Smiths Group (LSE:SMIN) Q4 2026 Earnings Call

0:00 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.

0:45 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, crystallising £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 four vectors of accelerate, innovate, execute and compound, which I will explain more later.

1:38 We have also made good progress high grading our portfolio exiting lower growth and margin businesses in flex tech 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 US legacy asbestos liability to enhance cash flow and strengthen our balance sheet. Thank you for watching. Our results illustrate the underlying strength and resilience of our business, the quality of our technology, and the strength of our customer relationships.

2:37 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 21-23%. The positive addition of DRC and data centre 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 FlexTech 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.

3:31 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. 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 Flextech, excluding the Flextech general industrial businesses, as well as Detection and Interconnect, that have been classified as discontinued operations.

4:20 Total Group includes the performance of all businesses for the periods during which they were owned. Starting with headline performance. Smith's delivered organic revenue growth of 1.2% to 1.9 billion, a resilient performance in the context of the challenging backdrop in two of our largest markets. Smith's headline operating profit increased by 1.9% organically to £399 million. Headline operating margin was 20.6%, an increase of 20 basis points. This absorbed the impact of the disruption in the Middle East, tariffs, lower volumes and continued investment in growth.

5:09 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 Flextech. Smith's headline EPS increased by 6% to 86.8 pence, Total Group Headline EPS increased by 12% to 135.7 pence, with growth in underlying earnings enhanced by the share buyback programme. Smith's operating cash conversion was 96%, reflecting the strong cash flow characteristics of the company, and the board is recommending a final dividend of 33.5 pence, taking the full year dividend to 48.5 pence, an increase of 5.4%.

6:07 Returning 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 £20 million effect in John Crane from the conflict in the Middle East. FlexTech Aerospace achieved an excellent performance, but the challenging US residential construction market and customer destocking and project phasing in thermal solutions had a negative effect on performance. Thank you for watching. Headline operating profit increased to £399 million and margin expanded 20 basis points to 20.6% organically.

7:09 Good progress towards our 21-23% medium-term target range. Pricing initiatives, particularly in John Crane and FlexTech aerospace, were positive, as were the benefits from the acceleration plan, including a £5 million reduction in central costs, as well as Smith's excellent 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 programme. Thank you very much.

8:24 Operating cash flow for Smiths was £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.

9:13 I will now turn to the performance of our two businesses, beginning with John Crane. John Crane grew revenue 2.3% with the conflict in the Middle East impacting second half performance by £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 US 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.

10:03 Headline operating profit increased 3.5% organically to £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 £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.

10:48 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 optimized opex. Working capital has also been affected as we maintain stock availability and experience 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 normalises 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.

11:41 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 on our leading technology capabilities and rival service network and deep customer intimacy place us ideally to win.

12:34 FlexTech revenue declined 0.4% in the year. Construction declined 3.6% against the backdrop of a weak US 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 four at 2.9%, supported by new custom winds, particularly in flexible ducting and multifamily projects. Thermal solutions declined by 6.2%, largely due to the destocking of residential heat kits experienced in the first half and the completion of an ultra-high temperature project.

13:20 In April, we acquired DRC, which adds cooling and heat removal technologies with exposure to fast-growing data centres and power generation markets. As a result, Thermal Solutions now represents around a third of FlexTech 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 higher growth adjacencies.

14:06 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. Thank you very much. We also invested in our commercial and strategic growth initiatives.

14:52 We acquired DRC for £165 million, consistent with our strategy of building into higher growth adjacencies. In a further move to high-grade the portfolio, we agreed sales for three non-core FlexTech industrial businesses for £40 million, and with these changes, FlexTech 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 two major pension transactions completed during the year and today we announced that our US John Crane business will begin a marketing process for the divestiture of its legacy asbestos liability.

15:41 Thank you very much. We completed the previously announced £500 million buyback and in line with the commitment to return a large portion of sales proceeds we have now completed the £1 billion Smiths Interconnect buyback with a further £1.5 billion related to Smiths detection still to execute.

16:28 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.

17:14 In FlexTech, we assume a continuation of the subdued US 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, FlexJet 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.

18:01 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 modelling. We are confident in achieving our medium term targets. Thank you very much. Give us strong conviction in more quickly delivering our 5-7% organic revenue growth over the medium term and underpin our 21-23% operating profit margin target. With that, I'll hand back to Roland.

18:51 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.

19:41 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 strengths 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.

20:34 Here too, demand is underpinned by customers' desire to have a single, integrated, customised solution, which our SureHeat, Watco and Farnham 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. Watco 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 US residential construction.

21:21 We see increased demand for housing over the medium term and our FlexTech 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.

22:30 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. FlexTech 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.

23:22 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 four 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 5-7% organic revenue growth target.

24:22 taking each in turn we are accelerating the pace of delivery of our strategic growth initiatives and increasing investment 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.

25:18 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 customised systems and integrated solutions, combining heat and cooling across a range of different end markets, including data centres. And in aerospace, we are targeting an increase in market share of ship set on key engine platforms and the strategic growth areas of India and MRO.

26:07 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 commercialisation ensuring that new product concepts are translated into tangible growth. Our five-year innovation roadmaps 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.

26:58 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 roadmaps 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. Smith's excellence provides a common approach to lean operations, enhance 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.

27:58 We continue to invest in modernising 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 FlexTech HVAC manufacturing processes to improve efficiency and enhance safety. During the year, the acceleration plan activities continued. These included site consolidation and footprint optimisation, ERP harmonisation and automation. We have delivered £20 million of annual plan benefits to date and remain on track for the £30 to £35 million of annualised 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.

28:52 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 organisation focused on delivering for our customers, supported by a lean centre. 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 FlexTech demonstrates this. Over the past years, we have invested around £700 million of capital into eight acquisitions.

29:39 Flextech has more than doubled in size over this timeframe, 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, FlexTech has a lower exposure to US 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.

30:32 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. Thank you very much. We identified an opportunity to enhance our strategic position by adding heat removal and cooling technologies to our heat solutions.

31:24 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.

31:40 In April 2026, Smith's acquired DRC Heat Transfer.

31:46 DRC was seeing a significant growth and so we were looking for a partner that could help us get there faster. Smith's came along at the perfect time. DRC stood out because it combines strong engineering expertise, a deep customer relationship and exposure to attractive fast-growing markets. It expands our capabilities from heating into cooling technology, complements our existing portfolio and strengthens our position in backup power generation for data centers.

32:14 In just the past few months, the advantages have already become clear.

32:18 As I talk more and more with the different divisions inside Smith's Group, I'm learning about different products that are inside the portfolio, and I'm seeing ways where we can leverage skill sets, product catalogs. Together, we can offer a more complete range of thermal management solutions while benefiting from long-term growth trends. It is a natural fit for Smith's. With their expertise and their willingness to invest, DRC will be the leader in the industry. It is still early days but in four months of ownership it has performed ahead of expectations contributing £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.

33:15 We're investing in people, process and capacity infrastructure to support this growth opportunity, which we expect to be a meaningful additive to Smith's 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.

34:02 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 3 billion pounds of value. We continue to be focused on creating value today and into the future. Thank you for listening. Julian and I will now be pleased to take your questions. and wait for your name to be announced. We will now take the first question.

34:49 One moment, please. And your first question today comes from the line of Christian Hinderaker from Goldman Sachs. Please go ahead.

35:02 Morning Roland, morning Julian. Thank you for the opportunity. 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 20 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. 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.

35:52 There's definitely no signs that it's getting better. We believe in H1, we'll continue to see those In H2, we anticipate that year-on-year improvement as we cycle over what happened in that 20 million. Also, we have seen a little bit of rebalancing of We saw that excellent growth in North America already because of what we've done with the organisation and responding to the customers. We believe 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 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 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

37:23 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.

37:39 Thank you, Roland. Maybe turning to FlexTech next. I'm curious how to think about the growth prospects for thermal solutions in fiscal 27, particularly when we consider the de-stock effect last year on heat kits in the distribution chain and also some of the project activity phasing. I guess DRC is contributing positively, but yeah, interested in the thoughts there. 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 there's been a lot of self-help, a lot of commercial activity. So we saw that and we've definitely seen that momentum continue in Thank you very much.

39:02 Just to pick on the question on thermal, it did return to growth in Q4, so we're pleased with that. Just to point at some of the factors that impacted last year's performance. First thing, we had this significant contract running through our sure heat business that on a year-on-year basis was a £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 heat kits. That had a £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 FlexTech 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 will increase that percentage even further. We do see that to an extent a kind of high grading of the FlexTech portfolio and pointing it towards area of faster growth, which should support the businesses as we look out in the medium term.

40:20 Thank you both. 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. Thank you. 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 have are in line with our typical levels of receivables, payables.

41:11 There's nothing different there, Christian, within the working capital mix.

41:18 Thank you. Thank you. Your next question today comes from the line of Martin Wilkie from Citi. Please go ahead.

41:32 Yeah, good morning. Thank you. It's Martin at Citi. I had a question on the announcement this morning about the asbestos liability. Just 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 fire management, the view was that sort of pay as you go was Thank you very much. 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.

42:21 The fact remains that John Craze 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 Thank you very much. We think the time's right and we thought it was helpful to announce this process that we'll launch in the coming days.

43:37 And to add to that, 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 buy-outs on the pensions. So this is a continuation and we've been preparing for this for several years and this is now... Thanks, that's really helpful. Just another question just on the uses of cash and obviously you've now integrated a DRC acquisition.

44:05 Anything changing in the backdrop in terms of how you're seeing Thank you. 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 markets. We always had an active, but Julian and myself are very involved in that process.

44:52 We will always be disciplined in our approach to any form of capital allocation. We're here to create value and that 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, 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 you know how we integrate how we support them on in areas where previously as a private company they haven't been able to be supported whether that's the smith's excellence system dealing with the capacity constraints whether that that's that's bringing their their safety to a higher level for for their for their employees whether that's helping with with their quality issues whether that's exposing them as Rob said in the video to other parts of the Smith 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

46:22 we're not going to try and just compete on price on those things thank you great thank you very much thank you thank you Our next question today comes from the line of Paul Fangman from Bank of America. Please go ahead.

46:44 Good morning. I hope you can hear me all right. Thank you for taking my questions too 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 20 million drag into the first half? And then to me, it sounded like you think about maybe a smaller impact going into H2. Appreciate it. Thank you to touch. Yeah, 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 saw across the second half of last year. I think that's reasonable.

47:30 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.

48:03 Perfect. Appreciate it. And then maybe just a second question. More general for the whole group, but happy to hear if you have more details 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, your customers to receive price increases from your end. Thank you. Yes, no, thank you for that. So as we know, Smith's is very strong on pricing. So from the two aspects of, you know, 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.

48:53 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 FlexTech Aerospace, slightly different dynamic because those are long-term contracts which you saw us negotiating and we continue to negotiate. So we saw... The thermal, because of the market dynamics, because of the growth, it's difficult not to price because we're getting positive growth 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 two pricing increases one on our metal products one on our flex tech Thank you much, appreciate it.

50:49 Thank you. As a reminder, if you wish to ask a question, please press star 1 and 1 on your telephone keypad. That is star 1 and 1 to ask a question. We will now go to our next question. And the next question today comes from the line of Jonathan Hearn from Barclays. Please go ahead.

51:12 Hey guys, good morning. 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 two 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? Thank you. 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 into approximately as a one times order book in John Crane so in spite of those headwinds we saw that as a positive. We had We were very pleased with that. In fact, a modest assessment of that would be two thirds of our aerospace revenues are covered going forward into this year, when we came into the year, I should say.

52:30 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 developing 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 order book makes sense to look at, it is characterised, as we said, that it came in relatively resiliently for us. Obviously there is book and burn that we need to achieve within the year as well.

53:20 From the point of view of tariffs, perhaps you... 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-free claims. I mean, it clearly is a fluid environment, but 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. 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 You saw our net margin increase to 26.1% and you saw our guidance around 21% so you can see that positive move there.

54:25 Much of that comes out of Thank you very much. So those are all the reasons why you've got the drop through to that around 21% going forward on that.

55:17 Great guys, thank you very much. Thank you. Thank you. As a reminder, if you wish to ask a question, please press star one and one on your telephone keypad. That is star one and one to ask a question. Just whilst we wait, once again, please press star 1 and 1 if you wish to ask a question. There are currently no further questions. I will now hand the call back for closing remarks. Thank you for joining us today. To summarise, 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%.

56:12 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 centres and global energy and also those positive portfolio developments in flex tech. 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.