Smiths Group plc

Good morning everyone and thank you for joining us. I hope you enjoyed the video celebrating our 175 year anniversary, which highlights many significant events over our history. micro xsmiths represents more than a fifth of this time and i have been fortunate enough to work on many projects where we have made important contributions to engineering and to our customers 2026 is yet another momentous period in our history as we reshape the portfolio and i am delighted at the execution of this strategy so far Turning to the agenda for today, I'll start with the key highlights before handing over to Julian to walk through the numbers in more detail. I'll then come back to you to provide an update on our strategy. And as always, we'll have plenty of time for questions at the end. The first half of fiscal year 2026 has been a strategically important period for Smith as we executed major portfolio actions, achieving attractive valuations for both Smith's interconnect and Smith's detection. It marks a period of progress in which we have delivered a solid financial performance and positioned the company for stronger, more focused growth and improved margin and return profile. These outcomes reflect consistent execution and sustained progress. We have continued to take a disciplined approach to capital allocation, investing organically and in growth accretive acquisitions, and divestments have enabled enhanced capital returns to shareholders. with a further announcement today of a new £1.5 billion programme. We have updated our fiscal year 2026 outlook for Smiths, following our change in reporting for discontinued operations. We expect organic revenue growth of 3-4%, reflecting expectations of a stronger second half, with its growth in line with our medium term target range. And we expect an operating profit margin of around 20%, demonstrating clear progress towards our medium-term financial targets. With that, I'll now hand over to Julian to talk through the numbers in more detail.

Thank you, Roland, and good morning, everyone. I'm pleased to be here today to present our fiscal year 26 half-year financial results. As usual, I'll take you through our financial performance, provide more colour around the latest developments in our businesses, before covering capital allocation. Before I start, I'd like to flag that the results include more complicated accounting disclosures than is usual, as we transition through the separations of interconnect and detection. Group refers to John Crane, Flextech and Smiths Detection, which was the basis of our guidance at the beginning of our fiscal year. Smith refers to John Crane and Flextech, our continuing businesses, and total group includes all four businesses across both continuing and discontinued operations. Starting with group headline performance, organic revenue growth was plus 4%, which was in line with our expectations. Operating profit grew 7.2% on an organic basis and 5.6% on a reported basis, resulting in a margin expansion of 50 basis points. Revenue for Smiths grew 0.4% organically, consistent with our expectations for a higher second half weighting. Reported revenue declined 1%, including a plus 1.4% contribution from acquisitions in FlexTech, offset by adverse foreign exchange of 2.8%. Smith's margin expanded by 20 basis points to 19.8%, continued progress towards our medium-term target of 21% to 23%. Total group EPS was up 8.4% organically, and 11.7% on a reported basis supported by the share buyback programme. Return on capital employed increased 130 basis points to 18.4%, and operating cash conversion was 78%. Turning to group revenue, the 4% growth was supported by growing momentum in John Crane, with a strong second quarter driven by growth in energy, Strong growth in Flextech Aerospace, offset by softness in Flextech Construction. And strong delivery in Smith Detection, where we continued to build and convert its strong multi-year order book. This growth was supplemented by a positive contribution from Flextech's acquisitions. Across the portfolio, there was a good contribution from new products and innovation, as well as strong commercial execution. Operating profit margin expanded 50 basis points for group. This growth reflected operating leverage and a positive mix impact from growth in John Crane and Smith's detection, a negative impact from US tariffs with the largest impact coming through in detection, and 70 basis points of efficiencies coming through from the acceleration plan, largely at John Crane, a reduction in central costs alongside savings from the Smith's Excellence Programme. Strong organic EPS growth of 8.4% was achieved by the organic operating profit increase, the share buyback partially offset by higher tax and interest. Reported EPS grew 11.7% to 62 pence per share, reflecting accretion from FlexTech 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 amortisation or depreciation. Total cash generation was £220 million, representing a 78% operating cash conversion. This reflected lower capex at £29 million following the completion of the majority of automation and capacity investment last year. This was offset by working capital outflows in John Crane and Smiths Detection to support second half order book delivery, It is worth noting that last year's working capital benefited from better than usual payables at the end of the period in the context of the cyber incident. Turning now to the continuing business. We'll focus today on John Crane and Flextech, but you can find performance reviews to Smiths Detection and Smiths Interconnect in today's RNS. John Crane delivered 2% organic growth with momentum building across the half. Following the marginal decline in Q1, John Crane delivered mid-single-digit growth in the second quarter, reflecting healthy demand and improvements in operational execution following the automation and machining capacity investments. Growth was led by energy, which grew 3.9%, with a strong performance in the second quarter. Dry gas seal demand remained healthy, while system sales were impacted by some project phasing in Europe and Asia. Performance in industrial was lower as a result of overcapacity in Chinese chemicals, partly offset by strength in mining and pulp and paper in the Americas. Aftermarket, which makes around 70% of revenue, was strong with increased focus on reliability-based contracts. Sales of original equipment performed solidly, particularly in the US and Latin America. John Crane margin expanded 50 basis points to 23.2%, reflecting pricing, mixed benefits from higher aftermarket growth, Smith's excellence and acceleration plan benefits, offsetting a limited impact from US tariffs. We continue to invest in innovation that strengthens our leadership in critical flow control. In the first half, we saw positive uptake of the new Type 93AX separation seal that we launched last year, and we also launched a new mechanical seal designed for ethane and ethylene pipelines. This has already delivered performance improvements for a leading ethane pipeline operator in the US Gulf Coast. Looking ahead, we expect John Crane's growth momentum to continue, with the second half expected to grow at a similar rate to the second quarter. Our growth outlook is supported by a strong and expanding order book in both OE and aftermarket. And with a positive book to bill, we have good visibility through the remainder of fiscal year 26. Turning to FlexTech. To reflect how we run the business, we show the performance of construction, thermal solutions and aerospace. The results exclude certain industrial businesses which have been classified as discontinued operations. This reflects the strategic decision to high-grade the Flextech portfolio to focus on higher growth and higher margin market sub-segments. Organic revenue for the half declined 2%, largely reflecting market-driven weakness in the US construction market, offset by strong growth in aerospace. Acquisitions delivered £12 million, or 3.4% to growth, which was offset by negative foreign exchange. In construction, performance reflected a challenging period for U.S. residential construction, where housing starts and building permits remain negative over the six-month period. This continuing market downturn has had a knock-on effect on customer inventories, which has impacted order levels, particularly in residential heat kits. Second half performance is dependent on the pace of recovery in US housing, which remains uncertain, and where builders' confidence remains well below 50. We have taken a cautious view on this. The thermal solutions business declined 7.8% in the period, largely related to customer destocking of heat kits that I just mentioned. This was partly offset by the completion of a large ultra-high heating contract. The pipeline of projects in this space remains healthy. Aerospace grew strongly at 10.1%, supported by healthy demand and a full and growing order book across both commercial and defence aircraft build programmes. Alongside renewed long-term agreements, these provide good visibility for the second half and beyond. Regarding acquisitions, the integration of modular metal is largely complicated. and DuckPack is progressing to plan. In thermal solutions, the integration of Watco is also largely complete and the business is now focused on accelerating growth from expanded capacity in its new manufacturing facility. Operating margin was 20.4%, a 60 basis points decrease compared with last year. This reflected negative drop through from lower volumes, the completion of the higher margin ultra high heat contract and higher material costs. This was partly offset by efficiency savings and the initial benefits from the acceleration plan. Our approach to capital allocation continues to support growth, returns and balance sheet efficiency. We invested a total of £101 million in RD&E and CapEx, investing for future growth and efficiency. We increased our interim dividend by 5.4% to 15 pence per share, and we paid £104 million in dividends in the first half, continuing our track record of consistent dividend growth. We completed the £500 million buyback at the beginning of December and we started executing the £1 billion buyback related to the sale of Smiths Interconnect. This is expected to be substantially complete by the end of calendar year 2026, with the first tranche of £600 million to be completed by the end of this fiscal year. We recently announced the acquisition of DRC for £164 million at an attractive valuation of 10 times adjusted EBITDA. The transaction is expected to complete in the third quarter of the fiscal year. Finally, today we announced we expect to return £1.5 billion of the Smith's detection proceeds via the combination of a tender offer or special dividend accompanied by a share buyback programme. This will commence upon the completion of the current programme and continue through calendar year 2027. We will update further on the precise mechanism and timing once the divestment completes. Our balance sheet remains strong with a leverage of 1.2 times as at the end of January, giving us good flexibility to continue investing for growth. We have updated our fiscal year 26 guidance for continuing operations or Smiths. We expect organic revenue growth of 3-4% with momentum building to deliver stronger growth in the second half which is expected to fall within our medium term target range. John Crane enters the second half with good momentum which combined with a strong order book in both OEE and aftermarket supports an improving second half and we expect growth of mid-single digits similar to the second quarter. A positive book to bill gives us good visibility through fiscal year 26 with the recent investments in advanced manufacturing and testing starting to bear fruit. In FlexTech, we expect a stronger second half, driven by continued strength in aerospace, supported by order book visibility and new contract positions. The pace of recovery in US residential construction remains uncertain. However, FlexTech is well positioned to benefit when the market returns. We expect operating profit margin of around 20%, progressing nicely towards our new medium range target, driven by operating leverage, benefits from the acceleration plan and ongoing efficiencies from Smith's excellence. We expect cash conversion to be around the low to mid 90s percent, reflecting continued investment for growth and strong underlying cash generation. Finally, one word on what's happening in Iran and surrounding countries. Our main priority is the safety of our people who work in the region. In half year 26, the Middle East region contributed to around 7% of revenue for SMIS, primarily in John Crane. We are mindful of the uncertainty these events bring and we continue to monitor developments alongside this potential size and duration of any impacts on performance which are not incorporated in our current guidance. In summary, our half year 26 financial results demonstrate a solid delivery, expanding margins and continued discipline on capital allocation. And with that, I'll hand back to Roland.

Firstly, I'll provide an update on our strategic progress. Then I'll turn to the Smiths businesses and the opportunities for continued growth and margin expansion. And I'll end with our people and culture. The defining feature of the first half was the value accretive transformation of our portfolio. We agreed the sales of interconnect and detection ahead of schedule for a total value of 3.3 billion pounds at highly attractive multiples that were above market expectations. These transactions reflect our ongoing commitment to maximize value for shareholders and to sharpen our strategic focus. The regulatory processes are progressing well, with InterConnect close to completion, and we remain on track to complete detection before the end of the calendar year. I would like to express my thanks to all my colleagues for delivering such a great outcome. The proceeds from these two transactions support substantial capital returns. We've already begun returning the InterConnect proceeds through the £1 billion share buyback programme initiated in December. building on the £500 million buyback completed last calendar year. For the detection proceeds, as Julian mentioned, we expect to return a further £1.5 billion. We look forward to sharing the details in due course. In the past four and a half years, we have returned more than £2.3 billion to shareholders via dividends and buybacks. With the remainder of the current buyback and the new programme announced today, there is still more than £2 billion to be returned, continuing through calendar year 2027. Our approach is consistent. Invest for growth, allocate capital smartly and return surplus capital to shareholders efficiently. Following the separations, Smith will be a focused industrial engineering company. We specialise in high-performance technologies in flow control and thermal solutions. We hold leading positions in attractive market sub-segments that are aligned with long-term structural megatrends. We are well regarded for the quality of our products, our technologies and solutions, and we are admired for our skills in customisation, customer service and our ability to help solve customer problems. We have a portfolio of well-known leading brands with a reputation for innovative and reliable products. We have valued customer relationships, which together with our high performing culture and a strong financial profile mean that we are well positioned to grow faster than the market in which we operate. Let me drill a little bit deeper into the growth opportunities in each of our businesses. Around 60% of John Crane operates in the flow control segment of the global energy market, where growth is underpinned by demand for energy security, energy transition and a continuing demand for efficiency and reliability. 40% of John Crane serves other industrial markets, such as mining, which also enjoy similar characteristics. Our growth strategy for John Crane is focused on our particular strengths in downstream and midstream energy. where we see considerable runway before the world reaches peak oil and gas. We also have a leading position in energy transition and are well positioned to take advantage of the high level of growth in areas such as hydrogen, geothermal and carbon capture and storage. In Flextech, while the construction market is soft in the near term, its future prospects remain favourable. we see increased demand for housing, which is expected to expand with population growth and the shortage of single and multifamily homes in the US. In thermal solutions, the industrial electrification trend is a key driver supporting emissions reductions, improved safety and efficiency, and spans industrial markets. Here too, demand is underpinned by customers' desire to have a single, integrated, customised solution. Energy demand is also a key underpin, especially for high performance and efficient heating and cooling. The addition of DRC broadens our position by expanding our heating business into cooling technologies. This adds high growth data center exposure. AI demand supporting the expansion in digital infrastructure. In aerospace, rising air travel driven by increased trade, GDP and population growth supports a continued increase in commercial aircraft production. And heightened security concerns support an increase in defence spending, also increasing demand for new aircraft. In our key end markets, these trends underpin a market CAGR forecast of 4% to 5% over the next decade. Our customer and market-led approach ensures we fully leverage our leading market positions and the underlying growth trends to drive performance and to take advantage of these multi-year tailwinds. Our aim is to continue to deliver above-market growth over the medium term, underpinned by a resilient and recurring revenue base. This provides a strong foundation for sustainable performance. We've set out the initiatives we are focusing on to drive this enhanced growth. Leveraging our existing portfolio and long-term customer relationships. Driving innovation through new product development and commercialisation. Driving commercial operational excellence and accessing higher growth and higher margin market adjacencies, both organically and through targeted acquisitions. We lay out here our strategic approach within each of our businesses and highlight a few examples. In John Crane, we continue to leverage our core energy offering and recent product launches to access new OE investment, especially in gas and energy transition. We see opportunities to drive further aftermarket growth by leveraging our global service network, transitioning a higher proportion into reliability management contracts and applying digital solutions. And we are targeting faster growing geographies such as Latin America. In FlexTech, despite the current low growth environment, we continue to drive the business forward to capture market opportunities. Leveraging our portfolio through our strong distributor relationships, for example, through widening the product lines we offer. We see opportunity to expand our position into more white space in parts of the US and Canada, and developing new products like our Blue Series sealed duct system. In thermal solutions, the addition of DRC brings cooling technologies, widening our addressable market. Here, customers seek tailored solutions and our recent acquisition positions as well. We see greater opportunities for growth as we evolve from a focus on heat and components to systems and integrated platforms to target higher growth areas like data centers. And finally, in aerospace, leveraging our portfolio with aircraft and engine manufacturers to add share on new programs. Accessing higher growth subsegments, for example, defense or repair and service. renegotiating long-term agreements with key aircraft and engine manufacturers, enabling better price capture to augment growth. In fact, across all the businesses, pricing is another key area of focus to ensure we capture the price that reflects the value we deliver for our customers and also underpins future growth. This multifaceted approach ensures that we remain well positioned to outperform in our markets over the medium term, supporting our 5-7% organic revenue growth target. On this slide, we set out some examples of initiatives we have recently executed. John Crane signed a multi-year reliability management agreement with a major energy company, improving equipment reliability and standardising performance across their global operations. FlexTech extended a 30-year partnership with a space customer and is renegotiating its long-term agreements with major aircraft engine manufacturers. These agreements grow and sustain recurring revenues and customer intimacy across the cycles. In innovation, John Crane recently launched its coaxial separation seal, which sets a new benchmark in its category and has had positive take-up. FlexTech's Blue Series offers enhanced emission control and ease of installation and has been well received by customers. Operationally, investments in automation and machinery upgrades, most notably at John Crane, improves delivery and lead times. This helps us capture orders, earn price and expand market share, supporting growth. And finally, market adjacencies. Here we have initiated our thermal solution strategy to access high growth market subsegments. Let me turn to our recently announced acquisition, which supports this approach. We're scaling FlexTech into high growth cooling applications with the agreement to acquire DRC heat transfer. DRC designs custom heat transfer and cooling solutions for data centers, general industrial, transit and energy. It serves blue chip customers and brings deep engineering expertise and a strong service culture. It builds on last year's acquisition of Watco, which expanded our heat business across the temperature spectrum. Strategically, DRC adds heat removal and cooling to FlexTech's industrial heat portfolio. It increases our addressable market and creates clear cross-selling opportunities for our heating technologies. It is aligned with the data center expansion and power backup applications, both attractive structural trends with a strong growth outlook. This is disciplined accretive growth and aligned with our strategy of accessing high growth market adjacencies. Turning now to margins, supporting the delivery of our medium term target of 21 to 23% is our acceleration plan, where we have updated the benefits and costs for Smiths. We now expect 30 to 35 million pounds of annualised benefits in fiscal year 2027 and beyond for 40 to 45 million of cost. Around half the benefits are expected to be achieved this fiscal year. We highlight here some of the initiatives underway in both John Crane and FlexTech, and we are also working on programs to maintain our central costs at 1.5 to 1.7% of revenue. These are all examples of our strategy in action that will propel us towards our medium term targets. We are reshaping Smiths into a focused, faster growing, higher margin company with clear growth pillars, high margin and returns, disciplined capital allocation and substantial value creation potential. Fiscal year 2026 represents a transition year as we reposition the portfolio and we remain confident in our ability to reach the enhanced through cycle medium term targets. We continue to make progress towards these targets, supported by our disciplined, balanced approach to capital allocation. This is how we will deliver enhanced returns and support a premium rating for Smiths. Our performance rests on the same foundations that have driven us forward throughout our history. Firstly, product and service innovation that delivers reliability, efficiency and safety for our customers. We are bolstering our approach here to be even more agile and purposeful, deploying innovation roadmaps by product, technology, processes and materials to ensure we capture market opportunities. For example, capturing electrification momentum and rising high temperature applications for Flextech and leveraging John Crane's extreme condition seals and energy transition applications. Second, a high performing culture with clear accountability and ownership. As part of this, a strong safety culture is critical and keeping our people safe is our number one priority. I wasn't satisfied in our safety record performance in the half. A number of targeted activities, including safety stand downs, are being implemented to drive improvements for the second half to ensure that we focus on delivering a zero harm culture. Third, operational excellence. With our Smith's Excellence framework driving continuous improvement to ensure lean and effective operational execution, 1,500 colleagues have taken our Smith's Excellence Yellow Belt training, broadening the reach wider and deeper into the business. And all of it underpinned by our Smith's values, which we have recently refreshed. These foundations are what bind us together to remain focused on delivering value for all our stakeholders. So, in summary, we have delivered excellent strategic progress, unlocking notable value in the portfolio. We delivered another solid half in terms of financial performance with a momentum into the second half, also supported by our strong order book. We expect four-year organic revenue performance of 3% to 4%, with second half growth ahead of that in the first and within our medium-term target range. We expect an operating profit margin of around 20%. We are deploying capital in a disciplined manner in growth and value accretive acquisitions and see further opportunities on this front while enabling sizable capital returns. We are well positioned in structurally growing end markets with attractive demand trends and are leveraging our strengths and capabilities to outperform this market growth. We are confident that Smiths is well positioned to continue unlocking significant value and enhance returns to shareholders. Thank you for listening. Julian and I are now happy to take your questions.