Smiths Group Q3 Earnings Call Highlights

Key Points

• Smiths Group cut its full-year organic revenue growth outlook to about 2% from 3% to 4% after Middle East-related disruption hit John Crane in Q3. Organic revenue was flat in the quarter, and the company expects the same roughly GBP 10 million impact to continue into Q4.
• Flex-Tek is expected to improve in Q4, helped by continued aerospace growth, easier comparisons in thermal solutions, and seasonal/pricing support in construction. Smiths said the business showed sequential improvement in Q3 despite weakness in U.S. construction.
• Margins are still forecast to hold above 20%, supported by tight cost control, the Acceleration Plan, and Smiths Excellence savings. The company also continued reshaping its portfolio through the Interconnect divestment, Flex-Tek asset sales, and the acquisition of DRC.

Smiths Group LON: SMIN lowered its full-year organic revenue growth outlook after Middle East-related disruption weighed on its John Crane business in the third quarter, Chief Financial Officer Julian Fagge said on the company’s Q3 2026 trading update call.

Fagge said Smiths’ organic revenue was flat in the quarter, bringing organic growth for the first nine months to 0.2%. He described the performance as “resilient” given disruption in global energy markets, continued softness in U.S. construction and a tough prior-year comparison in Flex-Tek.

The company now expects full-year organic revenue growth of around 2%, down from its March guidance of 3% to 4%. Fagge said the prior guidance excluded any impact in John Crane from the Middle East conflict. The revised outlook assumes the disruption seen in Q3 continues through the balance of the fiscal year.

Smiths now expects operating profit margin to be slightly above 20%, which Fagge attributed to cost control, the strength of the operating model, delivery under the Acceleration Plan and ongoing Smiths Excellence savings.

Middle East Disruption Hits John Crane Revenue

John Crane delivered 3% organic revenue growth in the quarter, but Fagge said revenue was negatively impacted by approximately GBP 10 million due to two months of disruption related to the conflict in the Middle East.

“We have 10 facilities in the region, and all of those facilities were significantly impacted by events,” Fagge said in response to a question from JPMorgan analyst Chitrita Sinha. He said Smiths was unable to ship against part of its opening Q3 order book, while customers were also unable to accept shipments or place their normal level of book-and-ship orders.

Fagge said the situation was stabilizing “a little bit,” but noted that the conflict remains, disruption continues and “it will take time for the situation to improve.” He said Smiths is assuming a similar impact in Q4, around GBP 10 million.

When asked whether the disrupted revenue could return quickly once conditions improve, Fagge cautioned against expecting a sharp rebound. He said John Crane would support customers as they seek to reopen and rebuild facilities, but that in many cases it could take time for operations to come back online.

Fagge also said the order impact in the Middle East has largely been in the aftermarket. He noted that about 12% of John Crane revenue is derived from the Middle East, though the company does not break down its order book by region.

Flex-Tek Expected to Improve in Q4

Flex-Tek performed in line with Smiths’ expected quarterly phasing, according to Fagge. He said construction remained affected by ongoing weakness in the U.S. construction market, though the business saw sequential improvement from the second quarter. Smiths expects that improvement to continue into Q4, supported by pricing initiatives and targeted customer wins.

In response to Goldman Sachs analyst Christian Hinderaker, Fagge said Flex-Tek should see a pickup in Q4 across its three main areas:

• Aerospace: Fagge said the business is expected to deliver “quite significant continued growth” in Q4, supported by a well-covered order book and the pricing and volume benefits of recent contract renewals.
• Thermal solutions: The segment declined in Q3 against a difficult prior-year comparison, including the completion of a large ultra-high heating project last October. Fagge said the comparison becomes less challenging in Q4 and demand for heat kits is improving.
• Construction: Fagge said Smiths is not assuming market improvement, but expects seasonal benefits, positive pricing and a better comparison to support Q4 performance.

Fagge said Flex-Tek’s aerospace business had three major contract renewals delivering positive pricing, with a fourth close to completion. He told Jefferies analyst Andy Douglas that investors should not expect a similarly significant pickup from contract renewals in fiscal 2027, saying the four major renewals were distinct to fiscal 2026.

Margins Supported by Cost Savings

Smiths’ updated margin outlook reflects tight cost management and benefits from the company’s Acceleration Plan. Fagge said the plan remains unchanged from prior expectations, with total costs of GBP 40 million to GBP 45 million and annualized benefits of GBP 30 million to GBP 35 million.

He reiterated that about half of those benefits are expected to come through in fiscal 2026, after a small single-digit contribution in fiscal 2025. Asked about the earnings impact from the GBP 10 million John Crane revenue loss in Q3, Fagge said it had not created significant under-absorption and that Smiths had been able to offset the impact through opportunities elsewhere in the business.

On central costs, Fagge said fiscal 2026 is a transition year because Smiths still had to carry a significant portion of central costs to support all four businesses before completion and separation activities. He said the company expects central costs to fall to around 1.7% of revenue “pretty quickly” as it enters fiscal 2027.

Portfolio Reshaping Continues

Fagge said Smiths completed the divestment of Smiths Interconnect during the quarter, agreed to sell two Flex-Tek industrial businesses and completed the acquisition of DRC. He said DRC aligns with Smiths’ strategy of allocating capital to high-growth adjacencies with exposure to data center and power generation markets.

Asked about DRC, Fagge said Smiths had owned the business for around a month and was “very pleased” with what it had found so far. He said DRC provides cooling systems for generator sets used in data centers, a market he described as robust. He added that Smiths sees opportunities to improve operational performance and unit output through investment and operational improvements.

Fagge said bolt-on M&A remains an important part of Smiths’ strategy and that the company has a “robust pipeline” across John Crane and Flex-Tek. He emphasized that Smiths would remain disciplined on capital allocation, including the areas where it invests and the prices it pays.

Energy Security Seen as Longer-Term Driver

Although the Middle East conflict is creating near-term headwinds, Fagge said Smiths believes the situation is reinforcing global focus on energy security and resilience. He said that should support structural growth in energy infrastructure spending over the medium term and could create opportunities for John Crane, particularly in aftermarket work.

Fagge said Smiths will report full-year fiscal 2026 results on September 22.

About Smiths Group LON: SMIN

Smiths Group plc operates as an industrial engineering company in Americas, Europe, the Asia Pacific, and internationally. It operates through four businesses: John Crane, Smiths Detection, Flex-Tek, and Smiths Interconnect. The John Crane business engineers mechanical seals, seal support systems, power transmission couplings, and specialized filtration systems. The Smiths Detection business provides sensors and systems that detect and identify explosives, narcotics, weapons, chemical agents, biohazards, and contraband.

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