16th Mar 2016 11:30
LONDON (Alliance News) - Smiths Group PLC on Wednesday said its pretax profit grew in the first half thanks to better operating margins, but its underlying results weakened amid continued pressure on its John Crane energy services business.
The diversified engineer, which will be demoted from the FTSE 100 next week, said pretax profit for the six months to the end of July was GBP168.0 million, up from GBP131.0 million a year earlier. On a headline basis, which strips out exceptional items, pretax profit fell to GBP189.0 million from GBP208.0 million.
Revenue fell to GBP1.37 billion from GBP1.42 billion, but the group's operating margin improved to 13.3% from 11.6%, primarily as a result of margin expansion in the units outside of John Crane.
John Crane, which provides engineering services to energy clients, saw revenue fall due to challenging oil and gas markets, though its aftermarket services sales remained relatively resilient. Aftermarket revenue fell 7.0%, while first-fit customer sales declined by 15%. The order book for John Crane also weakened, though not by the same rate as the first half sales decline, Smiths said.
Smiths Medical, the medical devices arm, was the main offset for the John Crane weakness, with revenue growing despite a strong comparator provided by the year before, driven by investments made in its infusion pumps business in previous years. Product launches also helped revenue rise in Smiths' Vital Care unit, which is within the Medical division.
The growth for Smiths Medical in parallel to the challenges faced by John Crane meant Smiths Medical became the group's biggest revenue component in the first half. Smiths Medical contributed 30% of group revenue, up from 29% a year earlier, while John Crane's contribution fell to 29% from 32%.
Margins for Smiths Medical also expanded in the half on the higher sales volumes and efficiency gains made in the business. Along with margin improvements at Smiths Detection, the performance of Smiths Medical helped offset the margin deterioration caused by John Crane for the wider group.
The Detection arm, which makes sensors which detect and identify explosives, chemical agents and narcotics, also grew its contribution to group revenue, up to 14% from 13%. The division benefited from an encouraging performance in its Ports & Borders segment, amid heightened security following the terrorist attack in Paris late last year, plus encouraging signs for military sales.
Smiths Interconnect, which makes connection components for wireless, defence and aerospace industries, saw a slight decline in revenue in the half, though margins improved through cost controls and management actions, while Flex-Tek, which makes components for heating and moving fluids for a range of industries, covering aerospace to domestic appliances, saw weaker revenue and margins due to pricing competition and a less favourable revenue mix.
Smiths said it will pay an interim dividend of 13.25 pence per share, up from 13.00p a year earlier.
Andy Reynolds Smith, who took over as Smiths' chief executive in mid-2015, said results for the group will be slightly more weighted to the second half than normal, with energy markets to remain challenging and set to hit John Crane further, but with margin improvement anticipated once more for the Medical unit. Detection, however, will see its margin improvements moderate due to a shift in its revenue mix, he said.
Overall, Reynolds Smith said, Smiths' expectations for the full year remain unchanged. He said he will seek to increase research and development spending and "ensure that it is deployed in a more focused and commercial way", along with prioritising investments in "attractive growth markets".
Smiths shares were down 1.7% to 1,059.00p Wednesday.
By Sam Unsted; [email protected]; @SamUAtAlliance
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