Welcome to the Smiths Q3 2026 trading update conference call. The call will be hosted by Julian Fagge, Chief Financial Officer at Smiths. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Julian Fagge, Chief Financial Officer at Smiths. Please go ahead.
Thank you. Good morning, and thank you for joining us today. Given the current market backdrop, and in particular, the conflict in the Middle East, we thought it was appropriate to hold a call to discuss our Quarter 3 trading update. Smiths' organic revenue was flat in the quarter, resulting in growth of 0.2% for the first nine months. This was a resilient performance considering the disruption in global energy markets, continued softness in U.S. construction, and against a tough comparator in Flex-Tek. In John Crane, organic revenue grew 3%. We began the quarter with a strong opening order book and operational momentum. However, as a result of the conflict, revenue was negatively impacted by approximately GBP 10 million due to two months of disruption. Encouragingly, our order book continued to strengthen, and we delivered a positive book-to-bill. In Flex-Tek, we performed in line with our expected quarterly phasing.
In construction, performance reflected ongoing US construction market weakness. However, we did see sequential improvement from the second quarter, which we expect to continue into quarter four, supported by pricing initiatives and targeted customer wins. Thermal solutions declined, primarily due to the completion of the large ultra-high heating project last October, which had a notably high contribution in Q3 last year. As we look ahead, improving demand for heat kits and a more favorable comparator supports a return to growth in quarter four. In aerospace, we delivered strong growth. This reflected solid execution against our order book and the price and volume benefits of recent contract renewals. This underpins our confidence in stronger performance in the second half relative to the first half. Turning now to the outlook.
In March, we guided to full organic revenue growth of 3%-4%, which excluded any impact in John Crane from the Middle East conflict. Reflecting the disruption we've now seen in Q3, and assuming that this continues for the balance of the year, we now expect full-year growth for Smiths of around 2%. We now expect operating profit margin to be slightly above 20%, reflecting the strength of our operating model, cost control, and good delivery supported by the Acceleration Plan and ongoing Smiths Excellence savings. More broadly on the Middle East, our priority remains the safety of our people in the region. At the same time, we're working hard to support our customers, and we're well-positioned to assist when facilities return to service and production recovers.
Whilst the conflict clearly creates near-term headwinds, and of course, we don't know how long this will last, we anticipate that our customers will require additional support from John Crane as and when reopening and rebuilding commence. The situation is reinforcing the global focus on energy security and resilience, which we expect to underpin structural growth in energy infrastructure spending over the medium term. Finally, to note that we completed the divestment of Smiths Interconnect in the quarter. We agreed the sale of two of the Flex-Tek industrial businesses and completed DRC, an acquisition that was consistent with our strategy of allocating capital to high-growth adjacencies with exposure to fast-growing data center and power generation markets. In summary, we are navigating short-term challenges, continuing to make good progress reshaping the portfolio, deploying capital with discipline, and investing to drive sustainable growth and long-term shareholder value.
Thank you for listening, and I'm now happy to take questions.
Thank you. As a reminder, to ask a question please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. We will now take the first question from the line of Chitrita Sinha from JPMorgan. Please go ahead.
Hi. Good morning, Julian. Thank you for taking my questions. I have two, please. My first is just on the Middle East disruption that you saw in Q3 and what you're assuming in terms of disruption in your full-year guidance. I mean, if I understand correctly from your comments, the organic growth guidance change is only due to the Middle East impact rather than any change in expectations elsewhere. My second question is just on the updated margin guidance. You've mentioned in the release that this is with the support of the Acceleration Plan and Excellence savings. Could you provide a bit more color on the moving parts here? Should we expect a slightly higher run rate than the 50% for the plan this year? Thank you.
Thanks, Chit. No, happy to take those questions. In terms of the Middle East, yes, we saw the disruption from the start of the conflict in Q3, and that had the GBP 10 million impact. We have 10 facilities in the region, and all of those facilities were significantly impacted by events. We've been doing our very best to support customers through the time period. Of course, as you can expect, there's been quite significant disruption. We've been unable to ship against the opening Q3 order book to some extent. Indeed, customers have not been in a position to accept those orders and those shipments. Equally, customers have not been in a position to place their normal level of book and ship orders that we would expect to see running through the quarter. That's the impact and how it's come through.
Things are stabilizing a little bit, of course, the conflict remains, the straits remain closed, disruption continues, and it will take time for the situation to improve, which is why we've modeled the effect through into quarter four. Your part B of the question was, yes, those are the two factors that are driving the change in the revenue outlook. Flex-Tek came in line with expectations in Q3. We are expecting to see that improvement and pick up through quarter four. In terms of margin, to your second question, the benefits of the Acceleration Plan will come through. They're unchanged versus our previous position. Just to remind you, the AP has a total cost of GBP 40 million-GBP 45 million, with GBP 30 million-GBP 35 million of annualized benefits, and it remains half of those coming through in fiscal year 2026.
Just to remind you, a small single-digit number came through in FY 2025. Overall, we're just managing cost tightly and appropriately as we go through the balance of the year.
Very clear. Thank you.
Thank you. We will now take the next question from the line of Christian Hinderaker from Goldman Sachs. Please go ahead.
Morning, Julian. Thanks for the time. I want to start on Flex-Tek and the guidance there, if I may. On my math, you need to see an organic growth number of north of 6.5% in the fourth quarter, following the 2.9% decline in the third quarter. I guess the incremental here is on the construction and heat kit side, principally. Maybe you can just walk through the assumptions there and whether my math is correct.
Morning, Christian. Thank you. Yeah. We will see this pick up in Flex-Tek in Q4. If I just unpick the three parts of the business there. The business that will lead the pack is aerospace. We expect quite significant continued growth in aerospace through Q4. Just to remind you, we've said that the second half will grow faster than the first half there. The drivers are a very well-covered order book, which we'll be able to ship against, but we also have the benefit of three contract renewals that are delivering positive pricing through the business, which is manifesting itself through Q3. We have a further contract that's close to closing out, which will also deliver benefits. We're in a good place on aerospace, and we anticipate that to continue nicely through into next year.
On the thermal side of the business, just to remind you, it grew 25% last year in Q3. We're cycling up against that very challenging comparator, and as I mentioned, that's to do with the large contract, which is now finished. That was the challenge for Q3, but that's now less of an impact through into Q4. We're also seeing now a bit of an improvement coming through on the OEM side of the business. These are the heat kits that we sell into a major U.S. customer, and these are now picking up. If you remember, it was this part of the business that challenged us in Q2. We've seen a pick up through Q3 and further expectation through Q4. That's better.
In construction, we saw an 8% growth in Q3 last year, and a little bit of that strength was frankly due to the cyber event. As we recovered from that, we saw stronger growth in Q3 last year. That challenged us a little in this year's Q3, but we expect that to pick up through into Q4. We are not necessarily seeing, as you would expect, any market improvement, but Q4 does give you some seasonal benefit as house building picks up generally. We have also got some positive pricing picking through that will go in in Q4, and that is market pricing. It is not specific to us necessarily, and that is on the flex duct side of the business. Overall, a slightly more positive outlook for Flex as we go into Q4.
Thank you. That's very thorough. On John Crane and the Middle East effects. You've called out the GBP 10 million revenue impact, presumably you'll be carrying the overheads, maybe face some additional distribution costs. How do we think about the earnings impact from that GBP 10 million revenue loss in the quarter?
It's not been a significant under-absorption for us. It's dropping through at normal gross margin, but we've been able to cover for that through opportunity elsewhere in the business and hence our small improvement to our margin outlook for the full year. Nothing particular to focus on there, Christian.
Thank you.
Thank you. As a reminder, please press star one and one if you wish to ask a question. We will now take the next question from the line of Andy Douglas from Jefferies. Please go ahead.
Morning, Julian. Christian's taken sort of my thunder, but just two quick ones. In terms of the pricing that you talked about in commercial aerospace in Flex-Tek, you said that there's three contracts done, one that's to be done. Is that all of the contracts that are being renegotiated, or do we have more to come through in 2027 and beyond? I appreciate that you'll be doing them on a regular basis, but do we have a big uplift again in 2027, or is it just this year?
Thanks, Andy. No, you shouldn't expect to see a significant pickup through next year. We do have many contracts in this business, but it was distinct that we had these four major contracts renewing through FY 2026. Maybe just a little more color, typically in our aerospace business, these contracts are renegotiated every four to five years, and therefore it presents that opportunity to not only price the order book, but also to win and negotiate different positions in the ship set. It's generally been a positive experience for us as we've navigated this year.
Perfect. Then just a little bit on M&A, and apologies if I've missed this. How is DRC going now it's under the Smiths umbrella? What have you found either positive or negative? In terms of the pipeline, what's that M&A pipeline looking like? You've clearly got a very strong balance sheet, even though you're giving a ton of cash back to shareholders, there's still plenty of opportunities for M&A. Just what's the pipeline looking like, and what are you guys thinking on that front, please?
Yeah. Very pleased with DRC. Look, it's early days. We've owned the business for around a month now. It's got off to a good start and we're pleased with what we've found. Just to remind you, the business has a very nice position supporting gensets or providing the cooling system for gensets for data centers, and clearly that's a robust market. We're seeing lots of opportunity. I think the key thing that we will bring here is the opportunity to drive operational performance and unit output through some investment and also some focus on flow and improvement in the operations there. That should see strong potential for us to build and grow that business strongly as we move forward. We're pleased with that.
On the pipeline, I think we've been relatively consistent here to say that we see bolt-on M&A as an important part of our strategy. We expect that to continue as we move forward. We do have a nice, robust pipeline across John Crane and Flex-Tek. We do see opportunity there. Just to say, of course, we'll always be very careful about where we allocate capital, the areas where we invest, and the price that we pay to deliver good returns. We hope that that continues as we move forward.
Perfect. Thank you very much.
Thank you. We will now take the next question from the line of Bhawin Thakker from Bloomberg Intelligence. Please go ahead.
Hi. Good morning. Thank you for taking my question. I just have one on John Crane, where you said there is GBP 10 million worth of impact on your 3Q sales. Could you please share what you are assuming for 4Q? Is it a bit higher than 3Q or at the same level as 3Q?
Bhawin, thanks for your question. We've said that we expect the Q4 impact to be similar to that of Q3, so around GBP 10 million. Obviously, we can't anticipate an end to the conflict, and we all hope that that happens. For now, we're assuming that that continues through Q4. Maybe worth taking the opportunity to note that at the point in which the conflict ends, it will take some time for recovery to come through. Clearly, we'll be supporting customers strongly as they require certain work from John Crane to help build back and reopen facilities, but it will take time. This is not an easy and quick fix for us. As you think that through, just bear that in mind.
I will just take the opportunity to note, of course, that the longer-term benefits coming from the crisis, and I think particularly the world's renewed focus on energy security and a requirement for facilities to build resilience into their operations, does present an opportunity for John Crane, particularly given the strength and focus on our aftermarket, which ultimately we see as an opportunity or a positive benefit to the business going forward. I will reiterate, it will take time, and I don't think we should be expecting to see a sharp bounce back in anything as we look out
Thank you. Just one more if I can follow up with your acquisition of DRC. What is the growth rate that we can assume for this business going forward, given the genset makers are seeing double-digit momentum right now? Shall we expect something similar for DRC as well?
Yeah. We're not going to give a guide on the growth of the individual business right now. I hope you understand that. Look, I think your assumptions in terms of tracking us up against how genset providers are performing is a sensible one, and clearly that was a key driver of the decision to acquire this business.
Thank you.
Thank you. We will now take the next question from the line of Jonathan Hurn from Barclays. Please go ahead.
Hey, guys. Good morning. Just one question for me, just essentially following up on John Crane. I just wondered if you could just get a feel for John Crane in terms of the order book for 2027. How much of your John Crane order book is from the Middle East for delivery in 2027, please?
Thanks, Jonathan. Just to remind you, about 12% of John Crane is derived from the Middle East. We don't break down our order book regionally, nor do we give detailed growth rates. Please excuse us for that. What we have seen, and I think we've noted it, is that we saw a positive book-to-bill in Q3. Look, I think when you break it down, you're seeing variable factors running through the business at the moment, both to the positive and negative, and I think that's what we should expect as we look out. Clearly, a require for more resilience, we would expect to deliver opportunity for us as we look out into next year as operations and refineries and facilities around the world look to build out their capacity or take advantage of full capacity. We'll see some regional differences.
We've seen particular strength this year, particularly in Latin America and in North America. In APAC, a region which is very dependent on Middle East feedstock, there are some challenges there that may continue. I think at this stage, it's a little uncertain as to how Europe will respond, what energy security means for Europe. It's going to be quite a complicated story. Overall, I think we've clearly seen some order impacts, particularly in the Middle East so far, and I expect that will continue and present some challenge as we go into the first half. It's a pretty fluid situation, and we'll keep updating as we go.
Great. Thanks, Julian.
Thank you. We will now take the next question from the line of Emanuele Sartori from Kepler Cheuvreux. Please go ahead.
Hi. Good morning, Julian. Thanks for taking my question. I just have two, please. I'm sorry to touch on this again. On the Middle East impact again, just wondering if you expect this order disruption to be recovered somewhat in H1 next year, and also the amount that is going to be disrupted in Q4. Just trying to understand if it's lost or there's a bit of timing there as well. Also here as well, what portion of orders are impacted? It's mainly oil-related or also aftermarket. Then my second question is just touching on the central costs. If you can give a bit more color on the central cost run rate for 2026 or 2027, post-disposal, future metrics, and et cetera. Thank you.
Thanks, Emanuele. Yes. The impact on the Middle East, largely the order impact has been in the aftermarket. As I mentioned, we came into the Q3 with an opening order book, and delivering against that has been challenging. As I said before, we've had a drop in some of that book-to-bill order and delivery that you'd normally expect to see. That's been a factor. As we look out and we all wish for an end to the conflict, you shouldn't expect to see a sharp bounce back. You should expect to see us supporting our customers to our very great stability to help them get back online. In many cases, it really could take some time for them to come back online. We're obviously not providing any guidance today on next year, nor indeed the first half, second half split.
I don't expect to see this sharp bounce back that perhaps you might think could happen. In terms of central cost, this year was the year of transition. We've still had to carry quite a significant portion of the central cost to support all four of our businesses prior to their completion and separation. This year is a little bit mixed, but we've guided going forward that we expect to get our central costs down to around 1.7% of revenue, and we anticipate getting there pretty quickly as we enter into fiscal year 2027.
Perfect. Thank you.
Thank you. There are no further questions at this time. I would now like to turn the conference back to Julian Fagge for closing remarks.
Thank you very much. Thanks for your time this morning. Just to remind you, our full year fiscal year 2026 results will come out on the 22nd of September. As ever, the investor relations team here is available to discuss if you have further questions. Thank you very much.