IMI plc (IMI) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the IMI Plc 2021 Interim Results Call. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Roy Twite of IMI Plc, to begin. So Roy, please go ahead.

Good morning, everybody. Great to be here. Obviously, you've got myself and Dan reporting on the half year results. If we move to the next slide, please, I can talk through the key messages from the first half. I think the first obvious thing to say was that it was another strong performance from our team. There's something that probably will be difficult to capture here, but there is a great spirit in IMI as we are using our deep engineering skills, our deep applications knowledge to really help create a better world and start to fulfill our purpose, which is bringing a lot of discretionary effort, a lot of passion across the company, which is evidence every day through our new Intranet, which is quite amazing in the way that we are sharing those achievements. Obviously, we grew well, 8% organic growth, and we got really solid profit growth on the back of that in the first half against obviously some easier comparators, although we did obviously have the headwind of that ventilator business last year. Return on sales improved strongly again, and we partly -- we had increased revenue profits and margins across all 3 divisions, which was good. And Critical orders, which you'll remember were down 10% at the end of the first quarter, actually finished up at the end of the first half as well. So another terrific performance from Jackie and the Critical team. Growth Hub, which I talked in quite a lot of detail about at the Capital Markets Day, is getting stronger and stronger. And the Sprint teams are already delivering early sales and orders. We have now around 30 Sprint teams working across the company. And they're working in really exciting areas, areas like industrial automation, obviously, life sciences and pharma and hydrogen. And we showed you some examples of those Sprint teams at the Capital Markets Day, obviously Critical, and I'm really looking forward to showing you further examples from Precision and Hydronics and cross divisional teams actually at the next Capital Markets event as well. We delivered over GBP 100 million in the first half back to shareholders through our share buyback program and through the dividend. And in fact, we've increased the interim dividend by 5%. And then perhaps lastly, before I go to Dan, we've increased guidance again; we take it up to 85p to 90p. Obviously, that does include the effect of the share buyback but that's up from 81p to 87p last time. About 1/3 of the improvement. So if you look at it, it's probably a 4% increase overall, about 1/3 of that improvement is coming from the share buyback and 2/3 is coming from better trading and better operational efficiencies. Okay, so with that, we will turn to Dan, please.

Thank you, Roy, and hello, everybody. Really pleased to be able to take you through the first half results today. If we can go to the next slide, please. So overview of revenue and operating profit. First, as Roy already said, real solid results, organically up 8% on revenue and 24% on operating profit. Now we did have some markets provided an easier comp last year, but we also had the ventilator surge as well. So we did go back to look at 2019. You'll see that in the press release. And versus 2019, first half, up 2% on revenue and 22% on operating profit. Roy already mentioned all 3 divisions up on the top line and increasing their margins in the first half. Also see on this slide, the corporate cost at GBP 11.6 million, continue to manage that closely. There was a one-off property sale in that number, which helped us by about GBP 1.5 million in the first half. I should also say that the investments we are making, continue to manage that closely. There was a one-off property sale in that number, which helped us by about GBP 1.5 million in the first half. I should also say that the investments we are making for growth and in our Growth Hub and Sprint teams, those are being taken by the divisions in the divisional numbers. So you'll see the impact in those results. So for corporate costs, we're looking at a figure estimating around GBP 25 million for the full year. So next slide, please. So continuing down the income statement. The interest charge, relatively stable to last year. What we are seeing is the free cash flow we're generating is sufficient for us to use for the share buyback and all the other investment needs. The pension charge there, small credit, and I've got the pension slide in the back, as we typically do. You'll see there still in surplus; in fact the surplus is increasing, and we're continuing to manage that very, very closely. Also, the adjusting items number lower in the first half, got the restructuring slide coming up in a little bit. And finally, taxation. Tax is up in the first half. It's impacted by 2 one-offs. Firstly, you're all aware, the U.K. tax rate is increasing, and we had a revaluation there unfavorable. Plus we also had a favorable resolution to a tax item in the first half led to a noncash charge of GBP 13 million. We are reflecting that as an adjusting item. What that means really is our underlying tax rate is still around 21% but I would expect that to start creeping up over the next few years. So next slide, please. So continuing to cash flows, you'll see operating cash flow slightly up at GBP 111 million. And really, overall, somewhat impacted by the -- by an increase in debtors and that's to be expected on the higher revenue we saw in the first half and particularly in the second quarter of this year. I would say, though, that debtor days are lower, lower by about 3% and our overdue position is also lower as well. So we're continuing to manage that very, very closely. CapEx, you'll see also flat to last year. We expect we'll spend up to our depreciation level, around GBP 65 million to GBP 70 million this year. Next slide, please. So continuing below operating cash flow, lots of numbers on this slide. But really, the big movements are currency. As you know, sterling strengthening. It does impact us adversely on the P&L, but it also lowers our debt as we hold our debt in the current season where we make our money. You see that mostly on the derivatives and the foreign exchange line. You'll also see some higher taxes paid there as well, and that reflects the higher profits, and we had some 2020 recoveries, which you'll also see some higher taxes paid there as well, and that reflects the higher profits, and we have some 2020 recoveries, which brought the 2020 number down a bit. Also, Roy already mentioned it, over GBP 100 million, GBP 101 million, in fact, of cash delivered to shareholders in the first half through the dividend as well as the share buyback, which is progressing towards our target of GBP 200 million. So overall, it means the debt is slightly up, but gearing, as you see, is still very, very comfortable at 0.9x. So next slide, please. So on the restructuring, what you'll see, we simplified the slide. We're only showing the plans going forward. I've got the full detailed slide that we've shared in the past. It's in the appendix, and you can see that, that takes you all the way back to the start of the strategy. Overall, our projects are on track. You'll see delivered GBP 12 million of benefit in the first half of the year. We're looking at GBP 22 million for the full year. And you'll also see mentioned there new initiatives coming through in Precision. Those are supporting the revision to the margin targets that we talked about last month, Capital Markets event. Really, it's all around making further reductions in complexity and some further footprint moves. Overall, the cost of about GBP 48 million we're forecasting with GBP 25 million of benefits coming through. And Beth and the team will provide a lot more about those programs when we have the Capital Markets event later this year. Overall, though, I should say, cash paybacks on these restructuring activities still continue to be around 2 years. So next slide, please. So in terms of Precision, first, in terms of growth and the growth strategy, really advancing well. Sprint teams are working across all of Precision's attractive end markets, looking in the industrial automation and certainly the life science and the process industries spaces. Really interesting to see the later-stage projects, the ones that have advanced, are getting intellectual property in place, and we're also starting to see early orders come through as well. So Beth and the team will provide a lot more detail as we get to September in the capital market event. But in terms of the first half, really strong results, up 7% organically, and we are seeing core markets recovering in industrial automation and Commercial Vehicle, and that's offsetting the headwinds from the ventilator surge. If we exclude the ventilator surge, what we're seeing is Precision up 14% versus last year on an organic basis. Margins also improved, you see up 40 basis points. And as I said, that includes the investments that Precision is making within their sprint teams and the Growth Hub activity. Terms of outlook, looking at both organic revenues and margins expected to be higher for the full year versus 2020. So next slide. So in terms of Critical, I hope you all saw the Capital Markets events really showcase the progress that Critical has been making on their growth activities and in terms of developing those newer markets. Also shows the progress on shifting the strategy towards a more aftermarket-focused business. And you see that here as well. Orders for the first half up 9% on aftermarket. And within that, upgrades were up 13%. Now I should say the comp in the second half is a bit challenging for Jackie and the team. You may recall last year in the second half, some really big nuclear upgrade orders. So a bit challenging, but overall, the upgrade strategy is still progressing really, really well. Overall, GBP 186 million of aftermarket in the first half and over half of that was through parts, which was up 8%. In terms of new construction, slightly lower, down 2% and that was caused by LNG. We did have a very strong first half last year in terms of LNG orders. So we kind of expected that to come down, although I should say we are seeing LNG projects shifting out in timing. We're not seeing cancellations, but we are seeing them slowly push out. You'll also see in terms of new construction, power was lower. But interesting, both coal-fired and gas-fired power new construction orders grew in the first half. It was really a nonrepeat of a large concentrated solar order last year in the first half that led to the drop. On revenue, good growth. You see 5% there. But clearly, it's the profit growth of 31% that is the standout. And that reflects both the shift to the aftermarket as well as all the footprint work and the efficiency activity that Jackie and the team are successfully executing. Margins up really, really well, 240 basis points at 14.4%. So on outlook, like Precision, we're looking to see revenue and margins higher for Critical in the full year versus 2020. So next slide. And in terms of Hydronic, excellent first half results, up 20%. Now there was certainly an easier comp as last year, particularly in April and May last year when the construction markets really shut down in Europe. But again, looking back towards 2019, Hydronic is up organically versus 2019 at 13%. But if I go back and break down that 20% growth versus last year, about 20% of that growth, 4% is through new products, and the rest we believe is split roughly 50-50 between recovery. So installers catching up and getting out and recovering some of the work plus wholesalers doing a bit of restocking in anticipation of the strong markets. And the other half, we'd say, is just underlying market growth. So really pleasing to see the growth from the new products coming through. That's clearly leveraging our brands and the strong market positions we have in Germany and the Nordics and other parts of Europe. And also should note and hopefully, you'll be aware, launched a really important product early in the year, our digitally enabled TA Smart valve. It's really the next level of control for building management, and that product has been well received into the market. I'm very certain Phil and the team will give you a lot more color on that in September. So profits also up very strongly, up 40% on that growth and also on the delivery of the efficiency activities that Hydronic is taking. And margins further improved, now up 20%. And again, that improved -- that includes the investments Phil and the team are making on their Sprint teams and the growth activities. So in terms of outlook, you might expect, we are calling for revenues to be strongly ahead and with margins also nicely higher in 2021 versus 2020. So next slide, and I think this will be my last 1 before handing back to Roy. Yes, the group outlook slide. As Roy already said, we are moving guidance up. Effectively, it's about a 4% upgrade to an EPS range of 85p to 90p. So that does include the currency headwind, and we're estimating that at about 5% and it also includes our estimate for the average shares we'll have for the year once we complete the share buyback program, and we believe that will be about 268 million shares. So with that, let me hand back to Roy for an update on strategy. Thanks, everybody.

Right. Thanks very much, Dan. Well, this next section will be a reminder for many of you actually, because I went into a lot of detail on our strategic initiatives to rapidly improve the business at the Capital Markets event. But if we move to the next slide, I do just want to touch on the key enabling strategies again and talk about how our purpose breakthrough engineering for a better world is really focusing the organization on solving customer problems, on solving industry problems and even societal problems. So problems like getting to net 0 carbon. We are obviously looking to play a major role in that evolution as companies, government, societies drive the world quite rightly in that way. So our purpose, obviously, moves straight into our business model, as this slide shows. And we are heavily focused on creating value both for today and for tomorrow and creating value today for us is about ever-improving customer service, putting the customer right at the center of what we're doing. It's about stripping out the complexity from the business to enable it to grow faster and create better returns and it's about continuous improvement, being better every single day in what we do. Value tomorrow is clearly about market-led innovation and how we use the sprint teams to really create much more differentiated new product that's being pulled by the customers into the market because it's directly solving their most acute problems and creating real value for our customers and obviously capturing some of that value in our business models, which are increasingly using digital to serve those customers and to improve the capability of our products. So as a quick reminder of the purpose and business. Well, if we move on to the next slide, as I said at the Capital Markets event, right, this to me is my favorite slide in the whole pack because this is a direct representation of all of the sprinting projects that are now happening within IMI. And the size of the circle represents the size of the opportunity. And obviously, you move through the 4 phases of the whole process, right from the initial problem identification through to scaling up the project. And as you can see, we're starting to get some projects across all 3 divisions into that scaling phase, and we will give you much more color on that at the next Capital Markets event. Next slide, please. So another quick reminder, we've increased our sustainable margin targets. We've worked again many times through our 5-year plans, and we now truly believe that Precision will be 20% margin through the cycle. Critical will be sustainable 20% margins. And you'll remember that we are moving the mix of that business to the higher growth, higher margin, higher returns, aftermarket business and Hydronic, well, as you can see from the first half, is already at that 20% margin. And we obviously think that's a 20% plus margin business as we continue to grow in high added value areas. So move on to the next slide then. To remind you about that Critical Engineering business, I laid out these 6 highlights when we really focused on this business at our Capital Markets event. And just to touch on a few things really, it's the aftermarket which is the real jewel in the crown for Critical and that aftermarket has been growing at 5% over the last 3 years. And that's despite COVID and the effect of COVID on our field service area of the aftermarket, and we aim to continue that faster growth rate at those improved margins by really continuing to deploy our upgrade valve strategy to upgrade our own valves in that installed base, but also our competitors' valves in that installed base. So increasingly capable manufacturing processes, including things like 3D printing, but really by helping our very advanced applications engineers, the valve doctors to scale up what they do. We also touched on some of the other exciting growth opportunities in Marine, pharma and hydrogen. And hydrogen, obviously, will be an increasing market for the Critical division to move into with new product, with new exciting applications plus, of course, the deployment of some of our existing products. Okay. Next slide. So we will be focusing on Precision and Hydronic at the next Capital Markets Day. And this is really just a small teaser to say, here are 6 of the highlights of those divisions. Obviously, there's a lot of common material with Critical Engineering, as you would expect. And all 3 divisions have now got very ambitious management teams that are really focused on their customers, really engaging with their customers and really, really purpose-led as well. Really everybody is very determined to create breakthrough engineering for a better world. That's a great unifying purpose through the whole company. Everybody feels good about that. Second point is that both Precision and Hydronic have got attractive end markets already with very positive growth outlooks and in areas like industrial automation, obviously, life sciences. Obviously, sustainable buildings, areas where we can grow into and with some attractive adjacencies as well. We've got superb applications expertise, as you know, through the applications engineers in Precision that really help the OEMs optimize their equipment, whether it be through the precise dosing of reagents within life sciences, or helping the vehicle OEMs reduce diesel emissions and actually move into hydrogen fuel cells areas like that or whether within Hydronics, it's our Hydronic College that are working at the system level to help reduce the energy requirements within commercial buildings while optimizing indoor climate and indoor comfort. Third point is the deep applications expertise that our engineers have, the real understanding often at the system level, often at the level that the OEM is working at to be able to understand their applications and optimize their applications using our fluid and motion control engineering expertise. The fourth point is we are investing heavily now in growth, right. As I said, we've got around 30 sprint teams, all focused on growth. We're investing more capital, as you know, sort of GBP 65 million to GBP 70 million level. Originally, that was going to be reduced, and we've said no, that's not going to be reduced. We're investing heavily in the business so that we can generate faster growth. Fifth point then is just the sheer amount of digital expertise we're pulling into the business, the amount of digital work that we're doing to really underpin the growth and really, it's in 3 areas. It's in how we're improving our customer experience, how we're helping customers self-select our products and our capability. It's also obviously directly on the product. So in the Capital Markets event, you're going to see Phil's new digital valve, which is starting to allow much more insight into the performance of buildings and optimizing energy savings. And then the third area, of course, is in the operational performance of our own employees and really understanding where we win through the data, which customers we win with, which products we win with and then how do we scale that up, how do we increase the productivity of our own people to really help growth through our own digital capability. And the sixth there and the final area then is the simplification strategies and again, at the Capital Markets Day, Beth will give you some more details, more flavor around her customer first program and how she's simplifying the structure in Precision to generate SG&A efficiencies. And then, of course, the simplification of the manufacturing footprint that's been happening in Precision now for the last couple of years and it's got plenty of room to run. And also within Hydronic, where as you know, we've gone from 3 warehouses in Europe down to 1. And we've actually reduced the manufacturing footprint by another factory to really simplify the structure and enable our customers to have 1 base of IMI and make it very simple for our structure, our customers to do business with us. Thank you. Next slide, please. Okay. So this next slide is about how we are living our purpose. And clearly, our purpose is breakthrough engineering for a better world. And that is a unit buying driver. I have to say that, that purpose is already helping with retention, obviously, with motivation, with engagement across the group. And of course, it's also helping with recruitment because that's what people want to be a part of, a company that is actually using its phenomenal engineering skills to help create a better world. I think that in the first half, we have actually had a step change in our communications capability because we've launched a brand-new Intranet. That Intranet is already full of examples of best practice of how people are growing the company, the growth projects they're on, the innovation, the customers they're interacting with. It's full of excitement, actually. And I have to admit, I am slightly addicted to our new Intranet. It's also on a mobile platform. So you can sort of look at it any time a day on your mobile phone and see just the sort of activities that are happening across the group to create the long-term profitable growth. And I think on inclusion and diversity, well, I think our track record speaks for itself. Over the last 2 years, we've gone from 0 women on the exec to actually over 40% of our exec committee is now women. And obviously, they are contributing incredibly well to the success of the company. But inclusion is obviously much more broader than gender for us, and we are really seeking to be a fully inclusive company. So for instance, on that Intranet, we've already got over 5,000 people, 5,000 active users on our Intranet contributing towards the company's overall success. And that's what our culture is all about for us, very, very inclusive. And then we're on track to halve our carbon dioxide intensity by 2030. There's huge energy in the organization to install energy saving devices, to install solar panels and in fact, our new factory in Italy will be a showcase for us for hydrogen and the production and the use of hydrogen to really be able to show our customers just where we are in terms of our technology that can contribute to that whole hydrogen economy. Next slide, please. So I'll finish now and then we'll go to Q&A. But the key takeaways are clearly that our strategy, I think it's crystal clear to everybody inside the company and hopefully to everybody outside the company, in terms of our ability to use our great engineering skills to solve industry problems in attractive markets at real pace, right? And we have detailed several times how in every market sector how we are going to win in those market sectors. The strategy is also about how we create value today and how we create value tomorrow. That growth is so crucial to us. And the value today part is all about improving customer service, reducing the complexity of the business through the number of sites that we operate out of and just making sure that we constantly reduce the complexity, that huge drag on growth, to enable our teams and our businesses to grow faster. And again, I think you're going to see a great example of that at the Capital Markets event when Beth talks about customer first, and how she's streamlining precision around its markets and its customers so that it can move faster. And then, of course, in terms of value today through the continuous improvement drive through making sure our business is better every day in terms of its productivity, its quality, its effectiveness and the way that it's serving those customers. And then in terms of value tomorrow, there's just a huge increase now in the quality of our new product pipeline. And I've spoken before, for years, decades, 80% -- 70%, 80% of IMI's growth is planned to come from its new products, and we've got to the point now where I actually believe that, that new product pipeline will generate significant growth. And indeed, in Hydronics, as I've said, it already is, right? So already Hydronic is getting about 3% growth from new products and clearly, that has not been the case for probably more than a decade where we've updated Hydronics products. So that's great. They're nice and competitive but now we're talking about additional growth coming through from those brand new products. And again, you'll see some great examples of that at our Capital Markets event. And then the culture, ultimately, culture. Culture is what generates the growth, right? Culture is what wins for companies. And our culture is all around that breakthrough engineering for a better world, helping our customers create a safer world, a more sustainable world and a more productive world, that's what we are doing, and that's what -- and our culture is all around that breakthrough engineering for a better world, helping our customers create a safer world, a more sustainable world and a more productive world. That's what we are doing, and that's what -- that was what is generating excitement and will generate growth within the company. And of course, we sharpened our whole customer focus. There's thousands more customer interactions now, not only from the sprint teams but from our businesses, to really hone in on those customer problems, whether they've got supply chain problems, they can't get supply from our competitors or whether they've got engineering problems they need solutions to. That's our whole mindset. That's our approach to our customers, not just pushing the products we've got but really becoming partners with them, helping them solve those problems. And the outcome, of course, will -- already is, right, improve returns, improve margins, improve returns and ultimately, will be sustainable profitable growth. Right. So I'm going to stop talking there and turn it over to Q&A, please, moderator.

[Operator Instructions] Our first question comes from Andrew Wilson of JPMorgan.

I've got 3, 1 on each of the divisions, if I can just take them I think 1 at a time. On the Precision side, I'm interested in, I guess, underlying performance of the Life Sciences part of the portfolio, given that it's clearly masked at the moment by the ventilators not repeating year-on-year. But just interested in terms of, I guess, what you're seeing on the ground now in terms of demand and also in terms of how you sort of ship that portfolio. And yes, just to get a sense of sort of expense that is how we getting on there?

Right. Well, thanks, Andy. I'm going to let Dan give you the numbers. What I would say is that obviously, life sciences arena outside of the areas that have been really concentrated on COVID, obviously, the discretionary operations and things like that have had a bit of a slowdown, I would say, Andy. On the positive side, because of the relationships we've built through the whole COVID experience and obviously, the incredible work that our teams did to ramp up ventilator valve production that is actually 1 of some extra business for the future. But in terms of the underlying numbers, Dan, do you want to give bot Andy, please?

Yes, Andy, as we said, Precision overall, 7% growth in the first half. If you take the ventilator surge out of the equation, they're actually up 14%. And within that, the fluid section and indeed, Life Sciences is up about 5%. So we're still seeing the growth. As Roy said, there's still a lot of focus on -- in that sector on vaccine now and with the relationships that we've built through the ventilator work we've done, I think we're positioned really well to continue to grow that space.

Second one, just on Critical. You mentioned specifically around some sort of [ petrochem ] in particular parts of the business. But just wondering if you can help us a little bit in terms of thinking sort of by end market into the second half? Because clearly, you have some quite specific exposures and also some lead to cycle exposure? I'm just trying to understand a little bit how we should sort of think of those going into the second half?

Dan, let me start on that one, and then you sort of finish it off, if you like. Yes. So Andy, I think we've been pretty consistent for the last couple of updates. We see strength for the year, and you can do the maths on the second half. But for the whole year, we see strength in the aftermarket, certainly, as laid out at the Capital Markets Day. We see strength in petrochem and that whole area around downstream. So still, we see strength in that. And as you can see, first, it's been good in terms of orders. We see continued strength there, particularly from China, actually, Andy. And then the third area is Marine. And first half has been good, as you can see in terms of new construction, but we see much more opportunity in that Marine segment pretty much as we've laid out the Capital Markets event. So I'd say they're the 3 -- still the 3 areas of strength. We also said at the Capital Markets event that LNG projects was slowing and you can see that in the orders. And I would think, Andy, that some of the projects that originally we hoped we'd get late this year, have moved out sort of 3 to 6 months on LNG. Overall, though, as you can see, our orders are up now 4% at the half year. So it's been a really strong second quarter. And generally, in those areas, particularly in those areas that I've identified, those 3 areas, we see good project pipelines. I don't know, Dan, if there's anything that you would add to that.

No, I think you nailed it, Roy. I think the key -- and you see it on the slide, Andy, the refining and petchem space is still very robust. And for all the things Roy said, we feel the second half will still be very, very good. We -- the 1 thing that I did call out, obviously, the nuclear upgrades, which was a great set of wins in the Americas last second -- last year's second half. That's the 1 thing that Jackie and the team have to overcome. But I think the opportunities throughout the pipeline, particularly in Marine and in refining and petchem, absolutely enables us to continue to end the year in a really good shape.

And then I guess final 1 for me, just on the Hydronics side. It seems as if the new products are certainly contributing to your outperforming the market. And I appreciate some of it's quite at the moment given we've obviously got some recovery in that. But it certainly seems to be kind of above-trend growth. Just interested in terms of when you think about product development now, how much of the thinking is sort of linked to kind of EU Green deal and potentially some of the opportunities that Hydronic would seem to fit quite well for? Or how much of the kind of the existing portfolio do you feel is already well set to benefit from that sort of as and when it comes?

Yes. I mean Andy, what Hydronics does is provide a comfortable indoor climate in buildings at minimum energy cost. I mean that's intrinsically what it does. That's what the Hydronic College does, our applications engineers. That's what the products do. And as you know, we've got leading market positions, we've got top quality brands. And so intrinsically, that business, its new products and its investments are aimed at doing that -- more of that even better, even faster. So actually, breaking news is that we've actually set the date now for the next Capital Markets event, which is the 23rd of September in the afternoon. John will send out that as sort of save the date. But what you'll really see there, Andy, is things like the new smart valve from IMI Hydronics, which is all about -- it's digitally enabled. So it enables us not only to set the building optimally but help maintain the building in an optimal position in terms of energy use, which is going to become increasingly more important as owners of the buildings are asked to verify and certify that their buildings meet certain energy requirements. So yes, I mean all of our investment, all of our dry will directly align with the EU Green Deal and it's exactly the same outcomes that are required. Less energy usage for a comfortable indoor climate. Yes.

Our next question comes from Max Yates from Credit Suisse.

I just had a question on the additional initiatives in Precision, the GBP 23 million that you've identified. Could you talk, firstly, a little bit about how we should think about that sort of phasing across 2022, 2023 and perhaps 2024? And also, given there's been kind of a lot of work that has already happened in this division, I'm surprised that there's sort of so much more that you plan to do. So maybe if you could sort of talk within the footprint optimization, the SG&A efficiency exactly what you found and where that sort of quite large step-up in efficiency is coming from?

Yes, Max, thanks. It's worth drawing everybody's attention to this really. So this is part or really the final step, I should say, in moving Precision's margins from 20% at the top of the cycle to 20% through the cycle. And as Max says, there is a lot of opportunities still in Precision. We started when I took over as CEO -- so what's that? 2 years ago -- just over 2 years ago with 32 sites in Precision. I think you all know that we've consolidated that down to 28% but clearly, that's a lot of opportunity still to consolidate into our best sites and our best sites, obviously, are the ones that are operationally super efficient. They've got a very strong cost advantage. Often, they're in places like China, close to the Chinese market, which is important, India and obviously, the Czech Republic and Mexico, but also some of our best sites have incredible engineering capability close to customers to enable us to execute on that application's engineering strategy. But you can imagine Max, coming down from 28 sites, there's still plenty of opportunity, plenty of runway there. Used to that complexity from the business. So this isn't only about cost. This is about providing superior customer service and removing some of that complexity, which is obviously a drag on growth. So that's 1 part of it. And we've laid that out for you and we'll lay out actually in a bit more detail at the Capital Markets event. And then the other side of it is the part that Dan talked about as you went through the business review, which is SG&A efficiency. And Beth has come in and done some really structured work to say okay, let's align globally around the markets. Let's make sure that we streamline all of the back office processes that will involve things, Max, like shared services for the back office. So this is going to be some -- quite a lot of work to get this done. And it will take about probably 2.5, maybe even 3 years to get all of that part of the work done. And none of this is easy, right? Closing sites, complex sites, you've got a lot of knowledge to transfer. Customer service will always be our first priority. So I talked about 1 large site that we deferred because of COVID because if you add COVID complexity as it was sort of around the beginning of this year on top of the site complexity, you're running in my opinion, too great a risk. So we'll be careful with the timing. But having done for having driven those results to the bottom line, we're confident in this program now, which is obviously why we're publishing it. And as I said, Beth will give you more details on that at the Capital Markets event in September. Does that answer your question okay, Max?

Yes, that's perfect. Maybe just a follow-up then on Precision in July. Just any kind of initial comments you have on kind of how the quarter has started, whether you've observed any either regional or specific end market weakness that is stepping down that is kind of coming through? Or is it kind of business broadly in line with what we saw in Q2 on a sequential basis?

Yes. I mean we've seen no real weakness, Max, I would say, across the -- across the segments. I mean Commercial Vehicle is super strong, right? With Commercial Vehicle, Max, the bigger risk is around our customers' supply chains. And then be able to run at the demand rate, I'd say that's the bigger risk. And obviously, they've kept going but at some places, they're still not running at the output that they would like to. The Commercial Vehicle demand super strong, and our supply chain operators have done a really good job because we scale -- as you know, we're up 50% in the first half. And although obviously, by the fourth quarter, the comparator gets a bit harder, right, because the fall quarter, I think, was actually ahead last year or the year before it recovered. But in terms of run rate, super strong in Commercial Vehicles. Same thing for Industrial Automation. Our Industrial Automation has a high correlation with PMIs. PMIs are strong, and our order books are strong, our order incoming rate is strong. It's strongest obviously in China and Asia, but Europe isn't that far behind. I think a lot of the European OEMs are obviously exporting into Asia, and they're seeing that strength now. So that's good as well. And the U.S. is building. So yes, I see continued strength in that whole sort of industrial automation, motion control area as well. And yes, perhaps the only area is that we obviously had some sort of follow over ventilator valve for buildings in the first quarter. That was pretty much gone by the second quarter actually, and we maintained our forecast of GBP 35 million to GBP 40 million of ventilator valves for this year, Max. And that's what we still think we deliver. So I would say, overall, Max, it's actually in pretty good shape in terms of precision demand.

Fantastic. Good. Just 1 sort of very quick housekeeping question. You've obviously mentioned on the buyback that you've done about GBP 60.5 million of the GBP 200 million. I know kind of average share count you've mentioned, but do you think you'll actually complete the GBP 200 million buyback by the end of this year, just thinking about kind of next year or next year's share count?

Yes, Max. Yes, Max. Our expectation is we'll get it done this year. We're approaching kind of the first half point now. So I think we've got enough time to complete it. So we'll have all the shares bought back and canceled by the end of the year, and we'll have a clean run in 2022.

Our next question comes from Alexander Virgo of Bank of America.

Just a couple of quick ones and follow-up, I suppose, on Hydronic first, margins above 20% first time in 5 years, I guess, nearly is a great result. And I guess, testament to the operational improvements that Phil's put in place. So wondered if you could talk a little bit about how we think about H2 and into next year, I suppose, really, given historically the seasonal strength H2 on H1 in margin terms? So that's the first one. And then second one, and I appreciate you probably don't want to talk too much about 2022 yet, but noting the strength in Critical order intake, the backlog improving year-on-year, just, I think, 1% or so organically and the margin mix being of richer profitability in that backlog. Just wondering how we can think about, I guess, Critical in the next 18 months?

Brilliant. Thanks, Alex. Well, I'll start, Dan, and then I'm sure you'll add. But Hydronics 20%, yes, we've said now, Hydronics is intrinsically through its brands, through its market position, through its technology, through its customer service, it's intrinsically a 20% plus margin business. And yes, Phil's team, I couldn't be more proud of what they're doing, the new product contribution, and this is very rough, Alex. But the new rough, as I said on the presentation, right, it's probably 3% growth just from new products. 4% if you add in probably what we've gained in market share around the edges because of our customer service. I've talked about this a couple of times. But when we kept customer service at its absolute optimum throughout the pandemic, whereas some of our smaller competitors obviously furlough people. And I think a mixture of those things has just shown how well Phil and the team are doing and really are. So definitely a 20% plus margin business, Hydronic, and its added value as Dan always reminds me, is 70% plus, right? So when you create volume growth, you really -- you see it coming through in the bottom line, as you can see. Second half, we are investing more in the business. Again, we'll show you that at the Capital Markets Day. Obviously, we think that something like 40% of the first half growth is catch-up, something like that, right? So that is where installers are working every hour, godsends, right? Because they're catching up. They can actually work at the moment. Some of them worried there might be further lockdowns across Europe. So they're working while they can. Plus, of course, wholesalers have definitely put some stock in the first half because they are worried some of our competitors' supply chains are struggling. I mean our supply chains have been under pressure, no doubt about it. It's just, once again, the team, the operational team in Hydronics, is doing a really, really good job. So yes, I think for the full year, we'll be around 20% margins in Hydronic this year, which as you say when you consider we were down at what, 15.9%, Dan, right, just a few years ago, is a great improvement. Part of that, Alex, is coming through the consolidation of the 3 warehouses to 1 and the consolidation of the manufacturing and the assembly into Poland. So that's contributing as well as the volume increase this year. But yes, I think that these are good solid markets. And I would expect Hydronics to be 20% plus as we go forward from here, Alex. So I don't know, Dan, if there's anything that you would add to that.

No. As you say, Alex, the normal seasonality means Hydronic does a bit better in the second half than the first. But because of some of the catch-up, I think we can't look at that and expect that, but still good growth for the full year. And as Roy says, we think the margin should be in that 20%, 20% plus range.

Thank you, Alex. Oh, and ...

Oh, and 2022...

Was all about Critical, Alex, just to talk about 2022 as always ahead of the game, Alex. So as you said, we're not really going to stop giving guidance for 2022. In Critical the good news is the order book is slightly up now, having been down at the end of the first quarter. The project pipelines look pretty good. There's a lot more self-help yet, as you know, from the restructuring table. So Dan's included the restructuring table in the presentation, but there's a more detailed version as well in the appendix, Dan, and in the press release. So Alex, you can see that Jackie and the team, there's still a lot more to go for in terms of self-help as well. So we feel right now, where oil prices are, where momentum is actually 2022 should be another good year for Critical. So yes, too early to sort of give anything more precise than that, Alex. But yes, the positive momentum is there.

Our next question comes from Michael Tyndall of HSBC.

Just a couple from me. I guess the first 1 is around the Precision margins. And I think about -- if I'm thinking about your future benefits and just simply add that, we pretty much get there. So is that an oversimplification? Is there an impact on sales when you start to consolidate footprint? Do you need to go out and get richer sales to make that margin target? Or is it simply a case of just watching the program roll out and you'll effectively get there through the actions you've taken? And the second question is just around -- I know it's only been a few weeks since we had the Capital Markets Day, but Critical noncore. Is there any update there? And perhaps looking at it from a different angle, what are your competitors doing in that same space? Are they also looking at that area of the market and saying, "Well, actually, we're going to stop investing, we're going to shrink. We don't want to be there"? So maybe the prospects for that business are changing because the competitive landscape is actually getting easier. There are my couple.

Yes, really good. I mean, fundamentally, you know IMI, I'm sure that we don't want to leave -- we want to leave as little as possible to change, right? We're all aware there can be external events. But what we like is very clear bridges, like we presented -- well, for the last 3 or 4 updates, right, showing exactly where the margin improvement is coming from, and then we like to deliver that at least in line with our plan. And obviously, that's been complicated by the whole COVID environment. But fundamentally, those building blocks are what will take the margins forward, and that's why we're confident of taking the margins forward. Precision is a -- both a high added value and a cyclical business. So trucks go through cycles. I'm sure you're well aware of that. People buy trucks when times are good. And obviously, they hold off and the age of the fleet increases when times aren't, so it is a naturally cyclical business, and motion control is less cyclical, but also cyclical, right? So in a bad recession, a typical bad recession, not like a COVID recession but a typical bad recession, Precision sales can come up 10% or even slightly higher than that, right? So you have to remember that. So it's cyclical and what we're talking about is through the cycle moving to 20% margin business. What we're also doing, as you know and what we'll show you a lot more about, is building the new product capability across IMI through profile and Precision has some very exciting projects that will contribute to this growth pretty substantially going forward. And again, we'll talk -- Beth will talk about that Capital Markets event. So we'll show you more of that. So yes, the building blocks take you there. And then over time, growth should drop through and those 20% margins will become stronger and stronger in terms of making sure we do that through the cycle. So yes, your maths is broadly right. On your second point on Critical. No, I would say just a few weeks ago, it's the same now. Those Critical business have improved, as you can imagine, in their first half results, nice improvement in margins in principle. Again, those businesses are part of that. I think Max asked me the question at the Capital Markets Day, what would happen if we sold those business. It's still about 100 basis point improvement if we chose to sell those businesses in the future. So no update on the last couple of weeks on that one. Have I answered your questions? I think there was -- oh, there was a competitor question, wasn't there? Sorry. Yes.

Yes. No, just wondering if they're deemphasizing. Yes.

Yes, yes, interesting. Obviously, some of fossil power is not as attractive to people and clearly, money flows, investment flows are not in that direction. So I would say that on balance in the aftermarket, there aren't many people investing as we -- as we showed you in the Capital Markets Day in upgrading the existing power stations in particular, I would say. It's a mixture of that. Plus the fact that we have got more coverage, more sales coverage of those assets, as Jackie talked about in quite a lot of detail, actually, at the Capital Markets event, plus the growth of sprint teams using the new technologies to enable us to service that market more effectively, faster but also with smaller packages so that we can get our technology into the existing installed base. So I'd say a mixture of those 3 things makes us actually build reasonable about, particularly the upgrade bounce strategy into that installed base.

Our next question comes from Mark Davies Jones from Stifel.

You've answered a lot of my big ones. So I'm just left with a couple of nasty nitpicking ones, if I may. Within Precision, factory automation obviously bounced nicely up 10%. I'm sorry, that's a fire alarm, well timed. Are you comfortable that you're at least holding share in factory automation? I've seen some companies produce higher growth numbers than that over this period. Is that just a factor of mix by sector and end market? I apologize for the background noise.

Yes. Thanks, Mark. Yes. No. Okay. Factory automation, yes, we're comfortable that we're at least holding share, Mark. Obviously, our exposure to Asia is less. From memory, Dan, we're sort of high 40% Europe, sort of a third Americas. Obviously, our exposure to Asia is less. From memory, Dan, we're sort of high 40% Europe, sort of 1/3 Americas and some -- what, is at about 12%, 14% Asia? Is it something like that?

Yes, yes, exactly.

It's about right, Mark, right. So obviously, yes, you've seen what I've seen, right? And we monitor this closely, believe us. We watch every division versus its peers. And yes, it's more of a geographical mix effect than anything else versus those peers. I'm confident, though, that over time, we will actually outgrow that market. When I look at the particularly the growth of new product pipeline, and again, we'll show you some of this at Capital Markets Day, we are moving -- as we have historically with the sector strategy, into places where we've got real differentiation and where our larger competitors aren't competing head on, right? So obviously, it's a sense of construction. So I hope that answers your question. I think, Mark, the other thing is that, obviously, as I said, we monitor all 3 divisions. And actually, some of the analysts tell us. But if we look at Hydronics' performance, actually, I think it's as Dan said, moving pretty much to the top of the lead now, which is great because it hasn't been there for 10 years. And Critical, obviously, as well, if you look at the way it's progressed, and Jackie and the team is also pretty close to that top of the league. So obviously, our ambition is to get Precision there as well. As I said, Beth is really sorting through Precision at pace, and we're confident over time we will get it there.

Our next question comes from Jonathan Hurn of Barclays.

Just a few questions for me, please. Can I just sort of kick off with Precision and just come back to Motion Control? Obviously, you said you saw a strong order intake in Q2. I think in Q1 orders were plus 5. Can you just give us where that order intake was for motion control in Q2, please? That was the first one.

Yes. So Dan, can you give Jonathan the actual number? I mean it was well ahead of sales again, Jonathan, because obviously, things have picked up sequentially year-on-year. So I think for the first half, Dan.

First half motion up 9%. So it was really 17% in the second quarter. And obviously, some easier comp, Jonathan, last year. Things softened up as the pandemic started. But still really good and pretty much across all the geographies as well with Asia probably being the strongest. No, I'm sorry, no, Europe actually coming back. And I think that's where we saw maybe the weaker comp coming through.

Okay. Okay. And sorry, just that number, that plus 17 in Q2, that was orders, that wasn't sales, right?

No, I'm sorry, that's sales. Or ...

Order number in Q2?

Oh, sorry. Yes. No, orders, I think, pretty much following PMIs as well. Let me dig that out, and I can get that for you.

Okay. Perfect. And the second 1 on Precision. Obviously, we look at Commercial Vehicles plus 50% in the first half. I mean as we look at that right now, is that providing a mix headwind in terms of margin for Precision overall? And if so, what sort of magnitude of headwind is that sort of strength in CB creating right now?

Yes, that is providing a slight headwind, Jonathan. You're right, particularly versus higher Life Sciences last year. And we always say, Jonathan, that it's about a 10% difference. But having reviewed it more recently, Precision are now -- because we've got some quite good efficiencies in Commercial Vehicles as well. Thinking it's more like a 5% to 10% difference in the effect -- the mix effect on the margin difference between Commercial Vehicles and industrial automation.

Okay. Okay. And then just maybe 1 last one. Just on Critical and maybe just looking at the bigger picture. I mean can you just talk a little bit about pricing now? I mean I think historically, we looked at the valves industry, there's been too much capacity. And then obviously, that's had a negative impact on pricing. Have we seen some of that capacity come out of the industry essentially on the back of COVID and potentially going forward, do you think there's any sort of upside to the pricing environment?

I think, yes, it depends where oil prices go as new investment comes and all of that, Jonathan. But right now, I would say pricing on new construction is still very competitive. It's still -- you're in the big -- typically only 2 or 3 people can produce what we do, in most cases, Jonathan. And we definitely got more competitive over probably the last 5 or 6 years now using things like value engineering and what Jackie is doing now, which again, we showed at the Capital Markets event, which is really offering more configured valves, less engineered from scratch, still highly engineered but that is enabling him to gain some efficiencies as well around new construction. So I wouldn't say at the moment pricing is improving in new construction. But I would say our margins in the order book around new construction have improved over the last 18 months or so because we have sold those water valves that I've talked about a few times, which were only really there to make sure we could pay overheads during what was a tough oil and gas period. And those valves have been replaced in our order of nearly completely now with better quality to make sure we could pay overheads during what was a tough oil and gas period. And those valves have been replaced in our order book nearly completely now with better quality, more severe service valves, Jonathan. So I think that's good. Pricing in the aftermarket is still good, has been really throughout because as you know, the nature of our products is -- they are in the most severe applications. And in those applications, OEMs tend to want to work with the original supplier of the valve itself. Plus our service, our local service has been incrementally improved over time as well. And that, again, keeps customers very, very engaged. It's much more about service than it is about price when you're at that sort of level of customer service. So Dan, I don't sure if you can help Jonathan on the order numbers, yes?

Yes. So year-to-date, Jonathan, so first half orders in motion up 18%. So if you do the math, it's up something like 20%, 25% to 30% in the second quarter. Sequentially Q1 to Q2, motion orders are up a little bit when you do all the math.

Yes. So just be careful of that easy comparator from last year, yes.

Yes.

But yes, in that orders ahead of sales, as I said, Jonathan, and PMI is still strong, and we lag PMIs typically by 3 months or so, 3 to 6 months, I'd say. So yes, the answer when I think it was Max asked a question, it's good demand going into the third quarter. Obviously, August, we all know holiday season, right? It can always be a bit more variable, but what we see so far is good.

[Operator Instructions] Our next question comes from Robert Davies of Morgan Stanley.

My first 1 was just on the aftermarket part in Power. Obviously, that's the biggest part of your aftermarket segment and is up quite strongly. I'd just be kind of interested over the medium term. Do you see any risks business from either the sort of growth in renewables or lower utilization on any of those assets at all? That was my first question.

Yes, Robert. I mean I think again, we went into a lot of detail on Capital Markets event on this. And Jackie explained that -- it's over 60%. I think it's even closer to 2/3, Robert, of our aftermarket in power. Fossil power is in Asia. And it's in areas like China, like India, and it's also in the cleanest and the most efficient power stations, sort of super critical type power stations because we could never compete effectively in the small -- the 300-megawatt power stations and local valve suppliers would normally win that business, right? And obviously, you know what we do in severe service. It is the most demanding technology. We're talking about temperatures up at 600, 650 degrees C, 400 [indiscernible]. I mean this is sophisticated technology. So for that reason, the footprint, the technology, we actually think it's as robust as it possibly can be within that segment. We are building, as Jackie explained, Robert, so we've got well over 100,000 installed severe service valves, and there's something like 200 and I think it was 60,000 competitor installed severe service valves that we're going after. And at the moment, we're only converting, I think it's 850 last year of those valves to our technology. And once we've done that, that then gives us the part stream for the future, which is the annuity. And as you know, Robert, something like, I don't know, 58%, I think you can do the maths from the actual press release, but it's something like 58% of that aftermarket is parts business, which is very high margin. It's the new version that you're trying to create by doing the upgrade valve work. So yes, of course, are going to be decommissioned our coal-fired power stations, the older ones in the U.S. and Europe. At the moment, that has been at a pretty slow rate actually. And we're more than offsetting that by what we're adding in both from new construction sands that are -- actually new construction orders were up actually in the first half. But more importantly, from the upgrade valve strategy that is giving us that parts business for the future. So yes, I mean over the long term, there will be more decommissionings, I'm sure. But over our sort of strategic planning horizon, we actually feel pretty good about that whole aftermarket strategy.

And then my second question was just around the growth in Hydronic. Maybe I missed it in the earlier comments. But was there any impact from restock in that number? I just thinking about how that sort of pans out into the second half. I know the comps are sort of slightly more difficult, but still negative from last year. So just wondered what are you hearing on the ground in terms of restock versus new products versus any other sort of impact in that nearly 20% organic growth number?

Yes. So ballpark, Robert, and these numbers are very, very hard to get right. I've noticed most companies don't get it right because it's very hard, but directionally from the work we've done, and we've done quite a lot of work, obviously, talking to customers and wholesales and seller directionally of the 20% growth in the first half, we think 40% of that is catch-up. So it's either wholesale or restocking or it's installers working abnormal hours catching up on projects because they can actually work and get paid now. So roughly then, about 8% growth in the first half, we think is catch-up. About 40% very roughly, Robert, we think, is the market, right? And then the other 20%, i.e., 4% growth, comes from a mixture of new products, and some small market share gains around our customer service initiatives, right? So broadly, and again, that's the very, very rough, but that's how we see it, Robert.

And then my final 1 was just really -- you mentioned a couple of times on different questions around the footprint of the business. When you look at your overall footprint at the moment across all 3 divisions, where do you see the biggest scope for footprint consolidation? And I guess my question is sort of leading into the potential for sort of one-off charges going forward. Is it sort of fine-tuning from here? Are there any sort of still major factory repositioning? Or you sort of realize you've got too many factories in wrong parts of the world and you need to be sort of making any changes? That would be my final question.

Yes. No, I think what we've now published in detail should, all things being equal with reasonable markets, get us to our margin targets, as I was talking about earlier, Robert, okay? So that's what we expected. Beyond that, yes, we will never stand still. I've always said of it, right? If there is an opportunity to strip complexity out of the business, which will ultimately help us grow faster as well as improve returns, then we would obviously crack on with it. And that's what we proved we can do. We can drive them into the bottom line. Clearly, you would think that with a number of sites left, and I'm sure you've already done the maths, but the biggest opportunity still will be within Precision at the end of everything, right? But as I've said, we will need sites not so much for their manufacturing, but for their engineering capability and proximity to some markets, Robert. So you can't just do [indiscernible] because of the way our strategy works, right? I mean some people have just said, well, obviously, you probably only need a handful of batteries, but it doesn't work like it. It just doesn't work like that. We -- our main ambition is to grow, and we will be investing more in applications engineering, more in growth hub, more in commercial excellence. And again, Beth will sort of outline in a bit of that because although we can save that money, that number we've given you actually is a net number of savings, obviously, which will hit the bottom line, but the actual gross number of savings is higher, and we're going to be reinvesting more in growth. So -- and again, we'll give you more flavor of that at the Capital Markets event on the 23rd of September.

Our next question comes from Edward Maravanyika from Citigroup.

I just wanted to ask around your new products if maybe you could help us with this deal and what percent of revenue, say, in the next sort of 3 to 5 years will come from new products for the group. And also what getting that done entailed in terms of investments, so in terms of what that might mean for R&D as a competitive [ site ]?

Yes. So yes, our margin targets take into account further investment, Edward, okay? So as Dan said, we're up to 30 teams now in the Growth Hub, which are building the new product pipelines. I showed you my favorite slide, right, which is an actual representation of those new products coming through. And -- but all of that investment is included within those margin targets, right? And as I said, if you take Precision, for example, we've given you the net number of cost reduction, which actually drops to the bottom line after we put investment back into the business in those vital growth areas like new products. In the first half, Edward, about 3% of Hydronics growth came from new products. About 2% of Precision's growth came from new products. So it's starting to build. Remember that previously, we had made our existing products more competitive, which is good, but this is now incremental growth, right? This is new -- what I would call real new product line. So that gives you a flavor. At the Capital Markets events for Precision and Hydraulic, we've already done this for Critical, remember, but at the Capital Markets event for Precision and Hydronic, we will show you the sort of growth rates we expect to get from those businesses over the sort of medium to longer term, right? And part of that is clearly -- a major part of that is new product growth, Edward.

That was our final question. So I hand the call back over to Roy for any closing remarks.

Perfect. Well, thank you, Nadia. Thank you, everybody, that joined the call. I really hope you can join us on that afternoon, the 23rd of September, for our next Capital Markets event. And I'm pretty excited about what we're going to show you in terms of new products, new product pipeline and a further sort of insight into the way the Growth Hub is developing across IMI. Something that I've literally just had in the last day or 2 is our employee survey, which, of course, we'll publish in the annual report. I think our highest-ever score might have been 74%. I think we're at 73% last year. In terms of employees that would recommend IMI to their friends and family, that's literally just printed at 80%. So I'm absolutely delighted, and as I said in the presentation, just a sheer ambition around growth, the sharing of growth projects, the new Intranet, the way that is enabling people right across the company to actually engage, is quite fantastic. And our HR Director, he definitely deserves sort of recognition for that. I think, hopefully, you've seen another update, another upgrade one of the analysts provided me this morning that this time last year, we were sort of guiding to, I think it was GBP 0.65 to GBP 0.70, right? And that just shows how the quality of the business is starting to improve through those new products, through that growth agenda, through the focus on the customers and being more commercial, more business-driven. And certainly, I hope you get a feeling of why we're confident the execs confident of gaining those sustainably high margins, sustainably higher returns and ultimately, that higher growth. Thank you very much, everybody.