Smiths Group H2 Earnings Call Highlights

Key Points

• Fiscal 2026 performance improved: Continuing-operations revenue grew 1.2% organically to £1.9 billion, while operating margin expanded to 20.6% and headline EPS rose 6% to 86.8 pence. Cash conversion reached 96%, and the full-year dividend increased 5.4% to 48.5 pence per share.
• Smiths completed a major portfolio reshaping by selling Smiths Interconnect and Smiths Detection for £3.3 billion in enterprise value, acquiring DRC Heat Transfer for £165 million, and pursuing the divestment of John Crane’s U.S. asbestos liability. DRC adds exposure to data-center cooling and other thermal-management markets.
• Fiscal 2027 guidance calls for about 4% organic revenue growth and a 21% operating margin, despite expected first-half Middle East disruption affecting John Crane. Smiths also has £1.5 billion of planned share repurchases remaining from the Detection sale, expected to be substantially completed by the end of calendar 2027.

Smiths Group LON: SMIN reported organic revenue growth and margin expansion for fiscal 2026 while completing a major portfolio reshaping that left the company focused on its John Crane and Flex-Tek businesses.

The company said it completed the sales of Smiths Interconnect and Smiths Detection, realizing £3.3 billion of enterprise value. It also acquired DRC Heat Transfer in April for £165 million, adding cooling and heat-removal technologies serving data center and power-generation markets, and agreed sales of three non-core Flex-Tek industrial businesses for £40 million.

Management said it is also launching a marketing process to divest John Crane’s U.S. legacy asbestos liability. Chief Financial Officer Julian Fagge said the annual net cash outflow related to asbestos has averaged about £20 million over the past five years. The company said the initiative is intended to remove liabilities from its balance sheet, improve free cash flow and increase available capital.

Fiscal 2026 Results

Continuing-operations revenue rose 1.2% organically to £1.9 billion, while headline operating profit increased 1.9% organically to £399 million. Headline operating margin rose 20 basis points to 20.6% despite Middle East disruption, tariffs, lower volumes in certain markets and continued investment in growth initiatives.

Headline earnings per share increased 6% to 86.8 pence. Total group headline EPS rose 12% to 135.7 pence, supported by underlying earnings growth, the performance of discontinued operations and share repurchases, partly offset by higher tax and finance costs.

Operating cash flow totaled £384 million, representing cash conversion of 96%. The board recommended a final dividend of 33.5 pence per share, bringing the full-year dividend to 48.5 pence, up 5.4%.

• Return on capital employed was 23.5%, above the company’s medium-term target of more than 20%.
• Acquisitions added 2.6% to revenue growth, including DRC’s contribution since April.
• Smiths invested £64 million in research, development and engineering, equivalent to 3.3% of revenue, and spent £39 million on capital expenditures.

Fagge said pricing actions, including in John Crane and Flex-Tek Aerospace, as well as savings from the Acceleration Plan and Smiths Excellence initiatives, supported margin performance. The company reported a £5 million reduction in central costs during the year. These benefits were partly offset by operating leverage, tariffs and increased spending on strategic growth projects.

Middle East Disruption Weighed on John Crane

John Crane’s revenue rose 2.3%, but the conflict in the Middle East reduced second-half performance by about £20 million. Excluding that effect, management said John Crane would have delivered 4% growth for the year and more than 5% growth in the second half.

Original-equipment sales, particularly dry gas seals, led growth, while the U.S. and Latin America grew at mid-single-digit rates. Aftermarket revenue rose 1%, restrained by the regional disruption. Industrial revenue grew 2%, with mining and water growth offsetting weakness in chemicals.

John Crane’s headline operating profit increased 3.5% organically to £270 million, and its margin improved 30 basis points to 23.9%. Pricing, mix and Acceleration Plan benefits outweighed inflation and an £8 million increase in strategic-project investment.

Management said its Middle East facilities remain operational, though maintenance programs have been delayed and original-equipment projects have shifted later. The company has also experienced reduced customer capital expenditure, lower order intake, higher inventory requirements and slower collections in the region.

For fiscal 2027, Smiths assumes disruption will continue through at least the first half. Fagge said the impact in the first half is expected to be similar to the £20 million effect seen in the second half of fiscal 2026, primarily affecting aftermarket activity. The company expects the impact to lessen in the second half as comparisons annualize.

Flex-Tek Portfolio Shifts Toward Higher-Growth Markets

Flex-Tek revenue declined 0.4% during the year, reflecting weakness in U.S. residential construction and lower thermal-solutions sales. Construction revenue fell 3.6%, although it returned to growth in the fourth quarter, rising 2.9% on new customer wins in flexible ducting and multifamily projects.

Thermal solutions revenue declined 6.2%, affected by residential heat-kit destocking in the first half and completion of an ultra-high-temperature project. Fagge said the heat-kit destocking effect was worth £13 million during the year, largely in the second quarter, while a completed contract represented a £7 million year-over-year impact.

Flex-Tek Aerospace grew 10.6%, driven by order-book execution, contract renewals with major aircraft-engine manufacturers, and pricing and volume gains. The business also recorded double-digit growth in India and maintenance, repair and overhaul markets.

DRC contributed £35.5 million in revenue during four months of ownership and had a pro forma growth rate of more than 20%, according to management. Smiths said the acquisition broadens its thermal capabilities into cooling and increases exposure to data centers, where it cited market growth expectations of more than 20% annually over the next decade.

Fiscal 2027 Outlook and Capital Returns

Smiths expects organic revenue growth of about 4% in fiscal 2027 and headline operating margin of approximately 21%, which would bring it into its medium-term 21% to 23% target range sooner than previously expected. The company expects cash conversion in the low 90% range.

John Crane growth is expected to be weighted toward the second half, while Flex-Tek growth is expected to be weighted toward the first half. Smiths assumes subdued U.S. residential construction conditions will persist but expects continued aerospace strength, a return to growth in thermal solutions and a positive organic contribution from DRC.

The company completed a previously announced £500 million share buyback and has completed a £1 billion buyback related to the Interconnect sale. It said a further £1.5 billion of repurchases related to the Detection sale remains to be executed and is expected to be substantially completed by the end of calendar 2027.

Management said its strategy centers on four priorities: accelerating growth initiatives, innovation, operational execution and disciplined acquisitions. It maintained its medium-term targets of 5% to 7% organic revenue growth and 21% to 23% operating margin, citing opportunities in global energy security, data-center thermal management, aerospace and the repositioned Flex-Tek portfolio.

About Smiths Group (LON:SMIN)

For 175 years, we have been pioneers of progress, engineering a better future. Our strategy is to be a focused, efficient and value creating industrial engineering company operating in the attractive and growing market segments of flow control, thermal solutions, construction and aerospace. We focus on solving the toughest problems for our customers, helping address critical global needs such as decarbonisation and the ever-increasing demand for process and energy efficiency. We are pioneers of progress.

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