IMI H2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 28, 2025

There are 9 speakers on the call.

Operator

Good morning, everybody, and welcome to IMI's twenty twenty four preliminary results presentation. I am joined here as usual by Dan Shook, our CFO. And the first thing to say is that 2024 was another strong year for IMI, demonstrating the success of our growth strategy that we put in place five years ago. We delivered 4% organic sales growth and 10% organic adjusted operating profit growth. Adjusted operating margins were up another 100 basis points at 19.7%.

Operator

And given the confidence we have in the business, we are increasing our medium term margin target to 20% plus. Our return on invested capital remains strong, and we had another good year of cash generation with more to come. In fact, over the next three years, we expect to generate in excess of a billion pounds in free cash flow. We're also increasing the final dividend by 10%. And given our disciplined approach to capital allocation, we're also announcing a further £200,000,000 share buyback program.

Operator

Based on the current market conditions, we expect another year of strong financial and strategic progress in 2025. We expect full year adjusted basic EPS to be between a hundred and 29p and a hundred and 36p after the share buyback, representing mid single digit organic revenue growth and margins above 20%. Finally, a quick update on the cyber incident. I am pleased to confirm that IMI has returned to normal operations. We swiftly reacted to contain the threat, working alongside external cybersecurity experts to protect our business and further enhance our IT security.

Operator

Dan will provide further details later in the presentation. IMI is a global leader in fluid emotion control. We operate under a one IMI operating model targeted at delivering our financial framework. Since 2019, we have achieved this through disciplined execution, leveraging our world class engineering expertise, and applying our best practices in commercial excellence, market led innovation, and complexity reduction across our attractive growth markets. Our business is aligned to three enduring megatrends, automation, energy efficiency, and healthcare demand.

Operator

These underpin the delivery of sustainable, profitable growth. They also help us shape the future of fluid and motion control. So with that, I'm gonna hand over to Dan to talk through the results in more detail.

Speaker 1

Thanks, Roy, and good morning, everyone. I'm pleased to be able to take you through our 2024 results today. So as Roy mentioned, another really strong performance in 2024 as our growth strategy continues to deliver. Revenue increased 4% organically, adjusted operating profit was up 10% organically, and our adjusted operating margin was up another 100 basis points. Adjusted basic EPS was 5% higher than 2023 despite the FX and tax rate headwinds in the year.

Speaker 1

Cash conversion remains very strong, and I'm pleased to announce that we are increasing our final dividend by 10%, reflecting the continued confidence we have in the business. So firstly, some more detail around our revenue and profit performance. Revenue increased to billion, reflecting 4% organic growth, which was mostly offset by foreign exchange and the impact of recent disposals. Adjusted operating profit increased to GBP $436,000,000. Organic profits increased by 10%, which was somewhat offset by disposals and FX.

Speaker 1

And as most will know, we have made significant progress delivering sustainable improvements in our margin since launching our growth strategy in 2019. As already mentioned, margins improved to 19.7% in the year, five fifty basis points higher than the 14.2% delivered in 2019. We're very close to the 20% mark, and we do see scope for continued improvement coming from further growth in our attractive end markets, continued progress in aftermarket sales, our strong pricing power and the final benefits from our restructuring program, which I'll update you on shortly. All these factors should see us improving margins over and above 20% in future years. And as such, as Roy mentioned, we are revising upward our medium term margin target to 20% plus.

Speaker 1

So looking at the full income statement. As mentioned, we saw strong organic growth and revenue and operating profit in the year. The net interest charge was in line with expectations at £16,700,000 as our net debt position has reduced by £91,000,000 during the year. You will see on the slide restructuring costs of £48,000,000 in 2024. This was higher than the estimate we gave at the beginning of last year and reflects additional projects completed in the second half.

Speaker 1

This has enabled us to increase the final program benefits in 2025 to £10,000,000 versus the £7,000,000 communicated earlier. This completes the program, which has transformed the business by consolidating or selling 20 sites since 2019 and over 30 in the last ten years. By transferring manufacturing into our best facilities, we have delivered a step change in customer service and employee engagement, creating an even stronger platform for accelerated growth. We will continue to look for efficiency opportunities within our current business, but any future costs will be taken into our underlying results rather than as an adjusting item. You'll see this on our outlook slide coming up.

Speaker 1

As expected, our adjusted tax rate for the year increased to roughly 24%, reflecting The UK rate increase and impacts from new minimum tax legislation. We do expect the rate to increase to around twenty five twenty five. And finally, our adjusted basic EPS increased by 5% to 122.5p in the year. Now looking at the performance of the platforms and sectors, first thing to say is that the overall performance was very much in line with our expectations. Starting with automation.

Speaker 1

Automation delivered strong growth with revenue up 8% organically and margins up 140 basis points to 20.5%. Process automation had an outstanding year, delivering strong order intake as shown on the bottom of this slide. Orders were up 10% organically with an 11% increase in aftermarket. We once again benefited from investments in energy security and the continued success of our competitor upgrade strategy in the aftermarket. We saw particular strength in downstream oil and gas, marine and hydrogen during the year.

Speaker 1

Organic revenue was 15% higher than 2023 and twelve percent higher on an adjusted basis. Industrial Automation delivered a resilient performance despite the softer markets in Europe and The Americas. Organic revenue was 3% lower than the prior year and 6% lower on a statutory basis. Turning to Life Technology. As expected, organic revenue was 2% lower than the prior year.

Speaker 1

However, margins were up 30 basis points to 18.4, supported by £10,000,000 of restructuring benefits. Climate Control saw good demand for its energy saving products, with revenue up 5% on an organic basis. And whilst the slowdown in European construction did have some impact, the sector continues to perform due to the retrofit demand for products that improve energy efficiency in HVAC systems. As expected, Life Science and Fluid Control organic revenue was 10% lower than the prior year, reflecting the continued softness seen across the global life science device market. Long term fundamentals of this sector are strong and we remain excited about the opportunities for growth.

Speaker 1

And transport revenue was down 4% organically in the year, reflecting the anticipated reversal of our H1 growth performance due to the strong H2 comparator. We continue to see good underlying demand for our innovative solutions across the globe. So continuing to cash flow where we delivered further improvements during the year supported by our profit performance. We saw a $22,000,000 working capital outflow in the year with debtor and creditor increases in line with the top line growth. Inventory levels grew in the year, largely reflecting the investment to support the record process automation order book.

Speaker 1

Now we still hold higher stock levels in other sectors to support site transfers. But with the program completed, we will now begin to bring stock turns back up on those sectors. CapEx increased to GBP 92,000,000, with this increase being largely due to a one off purchase of land that will become the home of our new process automation facility in North America. We expect CapEx in 2025 to be at a similar level as we finish construction of this facility. The cost of the new facility will be effectively funded through the sale proceeds of our current property, which we will sell once fully vacated.

Speaker 1

And as most will know, we will continue the investment into our facilities to keep IMI's operations both efficient and high performing. You'll see on the slide that free cash flow increased again to £263,000,000 Our net debt has reduced to £548,000,000 at year end from GBP635 million at the start of 2024. Net debt to EBITDA reduced to 1x at the bottom of our target range. Now as we deliver on our growth strategy and achieve our financial framework targets, the result has been a step change in free cash flow generation. You can see our free cash flow has improved significantly from GBP 158,000,000 in 2022 to GBP $263,000,000 in 2024.

Speaker 1

We now see a clear pathway to delivering in excess of GBP 1,000,000,000 over the next three years. This will come from further growth, the normalization of working capital mentioned earlier and the end of our restructuring program. And you would have seen on the last slide, we had cash costs from restructuring of about GBP 40,000,000 in 2024. So given that strong free cash flow, this slide is a reminder of our disciplined approach to capital allocation. Our priority is delivering consistent, profitable organic growth.

Speaker 1

So we continue to invest both in our people and operations to help accelerate solutions to solve our customers' most complex engineering problems. We will also pursue bolt on acquisitions that enhance our position in attractive long term growth markets and that provide financial returns in line with our strict criteria. Since 2019, we have deployed over £400,000,000 in M and A, while at the same time increasing our fully burdened return on invested capital by 200 basis points from 11.4% to 13.4% last year. And last but certainly not least, we will continue to deliver returns to shareholders. Our progressive dividend is an important commitment we will maintain even while we invest in the business organically and inorganically.

Speaker 1

And when we see situations where we expect leverage to fall below our one to two times target range, we will look to return capital to shareholders, which is why we have announced a further million share buyback today, which with the dividend means we expect to return over million to shareholders this year. So final slide before I hand back to Roy, our group outlook. Based on current market conditions, we expect adjusted EPS to be between 129p and 136p in 2025. This guidance reflects continued organic growth in our automation platform from the record order book in process automation and the resiliency within industrial automation. The Life Technology platform is expected to be broadly flat in the full year, but down in the first half.

Speaker 1

This reflects continued growth in our Energy Efficient Products and Climate Control, no forecasted recovery in Life Science and Fluid Control and the strong first half comparator in Transport. We expect further margin progression in the year, leading to an adjusted operating margin in excess of 20% in 2025, supported by further growth and the final benefits from our restructuring program. Although the program has finished, we will continue to identify efficiency opportunities to drive improvements in our current business. Any one off costs for these activities will now be taken into underlying operating profit, and we estimate that will impact the 2025 results by between 1p and 2p of EPS. There are a few other moving parts in our guidance this year.

Speaker 1

As you can see in the bridge, we are expecting to see our interest charge to increase to about $18,000,000 as a result of the share buyback and some debt refinancing. We also see the tax rate increasing to around 25% and our weighted average number of shares reducing to around $251,000,000. As things stand today, we do not see any material FX impact on sales and profits. This all gets us to our 1.29p to 1.36p EPS range. And finally, Roy already mentioned the cyber incident.

Speaker 1

Through the incredible hard work from our operations and IT teams supported by the industry experts, we are very pleased that IMI is back to normal operations. As a result, the outlook EPS range fully reflects our current view of the limited impact of this incident on our underlying business. We will, however, recognize a one off exceptional charge in 2025 to cover IT systems recovery, upgraded IT infrastructure and advisory costs, which we estimate will be between £20,000,000 and £25,000,000 So with that, let me hand back to Roy to talk you through the strategy update. Thanks, everyone.

Operator

Thanks, Dan. It is clear that our growth strategy continues to deliver results. We are building on a track record of compounding profitable growth. And as you can see on this slide, adjusted EPS has grown at an 11% CAGR since 2019. IMI has been through a period of significant transformation in recent years.

Operator

And as you saw on the previous slide, we are building a track record of compounding EPS growth supported by the delivery of our financial framework. We have delivered average organic growth of 4.7% over the last three years, supported by our leading positions in attractive long term growth markets and our success in driving commercial excellence and market led innovation. Our growth hub culture and processes remain at the very heart of what we do, and I am pleased to report that our teams delivered another record year of growth hub orders in 2024. As Dan mentioned, our operating margin increased to 19.7% in 2024 and is now five fifty basis points higher than in 2019. This significant margin improvement reflects accretive growth, the completion of our multi year complexity reduction program, a strategic focus on the aftermarket, and our strong pricing power.

Operator

Supported by further growth in our markets, we now believe that our business can deliver adjusted operating margins of 20% plus. Cash conversion remains high at 92%, and we are committed to deploying this cash to enhance shareholder returns. IMI has been strengthened by six complementary value enhancing bolt on acquisitions since 2019, with our fully burdened return on invested capital increasing to 13.4%, significantly higher than our 12% underpin and our 9% weighted average cost of capital. I also wanted to spend some time sharing with you a few examples of how our strategy aligns to structural growth themes and is successfully driving sustainable, profitable growth. Firstly, we saw further strong growth in our solutions for the hydrogen value chain.

Operator

Orders have scaled rapidly from £7,000,000 in 2022 to over £60,000,000 in 2024. And I am pleased to report that our innovative Vivo Electrolyzer System is now well established in the market. Secondly, the rapid expansion and demand for data centers continues to present an exciting opportunity for climate control. As you all know, energy efficiency and temperature control are absolutely critical for data center performance, and our fluid and motion control solutions can play a key role here, particularly in direct liquid cooling systems. We delivered 7,000,000 pounds of data center orders in 2024 supported by our strong customer relationships right along the value chain and our dedicated sales resources.

Operator

Finally, whilst it is still an emerging market, we see a good opportunity to deploy our process automation expertise to support the development of small modular reactors. We are currently collaborating with the leading players in this space and see an opportunity to deliver between £3,000,000 and £20,000,000 of value per SMR. Targeted bolt on acquisitions are a key part of our growth strategy. We have completed six acquisitions over the last five years and will continue to pursue acquisitions that enhance our position in attractive long term growth markets and help us to compound profitable growth. We look for quality businesses that enhance our leadership position in fluid and motion control.

Operator

We like acquisitions with differentiated technology that is mission critical for our customers in core markets like automation, smart buildings, and life sciences. We then leverage our commercial, operational, and engineering excellence to create real synergies that deliver returns in line with our strict financial criteria. The acquisition of Heatmeiser in 2022 is a great example of this. And more recently, we completed the acquisition of TWTG, a leading sensor solutions provider for €25,000,000 in October. TWTG is a great example of the sort of business that we're looking for.

Operator

Their differentiated product portfolio greatly expanded our asset monitoring offering and presents a significant opportunity for us to accelerate aftermarket growth, particularly in process automation. Our people are key to the successful delivery of our strategy, and we empower them to grow our business. I'm therefore very proud to report that employee engagement remained very high in our annual survey with 79% of all employees seeing IMI as a great place to work. We also saw a significant reduction in health and safety incidents during 2024. We remain absolutely committed to an accident free workplace, and this is excellent progress.

Operator

We also launched exciting new talent programs in the year to help our people develop, grow, and continue to create significant value for our customers. So to summarize then, the key takeaways from today are, first, that our growth strategy continues to deliver strong results. And I am proud of our achievements in 2024 despite some mixed markets. Organic revenue grew 4%. The adjusted operating margin was up another hundred basis points, and our organic adjusted operating profit grew by 10%.

Operator

Second, reflecting our disciplined approach to capital allocation, the strong balance sheet, and our confidence in future performance, we are announcing a further £200,000,000 share buyback in addition to the 10% increase in the final dividend. Third and finally, we are targeting another year of strong financial and strategic progress in 2025. And based on current market conditions, we expect this year's full year adjusted EPS to be between a hundred and 29p and a hundred and 36p. Okay. So I'm gonna stop talking there, and I'm gonna hand over to the moderator for the q and a, please.

Speaker 2

Our first question comes from the line of Christian Hinderager of Goldman Sachs. Your line is open. Please go ahead.

Speaker 3

Good morning, Roy. Good morning, Dan. Thanks for the questions. I want to start with the process automation order book, fairly very strong growth. I think it accelerated, if I'm not wrong, into the fourth quarter from the third.

Speaker 3

I'm just curious as to the underpin that provides for 2025 and then maybe beyond and how do we think about the phasing of the order book?

Operator

Yes. Excellent. Thanks, Christian. Good morning, everybody. Again, I think the process automation order book, Christian, was up nearly £100,000,000 across last year.

Operator

So from the opening order book to the closing order book, it was up almost £100,000,000 The book to bill was 1.12. Clearly, that did include that marine order that we called out that, well, you know, will ship over several years, not just 2025. But, yeah, the order book's in really good shape, Christian, and that does underpin this year's growth. And we would expect, very good growth again from process automation this year.

Speaker 3

Thanks, Roy. Maybe secondly on life sciences, I guess two parts here. Curious as to whether there are any significant new platform launches that the customer set in the next two years where you might have secured new content? And then secondly, how do we think about the inventory dynamics? And you've I think been cautious in not calling for recovery, but just a little bit of color would be helpful.

Operator

Yes. I think Christian, we consistently don't call for recovery in this space. It's 7% of our business, the life science part. And, you know, it's it's many people have called a recovery and obviously, you know, fallen on their sword. Right?

Operator

We we definitely not gonna do that. We haven't caught a recovery in our outlook. On the platform side, we had a really good year, and we won several platforms for the future, both on analytical devices, but also on medical devices as well. So so, you know, we are building for the future. We're using this opportunity to to carry on making sure we're on future platforms.

Operator

But, yeah, we're not calling a recovery. I think, you know, what some people are seeing is more use of the reagents, which is great. That doesn't directly affect us. But, you know, obviously, we hope that more use of the reagents means eventually, you know, more reordering of the kit. Clearly, people bought a lot of the analytical kit during COVID.

Operator

They obviously bought a lot of ventilators as well during COVID. Plus, as you know, we consolidated some more sites last year and our customers in particular bought some stock ahead of that as well. So that's why we think for us, we're calling a pretty flat year for life sciences, Christian.

Speaker 1

Certainly, the engineer to engineer and scientist to scientist work behind the scenes, and Christian, you know this, is going at full pace. And the new devices that our customers are developing are very cool, getting more tests, more precision, faster. So absolutely, it's there. It's just very hard to call when the launch of those new devices will come out.

Speaker 3

Thank you both. And maybe just finally on climate control, could you add a bit of color? I'm surprised maybe by the strength in growth in the second half, given the weakness in particular in some of the resi space. Could you add some context around resi versus non resi dynamics?

Operator

Yes. I mean, it's a very, very strong second half as you've noted. I think it was 8% growth. I mean, well done to Jackie, Stefano and the team. Clearly, you know, the big market move actually was geographic.

Operator

It was the German market that was down in the first half, up in the second half. And that's more to do with more standards, more regulation around energy saving, Christian. And as you know, that's what really underpins that business is obviously its brilliant control capability around hitting the right indoor climate, but also the energy savings that we can get. And and the the regulation in Europe and the focus in Europe, and something like 90% of that business is European, is clearly on energy savings. So not so much of a diversification between commercial and residential for us.

Operator

Remember that at the moment, you know, the majority of that business is into refurbishment, obviously, you know, on energy savings. So it's more that that's that's caused, the increase as well as obviously the self help, the really great work as I said by Jackie and Stefano on our commercial excellence.

Speaker 3

Thanks very much.

Operator

Thank you, Christian.

Speaker 2

We have a question from Loosh Mahendra Raja of JPMorgan. Please go ahead.

Speaker 4

Good morning, guys. Thanks for taking my question. I've got a couple, I think. The the first is on industrial automation. Could you just update us on what the sixty day moving average orders have have been doing year on year or sequentially?

Speaker 4

That that'd be helpful. Secondly, on GrowthHub, you know, really good momentum there. Is that particularly good? Any of the sort of five divisions, or or or was a lot of that innovation sort of quite, quite quite broad spread? And then just on currently, on the margin target, how should we think about that 20% plus?

Speaker 4

Are you putting a cap on that or a top grade, some more details possible around how you think about that 20% plus margin target?

Operator

Yes. I'll start with one actually, Lush, because I think that's pretty key to everybody. I've said on several of these calls, I never ever wanted to cap the margins target. When we started

Speaker 5

this

Operator

program of sort of our one IMI operating system focused on commercial excellence, focused on market led innovation and complexity reduction, we were at 14% margins, I think it was 14.2% back in 2019. And obviously, we knew that we were going to completely reconfigure our manufacturing footprint, as Dan said in the presentation, we've done that. We've worked really hard. That's a difficult program, but we've done that 20 sites during the last five years, over 30 sites in the last ten years, obviously starting in process automation. And we've also proven our pricing power consistently year in, year out.

Operator

We've also improved the mix of the business in the aftermarket as well. It's a really good move in our overall margin profile. So we've done all of that. I never wanted to cap margins 20%. I think as we look to our five year plan, Dan, we said, okay, we are fully investing in this business, both in OpEx and in CapEx.

Operator

And by the way, we could get that 19.7% margin earlier. We actually increased investment in R and D percentage of sales at the same time. And we've obviously focused on growth hub, invested in the team, invested in innovation. And our primary focus is still growth and investment in growth. And I don't want to lose that.

Operator

But as we look to the five year plan, Lush, what became absolutely apparent is that over a reasonable period of time with reasonable growth in our markets, and I expect that will change, you know, between process automation and industrial automation. I expect that mix will change of growth over the five years. But as long as we get broadly supportive markets, as you know, we expect to deliver our financial framework in the medium term of 5% organic growth. Given that, we will drop through at more like 30% than 20%. And I'm sure that, you know, last year, you know, your math is pretty good.

Operator

Right? You've already done the math. That would mean that we'd be, at the end of the five years, closer to 22% margins than 20% margins. And, again, I'm not putting out a new margin target out there as such, but the sheer math says that, you know, we're gonna drop through better than 20%. You know, we feel good about pricing power.

Operator

We feel good about what we're doing in the aftermarket, and we feel really good about what we're doing in GrowthHub because that is margin accretive. Because as you know, what we're doing there with the innovation is solving acute customer problems, the problems that customers really care about. And that means that we add tremendous value for customers, and we capture good value ourselves as well. So if I just move into GrowthHub, actually, Dan, I'm gonna let you talk about the sixty day moving average because I'll just I'll just talk about the whole thing. But as I move into GrowthHub, it's just tremendous what's happening.

Operator

And I think Dan and I have just added another four or five projects. So we've probably got, I don't know, 14 or 15 projects now that are meaningful in that growth hub. Yes. It started in process automation. And I have to say, every time I meet the process automation team, they are they are absolutely one driving the projects we've got.

Operator

And you saw what's happened to our Vivo electrolyzer system, which is now really focused on that transport local transport network. You know, the orders went above 50,000,000 last year. I mean, it really is really is motoring. But, yeah, across across the rest of the sectors, we see really good projects now in Climate, and we're absolutely determined to drive up the percentage of sales from new products in Climate. A lot of that is obviously the connected products.

Operator

A lot of that is coming out of HeatMiser, which is really exciting. But not just HeatMiser on its own, HeatMiser in connection with our existing products, things like our thermostatic radiator valves, and building a more connected circuit within the residential space, which again, you know, will drive further growth. So that's a really good space. Life sciences as well has got some good new products coming through. And as I said, they're winning some future platforms.

Operator

And in transport, I don't wanna leave transport out of this, they've managed to produce a very, very competitive system valve that will go into several systems on the truck. And in fact, they've already won contracts that will build our dollars per truck for the future. Yep. So, yeah, in several spaces in industrial automation, they're working on more analytics within the valves, more more data driven solutions for customers, which are our small and medium sized OEMs. So, yeah, it's spreading across the board.

Operator

Clearly, it started in process automation, and they've done a really, really good job. But as Jackie's gone over as COO and is doing an excellent job of really spreading the best practices, our our market led innovation, our commercial excellence, and complexity reduction really driving it harder across the whole company. So, no, Lars, it's really spreading well. So with that, I'll stop there. And Dan?

Speaker 1

Yeah. So in terms of sixty day moving average, Lars, it is slightly negative in IA at the moment. Now it's a little bit hard because obviously it's been impacted by the cyber event when we were offline there for a little bit. So hard to really read into it. Having said that, the recovery in these last couple of weeks has been good.

Speaker 1

As you'd expect, the softness in IA is mostly in Europe, where we're still seeing growth in Asia, growth in The Americas. And actually, the coverage for the full year doesn't look too bad. And as you read in the results, we're calling that kind of slightly down. So we feel like we're covered. Nothing and again, it's a little bit hard until we get past the cyber event, but nothing in there that suggests anything either way in a big way.

Operator

Yes. IA slightly down in the first half, Dan. Slightly up for the year.

Speaker 1

Yes, exactly. Slightly up for the year. Exactly. Yes. Sorry.

Speaker 1

Thanks, Roy.

Operator

Does that answer your question? I was

Speaker 4

super helpful guys. Thanks very much.

Operator

Yes. Great. Thanks, Lars.

Speaker 4

Yes. Yes, really clear. Thank you.

Speaker 2

We have a question from Andrew Douglas of Jefferies. Please go ahead.

Speaker 6

Good morning, gents. Three questions for me, please, standard. First one is on the retrofit opportunity or progress you're making on the process automation. I can't remember you talking about it on the call. So I just want to make sure that that's continuing a pace and how we are thinking about that as we go into 2025, please.

Speaker 6

Do you want to do one at a time? Might be easier.

Operator

Yes. That's really helpful. Thank you. No, really good progress, Andy, on upgrade valves last year. Yeah.

Operator

And it actually accelerated. But I think in overall terms, we were about we're over 20% up on competitor upgrade valves, you know, so so really, really strong. I still think we're getting sort of four or five, competitor upgrades for every one that we're losing, Andy. So it's really, really good progress. And that will not only driving orders, it will obviously drive profitable sales.

Operator

As you know, Andy, roughly the margins on upgrades are about double what they are on new construction. But the real point is once you've got that installed base, then it's that parts annuity, our highest margin level, which you then get for years and years and years because

Speaker 7

Yeah.

Operator

These are only the critical operations. Right? And and because of that, we produce very high quality parts. Customers know that. And they will come back to us as the OEM and continue that parts annuity.

Operator

So really good progress from Jackie, Robbie and the whole process automation team on that.

Speaker 6

Perfect. You've announced a buyback which takes your debt to EBITDA up about half a turn. You still got loads of firepower for M and A. Just give me a feel for the M and A market that you guys are operating in. I know that one of your challenges is finding businesses that are sufficiently high quality for a sufficiently low multiple.

Speaker 6

Is that the ongoing challenge or is it lack of available quality businesses out there?

Operator

No. The pipeline is a fault. I mean, you know, we've reviewed the pipelines with the board this week. The pipelines are full. So I mean, no, there's plenty plenty of companies out there.

Operator

As you know, Andy, we tend to target, you know, well, preferably private companies, where we build the relationship and, you know, buy them outside of a process. Not always possible, but that's our favorite method. Yeah. You know, TWTG, we were tracking it for a long time. We knew we wanted a sensor company to really help accelerate aftermarket growth in process automation.

Operator

And I met again with the team just literally a few weeks ago. Fantastic team, so entrepreneurial, and and a great sense full band sensor. It's those sort of companies that we really think can accelerate the core business that, you know, will give us an even stronger position in fluid and motion control that we're after. Pipeline's good, but as you know, we're super disciplined on price. You know, one of our key measures is ROIC, fully burdened ROIC with everything written back into it.

Operator

Yep. And, yeah, we really like the way that's moved up, as Dan said in the presentation, more than 200 basis points. Clearly, you know, we've got an underpin that that we we put out there in our financial framework. And, you know, we don't really wanna go below that for very long. Right, Andy?

Operator

So so it's it's about discipline. And and you will know, you know, we walk away very often when the price goes too high for us to make good returns on an acquisition. So it's more about that than it is about the amount in the pipeline.

Speaker 6

Okay, cool. That's great. And then lastly, just on inventory and working capital normalization. It feels to me like you've got benefits of kind of lower restructuring, lower kind of buffer stock coming through. But also you've got continued growth in Process Automation, which will be higher than anyone else.

Speaker 6

That's kind of WIP intensive. So am I right in thinking that as we get to maybe slightly more slowing growth in Process Automation in 'twenty six, 'twenty seven, that's the next leg of growth in free cash flow as we go out. Not kind of looking two years, we won't go out this year because process will have another good year.

Operator

Yes. I'll just make a comment on that, Andy, because I obviously hope the process automation order growth doesn't doesn't slow. Right? And it's interesting because this year, we still see opportunity in conventional power, Andy, you know, I'd say particularly in Asia is strong. And then nuclear, you know, we see opportunity in nuclear

Speaker 5

as well.

Operator

So So I mean, let's see, right? Oil and gas is a very, very high level. And gas, we still think LNG is going to be strong and all that stuff. But you're right, there's a lot of moving parts geopolitically. Who knows how that's all going to pan out?

Operator

If growth does slow, then that

Speaker 1

Yes. So you do have to look at our stock levels in two buckets. The Process Automation business is absolutely much more around WIP for that order book. And as we said, 13% up, so that's supported. On the other side is maybe a little bit more traditional days of stock.

Speaker 1

And in those markets, as you say, as we've come off the restructuring program, we have held safety stocks to make sure we didn't let down customers as we were moving our production to our best facilities. So, yes, from that perspective, there's an opportunity to start bringing those back down and you can do all the sums in our with the data that we've got to say, yes, there's definitely some stock we can pull off. We'll start getting at that this year. I don't think it'll come all the way through in 2024, But there'll be an opportunity for us to support the 90% plus cash conversion and that will be that will form a part of it. And that will be in 2024 and I suspect we'll sorry, 2025 and I continue into 2026 as well.

Speaker 1

So yes, so that's an opportunity to continue to generate the very good free cash flow that we're producing now.

Speaker 6

That's perfect. Thank you very much, James.

Operator

We

Speaker 2

have a question from Stefan Klepp of HSBC. Please go ahead.

Speaker 7

Yeah. Hi, morning, gents. I hope you can hear me. Can we elaborate a little bit further from leverage buyback and cash generation? Because if I go through the math, it comes out that at the end of the year, despite buying back 200,000,000, you will be again at the lower end of your target corridor.

Speaker 7

Is there a chance that you could reload and buy back more shares through the year? What would be the criteria for that? And would we have to wait for the end of the fiscal year? Or could you just, after the completion of the program, just extend it? And let's go for that first probably.

Speaker 1

Do you want me to go? Yeah. Go on, Daniel. Come on, Stefan. Already?

Speaker 1

So no surprise. I mean,

Speaker 7

I'm very happy. I mean, I've wrote so much about it, but, yeah, go on. No.

Speaker 1

Look, you're yeah, no surprise your model is right. If we don't unlock any M and A, we'll probably be still somewhere around the bottom end of our one to two times leverage. Way too early to comment about what we might do if we get towards the back end of the year and that very good pipeline has not yielded anything kind of coming through. Certainly, our preference and again, it's why we maintain the dry powder even with $200,000,000 that we'd like to deploy that with a number another TWTG or Adaptus or Bar. I mean, we've unlocked some really good ones.

Speaker 1

And I think more and more those small private companies recognize it's a great place to put their legacy to fold them into IMI. So just in case there are any of them listening in today, we love you all and we'll keep talking with you. Yes. I think,

Operator

Stefan, if you think about it, what did you say down in the presentation that we had returned £700,000,000 to shareholders over the last five years. You think about this year, Stefan, so probably we'll do the 200,000,000 share buyback, and the dividend will probably be over 80,000,000. Right? So that's $280,000,000 in a year. You know, we're starting to to really crank up the cash return to shareholders.

Operator

But yes, we would love to build the company further exactly as Dan says. And as I said, the pipelines are good, right? We just need some to come our way at the right price.

Speaker 7

Okay. Understood. Yeah. Fair. And then on the margin plus, I mean, you explained it quite diligently.

Speaker 7

But I think in the in the past, you said as well you would always like to forego higher margins to invest more in in in higher growth levels. And since you have now changed the the wording here with 20% plus, is it more or less that you have become much more confident on the growth that IMI and the current setup can achieve? Is that how I should or we should understand it?

Operator

Yeah. I think that's definitely true. I'm certainly a lot more confident than I was five years ago because, you know, we're now much closer to customers. You know, we're now innovating much more strongly as you can see from the growth up numbers. And of course, we've got a much, much better factory footprint where we've moved a lot of our manufacturing into our best factories, you know, which have an incredible customer focused culture around customer service.

Operator

They obviously have a much more competitive cost base, and they really are superb operational outfits. So so, yeah, if you put all that together, I'm definitely much more confident, than I was back in 2019 in the growth of the company, and that's the most important thing. But on top of that, I was never trying to cap margins, Stephen, as I said on multiple calls, you know, and I know it was red like that, but I just always wanted to, you know, achieve or get very close to that 20% because, obviously, a lot of people didn't believe me when I talked about it back in 2019 that that's what IMI, you know, could do. Where we are now is much better levels of investment and, you know, record capital investment last year. We're going to have a similar level this year.

Operator

We've invested more in R and D, as you know, as a percentage of sales. So, you know, we really are ticking up. And then when we did our five year plans and reviewed all of that, actually, we can continue to invest fully in the business, which is what we'll do, and then we can still drop through on average about 30%, Stefan. And that's why the simple maths takes you to improve margins.

Speaker 7

Okay. Got it. Last one, again, process automation. And because it's so important, can we be a little bit more specific on what kind of order growth organic sales growth you're expecting? Because you must be sold out for 2025 for sure.

Speaker 7

And then what kind of momentum you're seeing in orders? I mean, you touched on that a little bit with saying energy there's an opportunity, but you said it's not oil and gas at peak and LNG. Can we comment on all these points, please?

Operator

Yeah. So we see very good momentum. So Q4 orders were up 7%, but in aftermarket, whereas you know, Stefan, we make 2.5 times the gross margins, They're actually up 18% in Q4. So we see good order momentum. We see good opportunities, as I referred to earlier, in conventional power, in nuclear power, and obviously in the aftermarket to continue the upgrade valve strategy, Stefan.

Operator

So, yeah, we would expect to sort of summarize that the order book at the end of this year will be higher again than the order book at the start of this year. So, you know, So that would indicate and I'm certainly not going to give any guidance on 2026 here today, but that would indicate that we feel pretty confident about what's happening in that business.

Speaker 7

Yeah. And LNG, maybe, how much does it represent in process automation, and where are we there? Are we only seeing those things trickling through, or are we mid in the investment cycle for LNG or at the end?

Operator

Yeah. So we'll be about middle, I would say. So typically, you know, we're sort of eighteen months, two years after FID depending on how fast the project goes, obviously. But but yeah. So I'd say we're sort of middle.

Operator

So that's why we very rarely get in the whole process automation. I I can't I can probably only remember a handful in years and years. I mean, I've been sort of involved in it since, what, 2013, something like that. So so, you know, a handful of of orders that have been canceled, Stefan, because, you know, even in some of the oil and gas recessions that we had, you know, tough ones during sort of 2014, something like that, people that start these projects, obviously, you know, they tend to continue. So we're we're about middle.

Operator

And, yeah, what we think is that The US will now obviously return to exporting LNG, and, you know, that that will be positive for us, obviously. So so, yeah, we feel good about where LNG is. It's about 10% of process automation altogether, something like that, Stefan.

Speaker 1

And certainly, the aftermarket on the LNG side has been very, very strong as you'd expect because all of the projects that we've contributed to over the course of the last ten years are running. So we're getting the aftermarket as well. I think as we said, when the change in The U. S. Happened, the priorities of projects shifted a little bit more to The Middle East and maybe Australia, maybe the priorities will shift back as well.

Speaker 1

So but yes, I'd agree, it's kind of in the middle of this. Yes. But every year, it just adds to the installed base, which gives us that aftermarket annuity.

Speaker 7

Yes. Wonderful. Can I tempt you to give us a comment on organic growth expectation, sales growth expectation for Process Automation?

Operator

Yes. Good point, Sebben. So it will be around high single digit is where we think Process Automation will be this year. So another convincing year of organic growth.

Speaker 7

Yes. Perfect. Super. Thank you so much.

Speaker 2

We have a question from Harry Phillips of Peel Hunt. Please go ahead.

Speaker 5

Good morning, everyone. Two, please. Just curious around with all the changes in the sort of manufacturing footprint and all the program you've undergone over the last few years and the growth in process against that backdrop. I mean, I should know the answer to this, but I don't. What is the is there any limitation in any part of the business process in particular where capacity might be an issue.

Speaker 5

Secondly, just on CapEx, obviously, you're saying 90% again this year, depreciation 70% should given the returns you're getting out of investments at the moment, do you think CapEx should sort of stay at that slightly elevated level just to prime the pump for future growth? And then just lastly, and Lush was asking the sixty day moving average. Now I got distracted, so I didn't hear the answer to that question. So if you could provide that again, that would be very helpful.

Operator

Yes, absolutely. So sixty day moving average, I'll just quickly do that one. Dan, I'm going to turn to you on CapEx obviously because I think you gave a good explanation in the presentation. Sixty day moving average is slightly down in industrial automation. I think some of the data has been slightly skewed by the cyber incident, Harry, obviously, over that sixty days, but it's slightly down.

Operator

The order book's slightly up, actually, in that. Yeah. And what we think is that, sales will be slightly down first half in industrial automation, but then slightly up for the full year. So so that's why we're not calling any big recovery in industrial markets. That's what we see from from from our own business, Harry.

Operator

So so that's industrial automation. I'll just quickly do process automation capacity. Wow. The execution in process automation under Jackie, Robbie, Giuseppe, and Kevin, absolutely fantastic, I have to say, and CD. I wasn't gonna get CD.

Operator

Really, I mean, you look at what they did in the fourth quarter, Harry. I'm sure you've already done the maths. But in terms of shipments, it really is a slick machine now in terms of the factories we've got. I would say that in terms of capacity, generally, we're only still running two shifts. There's still a third shift to go at.

Operator

And so, generally, we're we're pretty good on capacity. Plus, Jackie and Robbie have been carefully outsourcing non core processes to make sure we've got capacity for the core processes. So I'd say it's in pretty good shape. There's obviously, you know, some areas that we're increasing the capacity, and obviously, that's what the CapEx is partly for. But in general terms, they're ahead of the game in terms of the planning.

Operator

Yes. Dan. Yes. Fantastic.

Speaker 1

And then on CapEx, so yes, the fact the CapEx we're spending not only is improving our facilities and making them more efficient, we're also getting a very modern footprint as well. And as I said, conveniently as we've moved in The Americas, our process automation facility, the facility we're exiting has a lovely value that will enable us to cover the cash costs of that. So that just helps in the overall cash position. But yes, I think we do have a slightly higher CapEx run rate right now because of some of these bigger projects that we're running. But I would say, we will always be, I believe, as we go forward in this next period, spending a bit more than depreciation.

Speaker 1

I mean, we're up around 1.4, one point five right now because of those one offs. But I think consistently, we should be around 1.1 or 1.2 times depreciation because we're always going to be on the front foot taking older machinery out, replacing it with machines that will do multi access and will take five jobs and put it into one just to drive that efficiency, enable us to utilize the footprint more effectively, so we can continue to grow with the footprint we've got.

Speaker 5

Fantastic. That's excellent. Thank you.

Speaker 1

Thanks, Harry. Thanks, Harry.

Speaker 2

In the interest of time, our last question comes from the line of Mark Fielding of RBC. Please go ahead.

Speaker 8

Yes. Good morning. Thanks for fitting in my I'd love to say last question, but it's going to be questions, you know that, don't you? But the,

Speaker 4

firstly, could I could

Speaker 8

I have a follow on to the answers you were giving to Stefan earlier around, process automation? I'm just actually curious in terms of those order numbers you quoted for aftermarket versus o e in q four and then just, you know, if there's meaningful delivery timeline differences between stuff you take in aftermarket and o e or whether actually, you know, they're all sort of in in the same queue. And then tying that into, how do we think about the automation margin mix? Because as you flagged, you've got higher margins in, you know, in the aftermarket. And I think in the wider automation business, IA must have been a bit more aftermarket y in the last year or so that's been generally tougher.

Speaker 8

And at some point, do you get a headwind from mix at all versus you get good leverage on the fact that businesses are growing? I'm just trying to think about the little moving parts that could happen there. And I have got another quite specific accounting question, but I'll just maybe hold there and let you answer those bits.

Operator

Dan can take the accounting question. On aftermarket versus new construction in process automation, Mark, yeah, there's a big difference, right? Because obviously, on the new construction side, on the OE side, we're building valves, you know, which could be the size of this room, which are twelve to eighteen month projects, even slightly longer in nuclear, you know? So, obviously, they're big, complex. They require a lot of our testing, customer testing.

Operator

Obviously, they're going into critical operations. On the aftermarket side, the lead time tends to be more like two, three, four months, something like that. So it's quite a big difference in terms of shipping. In terms of automation mix, then lower margin is new construction process automation, obviously. And we've said that roughly the margins, the gross margins in the aftermarket are 2.5 times.

Operator

So if we did see a huge acceleration of new construction process automation, then that would be an adverse mix. Having said that, it would have to be a really huge acceleration really to knock that business now far below 20% margins mark. On the industrial automation side, yes, there is a mix change, if you like, a margin mix change, but it's much, much smaller. It's much closer new construction to aftermarket in IA than it is in Process Automation. So as you think back, Mark, and you've known this business almost as long as me, right?

Operator

So it's very, very infrequently that that really changes by more than a couple of hundred basis points the overall margin of Industrial Automation. And Dan, do you want to Mark, do you want to ask you a question on accountancy and Dan answer it?

Speaker 4

Yes. Just exactly. This is

Speaker 8

a very specific one. I'm afraid, you know, it was an incoming I received that, you know, is beyond my accounting knowledge that a commentary for someone out in the market about your inventory impairment provisions having gone from sort of 11% to 12% to since 2021 not having existed within your accounting. I think that's a misinterpretation, but I'd love Dan just to clarify that.

Speaker 1

Yes. Yes. Thanks. Thanks, Mark. And we're not sure where this is coming from.

Speaker 1

And just a general comment that if anybody has any insights about our accounting, please come and talk to us because we can clear it up. I think it refers to the note we have in our annual report. And yes, we did change the way in which we disclose some of the impairment in provisioning, a while back 2020 or 2019. But in no way has it changed the way in which we do our provisioning. In fact, the reason why we made that change is we actually tightened up our E and O provisioning policies, which means we're providing more quickly during the year and making sure we stay in front of it.

Speaker 1

The fact is, and it's on the page on the annual report, our provision as a percentage of the stock level has not changed. It was 11% to twelve percent five years ago. It's still 11% to 12%. And we continue to charge into our results. We provide for the excess and obsolete.

Speaker 1

And yes, we do. When you have a 10 foot bar stock and you make actuators from it and you're left with three inches at the end, you have to throw that away. And that's what the provision covers. And yes, indeed, if we make product that ultimately we don't sell, we have to put that away. We're not impairing as much because we're providing more quickly into the accounts.

Speaker 1

So, but again, happy to talk to anybody who has something specific there. But I don't I think someone's misinterpreting what's going on in our accounts. We absolutely have a fully provided stock level and it's pretty apparent. And since this might be the last question, let me just say and put it on the official record, since it's the February 28, happy birthday to my son, who turns 22 today. I just wanted to get that in the official record.

Operator

The only thing I would add to that, Mark, is obviously our cash flow is 92%, right? And we carefully watch profits to cash when we do our business reviews, right? We know ultimately it's about the cash generated. So and as Dan said, the provision as a percentage of inventories is the same as it was five years ago. Yes.

Operator

Very good.

Speaker 4

And I

Speaker 8

think that's Thank you. And happy birthday, Dan.

Operator

Very good. I think, moderator, that's the end of the question. So I'll probably just summarize by saying that, obviously, we're really proud of the record results. We're really pleased with the way the sort of one IMI operating system is working and as I said, how Jackie is driving those best practices across the group. We're really pleased with the cash generation.

Operator

And we're returning a lot of that, potentially more than $280,000,000 to shareholders this year. Thanks very much, everybody.

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Earnings Conference Call
IMI H2 2024
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