioned now?
A: We have not been hit as badly as we feared. Our civil business is down by about 25% and the full effects are only really being felt now. We downsized quickly and will have completed the changes by the end of 2002. More site closures will happen. Reacting so quickly has helped us. Our other activities in counter-terrorism and military have meant that the affect on our earnings has been restricted to about 15%.
Q: There has been some criticism that downsizing in the UK was so severe that companies will be unable to react as the cycle changes back to growth. Is this what happened at Smiths?
A: Not at all. What we did was a re–positioning. We are in a cyclical industry and we were able to respond. It will come back – of course it will. We won't take off any faster than our customers do.
Given we had to come down in size, we have taken the opportunity to create centres of expertise and closed a number of sites to focus product lines in a particular place.
Q: You have often talked about the fine balance between US/UK and civil/military in the Smiths business. Is that still the same post 11 September?
A: We are still around 50-50 and that has served us well but it is swinging more in favour of America where there is more demand for defence spending. We have seen our split between civil and military change to about 35-65 in favour of military.
Our financial year end is July 31. Looking forward we see things staying flat until well into 2003 but there will be growth in specific markets. We are particularly interested in the detection business and are well-positioned for stronger growth. Most people are talking about 4% and we see no reason to argue with that.
Q: You have been quoted as wanting to move up the systems supply chain by expanding the company's capabilities and producing full systems. Can you explain that?
A: Primes [Primary contractors] are looking to place a requirement to supply chains for a complete solution, rather than pieces that they integrate. Primes do a lot of second and third-tier work – they are traditionally very vertically integrated – but they are now starting to concentrate on a few core skills.
This allows us to move up the supply chain by supplying fully-integrated systems. It means sharing more risk, but the upside is closer links with prime contractors, a more efficient supply chain and higher added-value work on future contracts.
There have already been some good examples of this. The C-130 avionics package; the integration of all power management on the Boeing 777 and the recent success in winning the refuelling system on the Boeing 767 Global Tanker Transport. It was offering the complete capability.
Q: Does this mean your suppliers have to play ball too.
A: It works both ways. We have strategic supply arrangements with our customers and with our suppliers. When a supply chain is working, it works as whole. It is the chain that wins, not an individual company. We have to work with our suppliers as partners to grow this offer to take on logistics responsibility to supply the whole system to the primes.
Q: You must have been disappointed at not getting anything from the TRW deal and some pundits such as The Financial Times have been saying you need to bulk up and make an acquisition. Is the pressure on?
A: The pressure is not on at all. We will be going after other opportunities as they emerge but not acquisition for acquisition's sake.
We were interested in TRW's aeronautic activities but we will not pay over the odds as that does not give shareholder value. We are looking for an acquisition that would bring a technological advantage or a marketing advantage.
TRW would have been a good fit – but not at that price. We don't have to make an acquisition, and we don't have to bulk up. There is nothing we can't do now if our customers demand it.
We have the financial strength and are looking all the time at products that would make a good fit. For example, the acquisition of Able Corp gave us the necessary component that enabled us to win the 767 tanker refuelling contract.
Q: Despite criticism from some quarters, the merger between Smiths and Dowty to create Smiths Aerospace seems to have been successful. Are you truly one company now?
A: Yes. We have completed the integration and we are no longer Smiths or Dowty. We are one business and leveraging our capability.
We now offer integrated actuation systems for flight control, landing gear and engine thrust reversion. Our unique ability to integrate electronic control with actuation reduces risk to the aircraft prime and resulted in Smiths' selection for key systems on the Airbus A380. We have achieved about $1 million of systems on each aircraft. We are now able to offer complete solutions and this offer of a fully integrated package is exactly what the manufacturers are looking for.
Q: Of course you had another successful acquisition – that of Barringer which has given you a rather opportune offer in the counter–terrorism market. Just how well is that doing?
A: The whole detection business is an area with very high rates of growth. The US is predicting a $40 billion spend on counter-terrorism and a lot of that is on equipment.
We had been working on many of these systems for some time. The events of 11 September really dragged the need up. We have been developing the products and are now the leading provider of sensitive and reliable trace detection systems, effective against explosives, chemical and biological agents and drugs. The Sentinel II walk–through portal is being used at Farnborough both on our stand and at the President's chalet.
We brought together the expertise of three companies – Graesby Dynamics, Barringer Technologies and ETC. They are now working together under the new business of Smiths Detection. We are rolling out the brand at Farnborough. It is an impressive set of products, we describe it as smart people using smart science.
Q: While this work is impressive, is it a good fit with aerospace?
A: These are sophisticated electronic products in safety-critical applications; there's a need for high integrity and the main customers are government agencies. It is a comfortable management fit for Smiths Aerospace.
Q: Are you confident overall that you have positioned the company for continued profitable growth?
A: Yes. The strength of Smiths systems integration skills and its lead manufacturing capability allow it to benefit from increased outsourcing from principal prime contractors.
We are in a good position as a major supplier on all the next generation military fighter and transport aircraft – production rates are increasing in the short to medium term.
The success on the 767 tanker refuelling project has given Smiths a strong stake in a fast growing market; our strong customer service network and expertise in Performance Based Logistics will enable Smiths to continue to grow its aftermarket services business and finally the strong position in the counter-terrorism market allows the company to benefit from dramatically-increased spending since the events of 11 September. All in all I am satisfied.
Q: What's your plan for Farnborough?
A: I'm going to be busy seeing people. There are a number of exciting programmes under way. We are working with Boeing to define systems design for Sonic Cruiser.
We are strategic partners and are working diligently. I see my role at Farnborough reinforcing our position with the customers and with the investment community, demonstrating that Smiths is a major player positioned for growth.
Source: Flight Daily News
