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Mar 19 2027in 172 days
$0.68
$1.29B
4 of last 12
Each report against the estimate that stood when it landed.
| Reported | EPS est | EPS actual | Surprise | Revenue est | Revenue actual | Surprise |
|---|---|---|---|---|---|---|
| Sep 22 2026 | $0.64 | $0.68 | +5.6% | $1.36B | $1.38B | +1.0% |
| Mar 20 2026 | $0.80 | $0.85 | +6.4% | $2.04B | $1.97B | -3.7% |
| Sep 23 2025 | $0.83 | $0.83 | +0.7% | $2.17B | $2.25B | +3.3% |
| Mar 25 2025 | $0.68 | $0.60 | -11.1% | $2.00B | $1.98B | -1.4% |
| Sep 24 2024 | $0.74 | $0.73 | -1.4% | $2.12B | $2.09B | -1.1% |
| Mar 26 2024 | $0.61 | $0.41 | -33.5% | $1.92B | $1.91B | -0.7% |
| Sep 26 2023 | $0.66 | $0.65 | -1.2% | $1.95B | $1.98B | +1.6% |
| Jan 31 2023 | $0.50 | $0.35 | -29.1% | $1.71B | $1.82B | +6.3% |
| Sep 23 2022 | $0.49 | $0.47 | -4.4% | $1.59B | $1.67B | +5.3% |
| Jan 31 2022 | $0.48 | $0.35 | -28.0% | $1.57B | $1.62B | +2.9% |
| Jul 31 2021 | $0.55 | $0.54 | -1.5% | $1.76B | $1.75B | -0.5% |
| Jan 31 2021 | $0.44 | $0.44 | +1.3% | $1.59B | $1.58B | -0.9% |
Roland Carter: Good morning, everyone, and thank you for joining us for our fiscal year '26 results. 2026 has been a significant year in the company's 175-year history. We have executed the portfolio transformation, delivering on our commitments to create significant value for our shareholders. We have proactively supported our customers against the backdrop of challenging external market conditions, and we have invested in our businesses to deliver a resilient financial performance, both now and into the future. None of this would have been possible without our people. Thank you for your dedication, hard work and commitment. Moving to our agenda for today, I will start with the key highlights from the year. Julian will then take us through the financial results and the outlook for fiscal year '27. I will then return to outline the path to higher growth, further margin expansion and continuing value creation. We will then be pleased to take your questions. Fiscal year '26 was a year of significant strategic progress for Smiths. We completed the sales of Smiths Interconnect and Smiths Detection at very good prices, crystallizing GBP 3.3 billion of enterprise value. These transactions have repositioned Smiths as a focused premium industrial engineering company. We have a stronger financial profile, a clear strategy for growth around 4 vectors of accelerate, innovate, execute and compound, which I will explain more later. We have also made good progress high-grading our portfolio, exiting lower growth and margin businesses in Flex-Tek and adding exposure to high-growth data center opportunities with the acquisition of DRC. In addition, today, we are announcing the launch of a process to divest the John Crane U.S. legacy asbestos liability to enhance cash flow and strengthen our balance sheet. We delivered operationally and financially. We grew organic revenue, expanded margins and generated strong cash flow. This was despite significant disruption arising from the conflict in the Middle East, ongoing weakness in U.S. residential construction, all alongside continued investment for growth. I am pleased with our performance given this backdrop. Our results illustrate the underlying strength and resilience of our business, the quality of our technology and the strength of our customer relationships. As we enter fiscal year '27, the near-term underlying market conditions remain challenging, but with opportunities for growth. Our robust order book and business momentum underpin our expectation of organic revenue growth of around 4% and further progress on our operating profit margin, entering our target range of 21% to 23%. The positive addition of DRC and data center exposure, the opportunities in John Crane from the structural tailwinds in global energy resulting from the focus on energy security and the repositioning of the Flex-Tek portfolio underpin our strong conviction that we will more quickly deliver our medium-term 5% to 7% organic revenue growth target and support our 21% to 23% margin target. Our outlook is supported by self-help initiatives and strategic execution. We are not relying on a broad market recovery to deliver that outlook, but purposefully investing in and driving the business forward. With that, I will hand over to Julian.
Julian Fagge: Thank you, Roland, and good morning, everyone. As usual, I'll take you through our financial performance, capital allocation and our outlook for fiscal year '27. Before I start, I would like to clarify the reporting perimeter. Smiths or continuing operations means the businesses within John Crane and Flex-Tek, excluding the Flex-Tek General Industrial businesses as well as Detection and Interconnect that have been classified as discontinued operations. Total group includes the performance of all businesses for the periods during which they were owned. Starting with headline performance. Smiths delivered organic revenue growth of 1.2% to GBP 1.9 billion, a resilient performance in the context of the challenging backdrop in 2 of our largest markets. Smiths headline operating profit increased by 1.9% organically to GBP 399 million. Headline operating margin was 20.6%, an increase of 20 basis points. This absorbs the impact of the disruption in the Middle East, tariffs, lower volumes and continued investment in growth. Return on capital employed was 23.5%, comfortably above our medium-term target of more than 20% and reflecting a higher capital base from increased investment in John Crane and the DRC acquisition in Flex-Tek. Smiths headline EPS increased by 6% to 86.8p. Total group headline EPS increased by 12% to 135.7p, with growth in underlying earnings enhanced by the share buyback program. Smiths operating cash conversion was 96%, reflecting the strong cash flow characteristics of the company. And the Board is recommending a final dividend of 33.5p, taking the full year dividend to 48.5p, an increase of 5.4%. Turning to revenue. Organic growth was supplemented by 2.6% of growth from acquisitions, including the contribution from DRC since April. Growth improved in the second half versus the first as originally guided, but was impacted by a GBP 20 million effect in John Crane from the conflict in the Middle East. Flex-Tek Aerospace achieved an excellent performance, but the challenging U.S. residential construction market and customer destocking and project phasing in Thermal Solutions had a negative effect on performance. Yet despite these headwinds, we achieved good operating momentum. We demonstrated resilience against a challenging market backdrop, and we added acquisitions, new businesses to the portfolio that enhance the growth potential of the business. Headline operating profit increased to GBP 399 million and margin expanded 20 basis points to 20.6% organically, good progress towards our 21% to 23% medium-term target range. Pricing initiatives, particularly in John Crane and Flex-Tek Aerospace were positive as were the benefits from the acceleration plan, including a GBP 5 million reduction in central costs as well as Smiths Excellence savings. Operational gearing, tariffs and increased strategic growth investments were a headwind to margin, and we continue to balance near-term margin delivery with investment for sustainable growth. The increase in total group headline EPS reflected the organic operating profit growth, the performance of the discontinued operations and the share buyback program, partly offset by higher tax and finance costs, reported EPS grew 12% to 135.7p, reflecting accretion from Flex-Tek's acquisitions, adverse foreign exchange and the accounting effects related to the sale of Smiths Detection and Smiths Interconnect, which under IFRS 5 are no longer subject to amortization or depreciation. You can find the Smiths EPS analysis in the presentation's appendix. Operating cash flow for Smiths was GBP 384 million, representing cash conversion of 96%, slightly ahead of guidance and demonstrating the strong underlying cash generative quality of the company. This was driven by higher operating profit and lower capital expenditure, although ahead of depreciation, reflecting continued investment in growth and efficiency. For example, John Crane's machining, testing, automation and capacity upgrades last year. Offsetting this, we recorded higher inventory to support the order book and maintain service through geopolitical and supply chain disruption and an increase in receivables, in part due to slower collections in the Middle East. I will now turn to the performance of our 2 businesses, beginning with John Crane. John Crane grew revenue 2.3% with the conflict in the Middle East impacting second half performance by GBP 20 million. Excluding this, growth would have been 4% in the year and more than 5% in the second half. Growth was led by original equipment sales, particularly in dry gas seals. The U.S. and Latin America performed strongly, growing mid-single digits. Aftermarket was up 1%, but held back by the impact of the Middle East. Industrial revenue grew 2% with strong growth in mining and Water, offset by weakness in chemicals, largely related to the Middle East and overcapacity in China. Headline operating profit increased 3.5% organically to GBP 270 million and margin expanded 30 basis points to 23.9%. Pricing, mix and the benefits from the acceleration plan more than offset inflation and an GBP 8 million increase in investment in strategic projects. Taking a moment to address the Middle East directly, where the safety of our people and their families remains our first priority. They have been doing an incredible job supporting our customers in the region. Our facilities have remained operational and our focus has been on supporting our customers day-to-day through difficult circumstances. We have experienced delays in maintenance programs and OE projects have moved to the right. We have also seen a corresponding impact on order intake as customers have reduced CapEx and optimize OpEx. Working capital has also been affected as we maintain stock availability and experienced slower collections. As we look forward, our fiscal year '27 assumes disruption continues at least through the first half. However, John Crane is well placed to support customers as activity normalizes and recovery projects begin, given our local presence, broad installed base and extensive service capability. We are already working hard to put ourselves in the strongest position so that we are commercially and operationally ready and flexible to support our customers when this demand returns. For example, we are rebalancing production capacity, optimizing our supply chain and as well as investing to increase our local manufacturing and service capability in the region. Longer term, the heightened focus on energy security and reliability is likely to have lasting implications, supporting investment across energy security and infrastructure markets globally. This encompasses capacity expansion and supply diversification, additional backup infrastructure with increased maintenance and reliability spending. This is where the largest opportunity lies. We continue to practically engage and support our customers and our leading technology capabilities, unrivaled service network and deep customer intimacy place us ideally to win. Flex-Tek revenue declined 0.4% in the year. Construction declined 3.6% against the backdrop of a weak U.S. residential construction market, where housing starts and building permits declined 0.8% and 2.1%, respectively, across the same period. Performance improved across the year, returning to growth in quarter 4 at 2.9%, supported by new customer wins, particularly in flexible ducting and multifamily projects. Thermal Solutions declined by 6.2%, largely due to the destocking of residential HeatKits experienced in the first half and the completion of an ultra-high temperature project. In April, we acquired DRC, which adds cooling and heat removal technologies with exposure to fast-growing data centers and power generation markets. As a result, Thermal Solutions now represents around 1/3 of Flex-Tek revenue on a pro forma basis. Aerospace grew strongly at 10.6%, with order book execution, contract renewals with major aircraft engine manufacturers delivering pricing and volume growth. We achieved strong double-digit growth in the strategic growth areas of India and MRO. Acquisitions added 6.4% to growth, reflecting our capital allocation decisions targeting high-growth adjacencies. The operating profit and margin performance largely reflected the market impact on construction volumes and a small impact from tariffs, partly offsetting by pricing in aerospace and operational efficiency savings. Our approach to capital allocation remains disciplined and focused on value creation. Growth is the main priority, and we continue to allocate capital to opportunities that have the potential to accelerate revenue performance. In fiscal year '26, we invested GBP 64 million in RD&E or 3.3% of revenue. CapEx was GBP 39 million, 2% of revenue. We also invested in our commercial and strategic growth initiatives. We acquired DRC for GBP 165 million, consistent with our strategy of building into high-growth adjacencies. In a further move to high-grade the portfolio, we agreed sales for 3 noncore Flex-Tek industrial businesses for GBP 40 million. And with these changes, Flex-Tek is now a more balanced growth portfolio with exposure across a broad range of attractive end markets with strong growth prospects. Our portfolio management approach also encompasses initiatives to improve balance sheet and enhance cash flow with 2 major pension transactions completed during the year. And today, we announced that our U.S. John Crane business will begin a marketing process for the divestiture of its legacy asbestos liability. These transactions will ultimately remove the liabilities from the balance sheet, significantly increase free cash flow and available capital. As a reminder, the annual net cash outflow related to asbestos has averaged around GBP 20 million in the last 5 years. In relation to shareholder returns, as I have previously mentioned, the Board continues to support a progressive dividend policy. We completed the previously announced GBP 500 million buyback. And in line with the commitment to return a large portion of sales proceeds, we have now completed the GBP 1 billion Smiths Interconnect buyback with a further GBP 1.5 billion related to Smiths Detection still to execute. We expect this to be substantially completed by the end of calendar year '27. Our strategy is clear and our actions demonstrate that we make sensible capital allocation decisions to drive growth, financial returns and free cash flow while retaining a strong balance sheet and a solid investment-grade credit rating. For fiscal year '27, we're guiding to organic revenue growth of around 4%, supported by operating momentum and our robust order book. John Crane is expected to be weighted towards the second half. We assume continued Middle East disruption during the first half alongside stronger growth in other parts of the world. In Flex-Tek, we assume a continuation of the subdued U.S. residential construction market, although we will continue to drive performance. We expect a continuing strong performance in Aerospace, a return to growth in Thermal Solutions and a positive organic contribution from fast growth in DRC. As a result, Flex-Tek growth is expected to be weighted towards the first half, reflecting in part the year-on-year comparator and also our active customer engagement to drive performance. We expect headline operating profit margin of approximately 21%, entering our medium-term target range of 21% to 23% sooner than expected. And we expect operating cash conversion in the low 90s range. We've also provided some further technical guidance in the appendix to aid your modeling. We are confident in achieving our medium-term targets. The structural tailwinds in global energy resulting from the anticipated response to energy security, our expanded exposure to cooling and data center applications through DRC and the evolution of the Flex-Tek portfolio, alongside continued underlying performance give us strong conviction in more quickly delivering our 5% to 7% organic revenue growth over the medium term and underpin our 21% to 23% operating profit margin target. With that, I'll hand back to Roland.
Roland Carter: Thank you, Julian. I will now turn to our strategy and the opportunity ahead. In January last year, we took the decision to reposition the portfolio and the completion of the divestments of Interconnect and Detection this year have been a defining moment for Smiths. The result is a more coherent portfolio with a stronger financial profile, allowing greater management focus and a clearer capital allocation model. Our portfolio sits across the clear growth pillars of Flow Control, Construction, Thermal Solutions and Aerospace and is well placed to deliver sustainable growth, high returns and strong cash generation, underpinned by structural growth trends. First, in energy, growth is driven by the long-term global demand for energy and is expected to accelerate further with the increased need for energy security and resilience, all of which support greater investment in critical infrastructure. Our growth strategy for John Crane is focused on our particular strength in downstream and midstream energy, where we see considerable runway before the world reaches either peak oil or gas. Our leading position in gas and energy transition position us well to take advantage of the higher level of growth in areas, including LNG, hydrogen, geothermal and carbon capture and storage. Next, industrial process electrification is supporting emission reduction, improved safety and greater efficiency across industrial markets. Here too, demand is underpinned by customers' desire to have a single integrated customized solution, which our Sureheat, Wattco and Farnam businesses are well positioned to support. AI demand is supporting the expansion in digital infrastructure and the subsequent data center developments drive power and thermal management demand. Wattco and DRC broaden our heat, cooling, controls and systems capabilities to access this high-growth market, and we are excited by the size of this opportunity. Next, the structural housing shortage, together with a growing population, drive growth prospects in U.S. residential construction. We see increased demand for housing over the medium term, and our Flex-Tek HVAC products are well positioned to capture this growth as we expand our portfolio and geographical coverage. And finally, aviation, where trade, GDP and population growth are underpinning the continuing increase in commercial aircraft production in a market where high qualification barriers and durable supply positions support resilient growth. Alongside this, the geopolitical backdrop is driving an increase in defense spending and the demand for new military aircraft. Also underpinning these trends is the ongoing focus on productivity and sustainability. Customers' desire to improve resource efficiency, drive production and reduce emissions also supports demand for our products. Our customer-centric model underpinned by a high degree of customer intimacy and a strong understanding of customer needs allow us to be true experts in developing customized solutions. This creates strong incumbent positions and drives high-quality aftermarket and recurring revenue. John Crane has a large installed base that has been built up over many decades. This drives a substantial aftermarket revenue stream across the operating life of a facility, provides recurring demand and sustains our customer relationships. Aftermarket represents more than 70% of the total revenue. Flex-Tek maintains strong customer relationships across different parts of the business. Around 70% of construction revenue is repeatable through sustained distributor relationships. Thermal Solutions designs customized products and systems in partnerships with its customers. and more than 75% of aerospace revenue is under long-term agreements, contracted positions or repeatable programs. These characteristics support resilience through cycles, retention of customer positions, pricing power, margin quality and cash generation, while allowing us to bring additional products and technologies to customers and channels we already know. Our priority is to combine these strengths to enable faster, more consistent organic growth. Our growth strategy is targeted around 4 connected priorities, which we call the growth algorithm. Accelerate growth initiatives, innovate with impact, execute relentlessly and then compound value through disciplined capital allocation into accretive acquisitions. These initiatives, although focused on growth, will support the delivery of all our medium-term targets, revenue and EPS growth, margin, returns and cash conversion and underpin our strong conviction that we will deliver our 5% to 7% organic revenue growth target. Taking each in turn, we are accelerating the pace of delivery of our strategic growth initiatives and increasing investments in our highest return opportunities. Alongside our pricing power, these actions underpin our plans to drive above-market growth. In John Crane, we are leveraging our leadership position in gas projects and have signed a number of major new LNG and NGL contracts, continuing to develop our leadership position in this area. LNG investments continue to accelerate globally due to energy security demand and projects of this scale strengthen our installed base, supporting long-term aftermarket servicing opportunities. To expand our aftermarket position further, we have signed new global performance plus agreements with customers in both energy and chemicals with a number of these having been taken over from other suppliers. These agreements provide the customer with a consistent reliability model across their facilities and for John Crane provides predictable recurring revenue. In construction, we have been successfully expanding the distribution of our full range of flexible and metal ducting products that we have built up through acquisition. And we are now harnessing higher growth opportunities such as the Canadian market. In Thermal Solutions, we're expanding our product offering to provide customized systems and integrated solutions, combining heat and cooling across a range of different end markets, including data centers. And in aerospace, we are targeting an increase in market share of shipset on key engine platforms and the strategic growth areas of India and MRO. And our recent contract renewals have strengthened our position and price capture. Innovation is critical to differentiation and sustainable growth. Through a more deliberate approach to innovation, our aim is to accelerate the pace of delivery. Our approach combines sustained investment in product development with disciplined commercialization, ensuring that new product concepts are translated into tangible growth. Our 5-year innovation road map for each business span technology, products, materials and manufacturing processes. These support both the evolution of existing products for new performance requirements and applications and the development of new differentiated offerings. For example, John Crane's recently launched 93AX separation seal has seen a very positive response from customers. We have further developed our dry gas seal products for larger machine needs, high pressures and speeds and have seen stronger sales of these, and our development of materials support new technologies for hydrogen applications. Capability road maps also help identify skills requirements and strategic partnerships opportunities. Our objective is to increase the pace of delivery and the commercial impact. Operational excellence is foundational to growth and value creation. We continue to execute our plans with discipline and excellence, tracking the key operational metrics that underpin performance and support our strategic priorities. Smiths Excellence provides a common approach to lean operations, enhanced processes, automation and supply chain resilience and is embedded and standardized across our business. All these actions help us better serve our customers, helping ensure that we are their partner of choice. We continue to invest in modernizing and automating our manufacturing infrastructure. And this year, we have completed the investment in John Crane machining capabilities and upgrading our test capabilities. We have also added automation to our Flex-Tek HVAC manufacturing processes to improve efficiency and enhance safety. During the year, the acceleration plan activities continued. These included site consolidation and footprint optimization, ERP harmonization and automation. We have delivered GBP 20 million of annual planned benefits to date and remain on track for the GBP 30 million to GBP 35 million of annualized benefit for this fiscal year. These initiatives help us better support our customers through improved customer service and reduced delivery times, helping to support our growth ambitions. With the increased focus that the portfolio changes have delivered, we have continued to adapt our culture to encourage a more agile, empowered and accountable organization focused on delivering for our customers, supported by a lean center. A high-performance culture combines pace and accountability with integrity, respect and uncompromising commitment to safety. And finally, disciplined M&A, which we regard as an important component of our value creation model by recycling free cash flow to augment and compound organic growth. Our track record in Flex-Tek demonstrates this. Over the past years, we have invested around GBP 700 million of capital into 8 acquisitions. Flex-Tek has more than doubled in size over this time frame, a double-digit compound annual growth rate in revenue. Acquisition returns have notably exceeded the cost of capital, delivering significant value creation under Smith's ownership. Acquisitions have also shifted the mix of the business over time. Today, Flex-Tek has a lower exposure to U.S. residential construction, around 40% with a corresponding increased exposure to higher growth Thermal Solutions and aerospace. These actions demonstrate our active approach to portfolio and capital allocation to focus our business on areas of higher growth. We focus on identifying acquisitions that give exposure to higher growth adjacencies that strengthen our market position, add technology, geography as well as customer access. Financially, we prefer capital-light, cash-generative businesses that are growth accretive and have attractive margin and returns profile. Our opportunity pipeline is across multiple vectors in each of our business areas, offering growth, margin and synergy potential. We have strengthened our approach to integration with clearer milestones, ownership, contingency planning. This ensures acquisitions get off to a fast start. This plug-and-play blueprint allows us to maximize synergy delivery and value creation. DRC is a great example. DRC designs customized heat transfer and Cooling Solutions for data centers or auxiliary power. We identified an opportunity to enhance our strategic position by adding heat removal and cooling technologies to our Heat Solutions. It also brought exposure to attractive higher-growth markets with a strong leadership and engineering team who needed support for their next phase of growth. Let's hear directly from the team in this video. [Presentation]
Roland Carter: It is still early days, but in 4 months of ownership, it has performed ahead of expectations, contributing GBP 35.5 million of revenue at a pro forma growth rate of well over 20% with an attractive margin. The data center market is expected to grow more than 20% annually over the next 10 years, supported by AI and cloud demand. We're investing in people, process and capacity infrastructure to support this growth opportunity, which we expect to be a meaningful additive to Smiths Group's performance over the coming years. So in summary, we have successfully transformed the portfolio into a focused premium industrial engineering company with an improved financial profile, delivering sustainable growth, high returns, robust cash generation and balance sheet strength. We continue to align our business to attractive end markets and trends that offer structural long-term growth. Our business model is resilient with a high proportion of aftermarket contracted and repeatable revenue, underpinned by customer intimacy and leading products and technologies. Our renewed growth algorithm strategy is focused on accelerating organic growth, driving innovation, value-creating execution and disciplined compounding M&A, supported by a high-performing team and culture. In fiscal year '26, we unlocked over GBP 3 billion of value. We continue being focused on creating value today and into the future. Thank you for listening. Julian and I will now be pleased to take your questions.
Operator: [Operator Instructions] And your first question today comes from the line of Christian Hinderaker from Goldman Sachs.
Christian Hinderaker: I wanted to ask firstly on the Middle East events. I appreciate a fluid situation over there. But curious, firstly, how we think about the GBP20 million impact in the half across OE and aftermarket. And then as we look forward, just curious on your thinking in terms of whether or when there may or may not be a catch-up effect as and when we see a reopening of business in the region.
Roland Carter: Okay. Thank you very much, Christian, for the question. Obviously, the situation on the ground remains difficult for our customers and for our people. And obviously, our people have shown excellent commitment in those 10 sites supporting the customers. There's definitely no signs that it's getting better. We believe in H1, we will continue to see those more of the situation as we've previously seen. In H2, we anticipate that year-on-year improvement as we cycle over what happened in that GBP 20 million. Also, we have seen a little bit of rebalancing of our customers. So we saw that excellent growth in North America already because of what we've done with the organization and responding to the customers. We believe that, that's only the beginning of the world rebalancing to this new normal. We're definitely preparing for supporting our customers when that bounce back comes back from the point of view of we're already preparing all the drawings. We're working with the customers. We're working with the supply chain. We're making sure that we're qualifying all our facilities around the world if there is -- well, when there is a surge coming forward. So we are deep in preparation for that. I mean if you stretch the medium-term outlook, I mean, we've got even more conviction, as I mentioned earlier, in the fact that there will be this need for security within energy, and we're there prepared to support that need for security as it is seen to spread out across the globe because people are going to want that resilience. So generally a very challenging situation in the moment, but absolutely prepared for when that changes.
Christian Hinderaker: Maybe turning to Flex-Tek next. I'm curious how to think about the growth prospects for Thermal Solutions in fiscal '27, particularly when we consider the destock effect last year on HeatKits in the distribution chain and also some of the project activity phasing. I guess, DRC is contributing positively, but yes, interested in the thoughts there.
Roland Carter: Yes. I'll let Julian talk about the phasing. But broadly, when we look across that market, yes, construction market will be pretty similar to that, that it has been. But you've already seen in the Q4 that we've had that growth because of there's been a lot of sort of self-help at Smiths, a lot of commercial activity. So we saw that, and we've definitely seen that momentum continue into the year on the construction. One has to remember that at the moment, construction is really only 2/5 of that Flex-Tek portfolio now. And about 1/3 of that, we've been moving away from just that traditional resi new build piece as well. So there is work behind the scenes within that. But I'll let Julian talk about the portfolio restructuring that we've done within Flex-Tek and also DRC perhaps.
Julian Fagge: Sure. Thank you. Thanks, Roland. So I mean, just to pick on the question on Thermal, I mean, it did return to growth in Q4. So we're pleased with that. And just to point to some of the factors that impacted last year's performance. So first thing, we had this significant contract running through our Sureheat business. That on a year-on-year basis was a GBP 7 million impact on the year. So that's now annualized out. So we'll move forward from there. The other factor that Roland mentioned was the destocking of these HeatKits. That had a GBP 13 million impact during the year and mostly in Q2. So we expect to have cycled through that now as we enter into the new year. I mean on the portfolio, I mean, yes, Flex-Tek has, over time, transitioned and repositioned to some extent, away from its predominant construction position. And yes, Thermal is part of that. And with the acquisition of DRC, we'll increase that percentage even further. We do see that to an extent, a kind of high grading of the Flex-Tek portfolio and pointing it towards area of faster growth, which should support the business as we look out in the medium term.
Christian Hinderaker: Maybe if I can just squeeze a quick third one in. Just obviously, with the change in structure and portfolio, a lot of moving pieces in the statements. But how do we think about sort of normal thresholds now for working capital lines? I don't know if you want to talk days or percent of sales basis.
Roland Carter: That's definitely one for you.
Julian Fagge: Thank you. I mean we've taken some actions in fiscal year '26 to strengthen our inventory position to better support customers through these challenging times. You've seen a small step-up in inventory levels, particularly in John Crane. But other than that, the levels of working capital are in line with our typical levels of receivables, payables. There's nothing different there, Christian, within the working capital mix.
Operator: Your next question today comes from the line of Martin Wilkie from Citi.
Martin Wilkie: It's Martin at Citi. Just a question on the announcement this morning about the asbestos liability. Just to understand a bit more about how that will be structured in the timetable. And also what has changed? I think in the past, albeit under prior management, the view was that sort of pay-as-you-go was sort of cheaper, if you like, than sort of settling it and exiting it. So just to understand, was something that has changed financially that's made this attractive to get rid of this liability now?
Julian Fagge: Thank you, Martin. So I mean, first thing I'd like to say is that it is important that we recognize that asbestos-related diseases are terrible for those that suffer from them. So I do want to acknowledge that and the impact that it has had. The fact remains that John Crane knows that its products are safe and for more than 45 years has resisted asbestos claims based on our defense. I mean to address your specific questions, Martin, we have worked very hard over the years to get ourselves into this position today where we have a reliable defense-based strategy. We have a more reliable cost of the asbestos defense, which flows through our free cash flow statement. And just to remind you, that is around GBP 20 million a year and has been for at least the last 5 years. I think the way we look at it is that today, we are now in a position where we have a case for presenting this to the market. And it also indeed follows some of the broader movements in the asbestos market where other companies have taken similar approaches. So we think the time is right, and we thought it was helpful to announce that this process that we will launch in the coming days.
Roland Carter: And to add to that, I mean, this is just one more of those steps of dealing with legacy liabilities on the balance sheet. So you've seen the buy-ins and the buyouts on the pensions. So this is a continuation, and we've been preparing for this for several years, and this has now accumulated as the markets also matured and the vehicles are much more mature now. So this is a continuation of driving free cash flow and removing the variability within that.
Martin Wilkie: That's really helpful. And just another question just on the uses of cash. And obviously, you've now integrated the DRC acquisition. Anything changing in the backdrop in terms of how you're seeing valuations for potential deals and availability of deals that can still be accretive to value, I guess, particularly in Flex-Tek, but just more broadly.
Roland Carter: Yes. We're, again, obviously very pleased with the acquisitions that we've been making recently. We have become very active in our scanning of the market. So we always had an active, but Julian and myself are very involved in that process. We will always be disciplined in our approach to any form of capital allocation. We're here to create value. And that's, I think, is the defining feature of both Julian and myself and how we approach these things. So we do have an active portfolio across the whole range of businesses. We do assess where we want to go. Acquisitions are there to accelerate our strategy when we feel that we can't do that organically. So we'll continue with that approach. And as we saw in that video that's just been -- we weren't the highest bidder for DRC. It was really what they felt we could bring to that. And I think you'll find that we have brought what we've said we would bring to that. And there is obviously a financial aspect to that, but the true aspect is really how we integrate, how we support them in areas where previously as a private company, they haven't been able to be supported, whether that's the Smiths Excellence System dealing with the capacity constraints, whether that's bringing their safety to a higher level for their employees, whether that's helping with their quality issues, whether that's exposing them, as Rob said in the video, to other parts of the Smiths portfolio to allow them to get new ideas where we can be better integrated as a whole. So we'll always be looking for places where we can genuinely add value. We're not going to try and just compete on price on those things.
Operator: Our next question today comes from the line of Tore Fangmann from Bank of America.
Tore Fangmann: I hope you can hear me all right. Two from my side. The first one would be on the impact in the Middle East. Is there any way for you to quantify the impact that you expect going into 2027? Should we assume a continued GBP 20 million drag into the first half? And then to me, it sounded like you think about maybe a smaller impact going into H2.
Roland Carter: Okay. Do you want to touch?
Julian Fagge: Yes. I mean I think it's a fair assumption that the impact going through the first half of the year will be at a similar level to that, that we see -- we saw across the first -- the second half of last year. I think that's reasonable. I mean, just to be clear, that's largely aftermarket. I mean we are able to keep our facilities operating. And just to repeat what Roland said earlier, we are doing a lot to support our customers through this time and indeed prepare for when things improve. You should expect that impact to be less in the second half as a result of this annualizing, certainly in terms of growth. So that's how we think about it.
Tore Fangmann: Perfect. Appreciate it. And then maybe just second question, more general for the whole group, but happy to hear if you have more detail also on the different segments. How would you describe the current pricing and inflation environment? I'm especially thinking about energy costs, steel inflation and so on and how, call it, happy are your customers to receive price increases from your end?
Roland Carter: Yes. No, thank you for that. So as we know, Smiths is very strong on pricing. So from the 2 aspects of we do have pricing power in the market and also we do execute well and effectively against that pricing power as well. So we saw last year, a significant part of the growth was pricing. This year, it will be more balanced between pricing and volume. We are in an inflationary environment. We have put through pricing across all of the businesses that we have. So within John Crane, there is pricing. Within Flex-Tek Aerospace, slightly different dynamic because those are long-term contracts, which you saw us negotiating and we continue to negotiate. So we still -- we saw positive pricing in Flex-Tek Aerospace, for example, last year, but that will continue to be accretive into this year as well. Thermal, because of the market dynamics, because of the growth, we still -- it's difficult because not to price because we're getting positive gross margins there. But because these are new products rolling out, you've got to have a benchmark there, and they're constantly developing. But we can see there is positive gross margin expansion from price within that, but there's that mix issue within that aspect of the business. And then construction, we've just put through 2 pricing increases, one on our metal products, one on our Flex-Tek flexible products as well. So we continue to be able to develop price with -- across the portfolio, as you can see. And we are very professional and we professionalized over several years on how we make sure that pricing sticks and we understand leakage a lot better than we did maybe 3 years ago.
Operator: [Operator Instructions] And the next question today comes from the line of Jonathan Hurn from Barclays.
Jonathan Hurn: Just a few questions from me, please. Firstly, just on tariffs. Did you see any tariff refunds in the period? And also, how do we think about that going into 2027? The second question was just on mix. How do we think about mix across the 2 divisions going forward? Are there some positive tailwinds to come through and help profitability? And the third and final one was just on the order book. Obviously, you're seeing some strong orders. Can you just remind us where we are in terms of order coverage for the year right now for both divisions, please?
Roland Carter: Yes. Let me take a couple of those, and then I'll hand over to you, Julian, if that's okay. So on order book, we came -- so we came into approximately a 1x order book in John Crane. So in spite of those headwinds, we saw that as a positive. We had very strong order book within aerospace. So we were very pleased with that. In fact, a modest assessment of that would be 2/3 of our aerospace revenues are covered going forward into this year -- when we came into the year, I should say. And the other place where we really sort of look into the order book is DRC, and we've seen that build robustly for this calendar year and the next actually for people are developing their capacity understanding of us. And that I should also sort of step back on the John Crane perhaps and say we are seeing certain customers asking to block capacity because they see the potential for upturn. So on the businesses where all order book makes sense to look at, it is characterized, as we said, it came in relatively resiliently for us. Obviously, there is book and burn that we need to achieve within the year as well. From the point of view of tariffs, perhaps you...
Julian Fagge: Yes. Shall I take that? So tariffs were a headwind for us last year, and that was after our mitigation efforts and the pricing adjustments we needed to make behind those tariffs. I won't comment on tariff reclaims. I mean, it clearly is a fluid environment, but net-net, it was a headwind to us. And as we look out, we expect tariffs to be relatively neutral to us in fiscal year '27.
Roland Carter: And then on your mix question, so we have robust growth across certain aspects of the business. You saw that in aerospace. But also, I think the more important aspect on mix is really everything we've been doing in the background about addressing the COGS and the gross margin. So you've seen that positive impact. You saw our net margin increase to 26.1%. And you saw our guidance around 21%. So you can see that positive move there. Much of that comes out of better new product pricing. It comes out of the AP plan really delivering. You've seen we are actually delivering against that AP plan, which is good to see when we have the rest of that to deliver the annualized benefits this year coming through. We've also got our general SE Smiths Excellence savings coming through. So those are all the reasons why you've got the drop-through to that around 21% going forward on that.
Operator: [Operator Instructions] There are currently no further questions. I will now hand the call back for closing remarks.
Roland Carter: Well, thank you for joining us today. So to summarize, fiscal year '26 was a year of significant strategic progress and also resilient financial performance. We are guiding to organic revenue growth of around 4% in fiscal year '27 and operating margin of around 21%. We've laid out the growth priorities we're focused on: accelerate, innovate, execute and compound to deliver above-market growth, plus the structural tailwinds in data centers and global energy and also those positive portfolio developments in Flex-Tek. All these support our strong conviction that we will more quickly move into our 5% to 7% organic revenue target in the medium term. Our next update to the market will be Q1 trading and the AGM on the 18th of November. Thank you for your interest in Smiths.
Operator: Thank you.
| Metric | FY2027E | FY2028E | FY2029E | FY2030E |
|---|---|---|---|---|
| Revenue Avg | $2.01B | $2.12B | $2.24B | $2.36B |
| Low | $1.97B | $2.07B | $2.19B | $2.30B |
| High | $2.04B | $2.17B | $2.28B | $2.40B |
| EBITDA Avg | $567M | $661M | $718M | $781M |
| Low | $555M | $646M | $701M | $762M |
| High | $579M | $675M | $734M | $798M |
| EBIT Avg | $492M | $589M | $647M | $710M |
| Low | $479M | $573M | $630M | $691M |
| High | $503M | $603M | $663M | $728M |
| Net Income Avg | $353M | $432M | $480M | $532M |
| Low | $343M | $420M | $466M | $516M |
| High | $362M | $444M | $493M | $546M |
| EPS Avg | $1.12 | $1.37 | $1.53 | $1.69 |
| Low | $1.09 | $1.33 | $1.48 | $1.64 |
| High | $1.15 | $1.41 | $1.57 | $1.73 |
| Analysts (Rev / EPS) | 8 / 1 | 10 / 1 | 5 / 1 | 5 / 1 |