IMI plc (IMI) Earnings Call Transcript & Summary

Well, great. Good morning, good afternoon, good evening, everybody, and a very warm welcome to this Capital Markets event for IMI. Very pleased to be presenting here today and hopefully demonstrating to you how we are accelerating our business performance. So next slide, I just want to introduce to you our executive team. And as you know, we've gone from 11 people that attend these meetings down to 7 to make it a much tighter decision-making unit so that we can move at pace. Today, you've obviously got myself, you got Dan, and then Jackie will be leading the presentations on behalf of the Critical division. And then later in the day, you're going to have both Beth and Phil come along and talk in more detail about, obviously, Precision and Hydronics. On top of that, you're going to have Liz, our HR Director -- our new HR Director, who's going to be talking some of the videos as well and explaining how we are resourcing for growth. Excellent. Next slide, please. So the agenda for today, we've got part 1 and part 2. And part 1 is me and Dan talking about how we're accelerating the business performance and about the key enabling strategies that are enabling us to do that. Part 2 today is Critical Engineering. And then in September, we're going to hold a second event and really focus on Precision and Hydronics. Next slide. So if we go back now to November 2019, not that long ago, or whatever it is, 18 months ago perhaps, we were talking about what our strategy was, as I obviously had become CEO for IMI. And really, these 6 points summarize what we said back then. And it was really about clarity on our key target markets, how we were going to win in each of those key target markets. It was a much strengthened emphasis on the customer and on being much more commercial as an organization. It was an introduction of the Growth Hub, and how that was going to transform our culture and create much more growth through innovation, really market-led innovation. The fourth point was about Precision and how we're going to take complexity out of that business, principally in the number of sites that we operate out of, and in the process of doing that, save about GBP 35 million a year in structural ongoing costs to improve the margins and the returns of that business. It was about putting under review 20% to 30% of Critical, which, of course, is still under review. Much improved performance from that segment of the business, but clearly not where we wanted to be in terms of those long-term returns. And of course, it was about setting margin targets. And really the point of that was more important internally actually than externally. It was about describing the sort of quality of business that we wanted to become, the level of differentiation that we wanted to create, and the amount of value that we want to add for customers but also capture our fair share of that value through our own business models. So it was quite an important strategy presentation back then. And clearly, we've moved at pace since that original presentation to develop the business, to improve the business and to take the culture forward. So the key enabling strategies, well, one of them was obviously the launch of our purpose, Breakthrough Engineering for a Better World. And that is really, really important. And ESG for us really is a way of life. We want -- as engineers, we want to do good in the world. And we find it easy to recruit top talent when that top talent really is engineering solutions for a more sustainable world, a safer world, a more productive world with meaningful work. And that's really what our engineers enjoy doing. And to be honest with you, quite a huge amount of discretionary effort into because that's exciting to think that we can actually create -- help create a better world. We also introduced our business model and our business model was about creating value for today through improved customer responsiveness, improved customer service and driving continuous improvement behind that much more rapidly. But it was also about creating value tomorrow by real market-led innovation, innovations that create a better world ultimately. Next slide. So absolutely fundamental to those enabling strategies is our Growth Hub. And our Growth Hub really is about solving industry problems, solving societal problems, certainly solving customer problems through our market-led innovation, through the sprint teams that I've talked about. And just about every update that we've had [indiscernible] IMS is obviously at the half year and now the full year results since I've become CEO. And to me, this is pivotal. You'll see a lot more about this, the Growth Hub, and how that works, how that's unlocking a very, very customer-focused culture and a lot of energy in IMI. And next slide really is an explanation of how that Growth Hub works. You can see at the top of the slide, we've got the IMI Growth Advisory Board. Obviously, I sit on that. The whole IMI execs sits on that, all 7 of us. But plus the 7 external members of that Board, all people that have scaled our businesses rapidly, often have used digital techniques to enable those businesses to scale much more rapidly than was previously possible. So that Growth Advisory Board sits over the top of the Growth Hub. Over the left-hand side of the slide, you can see that we've got 4 site teams now; again, right across IMI. We're going to talk about Critical today, but they're right across IMI and they are looking for future trends, future megatrends and scanning the markets for emerging opportunities. I'll just give you 1 example. Phil's teams are looking at the buildings of the future. How are buildings going to be much more sustainable? Obviously, buildings use about 40% of the world's energy and about 60% of that is used in HVAC, right, in heating, ventilation, air conditioning. And we think we can have a major role in making buildings more efficient and more sustainable. That's just 1 example. So Phase 1 then of the Growth Hub. This is where we put the teams together. And the teams really look at those future trends from the foresight teams and start to find acute customer problems. So we're not looking for problems -- all customer problems; we're looking for the ones that really keep the customers awake at night. They're acute customer problems that if we can solve those problems using our engineering capability, then we'll create tremendous value for those customers and that product or service will get pulled into the marketplace. If we find that acute customer problem, then the team will come to Gate 1, they'll pitch that acute customer problem, and if typically the division executive says, yes, let's go with that idea, it goes into Phase 2. A more substantial team typically is put around that problem, cross-functional teams. So it's got engineers on it, obviously commercial people, financial people, it's typically a very diverse team. We try and make them as diverse as possible because this is where the real innovation spark starts to happen because the team talks to typically 100 to 300 customers and really validates that it is a real acute customer problem, starts to generate the solution to that problem and build the value proposition. So they'll start to test things like what price is the customer prepared to pay to solve this particular problem? What are volumes likely to look like? And they start to create the value proposition. And by the end of Gate 2 as well, they start to have a very initial business case. At Gate 2 the team pitch again. And remember, each of this phase, typically the team is only getting funding for 3 to 6 months' worth of work. And at the end of that Gate 2, if they move into Phase 3, then the team will really start to make sure that there is significant customer commitment. So obviously we look for things like letters of intent. We look for real customer approval of this solution. And ultimately, by the end of Phase 3, the team has to collect at least 1 customer order. So it's not really about the customer order at that point, it's about testing the proposition. We validate the business case and in Phase 3 we prepare for scaling. And again, the teams that moved through Gate 3 that actually passed, they pitch again, but if they go into Gate 4, then it is all about scaling. And typically, the composition of the team will change then. It becomes more commercial, and we're really looking for products and services that we can scale up very, very rapidly. At any point throughout this, the team will kill the idea itself sometimes or the divisional exec or even the IMI exec will kill the idea if it's not really gaining traction as we go through this process. So it's all about pace. It's all about diverse teams coming up with ideas, new products. But what is sure is that the time they start to come through scaling that we've got a real product here and a real growth opportunity. And that moves me nicely on to the next slide. So this next slide is actually my favorite slide in the whole pack because this is a real representation of all the projects now that are coming through Growth Hub in IMI. So this isn't just Critical Engineering; this is Precision and the Hydronic as well and often cross-functional teams. But this does show the amount and gives you a sort of indication of some of the size of the opportunities that are now coming through the Growth Hub pipeline into Phase 4 and scaling up. And as you know, in Critical last year, we won GBP 6 million of business. And this is from teams that often only pitched in sort of April last year. And this year, we want to more than triple those orders from those teams to more like GBP 20 million. And Jackie is going to talk more about that later on. So yes, I'm very excited about the sort of opportunities, the sort of growth opportunities that are now in our pipeline, which will lead to future growth. Before we go to a coffee break, I did want to take the chance to just give you my highlights from what you're going to see from the IMI Critical Engineering team. Obviously, we've got Jackie leading that actually directly after the coffee break. So this was really my highlights on this slide, the 6 highlights. The first one is that it's an incredibly ambitious management team under Jackie, who are really working at an accelerated pace to deliver an improved business. The second point is obviously that the jewel in the crown within Critical is the aftermarket, that installed base and that lovely parts annuity that comes from that installed base. And in fact, our aftermarket business has grown at 5% CAGR over the last 3 years despite what's been happening with COVID. And obviously COVID did disrupt our field service business, as you know, last year. We've got 160,000 installed valves -- installed severe service valves in IMI. And the competition have got about 280,000 installed severe service valves, which obviously offers a good opportunity for future growth as we look to upgrade those valves using the tremendous skills of our Valve Doctors, the applications engineers that understand the full system and can upgrade valves to give customers a safer and more reliable and often a quieter solution that provides more productivity, more reliability to that process plant. The third point is the new construction headwinds are diminishing. So those big headwinds of new construction power, of new nuclear power business, obviously that's much, much smaller part of our mix now, and so the headwinds from that, the drag on growth is certainly diminishing. Point number 4 is there are some great growth opportunities, which Jackie is going to really bring to life, with his team in the marine, pharma and hydrogen markets, amongst other markets, for Critical Engineering, but we're going to focus on those 3 great growth opportunities today. The fifth point is the Growth Hub sprint teams are really increasing the pace of innovation. And obviously, the initial teams are in our core space in the aftermarket because that's where we know the market, we're learning quickly the new processes, but also because the returns are really strong, as you know. But now the Growth Hub teams are starting to move into the new market areas, marine, pharma, hydrogen and other areas where hydrogen can use its deep applications engineering skills, its deep, fluid engineering skills to really solve customer problems, solve industry problems and create huge value. And then the final point and my final highlight for the Critical team is, obviously, we are moving into a period of sustained margin expansion, both because the growth areas that we're going to highlight are at that higher margin, 20% type bottom line margins, but also because the aftermarket content is clearly increasing in the mix. And I think you all appreciate just what that does for the mix of the business, the quality of the business in terms of margins and ultimately, returns. Right. Well, I'm going to leave the rest to Jackie after the break, but you do now get a well-deserved 15-minute coffee break. Thank you. [Break]

Firstly, let me describe my team. We are very diversified group with many different skill sets and management experience across different industries and cultures. We are also a very good mix of the people who have worked many years at IMI and also some new additions that I can challenge our established way of thinking and working. Our structure includes 5 regional presidents, 2 in Europe and 1 each in Americas, Asia Pacific, and finally Middle East, Africa and India as 1 region. Together, this group has over 100 years of severe service process control experiences. The regional business are supported by 7 functional leaders with global responsibilities, including Sharon, who was recently appointed in a newly created Digital Director role. Today, you will hear from 4 of our regional presidents, and they will talk about specific growth initiatives that are enabling us to deliver value today and value tomorrow. So let us jump in talking about Critical Engineering. We are a business of around GBP 650 million revenues with a long heritage of providing highly specialized valve and control solutions that optimize the flow of steam, gas and liquids in some of the most severe and harshest operational environments. To give you an idea of our engineering expertise, we have valves that needed to operate it down as low as minus 250-degree C for cryogenic liquid hydrogen application and as high as 1,650 degrees C for steam connecting applications in the petrochemical market, the same thermal protection that was required by space shuttle to reenter the earth's atmosphere, control of operating pressure as openly as high as the internal pressure of jet engine. Given our history, we have extensive installed base of equipments around the globe, which generated 52% of our order intake in 2020. Our end market customers rely heavily on the integrity and superior performance of OEM products and therefore demand supply of parts and accessories directly from us. Our products are developed by a strong engineering group with the technology and abilities to innovate to meet the customer needs. We also have a team of specialist of Valve Doctors across the world to maintain and service our customer equipments and to solve customer problem regardless of whether they are in aftermarket or in new construction. The traditional market has been power, oil and gas and petrochemical. Our strategy is to diversify our end-of-market exposure alongside the transition that's occurring globally in energy markets. We have defined our pivot to including further investment in attractive and sustainable market, for example, marine, pharma and hydrogen sectors, where we already have positions today. Just to remind you, the outlook of this year is that we expect IMI Critical Engineering 2021 organic orders, revenues and the margins to be higher when we compare with 2020. In today's presentation, I will help you to understand the strong alignment that Critical Engineering has within IMI business model and highlight the specific examples of how we are delivering value today and value tomorrow. Our ability to provide [ value ] specialty solutions in severe service applications has made us a trusted partner with our customer. Many of them are looking to our expertise as they work to transition their business. We will explore this with examples of our product and business innovation. We will underline the importance of our market and demonstrate why does the market for new construction in some of our [indiscernible] market is challenged, the aftermarket business will, in our view, perform better than many forecasts. And indeed, some segments will increase through upgrade opportunities. This will allow sufficient time for us to complete our strategic pivot and deliver sustainable and profitable growth. For the future, we will describe our Growth Hub model and our approach to identify and solving acute customer problems that exist in our industry. We will also describe the newer sectors where we plan to invest that offer strong sustainable pathways to grow. So let's talk about strategic value of the aftermarket. To make the aftermarket a success, we need to satisfy customer requirements of the right solution on time with a specialist know-how to keep their plant running efficiently and safely. The installed base of Critical Engineering equipment has around 160,000 assets across more than 12,000 plants worldwide. We have recently invested heavily in the region to enhance our coverage and the responsiveness, maintaining a high level of customer intimacy. Customers often come to us for upgrade solutions on competitor valves to enhance their operational performance. It is our credibility and the local service capability that drives this. Our global capability are opening more and similar opportunities for us with the great collaborations between the region and engineering centers. We have trained and empowered our regional team to provide local support and build trust with key customers. These regional capabilities provide options when we consider future acquisitions. With all this, we believe we can not only protect but also increase our installed base by winning upgrade orders to offset any retirement of existing valves. We adapt our technology and the digital tools to support the customer, particularly in the COVID environment where access to sites has been challenging. The division of the market strategy will both ensure Critical Engineering, maximize the near-term opportunities and strengthen positions with customers supporting them in their own transition to new markets. I thought it was important for us to provide more details on compositions of our business and why we're confident our aftermarket will continue to expand in the next decades despite the challenge with some new construction segment. Before we move into the market segment, it is also important to remember that 360 basis point improvement to the margins has been already taken place over the last 3 years. Our aftermarket has grown around 5% annually from 2017 to 2020. This has been driven by better global coverage and especially with our focus on refinery and the petrochemical upgrades, growth in valves within gasified power stations and a significant increase in upgrade and life extensions in the nuclear market. Looking forward, we expect the aftermarket to grow to almost 2/3 of our business on an organic basis, driven by growing refinery, petrochemical and the nuclear segment. Our refining and petrochemical aftermarket has grown by over 50% in the last 3 years, driven by upgrade opportunities due to customer efficiency requirements and increasing legislation as well as our improved sales effectiveness and customer contact. We expect that growth will continue due to the key global macro trends, including electrification, EVS, advanced health demand and FMCG packaging. The nuclear aftermarket has grown by 60% over the last 3 years as large section of existing plants are expected to support zero-carbon energy future. As a result, we expect parts and upgrade to remain stable in this market. Regarding our Fossil Power market, we expect our installed base will continue to require aftermarket servicing and upgrade in emerging markets, which represented around 60% of our power installed bases. Outside emerging markets, gas power plants, which almost 2/3 of our power installed base globally, are expect to continue to operate as the key transition energy sources. In the Oil & Gas aftermarket, we expect a stable growth supported by a strong installed base of LNG anti-surge valves. Over the same period, new construction has declined. Although, bear in mind, the business was affected by COVID in 2020, we have seen the resurgence of LNG activities, which partly offset the reductions of our upstream oil and gas projects. The refining and petrochemical sector projects activity took a pause in 2020, especially in China, but has started to rebound. We believe the business will deliver an average annual growth rate of between 3% to 5% over the next 4 years. It is a combination of the cycle in the new construction project activity, underlying aftermarket growth and organic growth from new sectors including pharma, marine and hydrogen. Part of those growth may be supplemented by merger and acquisition targeted and diversified into the new segment. Now let's turn to looking at the value today. Before we dive into examples, let's pause to consider the importance of our innovation model and the Growth Hub. In Critical, we started with growth accelerated project in September 2018, where our teams had 3 months to find a customer problem, validate it and develop a potential solution. They then had to pitch to convince the leadership that it merited continuity into development. It led us to realize that if we were going to deliver the projects with the right growth mindset and pace, then we need to create an end-to-end process. This is what we now call the Growth Hub. As you all heard, this is now applied to across the entire IMI. What's key is a diversified team working at speed throughout the model, through diversity of the thoughts, background, skill set, gender, nationality is the key to unlock our group potential. There are 4 strategic benefits that come from adopting the Growth Hub model. First, we're able to defend and even extend our existing positions in the industry by innovating around our core. Second, we can take existing competencies and experience and seek to apply that to customer problems in new and adjacent market. Third, the Growth Accelerator methodology allows us to open our minds to think bigger and embrace disruptive technology and new ways of doing business, including the recognition of the roles of digital can play. Finally, when I and my existing capability may not be able, applicable consideration can be given to partnering or acquisition activities to bring enhanced capability and the customer sets into IMI. Growth Hub team and the processes will ensure Critical is always directing its expertise and resources towards the right and scalable opportunities as they emerge. Our early success has seen incremental orders of GBP 6 million in 2020 and expectation of a strong acceleration to GBP 20 million this year. So let's look at some examples to bring this to life. I will now hand over to Wayne Prokop, President of America Regions, to talk about success with our Retrofit3D solutions.

Yes. Thanks, Jackie. So Retrofit3D is a result of one of our Growth Hub projects that's currently in Phase 4. The current market for Retrofit3D solution consists of any customer experiencing issues with a control valve and customers having problems with obtaining replacement parts, primarily due to long lead times. At this point, our customers are primarily in the Oil & Gas and power markets. Power is a prime target for Retrofit3D as they don't require special qualifications for 3D printed parts and this market has the highest concentration of control valve issues. Many of these issues have been caused as a result of renewable energy sources. So renewable energy, primarily wind and solar, obviously have limited availability based on weather conditions. When renewable consumption is high, other power sources scale back to reduced loads and are required to cycle more frequently. This creates additional stresses and problems to plant operating equipment, especially control valves. These issues consist of erosion, cavitation, flashing, noise and vibration, which cause excessive and frequent maintenance to be performed. As a result, unplanned and longer outages are required, which obviously impact customer cost. Many customers are also facing obstacles with procuring replacement parts primarily due to the age of their valves. The Retrofit3D business is addressing the core issues of improved valve performance with an innovative solution that allows us to solve the customers' problems in weeks versus months or years. Retrofit3D lead times are approximately 4 weeks compared to 26 weeks for standard configured parts, resulting in a 22-week reduction. Our solution doesn't require replacement of a new valve and eliminates the need to remove or cut the valve body out of line. Subsequently, we've reduced the total cost of ownership, improved customer service by providing quotes within 24 hours and have delivered a fully engineered solution in 4 weeks. Our Valve Doctor and applications engineering expertise utilizing Retrofit3D technology provides a substantial competitive advantage. The Retrofit3D market for control valves is seen as a GBP 40 million opportunity with a very high conversion rate. We are also evaluating opportunities for growing these capabilities into other segments. Let's take a look at a video now about Retrofit3D. [Presentation]

Thank you, and I will now hand over to Tarak, President of our Middle East, Africa and India region.

Thanks, Wayne. As part of our growth of journey, the IMI Critical Engineering team engaged with more than 100 customers globally to understand their key problems. And based on detailed interactions, we found that erosion is a big unsolved problem in multiple industries. Customers face regular problems of leakage from valves, pipeline erosion and process instability due to typical erosion issues. They have to deal with unplanned maintenance and also sometimes forced plant shutdowns, ultimately resulting in losses. Based on customer feedback, we analyze that erosion in any system could be due to wet steam, flashing or particles present in process fluids. We focused in the first phase on erosion due to wet steam, predominantly in power plants across the world. We leveraged our more than 100 years of engineering and application expertise to review different applications which are prone to these problems in a plant, continuously took feedback from our customers and enhanced our solution. After 6 months of detailed application and design studies, identifying right materials for erosion resistance and establishing global capabilities to support our customers, we launched EroSolve, our solution for chronic erosion problems. The deep and broad expertise that IMI Critical Engineering brings with our knowledge of design, application, material science and manufacturing helped position EroSolve as a differentiated solution for our customers. Today, we have many customer references across the world, from India to the Americas, where the EroSolve solution has been installed successfully. These valve that were upgraded where our customers were facing immediate failures or leaks have been operating for several months without any erosion issues. Within first year of its commercialization, EroSolve won more than GBP 3.5 million orders from various customers. We used our Growth Hub approach throughout this process. Focused teams with very customer-centric mindset are created, and we applied various tools of test and learn, assumption busting, et cetera in each phase of this program. Now we are enhancing our EroSolve offering and extending it to other applications of flashing and particle erosion. This will help us to rapidly scale this brand in multiple industries over the next 12 months. The EroSolve market is seen as a GBP 50 million opportunity with a high conversion rate. Let's look at the EroSolve video. [Presentation]

Thank you, and I will hand back to Jackie.

Thanks, Tarak and Wayne. Our strategy to pivot the portfolio to more diversified markets were developed after some extensive research of the potential attractive and sustainable industries. Based on our competency and experience, there are several markets where we can play in a way. In this session, we will focus on just 3 examples: marine, pharmaceutical and hydrogen. Across these 3 sectors, there is a mixture of an established positions in marine and early platform in the pharmaceutical process industries via the 2019 acquisition of IMI PBM and the future potential that we're expecting to explore our expertise in the hydrogen space as a global energy system gradually transitions towards net zero. I will now hand over to Steve, President of our European Marine and the Nuclear business.

Thank you, Jackie. Naval marine for IMI mainly refers to submarines. To give some context to the critical nature of these products, an oft-used comparison is with a space shuttle. A space shuttle has 10,000 moving parts and houses 5 to 7 people. By comparison, a submarine consists of 10 million moving parts and houses upwards of 100 people whilst operating hundreds of meters under the sea for prolonged periods. Products in this sector need to function in the most demanding of conditions. And IMI has over 50 years' experience operating in this critical space serving across 37 navies globally and has accumulated over 3 million years of faultless service. The sector has doubled within IMI over the last 4 years, seeing growth from GBP 22 million in 2017 to a projected GBP 60 million in 2021, whilst naval marine sector globally with a served addressable market of GBP 800 million is forecasted to grow at greater than 5% per annum over the next decade. That growth is fueled by the threats emerging from non-NATO friendly nations which incentivizes NATO and her allies to invest in naval marine assets, and an underwater capability is a focal point for that investment due to the breadth and flexibility of the capability it provides. Currently, there are over 520 submarines globally with additions of 10 per annum expected going forward. Every one of those submarines includes in excess of 14 different valve technologies and in excess of 4,500 valves in total. When a government invests into a naval marine program, it makes a commitment to invest in that asset for a 35-year period. Following the new construction award, there is aftermarket support for the life of that asset that can be worth 6 to 7x the original new construction value over a 35-year period. So why do we win? Firstly, the deep understanding of design, application and qualification requirements provides a high barrier to entry. Second, governments and navies need partners that can support them sustainably for the next 35 years. Thirdly, the environment continues to evolve and maintaining a competitive edge through innovation is key. Our Growth Hub projects support us in this objective. And finally, governments need a lasting legacy as a result of the investment being made, which drives a localization requirement. For example, the U.K. government is investing GBP 32 billion in the Dreadnought program. IMI's global footprint positions us well to support this, with Australia and their SEA 1000 project being a current prominent example. So IMI is well positioned to support the projected growth in this and emerging adjacent markets such as unmanned underwater vehicles. And our ambition is to deliver GBP 50 million plus of additional revenue by 2030. I'll now hand back to Wayne Prokop to review the pharmaceutical market.

So critical valves in the pharmaceutical industry are typically much smaller than chemical and oil and gas valves and are subjected to less extreme conditions such as temperature, pressure and corrosion. However, criticality is driven largely by hygienic and aseptic requirements as well as reliability due to the high cost of failure, such as the complete loss of a process batch. Clean-in-place and steam-in-place valves are found across the manufacturing process due to the aseptic requirements in pharma. The large molecule segment requires the highest degree of criticality driven by the high share of aseptic batch transfer applications while the small molecule processes require high corrosion-resistant and temperature-controlled [ new ] reactor and batch transfer valves. We estimate the global market for critical valves and actuators in pharmaceutical applications is about GBP 400 million. Typically, critical valves in the aftermarket are procured individually, especially when they have specific parts of the valve, such as membranes of diaphragm valves that often need to be replaced frequently. Due to the high cost of failure, end users, whether big pharma or contract manufacturing organizations, rely on trusted suppliers for dependable products. This creates high barriers to entry as suppliers must invest in educational and sales campaigns to win over market competition, especially when valve suppliers have a limited track record to prove their reliability. This high cost of failure, combined with the technical complexity leads to strong customer loyalty in the aftermarket, which helps drive higher margins. OEMs and EPCs are the key purchasers of critical valves in new construction, with aftermarket typically served by the OEMs. Customers require vendors to be approved and offer local presence to facilitate technical support. The market is expected to grow at a high single-digit CAGR, driven by rising living standards, increased life expectancy and the demand for improved and personalized therapies. The latter results in smaller batch sizes and increased reliability demands when it comes to hygienic and aseptic requirements. We believe there are strong opportunities for growth for IMI, and our ambition is to achieve greater than GBP 75 million of additional revenue by 2030 from a combination of organic innovation and M&A. Now I'd like to turn over to Giuseppe, the President of Europe, Oil, Gas & Power, to talk about the hydrogen market.

Thanks, Wayne. Hydrogen market is a strong value stream for IMI tomorrow. Hydrogen is the simplest and most abundant element in the universe. It was raising a large amount of clean energy [indiscernible] polluting greenhouse emissions, just water. Moreover, hydrogen is also the most abundant element in our current business analysis and market prospects. And there is [indiscernible]. An exceptional momentum is gathering around decarbonization driven by government commitment and public concern around the climate change and the sustainability. The scale of required future industrial investment is estimated at $11 trillion. Over the near term, a sixfold increase in hydrogen investment is expected through 2025, which will become 20-fold through 2030. The European Union has already committed to reach a 40-gigawatt capacity for green hydrogen by 2030 while the current installed capacity is no more than 01 gigawatt. But Europe is not the only one. The U.S.A. is also setting ambitious targets on emissions. China will invest USD 5 billion until 2024 on fuel cell technology. Why do we win? IMI is a technical market leader in the hydrocarbon industry, where hydrogen has been one of the key element for more than a century. So we have to know how to handle hydrogen, which is highly inflammable, prone to dangerous leaks and poses several manufacturing challenges. We have mentioned the customer [indiscernible]. We have all the existing key client in the chemical market, including operator, licensor, and EPC, all of whom are making the transition to hydrogen. At the same time, we've the ability to support the [indiscernible]. We already have in our portfolio of products suitable for the hydrogen market. But what is more important is that we have the mindset on how to design, test, build and commission complete turnkey solution for electrolyzer, compression and storage, meeting worldwide industry standards and complex local regulation and acting as a process solution provider. So what are our key faster way to growth? We will leverage on our existing portfolio, scaling and streamlining our product to better fit into the hydrogen landscape. We will identify the best position in the hydrogen ecosystem to solve customer problems. The most [ remunerative ] opportunities were addressable by [indiscernible]. We will acquire specific technologies needed to provide a complete and proven customer solution. Our ambition is to achieve GBP 100 million-plus of additional revenue by 2030, contributing to build a better world, as we do. Thank you, and I will now hand back to Jackie.

So to summarize, our Growth Hub for innovation is now well established. We have over 20 teams working across the phases in the individual projects. We have established early momentum with GBP 6 million of orders in 2020 and expecting an acceleration to GBP 20 million by the end of this year. As we involve more and more of our colleagues in the Growth Hub activities, we further embed a strong culture of innovation and instill a sense of urgency to move our strategic agenda forward at pace. Within aftermarket, we will focus on getting closer to our existing customers as they transition to more sustainable markets. We believe that our marketing power, at least from an aftermarket perspective, are declining at a slower pace than many forecast, allowing space for the division to pivot and grow. However, we're not complacent, and we are moving quickly to identify opportunities for organic and inorganic growth in the market with more sustainable growth drivers. Pharma, marine and hydrogen are 3 examples of the market where we expect to excel. Our strategy is clear, and I strongly believe we have the team to execute it well. Thank you very much for listening. I will be happy to take your questions later in the Q&A session. But for now, I will hand it back to Dan.

Thank you, Jackie, and hello, everyone. It's good to have everybody together virtually today. Before we go to Q&A, I wanted to share a few slides regarding our margin targets. We initially set targets for each division as part of the strategy launch back in November of 2019. And this May, we were able to revise them higher. This slide summarizes the changes we reported in May. For Precision, we now expect to achieve 20% margins through the cycle. For Critical, we expect the division to deliver 20% margin sustainably. And for Hydronic, our margin expectation is now for margin delivery above 20%. Of course, these revisions are all underpinned by the 2020 results, where the divisions achieved improved margins despite the disruption from the pandemic. If we move to the next slide, you can see the rationale for each upgrade. You should recognize this slide as one we have been presenting since November 2019. And we've highlighted those areas which are supporting our margin revisions. For Precision, Beth and her team have continued to develop the division's strategy and operating model. And as a result, they see further efficiencies through additional site consolidation and SG&A optimization. For Jackie in Critical, as you saw today, the transformation into more attractive markets and higher aftermarket mix is already progressing. And this, combined with their footprint and portfolio activities provide the basis for the revised target. And finally, for Phil in Hydronic, the delivery of their supply chain optimization program and strong pull-through high-value add new products provides the catalyst to revise their margin target higher. Now our new Growth Hub process is well embedded across all 3 divisions, which will support the top line growth, which is a key delivery element for each divisional strategy. We will continue to use the improved results to invest in our people, new products and systems to support our growth ambitions. So with that, let me hand back to Roy to close out before the Q&A session. Thanks all.

Well, great. Thank you, Dan. All right. So turning to the closing remarks then, and the key takeaways really. I think what you've heard today hopefully has got across a sense of how our strategy is evolving, how our strategy is about solving customer problems, solving industry problems in attractive market spaces. That is creating both value today through improved customer service, through more continuous improvement, but also about value tomorrow and how we're going to create growth through a whole series of innovations that are absolutely targeted on solving customer problems and therefore creating tremendous value for those customers and therefore creating real pull in the marketplace. The second piece really has been about the culture and how the culture is changing. It is obviously about creating a better world. That's what engineers want to do. That's what creates excitement. We want to create more sustainability in the world. We want to create a safer world, a more productive world with meaningful work. That's what IMI is all about and that's what's unlocking the energy within the organization. Also, I'm sure you've seen that the culture now is much more about the customer. It's much more -- it's sharpened around the customer, and it's sharpened around innovation and making sure that those innovations are really going to create value. And then, of course, ultimately, that will all create better returns. And ultimately, that will create more growth through better targeted new products, through better targeted new services that we're creating. New business -- whole new businesses that we're creating will drive ultimately that profitable growth which, of course, is our ultimate aim. Fantastic. Well, I am now going to stop there. We are going to play the video, the video I promised earlier, which is a short video, but does capture some of that energy, some of that innovation and creativity that is our Growth Hub. So please play the video. [Presentation]

Well, great. I mean, hopefully, you enjoyed that video just as much as I did. It actually does -- actually makes the hairs on the back of my neck stand up, actually. It's incredible the energy that's being created. When you talk to the teams, when you listen to their pitches and just the sheer amount of organizational energy and passion that is being unleashed to create some pretty amazing engineering solutions and ultimately growth, as I said. Right. With that, we're not going to stop, and we're going to turn over to Q&A, please, moderator. Thank you.

[Operator Instructions] Our first question comes from Max Yates of Credit Suisse.

Just my first question was I wanted to understand, of the aftermarket business today, the sort of GBP 340 million of orders, how much of that is driven by these upgrades, valves upgrades, and how much is parts and service? And maybe an extension to that, could you give us a feel of -- you mentioned the sort of 280,000 sort of competitor valves, how many of those were you upgrading last year? What did that number look like sort of 3 years ago? And kind of are you confident that that kind of keeps accelerating? Because as far as I understand, the upgrade seems to be quite an important growth driver within that overall aftermarket growth for the Critical division. So maybe a couple of questions there.

Yes, Brilliant, Max. No, thanks for that, Max. You're absolutely right. So just to give you the numbers then. If we looked at last year's bookings, of that aftermarket, 55% was parts, 32% was upgrades and 13% was field service. But Max, what you have to remember about last year was that COVID hit field service pretty hard. But still, your point is absolutely right. When we looked at our upgrades growth over the last 3 years as part of that detailed work, upgrades have been growing at something like 18% compound. And clearly, that's the whole plan. As you know, we capture most of the parts because once you've got a severe service valve in place, the OEM tends to buy the parts from you. But the key opportunity is upgrade. And obviously upgrade is a very technical sale, right, because you've got to understand the whole process. You've got to convince the customer that during the outage, when their process plant or their power plant is down, that you will be able to give them a better solution. And ultimately, when they finish the outage after that 4 or 6 weeks, that when they fire up, everything works, right? So it's quite a technical sale. But as you said, that's where we've really grown the business. We've grown the business more in our own installed base than we have in the competitors' installed base because that is even harder. The barriers to entry are even higher. But with some of the things that we showed you in the videos, with some of the latest technology and the application engineering expertise, which is the ingredient that you absolutely need, that using more digital capability, we've been able to do more competitor upgrades. At the moment, competitor upgrades, Jackie, last year would be less than 1,000 valves, right? So I'll let Jackie come in, in a moment, but yes, it will be less than 1,000 valves. And clearly, using the newer techniques that we've just shown you, there is an opportunity to grow in that space. Jackie, I don't know if you want to add any color to that?

Roy, obviously, you're right. Last year, we convert around 850 valves from competitor. I think the market potential for us is tremendous. Normally, 10% of our competitor valves or 10% of total installed competitor valves is open for upgrade for all the -- other than original manufacturers. That is a great opportunity for us. Like you said, the better customer coverage, the better responsiveness through the digital. And certainly, those Growth Hub initiatives plus our application engineers is definitely is great opportunities we can put into the market, continue to capture this opportunity. Roy, thank you.

Yes, brilliant. Thanks, Jackie. Max, does that answer your question?

Yes. That's very helpful. Maybe just a quick follow-up. Obviously, you've talked about the 20% to 30% of the business that's under review. I think kind of when we started talking about that, if you remove that, it was sort of 150 basis point margin accretive. I think now you've improved the margin and now it's only 100 basis points. Maybe if you could just give us your latest thinking on the review, how it's going and also sort of where we are in terms of that profitability impact on the overall division.

Yes. So Max, again, you're absolutely right. It is -- at the moment, it would be about 100 bps improvement for the whole division if we took that part out because the margins have improved. The -- as I said on the video already, the situation is the same. It's still under review, that area of the business. What's interesting, Max, actually, if you look at that chart that Jackie presented, which I thought was pretty useful and it broke the business down into those 3 parts, right, the aftermarket part, which I think was 53% of the business; the fast-growing part, obviously, pharma, hydrogen, marine, that fast-growing part, which was about 10% of the business; and then the new construction, let's call it new construction fossil power, which was probably about 1/3 of the business, something like that. Now obviously, the 20% to 30% of Critical that's under review, as I've said on several occasions, is much higher new construction than aftermarket. That's why it's under review fundamentally. And what those people in that business have to prove to us, that they can do more of an upgrade valve strategy because that does so many things for us, Max. Obviously, it improves returns. It gives us a more stable environment because we're not so susceptible to the waves of investment that come through on the new construction side. And fundamentally, it gives us a better quality business where we are working closer to end users, which is where we add the most value. So that's why that part is under review. Already -- and I've said this before, so this is not new news. Already, another business has managed to make that transition and -- within Critical Engineering and is now much higher aftermarket content, much higher returns as a result, much closer to the end user as a result. But the jury is still out on the 20% to 30% of Critical for that very reason. They're trying to make that transition. If they can't make that transition, then obviously, as we said all along, then we will dispose of those businesses. So we're still in that position, Max. The good news is they have tremendously improved their margins and the quality of their order books, obviously partly as a result of this process.

Our next question comes from Jonathan Hurn of Barclays.

Just a couple of questions for me, please. Just the first question is, obviously if we look at the power generation mix, obviously it is changing, but at the moment you have quite a fair exposure to fossil power. So the question essentially I have is that how much prudence have you built into the impact of the decommissioning rates on your business? Because obviously as they start to come through, they can obviously affect the aftermarket. That was the first one.

Brilliant, Jonathan. Good to hear from you, Jonathan. Yes. So obviously, you know that we build pretty detailed 5-year plans. And while new construction power is now very, very small in terms of what we do in overall terms, but the aftermarket is more important. And really why -- as Jackie said a few times in the video, we're more confident is really because of 2 things. One is geography, and two is technology. And Jackie, I'll let you give a bit more flavor as to why we think that installed base won't be decommissioned at a rapid rate.

Yes. Thank you, Roy. Definitely, geography is one of very important factor. 2/3 of our installed base at this moment are in India, China and also all the Asia countries. I just want to add a little bit more for you, Jonathan. China, at this moment, they will not allow any like power plant or coal-fired power plant which coal consumption is higher than 280 grams per kilowatt, which means now the power plant is getting more clean. They are pushing more harder to super, super critical. So those power plant needs to be continue to run several years and plus all those power plants are pretty new, pretty young at this moment, less than 10 years. So therefore, we believe those plants will continue to run for the next several years because, certainly, even a country like China committed about emission zero by 2060. They still want to keep the factories -- keep power plants running. And also another reason is that the remaining power plant outside that is -- probably is using more about -- more things like LNG combined cycle rather than coal fire. So those -- because those plants are younger and more efficient and cleaner than older one, even outside of China, those in the United States. So we believe many of more vulnerable power plants in the Western world is already decommissioned. So -- and all the rest are leaving parts. They only left some cleaner and a more stable basis behind us. Thank you, Roy.

Thanks, Jackie. So Jonathan in that case so basically, as Jackie said, about 2/3 of the installed base is in Asia, and most of that because we could only win in the supercritical power stations because a lot of other companies could do the less sophisticated power stations. But because we've won in that area and what Jackie's saying what I believe is that those power stations are cleaner, they're more efficient, and they'll be around longer. So that's really the reasons, Jonathan.

Great. That's very helpful. And second question was just on IoT, and obviously, your valve offering. I mean how much focus do you put on IoT? And essentially, how do you set it up? Is that putting a sensor on the valve for you? And just going forward, what's the kind of opportunity that you see for Critical coming out of the IoT and digitalization?

Yes. I'll let Jackie talk about some of the details because I think it's -- there's really -- well, there's really 3 ways, Jonathan, that digital is becoming very, very important. Some of it was sort of captured in the video. So this is not just true for Critical, actually; this is true for IMI. The first is customer service, right? So we can dramatically improve our customer service. Customers can self-serve. We can make it much more scalable, our customer service, by using digital techniques. And what's interesting, Jonathan, is that Precision, and you'll see this in the -- when we do the next Capital Markets event, Precision won their first order by a bot, which is the completely automated customer service with interaction with the customer that led to an order on [indiscernible] which is one of the new innovations that Precision are bringing through. They won that last week. So that's one area. And Jackie showed some areas like in Retrofit3D, where we're using configurators to enable better customer service. The second area is proper, what we call, IoT, which is digitizing valves. Jackie's got some examples of that. Probably the fastest-growing new product that we've got within Hydronics at the moment is a smart valve. And I sort of held up the prototype. It was a couple of months ago, Jonathan. But it's incredible how quickly orders are building, because within commercial buildings, building owners are being asked more and more not only to improve the efficiency of the building but to prove it through continuous measurement. And again, we'll show you that in the next Capital Markets Day. Phil is effectively creating a whole data network around smart valves, which enable customers to keep buildings, whatever is happening externally in terms of temperature, sunlight, whatever is happening internally in terms of adjustment, but to keep them at their optimum energy efficiency while still remaining comfortable. And then the third area that we use in digital is internally to optimize processes. So things like sales effectiveness, really looking at where we're growing, really looking at which sales engineers are winning, how they're winning and then looking to replicate that to amplify that and to scale that up. So yes, I mean, the whole conversation around digital, I think, has expanded, well, definitely exponentially, I would say, Jonathan, over the last sort of 18 months. And more and more, we're applying that, particularly within the Growth Hub teams, within the sprint teams. Jackie, do you want to talk a little bit more about the Critical part of that?

Yes. Thank you, Roy. I just want to add 2 piece on top of what you're saying. Certainly, satisfied customer, easy to do the business with us. That's definitely everything we need to do. But from a Critical perspective, there's 2 particular examples I want to have. Number one is, you remember during the COVID time, our people is not able to access to the sites. Then we are actually using digital and sent the customer Google Glass and helped the customer in Kazakhstan to start up their products or their equipment. Those were very much complicated. But because our people cannot go there, digital offers great opportunity to help our customer. So this is one area we will continue to expand. The second one is definitely in Critical is we are very much famous on our Valve Doctor, right? The people -- the application engineer is able to assess the customer problems and offer solutions. But then in the past, those Valve Doctors only can be there in person. But now with digital solution, we literally kind of virtualize the Valve Doctor services to help customer easy to optimize their processes, which means they can have a better operational performance. So I think that is all additional things we do in Critical. Then third, certainly, Retrofit3D is another great idea. So overall, I think digital definitely opened another door for us. I would believe digital will enable us to get closer to our customer, respond to them faster. And also, meanwhile, digital can help us to differentiate ourselves with our competitors, right, because, for instance, Valve Doctors is really, really a great one. But then of the Valve Doctor service 24/7 is another dream we want to achieve. So Roy, I hope I helped Jonathan give some questions -- answers, Jonathan.

Perfect. Thanks, Jackie. Was that okay, Jonathan?

That's great. That's very helpful. And maybe if I can just squeeze one last one just on the aftermarket. So obviously you talk about further upside with the customer. But if you look at it, already you captured a high proportion of the aftermarket already. So I just -- can you just sort of clarify where the upside to the current customer is coming from? Is it from the upgrade that you talked about when you answered Max's question? Is that the real driver there?

Yes, it is. I'll try and keep this one short, Jonathan. Yes, exactly that. So as you know, we already get a huge amount of our own parts business because of the critical nature. So parts will come. Obviously, once we've done the upgrade, either of our own valve or, even better, of a competitor's valve, we'll then get that part stream from the upgrade valve. But if you look at where we've grown, so Jackie said that we've grown at 5% CAGR over the last 3 years, which I think is pretty good, as I said, because despite COVID, which definitely hit field service, the real driver of that growth has been the upgrade valves. And as we said, well, it was 850, Jackie, that we managed to upgrade of the competition's installed base last year. The competition's installed base was at 260,000 valves. Now obviously, not all of that is available for upgrade. On Jackie's math, he was saying, look, he can target only about 10% of that because, obviously, the customers got to have a problem, right? They got to have either vibration or unreliability or noise or something that's got to cause them to want to upgrade that valve, Jonathan. But yes, to give -- to try and keep that fairly short, that's exactly the opportunity and that's where we have been growing. And really, it's these techniques like 3D printing digital that enable us to go after that in an even better way going forward.

Our next question comes from Mark Fielding of RBC.

I've also got questions. In terms of the first one, actually, following up from Jonathan's question before me in terms of whether you built enough prudence in the power gen declines. I was sort of looking at the other way around, that actually the opportunities you've outlined in marine, pharma and hydrogen, they on their own, I think if you add it up, equate to something north of a 3% per annum CAGR out to 2030. And a little bit of that obviously is inorganic, as you flagged. But I'm just thinking about that in the context of the 3% to 5% per annum growth target. And is it that some of those opportunities are more back-weighted? Or is it just a degree of conservatism around some of your other more traditional markets? So maybe start with that one.

Yes. I mean we always try and pull it in a pretty prudent way, I would say, Mark, because especially at the moment, right, still COVID floating about, it's still hitting our field service. But yes, we do feel strongly that those 3 segments offer the sort of levels of growth that we've indicated. Obviously, we wouldn't have put it there. We are excited about that. Clearly, Mark, we've been really, I think, open because we've laid out the segments, Jackie laid out the 3 segments of the business. So we've got 10% of the business growing rapidly. It's doubled in the last 3 or 4 years. That's the bit which is pharma and marine and those areas that we went through, right? But then you've got this sort of middle third, which is new construction fossil and that's clearly been under pressure, right, because that's come down. That's -- I think it was 9% CAGR over the last 3 years. So again, it has been hit by COVID, no doubt about it. Last year, when the oil price sort of got to 0 at sometime, there's no doubt it's been hit. But we're still saying in our model that we expect that to be flat to slightly down as a CAGR, right, because we've been pretty realistic about that. And then as we said, then we grow the aftermarket -- continue to grow the aftermarket. So you're right, Mark, we're not, I don't think, overly optimistic. We try to be balanced in our model. And we've shown you exactly where we see the opportunities. Yes, of course, there is opportunity for upside on that. And of course, our internal plans will be more ambitious than that. They always are, Mark. And sometimes we overdeliver. Recently, I think we've upgraded a few times. But those -- this plan really is a balanced plan, in our opinion, of what we think is a sort of median case for what we can achieve. Is that okay, Mark?

And maybe just -- well, that's perfect on that. Just picking up then, and it's a continuation of that, to a degree. I mean, obviously, separately, talked about Growth Hub , the growth of GBP 20 million of sales this year, Critical. You gave us 2 case studies in terms of the 3D printing and the EroSolve, which themselves actually are a GBP 50 million per annum opportunity. How do we think about time line for conversion for some of these sorts of opportunities? What's the rate that they actually start to contribute? And also how do margins evolve with that?

Yes. I mean, they are accretive. So Mark, perhaps if I just go back, right, so I remember looking at this 20 years ago, right, in IMI. And the plans then said that 80% -- roughly 80% of our growth will come from new products. And then 10 years ago, it was about the same, Mark. And sort of coming in as CEO, what I realized is that's the bit that we really had to fix, right, because it wasn't much of a surprise when everybody presented their plans to me, that a huge percentage of the growth had to come from new products, new innovations. And we had to completely change our effectiveness around new products. And that really is what Growth Hub does, right, because I hope you now see it. We've obviously -- I think we presented it twice today, really, and I hope we haven't overdone it, but it's so important that people realized that we have fundamentally changed the way we do new product because we're really going after customer problems, right? And to me, there's always been 2 generic strategies. You can either win on price. That's got a lot harder obviously with global competition, right, and you can chase your margins down, if you're not careful. But that's a strategy. The other strategy is you win on differentiation, right? You win on customer value. And you can kid yourself all day long about how you're creating customer value. But to me, to be sure you're going to create customer value, you solve one of their really acute problems, right? So if they've got an unreliable power plant and they're getting fined every time that power plant goes down, that is what we call an acute customer problem. Now if that problem is directly linked to steam control, we can normally do something about that, right, and we can make it more reliable. It's said in one of the videos that 1 customer, they had a problem that was costing $1 million a go, I think it was, right? That's the sort of problem that if we can solve using fluid and motion control engineering, that creates, number one, real customer pull. Number two, obviously what we're looking to do is to get some IP around the solution so we can capture our fair share of the value for the long term. That creates good margins. So it won't probably surprise you to know, Mark, that both 3D -- Retrofit3D and EroSolve have both very accretive margins, right, because they're tremendous value for the customers. You can see it. So yes, in terms of margins, they're good. And what I've said is that last year, GBP 6 million for Critical; this year we're trying to treble that, right, get towards GBP 20 million. We're on track to do that, Mark. I'm not going to lay out year-by-year in terms of granularity because if I'm not careful what happens to those teams, those innovation teams, is I sort of kill the innovation. They have to be allowed to fail because if they're not, we waste resource on things that teams keep going and going rather than killing their projects. And at the moment, we've been incredibly successful. And actually now, as Phil said in the video, teams killing their own projects. And I have to allow that. Otherwise, I'll just stifle innovation. I'll be back to square one. But in overall terms, Mark, that 3% to 5% includes what we can do in terms of that innovation. And as you know, we're building margins. What were they, 12% or so? And you can see we're rapidly moving margins, and this business is accretive. The turnaround valve business is accretive. The growth accelerator business is accretive. And that is obviously what's helping us improve the mix of the business, improving the returns, improving the margins and improving the growth rate, particularly as the aftermarket becomes a bigger part of the business, continues to grow at 5% as opposed to that sort of 1/3 of the business, which obviously has been shrinking. And we don't expect it to be better than flat to slightly down, Mark. So yes hopefully that -- you understand that, yes, if everything goes well -- and in life, I find that it rarely does. But if everything goes well, of course, as I said, we could exceed those targets. But we're not going to count on that.

Great. And just a final -- my final question was actually sort of linked to what you were just saying, actually, which is just in terms of the margin targets you set for the business. Obviously, you've given a target for Precision that is quoted a through cycle, target for Hydronic that is 20% plus. It's a very fixed 20% number for Critical. So is that because you think it's a more stable business or is it just that's the first checkpoint you want to get to and then you think about it from there?

Yes, I'm going to let Jackie talk about this in a second. But the way I think about Critical is it's becoming more stable as more of the business is aftermarket, right, Mark. In Hydronic, the added value is so high, and obviously the markets are now much more attractive because of the whole green agenda, right, in buildings, that Hydronic there is really helping. Plus their new product is now starting to hit the mark. They're not just doing better versions of CRVs, better versions of balancing valves, this is genuinely new product, again, accretive margins. And so when you do the math on Hydronic, it's very high added value in those markets. Even when you're heavily reinvesting in more sprint teams, the drop-throughs that you get, Mark, result in better than 20% margins. So that's Hydronic, right? Precision, as you know, is cyclical, right, because it depends on customer CapEx. And so it will be cyclical. But effectively, what we've done roughly, Mark, is move up the margin target in Precision by about 300 basis points, right? If you do the math, that's what you get, to get a 20% through-cycle margin once we've done the work we need to do. Whereas Critical, as it becomes more aftermarket, yes, more stable and more predictable because of less new construction, less volatility, and that will -- that's why we think structurally, it's a 20% margin business. Jackie, is there anything you want to add to that?

No, Roy. I think you answered it exactly. I think our goal is that to have a good mix between new construction and aftermarket like we say in the presentation. If we can get 1/3 new construction and 2/3 aftermarket, the nature of our market is more stable. But then certainly, the other 1/3 of new construction business is always cyclical, right? So this is the reason, I think, 20% is a quite good target for us. But also try to rehighlight here that in the past 3 years we already improved margin about 350 basis point. I think we will continue to do that. So yes.

Perfect. Is that okay, Mark? Does that answer your question, okay?

That's great.

Thanks, Mark.

Our next question comes from Robert Davies of Morgan Stanley.

My first one was just around, I guess, the ability to penetrate that installed base that you flagged. I know you put out that 10% of 280,000 competitor valves were sort of out there and addressable market. But I'd just be quite interested in terms of how fragmented is the customer base. How often do people have a kind of broad offering where they will sell multiple valves across different spaces that make them harder to get into? I just like to kind of get into a bit more granularity in terms of what's the challenges or opportunities within that set to sort of put a dent in sort of pushing your sales there. That's the first question.

Yes. Brilliant. Thanks, Robert. Well, I'm going to have Jackie talk about that. And Jackie, you might even want Giuseppe just to talk about an example.

Yes.

Because it is hard and particularly in the nuclear aftermarket. As well, Jackie, you might even want Wayne to bring in a bit of sort of frontline experience on that. But do you want to talk about it first, Jackie?

Yes. I think -- Robert, thanks, a very good question. From -- yes, always aftermarket is very much challenging for everybody. For us, the aftermarket is all about coverage -- quality coverage and responsiveness. We have all the valves around everywhere in the world. And then we certainly need to rely on regional people. We certainly need to improve the touch time of the customer. So what we say is that how are we able to continue to engage in power, equip the regional people, which they are able to get closer to the customer and offer the quick responses. I think maybe Giuseppe, our Oil and Gas European President, may give you an idea, some example. And also, Wayne, can you give another example after Giuseppe? Giuseppe, hand over to you.

Yes. Thanks, Jackie. Yes, I can give you several example, but I can give you probably the example of Japan. So I mean in some of our business, mainly related to refinery and petrochem, historically, was used to move from the main location worldwide. And this obviously is quite difficult to cover all the work. So with the new setup with the region, obviously this has changed a lot. And the example can be that, for the first time, we entered in the refinery in Japan. So for Japan, as we are talking specifically about product for refined, so Remosa product in the FCC. So FCC, Japan has 21 FCC, no any installation of IMI since ever. And specifically the business that on this product, so Remosa try -- I personally tried because I stay in this business for a long time. I tried since 20 years to 25 years to enter in this market with no chance. Honestly, no chance to get there because you need local support, local language, local mentality in the approach. So leveraging on our colleagues in Japan in the region, we were able to convince the customer about our added value. So leveraging on our technical experts, on our local presence, on our capability to serve the customer 24 hour from local point of view and globally. And we won the first order in Japan that was a monopoly from one of our competitor. And we got the order from 1 customer that owned 50% of the FCC in the country. So this is a great example of leveraging on our global footprint and capacity, technical capacity, which can have a lot of upgrade. And these are upgrade on competitor valve. I hope that I answered your question.

Brilliant. So did you get that? So it is complex, Robert, right? So we've got here some of our technology from an Italian technology center. The competition basically owns the Japanese market. It did all the newbuild. And what Giuseppe and the team's done is working through Criticals, frankly, excellent global footprint, which, of course, is very hard for our smaller competition to do, has managed to get that reference in the installed base in FCC, catalytic cracking, the owner of which owns half the FCCs in Japan. So it's that -- it isn't easy, Robert, but there is a very methodical approach now for attacking those installed bases and making those conversions. And I think the other thing to add, actually, Robert, is that this is what's been happening for 3 years, right? So it's not like we're going to expect a miracle on upgrades. Yes, it is tough. But upgrades, as I said, that part of the aftermarket has been growing at 18% CAGR over the last 3 years.

Understood. And then my follow-up question was just, you obviously mentioned some of the different dynamics across, I think it was marine, pharma and hydrogen, interesting opportunities for you. I think you've mentioned the sort of declines in the power gen business. But perhaps you could touch on some of the other parts of the Critical kind of offering across refining, petrochem, the different parts of oil & gas, maybe nuclear. Just would be kind of interested to get an update there of what's sort of going on. LNG is another one, I guess, that sort of interested IMI. Just would be kind of interested to hear a little bit more about those subsegments, please.

Yes. So I mean, I'll start and then Jackie can take up. So LNG is definitely slowing in terms of project activity, Robert. There's no doubt about it, right? We are working on some big projects. And I would think that they are going to go out 3 to 6 months in terms of activity. I think the better news is, as Jackie said in his presentation, that China is still building receiving terminals, and there's effectively going to be a sort of slowdown, but then we think it's going to be pretty good again. So LNG is slowing down. Nuclear new construction is tiny for us, Robert. And actually, we didn't let Wayne talk, Jackie; that's my fault. But perhaps we'll let Wayne explain that in terms of upgrade valves, nuclear is really good for us, isn't it? Wayne, I don't know if you want to just comment on that.

Yes. So -- excuse me, Roy. Yes. So as -- in the Americas especially as a result of some of the nuclear power plant upgrades and plant life extensions, the nuclear upgrade business has some really potential good market opportunity for growth. So the landscape has changed a little bit. So many of the nuclear plants are upgrading their main steam systems, their feedwater systems, their generators. They increased their megawatt output, and most of it's about 15% megawatt output. This approach is obviously a lot less costly than going down the new construction energy path. And additionally, in the U.S. markets, these plants were originally designed by the OEMs to operate for 40 years and approved to operate for 40 years by the Nuclear Regulatory Commission. So over the years, with enhanced technology, improved maintenance and probabilistic risk assessments on equipment, the license extensions have been granted for plants to operate for 60 years. Additionally, there's various U.S. nuclear plants that have also already applied for license extensions to operate for 80 years. So as a result of these 2 anomalies in the U.S. nuclear market, the upgrade opportunities in the Americas nuclear industry especially are a growing market. We're currently manufacturing nuclear upgrade orders for main steam and feedwater isolation valves to help extend the operating life of these U.S. nuclear plants. And there's many other opportunities we're pursuing for upgrades as the plant life extensions are improved and equipment continues to age. So I hope that's just a little bit of clarity on what the nuclear market is doing and what we're doing for the upgrade portion.

Thanks, Wayne. Yes. So that's the sort of Nuclear. And then, Jackie, do you want to talk about new construction in petrochem and oil & gas outside of LNG?

Yes. Thank you, Roy. I think new construction petrochemical, I think probably the country that's build up a lot of petrochemical complex, that is China. Because China 3, 4 years ago, they allowed the private investor entry into their area. Certainly, we have captured the big portion of that market over there through the localization. Yes, I think outside of China, like Giuseppe gave the example, we also very much focused on the upgrade. We did some upgrade in Japan, like Giuseppe said. And also we are very successfully in Middle East and India in terms of all the upgrades. So landscape a little bit different, but from our side, petrochemical, we definitely have a great product, technology and some competitive advantage. Regardless of new construction or aftermarket, we are winning very nice shares. And also, one more thing, Roy, I want to mention that, definitely, at this moment, we are more collaborative, work together as a team. Like the end of last year, we're winning a project. It's a petrochemical project and the user in Mexico. EPC is in Korea and Italy. And then through the collaboration of all the team, we finally bring this order back to home. And by the way, the product is going to manufacture in Italy. So I think that we as a global company we really work as a team. We are able to capture the opportunities in the market.

Brilliant, Jackie. And Jackie, so just to give Robert a flavor, the areas where we see projects for us to win is CATOFIN, which is dehydrogenation of gases. Yes, we see ethylene. Jackie as well. Yes. And some decokings, right?

Yes, delayed coking, ethylene and also PTA. PTA is another one. We have some great advantage. Yes.

Excellent. So does that answer your question, Robert?

Yes, that's very comprehensive.

Our next question comes from Harry Philips.

Just a couple from me. Just in terms of the potential inorganic action around marine, hydrogen and pharma, I mean, clearly, those are high-growth areas, as you've already highlighted. What sort of multiples would you envisage in having to pay to get involved in potential M&A there? And then just secondly, looking at the installed base and your own installed base of, I think, over 160,000 to 180,000 valves, in the same way, you're looking at your 280,000 competitor valves, but as one of the biggest players, if not the biggest, surely, they are looking at you, your competitors, that is, and sort of wondering how they can do the same to you as you want to do to them.

Yes, precisely, Harry. I'm going to let Jackie tackle that question because that's a great question. And it sort of speaks to how tough it is and the sort of -- well, it was a bit like Jackie was describing, the sort of footprint, the sort of applications engineering capability, you need to be able to do that. But I'm going to let Jackie talk about that. In terms of the 3 areas, Harry, we see marine as being mainly organic in terms of growth. So I think you know, Harry, that we've doubled our marine business in the last, I think it's 3 years, Harry. And we -- as Steve was saying in the video, right, we know the submarine programs. We know the countries that we're working with. And that business is evolving quite nicely. It will be bumpy. I'm sure the orders are large. It depends on the defense budgets and things like that, Harry. But overall we've got a pretty nice track actually over sort of the next 10 years. So there might be the odd very small bolt-on but basically that's mainly organic. Pharma is different. You know that we're moving into pharma from scratch. We bought PBM, and we got that at a pretty decent multiple, actually. And actually, Harry, we exceeded our returns on PBM, exceeded our cost of capital in the first year. So that's the way we look at it, Harry. We give ourselves 3 years to exceed cost of capital. We do not want to destroy shareholder value. So that's a red line for us. We give ourselves 3 years to do that. We actually did it within a year within PBM. So whatever multiple we're paying, we want to be certain of the growth synergies fundamentally. So the cost synergies did help us. The cost synergies were around -- mainly around indirect purchasing areas on PBM. That's what we're going to stick to in terms of that sort of discipline. Hydrogen, again, will be mainly organic, right? And hydrogen, Jackie actually looks after hydrogen for the whole of IMI. He's coordinating across all the teams, which is brilliant. And there are opportunities for IMI to be involved in hydrogen right from production, which is obviously mainly Critical, through to distribution. So you're going to see some of this actually where we show you Precision because they have opportunity through their regulation capability to be able to very reliably distribute hydrogen. And then, of course, on vehicle as well as fuel cells become a possibility on areas like commercial vehicles, Harry. So yes, we've got quite a lot of opportunity. Clearly, the multiples in hydrogen are very, very high. And our strategy does not rely on big acquisitions in hydrogen to propel us into that space. It will tend to be bolt-ons. And it will certainly be, Harry, where us plus the acquisition equals much faster growth than we can do either of us on our own, right? So there will be the synergies there. So we are mindful, don't worry, Harry, of making sure that we're going to create value. Jackie, do you want to talk a bit about -- then Harry's other question is, yes, if we can do it, why can't the competition do it to us on aftermarket?

Yes, Harry, this is a very fair challenge. Yes, competitor can do that. Let me just give you a little bit of flavors on that. If you look at the total valves for everybody, normally probably 80% of valves works fine. And then rest 20% of valve may have some problem because a lot of valves are procured by EPC. The normal EPC, they try to reduce the cost as a one-off cost as low as possible. Therefore, as long as a valve can work, they will purchase the valve. Sometimes they will not care about the total cost of quality. They don't care about the lifetime cost. But then roughly speaking, about 20% valves somewhere have some problems on the site. Then among this 20% of valves, probably half of that, customer will go to the OEM for the upgrade first. Because you are an OEM, you have all the joints to have everything. So therefore, customer tend to go to there -- go to the OEM. Only the rest 20% -- 10% of valves, which is we mentioned, 10% of 280,000 competitor valves, customer is willing to open to everybody to do the upgrade. Then at that time, the reputation, the kind of track record, application engineering capabilities, quick turning around, local service capability and responsiveness will become the key winning factors. This is why we believe we're able to tackle that. Giuseppe gave us ideas about how are we able to leverage the local people. We also mentioned a little bit about digital, how digital can make it work. Retrofit3D, the key question for -- the key advantage of Retrofit3D is really that we're able to offer solution within 4 weeks and without touching those big competitor valves, probably already weld on a pipe. So therefore those capability really, really enable us to winning the competitors' installed base. And then, certainly, meanwhile, we also continuously go to customer to upgrade our own installed base. So Roy mentioned, in the past 3 years, every year we have probably 18% CAGR in terms of the upgrade growth. Among that, roughly 50% is upgrade our own product and the rest 50% is upgrade competitor product. The reason to upgrade our own product there, we certainly also want to offer customer better service. So make sure they're happy with that. I think overall it's -- like I said, it's reputation and the service capability to help us to win that. But that will only talk about 10% of the total installed base they open for everybody to do the upgrade work. It's not like the entire world, okay? Harry, hopefully, I answered your question.

Perfect.

Great. Thanks, Harry. Good to hear from you. Great. Are there any more questions?

We have a question from Will Turner of Goldman Sachs.

I've just got some follow-up questions following on from some that have already been asked earlier in the Q&A. The first one is, on the oil & gas business, you mentioned like the weakness or expecting some weakness in LNG. Can you just expand a little bit more on why -- what drove that? And has that GBP 500 million worth of orders that you were tracking about a year ago, are they still out there or do you think they've postponed for quite a while? And then secondly, kind of related to the oil & gas -- well, related to oil & gas business still. I noticed how the aftermarket intensity is a lot lower than the overall end markets. Should we expect that to increase now that you've got this pickup in new construction orders you've had over the last couple of years? Those are my first 2 questions.

Thanks. Well, just let me make sure I got the second one right. The aftermarket intensity on oil & gas is lower?

Yes.

Yes. Okay. Well, it's more to do with the nature of the application than anything else, Will, okay? So obviously, how fast does your valve wear out, depends on lots of things, right, but including the pressure, particularly the pressure drop actually across the valve. It depends on the media that's going through the valve. So the sort of valves that Giuseppe was talking about, they're working in a catalytic cracker. They have got silica because silica is the catalyst running through them at 700 degrees C. I mean that wears the valves out pretty quick. The valves in a gas-fired power station -- actually, our gas aftermarket has been up recently because, as Jackie said in his presentation, gas power stations are being cycled more. And actually what happens there, Will, is it's the initial wet steam that does all damage on the initial start-up. So it's -- the aftermarket density is more correlated to the application itself than anything else. And obviously we'll try and drive upgrade valves. But in terms of the parts we get on the back of that and the parts, as I said, what was it, 55% of the aftermarket is parts, that's more to do with how fast the valve wears. There is another dimension, Will, but without getting too technical, for cheaper valves, the customer will literally throw the whole valve away, right? And we tend not to operate in that space because obviously that is 0 aftermarket, although some of our isolation valve business, which is the business which is under review, is more like that, right? But without getting too techy, it's more about the application. On LNG, I'll let Jackie talk about LNG in a second, but we still got roughly, looking at the last OPR pack, about GBP 500 million in the pipeline. It's not particularly that projects are dropping off the list. It's more to do with the timing. And obviously, throughout last year, obviously, there was nervousness in our oil & gas customers. But Jackie, is there anything else you want to add on LNG?

Roy, I think you're absolutely right. This GBP 500 million opportunity is still there. But I think from timing wise, it's probably pushed a little bit into 2022 and onwards. Just 1 big example, 1 very clear example, there's 1 project from Middle East and EPC in Japan because Japan has not allowed any Middle East engineer entry into Japan. This reason, literally, you have to postpone the project for 6 months. But the project is there. The project is going to move forward. I think also one -- I'll just little bit add on, Will, about aftermarket density is, Roy is absolutely right, it's all about application. And also it's all about the valve type, right, because literally on-off valve has less aftermarket and control valves more aftermarket. But then for us, I think the jewel on the crown is those control valves market, which customer often need maintenance. So yes, so your part is right. Thank you.

Thanks, Will. Was that okay?

Okay. Yes, yes, that was clear. That makes sense. And just a final question. On the -- specific to the Growth Hub , how do you go about compensating or directly incentivizing your employees to take advantage of the Growth Hub? And what are the kind of like implications for your -- or the engineers that pursue a new product but then at Gate 2 or 3 after spending maybe a few months working on a product, it's been successful, how do they like typically respond to that? And what does it mean given that they've probably spent time on that rather than doing what the job they were previously assigned?

That, Will, is a spot-on question. I -- what's happening over time is, obviously, we're building a muscle, right? And I remember Jackie and I had to kill some early projects and people were not happy. So we're going back, what, 18 months, 2 years probably now, Jackie, right? It's almost a revolution, because people put their heart and soul into it. So, Will, even though they've only been working on it, in some cases, for 12, 24 weeks, they are putting so much discretionary effort in. And I'll tell you one story, very quickly, Will. I know some people want to watch the football, right, but Tarak, who's on this call, who presented, he told me sort of a wonderful story, which is that one of his engineers was working so hard, I think it was on EroSolve actually that Tarak presented, literally working 7 days a week, which I'm not condoning, I don't want people to work 7 days a week, right, I don't want the mental health issues that can come with that. But this engineer was so into what he was doing, and he said to Tarak, I've only got 1 problem is that is my girlfriend is going to leave me. And Tarak, of course, said, well, you need to balance things a bit better than this because you're absolutely right, it is a problem if we kill the projects. Now the way to kill the projects, if it has to come to that, is obviously asking questions at the pitch events. And then gradually, it sort of becomes apparent that there's probably not enough in this. In fact, EroSolve is a classic example, Will, of where I thought it wouldn't be successful. And I put quite a lot of pressure on the questions. And Tarak actually persuaded both Jackie and myself, you should continue, and now it's becoming a successful business pretty quickly. And Tarak was absolutely right. And that's one thing actually as a leader in a business where you're going to do innovation, you have to accept that the teams have much more relevant customer insight than you had, even if you'd spent sort of 30-odd years visiting customers and really trying to understand the market. So increasingly now, Will, the good news is the teams are killing their own projects, and that's a much, much better outcome because as they go through the process, they realize either the customer problem isn't actually big enough, because what you thought was a customer problem, when you've spoken to 100 or 300 customers, it's sort of you start to realize this isn't really an acute problem or that actually our solution is not the right solution, right? The customer is not prepared to pay that amount of money. It doesn't solve the problem in the customer's eyes or it's too risky in terms of its implementation. So yes, we are moving to a better position where teams kill their own projects. Then the good news is the people that have been on those teams, often, their profile has gone through the roof. They present to Jackie. They present to Jackie's team. They present to me. We had 1 pitch call about 2 or 3 weeks ago where we had half the nonexecs on. That's the level of energy this is creating. The nonexecs are really contributing and excited about it. So the profile, if you're on the team, your profile can go up very, very quickly. You can learn business skills much quicker than I did. I often say, if you spend 6, 9 months on a sprint team, you'll have learned what I learned in the early days. It probably took me 5 years to learn it because customer interaction, innovation, working in a team, creating a business plan, creating a value proposition, you're doing all that at incredible pace. So the people on the teams are raising in the profile, and we've already promoted several people, haven't we, Jackie, from the teams to managerial leadership positions because they've stood out. In fact, one of them is now running Japan for Jackie who was a key member on a sprint team. So there's lots of benefits to be on a sprint team. We do not directly incentivize the first 3 phases because it's almost counterproductive, because what you want people thinking about is a creative solution, not about money. When we get to Phase 4, then we directly incentivize actually the whole team. And this was Jackie's proposal, which is working pretty well or very well, I would say, where the whole team that's been involved then gets a commission-based bonus. So it's not based against any target. The target is exponential. But obviously the more they get -- the more commission they get, they're spread back into the team. So that's the way we're running it. And again, we're still testing and learning with the process, but it certainly seems to be incentivizing the right behaviors at the moment.

That's very clear.

Brilliant. Great. Thanks, Will. Any last questions at all?

Yes, we have a question from Xing Lu of UBS.

A few quick questions. Hopefully, I'll ask them at one go. I appreciate I'm keeping you guys from the England game. So my first question is, Roy, just referring to your favorite chart, what is the conversion rates that you've seen so far kind of from Gate 1 to Gate 4, just to get a sense of kind of innovation effectiveness and the return you're getting from investments? Second question is just on the Critical margins by kind of aftermarket, new construction and new markets. Any kind of ballpark margins that we can use kind of just to get a sense of the margin improvement from a mix perspective to 25. And last question for Dan and just a clarification I appreciate this is not a focus of this event, but just on the additional GBP 25 million cost savings for Precision, is that over above the GBP 40 million that's still to deliver and what is the time line for this, please?

Right. So Dan, do you want to take that question first, Dan, just on laying out the cost savings? And Xing Lu, it is quite clearly laid out in the year-end pack with the additions of what Dan's laid out today. But we'll let Dan talk about that. I'll then cover aftermarket margins, Jackie. And then perhaps if you just talk a bit about the sort of conversion rates you're seeing as you go through growth accelerates. I mean, bearing in mind, it's early days for us with growth accelerator. We literally are -- although IMI has got a long history of innovation, as I said, we are trying to radically increase the effectiveness of our new product development, Xing Lu, right? So -- but it's early days for us in doing that. So Dan, do you want to just talk about the savings in Precision?

Yes. Yes. Just very quickly, yes, it is incremental. So it's in addition to the 14 that was part of the original 75 and 30, which is now 80 and 35. So that 14 is still coming through, and those are projects that have already been launched. We wanted to kind of put a box around that original program, that Roy mentioned, way back in November of 2019. And as Beth has come in and revisited the whole agenda and done a completely new view to restructure, we see more opportunity, and that's that additional 25 coming through customer first, which is restructuring the organization towards those global lines of business as well as some additional fit for growth, additional opportunity to really streamline. And that has a lot to do with leveraging some of the foundation work that we've been building over time. In terms of timing, it's going to -- those always take some time to run through. So that's not going to all show up in the next 1 to 2 years. It will flow through. But we'll continue to give you that transparency as the projects develop out.

Brilliant. Thank you, Dan. Very clear. On the margins then, I've given you the splits in the aftermarket, Xing Lu, right? So on the Parts part, typically, the gross margins are towards 70%. This is gross margins, right? Typically, the Upgrade margins are sort of 45% to 50% gross margin. And then field service is more like 35% to 40%, something like that. So that just gives you the gross margin splits in detail for the aftermarket. New construction is more typically 20% to 25% gross margin in that sort of area. So yes, you can sort of do your maths now as you see the mix change over time, right, but remembering that we will be investing more in the business and more sprint teams as we go forward. Jackie, could you just talk a little bit about the sort of conversion rates you're seeing as you go through the Growth Hub?

Yes. Thank you, Roy. I think, Xing Lu, from Phase 1 to Phase 2, the conversion rate sometimes is around 10% to 20%. Because remember, Phase 1, we threw out a lot of ideas. Both sides really need to define the customer problem to understand whether or not it works for us to continue to explore further. So Phase 1 to Phase 2, around 10% to 20%. Phase 2 to Phase 3 is roughly around 30% to 50% because normally when we enter into Phase 2, we try to find solutions. So some solution is okay, and then we usually get a couple of others. We will move to Phase 3. So then move from Phase 3 to Phase 4, the conversion rate is between 50% to 70% because the Phase 3 to Phase 4 is more about scale, whether or not we are able to scale, repeat this kind of success story. So if this 1 project -- sometimes the project is very much regional-specific. We will rather to stay in the region. We'll not move to Phase 4. But does not mean those projects will be dropped off, but mainly focus on the region. But then some project, we're definitely able to scale it globally. So we move to the Phase 4. So roughly speaking, around 60% to 70% conversion rate. So the early stage, very low conversion rate. Move to the phase, we get a high and a higher conversion rate. And also from -- honestly, from a resource perspective, that will make more sense because at the beginning of the stage, we are putting more people but everybody spends a quite short period of time. We're running something like a hackathon, a sprint cycle. And then moving to Phase 3, Phase 4, you definitely need to define the problem questions, offer solutions. I think that will consume a lot of time. Hope I answered your question.

Perfect, Jackie, because...

Perfect.

Hopefully, exactly as Jackie said, that's the problem. If you look across industry, you look at Clayton Christensen's work and research and stuff, and you're lucky if you get more than 1 in 10 new products, right, right? But what this process is doing is making sure that's built very early where you spend very, very little investment, and you're still test and learning and you kill at that point. Once you start to get towards investment, as Jackie said, the certainty is building and building. So that's why the process is so important to us. Excellent. Right. Did we cover all your questions there?

Yes. Perfect.

Great. And are there any more questions?

That was our last question.

Great. Well, thank you very much. Thanks to everybody for attending today. My personal thanks to Jackie, to the Critical team for taking the time to show everybody what they're doing. I think it's incredibly powerful. And I hope you've got a good insight as to why Critical has come through this inflection point and how it's pivoting to growth. Thanks very much, everybody.