Smiths Group's first half profits stumble and outlook remains mixed

18th Mar 2015 08:20

First-half profits at engineer Smiths Group stumbled on the hurdles of foreign currency and the lower oil price, but the company expects things to pick up in the second half.Underlying revenue, excluding forex effects, rose 1% to £1.4bn, though it was down 2% at the reported level, as growth from oil engineer John Crane, Smiths Medical and Flex-Tek outweighed continued declines at Smiths Detection and Smiths Interconnect.The ongoing tough trading conditions in Detection and particularly Interconnect led to a 60-basis-points fall in the operating margin, dragging down operating profit to £232m, 3% on an underlying and 5% on a reported basis.Underlying pre-tax profit fell 3% to £208m, with basic earnings per share down 3% to 38.5p and the dividend up 0.25p to 13p.Positives for the second half are that Flex-Tek should continue to perform well, Medical to continue its improvement but at a slower rate, and that performance is beginning to stabilise at Smiths Detection as a result of efficiency initiatives and restructuring, with recent wins strengthening the order book.There may be some initial benefits from a new cross-divisional programme launched to accelerate revenue growth through focus on four areas: sales and marketing excellence, quality improvement, China, and innovation.However, John Crane, at 32% of group revenues, is expected to see a "slight easing" in trading as upstream customers adjust spending to the lower oil price and defer some projects, while smaller Interconnect faces continued tough trading conditions and will be below last year.Furthermore, the growth rate at Smiths Medical is predicted to slow versus the strong first half performance.Overall, management said it expects the group to deliver an improved underlying performance in the second half.Broker Investec said, in aggregate, the results were close to its estimates but it was wary of the impact on John Crane going forward, from lower spending by oil and gas customers."John Crane met expectations in H1 and its upstream operations including onshore conventional extraction are already under pressure, which does not look likely to ease," analysts wrote. "A greater risk is that spending cuts will affect midstream volumes and pricing pressure will emerge across the board, as opex budgets are trimmed. We assume that this will be a factor depressing full year 2016 expected performance."Alongside the results, the company announced Rob White has been appointed as interim chief financial officer from 25 April, to replace Peter Turner until a permanent replacement is in post.