IMI plc (IMI) Earnings Call Transcript & Summary

Welcome to IMI's interim results. Your presenters today will be Roy Twite and Daniel Shook. I will now hand over to Roy Twite to begin.

Thank you, Rachel, and good morning, everybody, and thanks for taking the time to join us today for our first half results presentation. As usual, I'm joined by Dan Shook. I am pleased to report that our first half year result for 2020 demonstrates the strength of IMI's business model and its operating resilience in what are very testing times. The energy, the continuous improvement attitude and enormous commitment of our employees and partners has been simply fantastic. And I have no doubt that IMI will emerge a stronger business when we come through this crisis. Our profit improvement initiatives, including material cost reduction, value pricing and productivity improvements, along with our strategic reorganization projects and the temporary surge in ventilator demand, helped us to improve 2020 first half margins in all 3 divisions. Our reorganization into business units with commercial general managers is largely complete, which is enabling a much greater focus on delivering for our customers and managing the entire value stream. We continue to invest for the future, particularly with our growth accelerator initiative, which is building a culture of market-led innovation within IMI. Indeed, some of our early projects are now gaining traction and winning small but high-quality orders. Today, we are also announcing the reinstatement of our 2019 final dividend. Given the resilient results delivered by the group in the first half, our strong cash flow and the maintenance of our robust balance sheet, it is appropriate to take this step at this time. In addition, we announced the 2020 interim dividend, which sets our baseline dividend cover at 3x adjusted EPS. This will enable IMI to effectively deliver on its long-term growth ambitions through internal investment and strategic M&A. We are also returning to qualified guidance today, albeit with a wider target earnings range, reflective of the ongoing uncertainty. Based on current conditions and assuming no material changes in the second half as a result of coronavirus outbreaks, we would expect IMI's adjusted earnings per share to be between 65p and 70p for the full year. Our top priority has continued to be the health and safety of all of our employees. Of the 62 confirmed coronavirus cases across IMI, 47 of our employees have thankfully now fully recovered and 15 are on their road to recovery. We have also ramped up production to 10x our original output for our most complex ventilator valves, more of which later. This morning, our group-wide factory availability was over 97%, and strict observance of social distancing, enhanced safety measures and deep clean protocols look to be having the desired effect. And those measures will remain in place for as long as it's needed. So with that, I'm going to hand you over to Dan for the detail on the results.

Thank you, Roy, and good morning, everyone. I'm very pleased to be able to take you through the half year results today. You will see on this slide the detail of our results on both an adjusted and organic constant currency basis. Currency movements had a limited impact on the results in the first half. On an organic basis, revenue of GBP 867 million decreased 6%. And when including the impact of the PBM acquisitions -- acquisition, revenue fell by 5%. Adjusted operating profit of GBP 121 million was flat organically to the first half of 2019. When you adjust for PBM and foreign exchange, profit increased by 3%. Corporate costs of GBP 12 million were lower than 2019 due to both permanent structural reductions and short-term cost actions in light of the coronavirus crisis. The profit margin, at 14%, was higher than last year, reflecting the commitment displayed by all our employees across the group to manage through this unprecedented period. Moving to the detailed income statement. Our net interest expense has decreased by GBP 2 million as a result of the repayment of an expensive loan note in July last year. There is a small pension finance income in the period, which reflects the overall surplus position we currently enjoy. By maintaining the majority of our assets in investments that closely matched our liability movements, we remain in a very good position despite the volatile market environment. Our pension summary slide is included in the appendix. Restructuring costs, including impairment losses, totaled GBP 9.7 million in the first half, and I'll provide more detail in a few slides. The acquired intangibles charge of GBP 9.4 million reduced slightly versus prior year as lower Bimba charges are largely offset by our PBM acquisition last September. So moving to operating cash flow, you will see that our overall working capital movement was broadly similar to 2019 as reductions from the lower sales activity were offset by some selective inventory building to ensure our customer service remains robust during this uncertain period. Debtor and creditor movements were favorable in the period, and we are actively managing our position to minimize any impact from customer credit issues. Capital expenditure of GBP 21 million was lower than last year, reflecting the completion of the construction of the new Critical facility in Japan. We are committed to our capital program as there remain good opportunities within our existing businesses to deliver quick cash paybacks from improvement initiatives. Overall, adjusted operating cash flow was higher, largely reflecting the improved profitability in the first half. Regarding net cash flow, you will see that our cash outflow for adjusting activities increased GBP 24 million, reflecting the cash impact of the programs initiated last year to address our footprint and cost base. Net debt has decreased from the beginning of the year despite some adverse currency movements. The suspension of the final dividend for 2019 clearly supported this outcome. And as Roy already mentioned, we plan to now make that payment in the second half and reset our future dividends to provide a baseline earnings cover of 3x. Our key financial ratio, as at June 30, net debt-to-EBITDA, improved versus June 2019 to 1.2x, providing further evidence of the resilience of our operations. Had the 2019 final dividend been paid in the first half of the year, net debt-to-EBITDA would still have been lower at 1.4x. So before turning to the divisional performance, I want to give you an update on our rationalization plans. This slide provides an update on activities, and I've included the slide from the full year presentation in the appendix so you can see the changes. There are 2 primary changes. Firstly, because of travel restrictions brought on by coronavirus, we have decided to defer a planned business transfer within Precision until we are confident that the knowledge transfer activities critical to these moves can be properly executed. Second, as a result of the anticipated slowdown in some of Critical's energy markets, we have decided to accelerate a number of cost-reduction initiatives mostly related to streamlining processes and functions versus footprint shifts. These 2 changes now lead to an expected group charge for the year of GBP 50 million with benefits in 2020 increasing to GBP 30 million. Cash impact for the year remains at GBP 60 million and includes outflows for some of the 2019 charge. So getting into the detailed performance of each division. Starting with Precision, you will see that our sales segmentation has been formally updated to reflect the 3 business units of Motion Control, Fluid Technologies and Commercial Vehicle. A reconciliation to the former Industrial Automation segment is provided in the appendix. Revenue of GBP 430 million was 7% lower than 2019 with minimal impact from currency to the division. The sales reduction was down to reductions in Motion Control and Commercial Vehicle, both of which were expected and both of which were hit harder by the coronavirus outbreak. Partially offsetting this is growth in Fluid Technologies and, particularly, Life Science where the temporary surge of ventilator activity drove 82% growth in that vertical. I've included on the slide details on orders and sales within the ventilator space to help you gauge its impact. Overall, our expectation is for this temporary surge to contribute an incremental GBP 70 million of sales in 2020, drop-through should be about 40% and we have delivered roughly half of this in H1. Operating profit of GBP 73 million was only slightly lower than the first half of 2019 as the division's restructuring initiatives, cost containment actions and value pricing delivered significant benefits. Overall, margins improved to 17%. In terms of outlook for the division, given the current weakness in both the Motion Control and Commercial Vehicle business units and assuming no material changes in the second half as a result of coronavirus, we expect organic sales and profits in the full year to be roughly 10% lower than in 2019. So next up is Critical Engineering. You will notice that we've modified our order segmentation on the slide to give a bit more breakdown on the aftermarket and to combine our Refining and Petrochemical activities. Again, a reconciliation to the old breakdown is provided in the appendix. Order input at -- in the first half at GBP 330 million was 11% lower on an organic basis. Oil & Gas orders were up 56% and benefited from New Construction LNG orders, which totaled GBP 42 million in the period. Power orders were down 2% as softness in aftermarket offset New Construction growth due to a large, concentrated solar power order in the first quarter. Refining and Petrochemical was down 20% against the difficult prior year comparator. Marine orders were also lower in the first half after receiving a large blanket naval order last year. The order book at the end of June was GBP 546 million, reflecting an increase of 1% versus the same point last year. Margins in the order book are broadly flat versus the prior year despite the shift in mix back -- toward New Construction. Looking now at revenue. Critical delivered lower sales in the first half of 2020 as a result of an overall slowdown of global project deliveries and site access during the regional lockdowns. Revenue of GBP 293 million was 4% lower on an organic basis. And when including the benefit from currency in our PBM acquisition, flat on an adjusted basis when compared to 2019. Operating profit was GBP 35 million, which was 1% lower on an organic basis. And when including currency and PBM, 6% higher on an adjusted basis when compared to 2019. Margins at 12% were higher than the prior year, reflecting rationalization and other cost benefits, which more than offset the adverse impact from a higher mix of New Construction sales. This slide also gives you a view of the results of PBM. The business has performed well with initial integration activities progressing to plan and supporting early margin improvement. In terms of outlook, based on the existing order book phasing, and assuming no material changes in the second half as a result of coronavirus, the division expects organic revenues in the second half of 2020 to be 5% to 10% lower than the prior year period. Margins for the full year are expected to be broadly flat to 2019. So turning now to Hydronic. Revenue of GBP 144 million was 5% lower on an organic basis as the government lockdowns across Europe significantly affected sales in April and May. The impact was most felt within France, U.K. and Italy and was across our product range. The division took immediate action to contain costs in the quarter and limited the fall in operating profit to 6% on an organic basis versus the prior year. As a result, margins improved to 17.1% in the first half. Regarding outlook, based on current market conditions and assuming no material changes in the second half as a result of coronavirus, we expect second half organic revenue to be 5% to 10% lower versus the second half of 2019. Margins in the second half are expected to be broadly similar to the first half of this year. And now turning to the outlook for the group for 2020. Based on the current economic climate and, importantly, no material changes in the second half from coronavirus, we now expect full year 2020 adjusted earnings per share to be between 65p and 70p. Within this outlook is the benefit from the estimated GBP 70 million in one-off ventilator parts sales within Precision which, if you do the math, should contribute about 8p to EPS. And with that, let me hand back to Roy for an update on strategic initiatives.

Thank you, Dan. I wanted to give everybody a brief update on our strategic progress at this half year stage and, in particular, to reinforce that our margin ambitions remain absolutely in place. Despite disruption from coronavirus, our group-wide restructuring projects remain on track to deliver GBP 30 million of benefits to the bottom line this year and an additional GBP 32 million to the bottom line in future years. Our purpose, "Breakthrough Engineering for a Better World," is gaining traction both internally and externally. And in particular, the solution-driven sprint teams that hunt for industry problems and then create innovative solutions to those problems are resonating with both employees and with customers. Our already strong ESG credentials are receiving increasing focus as we look to further improve our diversity, create more products for a sustainable world and reduce our own carbon footprint. In terms of capital allocation, we will prioritize investment for growth from our improving cash flows and confirm a more prudent and sustainable dividend position for the future. And this next slide is a slightly updated version of the one that I presented back in February this year and details the bridge for each division to achieve its stated margin target. All 3 divisions are executing well on their productivity and material cost-reduction initiatives as well as advancing on value pricing, which is enabling us to win the inflation equation. Footprint and supply chain optimization programs are also progressing well. Precision has now consolidated 3 factories and assuming no severe disruption from a second wave of coronavirus, will continue its restructuring program in the second half by consolidating one of our U.K. factories into our well-established, best cost Czech operations. We have, however, now taken the decision to defer a planned business transfer within Precision because of the increased risks of the move from coronavirus. As previously communicated, this delay postpones a restructuring charge into 2021 but does not affect this year's forecast savings. Precision is still on track to deliver the promised GBP 20 million of additional restructuring savings this year, having delivered GBP 13 million in the first half. This is on top of the GBP 1 million savings achieved last year, leaving GBP 14 million more savings per year still to be delivered to hit our original GBP 35 million target. This restructuring program will also reduce complexity and accelerate the division's future growth. As previously stated, once Precision has completed this GBP 75 million restructuring program, it will be very well positioned to deliver the 20% margins at the top of the next cycle as opposed to 16.7% margins it produced at the top of the last cycle in 2018. In Critical, we have announced a further GBP 20 million restructuring charge today. And this investment will enable us to consolidate more activities, creating an even more competitive cost base in the division and helping us to deal with any reduced demand from the Oil & Gas sector in the short term. As I've said in May, we have delayed any strategic actions on the 20% to 30% of Critical's business that does not currently meet our margin target criteria for at least 6 months because of coronavirus. These are good quality, improving businesses, which are both profit and cash positive and we certainly will not be fire selling them. Previously, I said that we had a clear pathway to achieve the bottom of our 17% to 20% margin target in Critical. But with the extra GBP 20 million of rationalization charge announced today, I am confident that we will get towards the middle of that target range over the next few years in Critical. The restructuring plan for Hydronic remains unchanged with GBP 3 million of annual benefits expected from a rationalization charge of GBP 6 million in total. Our focus on solving customer problems is increasing every day, and here are a few examples from our recent activities. In Precision, one of our key first half initiative was to scale up production of one of our most technically demanding valves for use in the most sophisticated ventilators globally. Our valve has a tolerance of 1 micron. And to put that into perspective, a human hair has a width of 50 to 70 microns. This scale-up of very complex production is an incredible engineering achievement and will help save thousands of lives. Last year, IMI sold about GBP 23 million of ventilator valves. And this year, we expect to manufacture and sell around 4x that amount. In Critical, one of our growth accelerator teams has been able to radically improve the performance of highly specified valves in the installed base by using the applications engineering skills of the Valve Doctors along with the additive manufacturing technology. Orders to date are already close to GBP 1 million, and we expect to deliver over GBP 2 million of orders this year. And in Hydronic, our applications engineers worked with a food processing customer in Russia to develop a system that provides much lower cooling temperatures and, therefore, far safer food storage. Additionally, the team identified a customer problem that could be solved by the automation expertise within Precision, facilitating a significant cross-selling success. In terms of capital allocation, building balance sheet flexibility remains our priority. We will build that flexibility through the continued focus on margin expansion and free cash flow improvements. Capital will continue to be invested in projects with a cash payback of less than 3 years to strengthen the business for the long term. This year, we expect capital investment to be around GBP 50 million. And we will, of course, continue to pursue strategically and financially attractive acquisitions that can, at the very least, return their cost of capital by year 3. And as I've said earlier, we will reset the interim dividend, which sets our baseline dividend cover at 3x adjusted EPS. So to wrap up, IMI has demonstrated excellent operational resilience in the first half in very demanding circumstances, thanks to the enormous commitment of our employees. Our profit improvement initiatives and strategic reorganization projects helped protect margins at 14% despite the 6% fall in first half revenues. Our sustainable growth initiatives are gaining traction through our sprint teams. Our increasing confidence has led us to reinstate the 2019 final dividend, and we have reset baseline dividend cover going forward at 3x EPS. Our confidence has also enabled us to resume qualified guidance for 2020 at between 65p and 70p of adjusted EPS. So before I close, I would like to personally thank Massimo for 5 years of hard work to help improve Precision. I am delighted to be welcoming Beth to IMI. She has an excellent leadership track record and brings a wealth of experience. I believe that she will really embed and accelerate our market-led innovation to generate long-term profitable growth. With that, I'm going to hand the call back to our moderator, who will manage the Q&A session for us. Thank you, Rachel.

Our first question comes from Max Yates from Crédit Suisse.

Just the first question I wanted to ask on was Hydronic Engineering. And I guess when I look at this division, we're used to sort of typically seeing some H2 seasonality. We've also heard from other construction-related companies a much sort of better end to the quarter versus what was seen in April. So I just wanted to understand a little bit around kind of why that business shouldn't see better organic growth in the second half and also not see that normal seasonal H2 margin performance that we're used to. So that was my first question.

Great. Thanks, Max. Good to speak to you. Max, obviously, markets are still moving about. And Hydronic is a very, very short-cycle business, as you know. It's our shortest-cycle business and the most short-cycle business I've had -- ever had to manage. I have to say that we did see a big improvement in March as well. So just to give you the phasing, I think April was down 18% on sales, May was down about 20% and then March was actually very slightly up on last year.

June. It's June, Roy. I think you mean June.

In June, sorry. In June, yes. Thanks, Dan. So June was very close to June last year, slightly up. But June did have a couple more working days in it. So let's say that June was close to flat underlying on last year, so we did see the same thing, Max, which was very, very encouraging. Of course, there is still a lot of moving parts in there. And countries like France, with a big union environment that Dan referred to, and even the U.K. and Spain have been slower and clearly are susceptible to even local outbreaks of coronavirus. So I think we are being on the cautious side with our Hydronic outlook. But remember that Hydronic is very, very short cycle. It could turn out to be better. Also, please remember that we are going to deliver GBP 30 million of, what I call, belt tightening, temporary savings this year, which has been around us volunteering salary reduction. Actually, 80% of our whole leadership group volunteered salary reductions and obviously reduced travel, reduced marketing, all of those aspects. And we've already had about GBP 20 million of that GBP 30 million. So that particular cost saving was weighted towards the first half, and that's helped all the divisions, including Hydronic, Max. So we might be being a bit cautious, but it is short cycle. And in offering guidance, we'd certainly want it to be, let's say, on the cautious side before we let things run away in what is still a difficult environment, for sure.

No. I just wanted to make sure you also saw that improvement. Just -- and my follow-up question would just be on how to think about cost saving or cost for 2021. And I think there's kind of 3 things that you've mentioned. One is the temporary savings, one is the structural savings and then you've mentioned a couple of times kind of freeing up cash for investment. So I guess the 3 parts of that. When you look at the future year savings of GBP 32 million that you've got left, do you expect those to all come through in 2021? And then do you expect the temporary cost savings to fully reverse? And then could you give a little bit of sort of maybe quantification around when you talk about investment, is that kind of CapEx, is that R&D? And maybe just a little bit of magnitude on how we think about that element of costs going into next year.

Yes. So the GBP 32 million is obviously -- it's future years. It's certainly not next year. We're not going to get all of it next year. I mean as I've said, we've had to delay Precision -- a program in Precision from this year into next year, which means that we won't get savings, probably barely any savings from that program even next year, Max, because you can imagine complex projects take real time to plan and execute properly. You're then left with a period of double production and some duplicates. So it's certainly not. I mean that is future years. That's why it's called future years. We certainly will not get all of that next year. I probably think, if you put it all in around -- I mean Critical are moving very quickly. So probably 1/3 of that next year, something like that, would be reasonable at this point, again subject to no major spikes in coronavirus because we are moving, as you know, from high-cost manufacturing to best-cost manufacturing, and that means moving between countries and that's complex. So you can't manage that if the spikes and shutdowns and -- or any risk of that because you could end up not satisfying customers, and that is not acceptable to me. So I would say that's a good number. In terms of the GBP 30 million, the temporary, of course, we'll review that in the budget process later this year. Half of that is definitely temporary and definitely will come back in costs because it's salary reductions. And I don't expect people to continue with salary reductions in normal times, obviously. So things like that. Then the other half is things like marketing, it's travel, and we'll review that at the budget. We are moving our marketing budgets, as you would expect, to much more digital investment. And I see that continuing. We're building online configurators. We want to have the best digital customer service of any of our peers, and that's what we're going to invest in, Max. So we'll talk more about that as we've done our budgets and so on. Probably not all of it will come back. But certainly, the half of it will come back and a good percentage of the other half will be invested in digital. And then on CapEx, you're absolutely right. Going forward, there's still opportunities for efficiency improvements in IMI, for sure. And most of what we're talking about will go into things like capital investment in new products. Clearly, as the sprint teams look to solve customer problems and, as I've said, we're already getting small orders from that, particularly in Critical, but as that develops, we would absolutely not want to be constrained on capital investment to put behind those and absolutely scale up their growth.

And Roy, I think...

Okay. But there's no -- sorry, go on.

Sorry, Max. I think, Roy, on the belt tightening, we do get asked about coronavirus-related government furloughing schemes, which we've had very limited action in there. There's very little that needs to come out, Max, as a result of that.

Yes.

Sure. And I guess just on R&D, there's no -- yes, there's no firm R&D sort of ambition or R&D sales ambition, it's just more allowing the people where there is the opportunity to develop products and invest.

Yes, yes. No, no. I'm not going to put firm targets in place. I would hate to waste shareholder money and I would hate to underspend. So I think you probably know the process, Max. We've set up sprint teams. They go after customer problems. They get -- depending on the program, they get 12 or 6 weeks to then pitch to the exec. And then if they can pitch that they've validated the customer problem across normally hundreds of customers, if they can actually pitch a solution that the customers are initially saying yes, that's the solution to this problem and if they can pitch the value proposition to the customer and the business case and we think it's credible, then they get investment normally for another 3, 4, 5 months to be able to continue that project. And some of the projects are at very early stages, this is. But some of the projects look like they will absolutely deserve the capital investment, and I certainly wouldn't want to be constrained about that.

Our next question comes from Alasdair Leslie from Societe Generale.

So first question. I was just kind of interested in what you're seeing in Precision in the U.S. at the moment. We've seen a number of U.S. industrial distributors that have been sharing a tailing off in the recovery and demand in July. Obviously, it might reflect the issues they're having there in terms of reopening the states and around rising COVID cases. So just wondering what you're hearing currently, particularly maybe for the -- in the channels as well. And I was just wondering whether the U.S. was maybe -- the outlook there was a factor behind or perhaps weighing on your H2 expectations for Precision which, just looking at the full year guide relative to H1, sort of still seems quite conservative. So that's just my first question.

Yes, yes. Thanks, Alasdair. Yes. I mean I think U.S., the outlook is tougher. And whereas Hydronics, exactly as Max pointed out, it had a nice recovery in June. I think that if you look at -- well, if you look across the piece, first of all, of what we now call Motion Control, Motion Control was actually quite -- wasn't too bad at least in the first quarter, slowed quite sharply in the second quarter right across the world. But in the U.S., as you said, end of June, July was definitely slower, Alasdair. So yes, we have been fairly conservative in our outlook in terms of what we think's going to happen in the U.S. Hopefully, with PMIs recovering, as you know, in both Europe and America, we tend to follow PMIs in motion control and factory automation sort of 3 to 6 months later. But we haven't counted on that in the fourth quarter. So we think third quarter, as I've said, globally, will be slower. I think the second quarter, I want to say, was 16% down. Was it, Dan?

Yes.

And I think third quarter will be more like over 20% down in Motion Control; fourth quarter, maybe a bit better. But we're not thinking we're going to get any sort of V-shaped recovery or anything, Alasdair.

Okay. And then just sort of a follow-up question, sort of slightly longer term and it relates to the kind of European Green Deal. We're seeing leaks that suggest maybe the majority of that could focus on building renovation, hydrogen, EV charging infrastructure. You guys look pretty well set up for kind of building renovation via Hydronic. I was wondering if -- do you guys see any interesting opportunities in Critical or maybe other divisions as well. But for hydrogen production, processing, anything along that value chain and kind of the hydrogen economy, I suppose?

I think you must have been sitting in our Board meeting, Alasdair, because that's exactly what we see. We see, obviously, Hydronic being well placed now. The European Green Deal, we all know, will take time to build it through and all that stuff. But in terms of the long term, yes, we think Hydronic is well placed. Something like 40% of the energy is used in buildings in Europe and about 60% of that is used in heating and cooling, and we definitely see opportunity for Hydronic. On hydrogen, yes, we've got 2 sprint teams concentrated on hydrogen at the moment. I won't get into the sort of commercial details of it. But yes, for both -- interestingly, for Critical on the hydrogen production side, and then in Precision on the -- if it's used on transport, in particular trucks, obviously. But beyond that, if it -- in terms of the actual network that's set up to enable the sort of feeding of the trucks and everything, we've all -- we've actually already won a few small -- only small, Alasdair, but in that area in Precision as well. So yes, I think hydrogen, as it's invested in, if it becomes as big as it could be, then there's a few exciting opportunities for IMI in there. I absolutely agree. And it'd be lovely for Critical, on top of Marine and obviously LNG strength, but then to pick up a really sustainable energy source to really drive that business in the longer term. So yes, absolutely. [Technical Difficulty]

I do apologize. We have a question from Will Turner from Goldman Sachs.

Roy, I hope you can all hear me fine.

We can, Will. Sorry about that.

Yes. No problem. These things happen. We're also looking up at this thing. So my first question is on Critical Engineering. So one thing we saw in this quarter is that it feels like the aftermarket was slightly weak driven by the field services. Do you view that weakness as temporary so that in the second half, that -- could you see a kind of like pent-up demand or a rebound in that field services component of the Critical Engineering aftermarket? And then my second question is a bit more broad, and it's on your growth accelerator plans. When we look into 2021, our current expectations, we can expect a cyclical recovery in some of your end markets. But can you just go in a bit more detail about some of the -- maybe like 5-division initiatives that you have, which means that you can grow potentially above what the cyclical recovery would imply for some of your businesses?

Yes. Absolutely can do, William. So first of all, Critical aftermarket. Yes, field service was 25% down. So it was hit very hard in the second quarter. We actually will -- Jackie did a great job. We went out and talked to 80 customers. And we are not planning for a big catch-up. It could happen. But basically, the 80 customers we spoke to have either rescheduled the second quarter into the second half, half of them roughly said that. And then the other half said they were going to push the field service into next year. So we are not planning for a big catch-up. We're still planning second half field service to be down in terms of the outlook that we've given you. So that was field service. In terms of growth accelerator, yes, it's going to take -- obviously, it takes time to build a proper culture of market-led innovation and these teams to really make a material impact on IMI will take time. If you talk to any CEO that's managed to do this, then it takes a few years to get this to be a material thing. But without it, it's very hard to generate proper long term, sustainable, profitable growth. And that's the mission we're on. In the shorter term, Critical -- and again, I don't want to give away commercial secrets, but Critical has some very clever technology. But going after in the installed base, as I said in the presentation, this year, that will be a couple of million of orders at very nice margins, obviously. And what we're seeing from customers initially is that it's definitely a valid -- value proposition. In other words, it can takes valves in the field that are creating noise or vibration. And it can, because of the way that the technology works, change the insides of those valves with a lot of clever engineering from the Valve Doctor, to a much better solution. So it controls the pressure drops, huge pressure drops in a much better way, therefore prevents cavitation, noise and improves obviously the reliability and efficiency. So that -- there's a project that could scale up. And again, it's early, very early days, right? On a -- potentially, on a larger scale within Precision in Life Sciences, we are running a, what we call, friends in adversity campaign. So again, completely centered on solving customer problems, that's the whole point. Unless you're doing that, you're not really creating customer value. And what we've done is, obviously, we've helped a lot of OEMs with our scale-up in ventilator production, which has been hugely difficult, but we've done it. And as I said, we're now running at 10x last year's output. And so naturally, we're asking them about other problems in places like analytics and, obviously, testing for COVID. But not only COVID, testing for other things and how we can help them with those platforms as well. And we are seeing some traction there as well, Will. So I don't want to get too carried away. Yes, hopefully, there'll be some lovely cyclical demand next year. It's early days for this program. As you remember, we were very focused on lean and efficiency improvements. And we're still focused on continuous improvement, all those things. But we're going from a sort of internal approach to a very external customer-facing approach. And that's going to have some growing pains, I'm sure. But I'm absolutely convinced that for the sort for longer term, this is going to generate some real value. The early signs are really quite exciting. And I think the teamwork and the teams and the way that they're motivated to solve these customer problems -- I was in a pitch event yesterday in Hydronic. And I have to say, it was fantastic. Some of the ideas that they've got from interaction with over 300 customers really, really is actually quite inspiring. So I hope that answered your question. I know it won't help you, particularly, with your model, Will, but it'll give you a flavor of what we're going after in our long-term ambition for the business.

We now have a question from Robert Davies from Morgan Stanley.

The first one was just I think on the potential outlook on the ventilator-related product into 2021. You obviously mentioned that sort of continued contribution through the second half. I just wondered, in terms of the contracts you signed with customers around some of those products, do any of those spill into 2021? Are you expecting effectively a kind of reversal back to normalized levels come January '21? I just -- if you could add some more color in terms of what's going on there specifically to start.

Yes. Thanks, Robert. Yes. So obviously, we've only just reinstated guidance for this year, Robert. So we've been super careful. We know why so many people aren't giving guidance, markets are still very, very uncertain. We have, of course, talked to all of the OEM customers around ventilators, obviously. So what we're saying is that this year, we're going to sell -- well, let's put it this way, we have sold GBP 35 million extra in the first half. Clearly, most of that happened in Q2, clearly, because we had to ramp up, as you know. Really, we started getting inquiries from sort of end of February, beginning of March, as you can imagine. And then we really ramped up to build, actually, 18 extra pieces of Precision equipment. And it was really good. We used a consortium which involved all of our own factories in Precision helping to do that, but plus other external people that helped us, which was fantastic. But we did that, we ramped up. So most of those sales were in Q2. And we expect about GBP 35 million extra in the second half, as we've said, so GBP 70 million for the full year. And it's dropping through at about 40%, something like that, Robert. We did talk to all the OEMs about next year. Clearly, some of that demand has been with the special consortiums like the ones set up in the U.K. -- like the ones set up in the U.S. where Ford were heavily involved, and it was a really good team spirit, actually. But -- and so they clearly won't happen. I'm pretty sure they won't happen again next year. But just talking to the normal OEMs that we've obviously built much closer relationships now, you get a very mixed view, Robert. Some of them think we'll still be running. And some of those orders are for next year, obviously, already, and they want to book capacity now. So some of them think that with the second outbreaks, with the issues, unfortunately, that is now in South America or in Africa or in India that there's going to be more requirement. And some of them have gone as high as 1.5x normal, normal, which for us, as you know, was GBP 23 million last year, right? And some of them are saying, no, there's a bear case. And actually, once everybody's got ventilators, it might be even slightly lower next year, Robert. So even they can't call it at the moment, so I'm definitely not going to call it. But that's the range that you're talking about, which is why it's been good for us to expand those customer relationships and move into other areas because we know that, that will give us more sustainable growth than this temporary demand.

And then couple of other questions I had. One was just around your outlook. You mentioned within the Precision business, you're expecting -- I think it was Motion Control to go from 16% negative to 20% negative. Just within that, what are the customers actually saying that's driving that? And what are the regional disparities that you see when you're taking that more negative view for 3Q versus 2Q?

Yes. It's -- so Asia is actually doing well. I mean it's actually getting back to growth. So Asia is fine. It's more of U.S. and Europe. And I think what it is, Robert, is that some projects that were started in factory automation will just be completed in Q2. Whereas what we think is and when we talk to some customers and distributors, obviously, projects that haven't been started because a lot of this is CapEx and therefore, more discretionary, won't be going through Q2. So we've done a detailed buildup, and that's what it's led us to believe. And then, as I've said, Q4, probably slightly better, so then whereas Commercial Vehicle we think starts to get better from next quarter. Factory automation, we think it's probably only going to start to get better in the fourth quarter because it should, if it follows the history and we've redid the analysis in Precision. And historically, and it showed a 0.67 correlator between PMIs and a 3- to 6-month lag and Industrial Automation in our Motion Control. So as long as that hasn't broken, and I don't see any reason why it would, you would -- should start to see a bit of a better fourth quarter. And yes, I'm certainly not going to try and describe the shape of the recovery. I think I'll leave that to you guys. But that's why we got to where we got to, Robert.

Great. And then maybe just a final one. I think it was just around the outlook within Oil & Gas, the Refining and Petchem segment in particular, what are customers basically giving you in terms of feedback from that segment? You mentioned obviously some of the pushouts in refurbishments, some of it in the second half, some coming into 2020. But just in terms of the general overall thought process in terms of that spending. Obviously, oil price has been hugely volatile over the last sort of 12 months. And I just wondered, when you're having this conversation, where are they sort of flushing out in terms of the current spending expectations? Are they still in sort of hunkering down and waiting to see -- waiting for things to sort of stabilize? Are they starting to sort of show any more signs of spending? Or is it just sort of still wait-and-see? I'd be interested in what the customers themselves are saying.

Yes. As you said, I mean refining had a really difficult Q2, didn't it? There was just so much excess fuel around and running in our places to store it, right? So no, I think they're still hunkering down. That's the basic message we've got, and that's certainly how we built our forecast. I think whereas Marine orders will bounce back strongly in the second half. And I think Marine, for us, is a real growth story. I don't think that's the case in the foreseeable future for downstream and refining. And yes, we'll see when we update you in November. But I think we've certainly taken a fairly conservative view in that area because it has been so tough, and nobody is really going out and saying, come on, it's time to invest quite yet. LNG is a bit different, actually, Robert. LNG, some projects, particularly the Middle East projects, the Russian projects, they're going on. I was really pleased. We've got GBP 42 million of LNG orders already in the first half. I think we've only got GBP 37 million in the whole of last year. So I think LNG is a bit different, but refining is -- you're right to pick that as an area where people are exactly, as you said, hunkered down.

Question comes from Mark Davies Jones from Stifel.

Can I start with a fairly broad one? Lots of commentary around margin targets. And I guess for understandable reasons at the moment, it's less in terms of growth on the top line. But I'm interested in the reset of the dividend cover level on what you're saying about capital allocation. Is there anything you can say at this point about sort of the medium-term, normal state organic growth targets that you might have for the group? And clearly, whether you'd be looking to step up the acquisition contribution? I'm conscious of your -- some of your experience, Roy, in sort of mix of top line growth driven from organic and acquisitions there. And how do you see that might affect the cost.

Yes. Fantastic question. Absolutely. I think certainly, in this environment, we're not going to put any organic growth targets out. I mean as you know, the ambition is absolutely long-term profitable growth and to build IMI into that sort of business with more of the business in attractive markets. Part of that, obviously, will be through the sprint teams, through new products, new service. But part of it has to come through acquisition, we know that. PBM was a good early example of that. Clearly, acquisitions at the moment are really difficult. And this -- but as you come through this phase, as we all know, we hope there will be some really good opportunities, and we certainly want to be neither front of the queue for those. So yes, it will be a mixture of the 2. We are investing. We've got a lot of sprint teams running at the moment. So yes, over time, we want to build this into -- it's a nicely growing, profitable business which is fully invested. And part of the reason for the dividend change, obviously, is the uncertainty. I think it's a more prudent approach. But obviously, part of the reason is that we want more firepower to be able to make that transition over time, absolutely.

Great. Can I also ask you about the background from customers? Was that your view that a change was needed? Or did you want to spend more time with them in the yards? And if you happen to make the change there, what do you think will that approach be at Precision?

Oh, sorry. You broke up on the second part of that question. I thought you'd finish. So can you just repeat that for me?

Oh, sorry. Just in terms of what -- yes, just in terms of what might change and what could benefit in terms of a new set of eyes coming into Precision. Are there particular areas where we should look for things to change?

Yes. So I mean, obviously, first things first. I mean I do want to thank Massimo for his hard work over the 5 years. I think you probably know that I've had more than half my career, so pretty embarrassing guys, more than 17 years absolutely involved in Precision and obviously, always been on the outside of it as well for the rest of my career. And I've just got tremendous ambitions for that division. I think it's -- well, number one, it's people; number two, it's end markets. When you think about Industrial Automation and Motion Control, when you think we're that -- the growth prospects of that, even more post-COVID, right, when people, frankly, don't want humans in their supply chains anymore, they want to automate and get back reliability and certainty into their supply chains. But also, obviously, Life Sciences. As we talked about, hydrogen, the evolution of trucks as they have to completely transform into a more sustainable fuel source over the coming decade. There's so many opportunities and it's such a great business that I wanted to bring in somebody that would really lead on the market-led innovation and really energize those sprint teams. And I believe, obviously, firmly that I found somebody in Beth that will energize those teams, support them and absolutely help transform that division into a real growth engine for IMI that will outrun the markets consistently, outrun its peers consistently. So really, that's the thinking behind that.

We now have a question from Alexander Virgo from Bank of America.

I wanted to dig a little bit deeper into Precision. I think the 15-odd percent underlying margins, ex the ventilator business in H1, is a fantastic result given the headwinds that you saw and having to deal with. Given the second half implied organic decline is probably 2x what you've seen in H1, I'm just wondering what you think -- what levers you're pulling, what things you can do to defend those margins, that operating leverage in the second half. Because obviously, that's going to be pretty critical when we think about 2021 and things reversing next year, with any luck, of course.

Thanks, Alex. Yes. Good question. Yes. Obviously, as I said, Alex, we are aiming to complete another factory consolidation in the second half. And short of a material spike in that area in the U.K. or a material spike in the Czech Republic, obviously, we will be completing that program. And so we will continue. As you know, Precision when I came in had 34 factories, which we all believe is too many, too much complexity to really allow that business to grow. And really, reducing that complexity and reducing the supply chain complexity that goes with it will enable it to get on the front foot. So absolutely, there's more levers we can pull, Alex. We're also cracking on, as I said, with material cost reduction. I've got to say their supply chain team is first class and really now starting to make progress on supply consolidation and negotiation while improving the resilience of the supply chain at the same time and done a cracking job of -- when China was shut down, resourcing those parts to Germany, I absolutely marveled really about how well that supply chain team did. And clearly, there's more to come out of the cost base in terms of the supply chain. Clearly, as you know, we've made progress on value pricing, particularly in the aftermarket, in Precision, that long tail. And that was a huge opportunity. And in some cases, we were selling aftermarket parts for EUR 150. And these are special parts from valves that I was involved in the design on, which is an embarrassingly long time ago now, Alex. So we've obviously moved the pricing around the aftermarket. I've said publicly that pricing for the previous 4 years for the whole of IMI I think was at 0.7%. We're running at more than double that now really through proper value pricing, looking at the detailed charts, looking at the scatter diagrams, using data analytics and making sense of all decisions around things like special parts in the aftermarket. So yes, plenty more levers we can still pull if things turn out to be worse. And clearly, as you can see from the first half, we're absolutely determined to make sure that our margins are resilient even when demand comes off, Alex.

Okay. And then just a follow-up and apologies for laboring the point a little bit. But Precision organic in H2, if we're down 13%-odd, if we're down -- that implies obviously down 20%-odd down high single-digit or something like that, Q2, Q3, Q4. I'm just wondering, you mentioned you've spoken to customers in Critical. You always used to talk about being out and talking to your customers in Precision on a sort of 10-week basis as well. Can you give us a little bit of flavor of what's actually happening now, what you've seen in July, sort of exit rates, if you like? And just try and get a feel for where that 20% comes from in Q3?

Yes. Well, remember, Alex, that the first quarter was okay for Commercial Vehicles. And it was okay for Industrial Automation as well. Remember, it was Q2 when it really started to come off. So when we talk to customers, and again it's back to this point that some of them have had projects that they were completing, and now those projects are complete. And so we've taken a pretty conservative view and said, okay, are all those people going to restart new capital investment projects in Q3? And we don't think so. And the early weeks of July are pretty much bang in line with our outlooks for Precision. So that's really where it comes from is that -- and we haven't put in a big recovery in Q4, Alex, right? Because although the PMIs have lifted, we'd like to see that start to come through in the orders in Q4 before we start putting that into the outlook. So that could happen, but we can't count on it.