IMI plc (IMI) Earnings Call Transcript & Summary

Hello, everyone, and welcome to today's conference call on IMI plc's acquisition of Adaptas. My name is Seb, and I will be the operator for your call today. [Operator Instructions] We'll now hand the floor over to Roy Twite to begin. Please go ahead, Roy.

Thank you, Seb. Good morning, everybody, and thanks for joining us today to hear about a very exciting acquisition that we're announcing for IMI Precision Engineering. This investment is obviously absolutely true to our purpose, Breakthrough Engineering for a better world, and it fits extremely well with our strategic and our financial ambitions, developing IMI's business further into the sustainable profitable growth markets in Life Sciences. I am joined on the call today by Beth, Beth Ferreira, Divisional Managing Director of Precision Engineering; and Dan Shook, our Finance Director. Beth is actually currently in the U.S. and will walk you through the main commercial and strategic considerations that make IMI's combination with Adaptas so attractive. And Dan will then summarize the key financials. But just before I hand over to Beth and to Dan, I wanted to extend a warm welcome to Jay Ray, Laura Ray and everyone at Adaptas. We are really delighted that they are all joining the IMI team, and we look forward to accelerating the development of both businesses in what is a really compelling combination. Okay. With that, I'm going to hand over to Beth to take you through the details.

Thank you, Roy. As Roy said, we are absolutely thrilled to welcome Adaptas the IMI Precision Engineering family. We see just tremendous growth potential with the combined strengths of our 2 businesses. Maybe first, I can just give a little bit of background on Adaptas. The Adaptas team have been market leaders in this highly specialized space since it was founded back in 1983 as Detector Technologies, developing the really core technology for manufacturing continuous dynode electron multipliers for mass spectrometry. Since then, Jay, Laura and the team have added a number of new technologies to the platform and expanding the product range into really complementary analytical areas, such as filaments and power supply. And then there was fluid handling and lab automation. These are the newest that were only acquired in 2020. And this area is relatively underpenetrated. But it is a space that we, at IMI, also play and we can help support Adaptas in this area. The market size for Adaptas' mass spectrometry is about $300 million and it's growing nicely in the mid-single digits. And we think that this can be expanded to the $500 million plus through organic and potentially inorganic initiatives. So it's highly attractive for IMI. Another area, manufacturing the mass spectrometry subsystems for OEMs using many of its own components, plus this technology and application expertise, is really a key differentiator for Adaptas that has resulted in really deep customer intimacy and long-term relationships. As you can see on the slide, Adaptas works with some of the world's largest analytical device manufacturers. Many of these are common with our IMI Life Sciences portfolio today, and this really presents an opportunity to expand the relationships in both businesses. And in order to support these multinational OEMs, Adaptas has facilities in the U.K., Australia, and China, in addition to the U.S., as you can see on the slide. So we flip to the next slide, as I mentioned, I believe Adaptas will be a fantastic addition to the IMI family and particularly Precision Engineering for a couple of reasons. Adaptas will increase our proportion of sales into Life Sciences, which, as Roy mentioned, has really attractive growth rates and really tangible problems that IMI and Adaptas can solve for a better world. We plan for Adaptas to be part of our Precision Fluid OEM business unit that encompasses life sciences and the process control segments. If you remember, last year, you heard a lot about this business' incredible response to the pandemic with ventilator valves for critical care. So Jay Ray and Laura Ray, we're really excited they will be staying with the business and help us see this vision of the combined synergies will report to our business unit MD, Martin Maas. So with the addition of Adaptas, this business unit will shift from about 23% of the IMI Precision Engineering portfolio to about 28%, and will actually increase our Life Sciences sector by about 60%. It's really getting a balance in this better world space that are improved. And it will also provide a nice counterbalance to some of our more cyclical segments in the division as well. Adaptas has grown at about a 10% CAGR over the last couple of years. And with a robust pipeline in hand, we expect some nice accretive growth to continue for our business as well. And I think what you'll find is that our approaches to the market are very similar between Adaptas and our current Life Sciences portfolio. The focus for both businesses is very much on key global OEMs, and are really building those intimate relationships with these customers, where we both saw really challenging technical problems and secure a long-term relationship on our product platforms. We each have different yet complementary customer relationships, which will allow for introductions to be made to each other's customers. And in some cases, subsystems may incorporate products from both the Adaptas portfolio and IMI's. And then in terms of margin, we expect Adaptas to deliver adjusted EBIT margin of 17% in 2021. And if you recall back in the Capital Markets presentation recently, I presented our ambition to deliver 20%-plus margins through our economic cycles in IMI Precision Engineering. And we believe Adaptas will help us reach this target, with the combination of the commercial synergies that we just talked about as well as some operational synergies, particularly around strategic sourcing in the shorter term. And so overall, what I would just say is that I think Adaptas has a very similar business model to our core IMI Precision Fluid OEM business. And it's in a complementary space, which will provide really excellent commercial synergies. It will be accretive to our revenue and -- revenue growth and margins. And it will help us develop those better world solutions for our customers. So I'm really looking forward to meeting more of the Adaptas team in Palmer, Massachusetts today and welcoming them to IMI in the near future. So very excited about this addition to our family. So with that, I will hand over to Dan for a few more details about the transaction itself. If I can, Dan.

Great. Thanks, Beth. And let me add my welcome to everybody at Adaptas as well. And to Jay and Laura, looking forward to seeing you again, and hopefully I can get over to Palmer soon and the other sites as well. So really, really pleased to be able to make the announcement today. So a bit about the numbers. I think you've all read it in the press release, $271 million, about a 16x multiple. And I think importantly, what's not in there and you see it on the slide, we'll be able to fund this through our existing facilities, but what we plan to do is work with our core relationship banks to term this out. I think those of you who know us, we've got our debt nicely termed out. Most of it doesn't mature until 2025. So we'll look to term this out and make it an easy transition keep our powder dry. It does move our gearing up to about 1.5x. So it enables us to have still nice headroom there and dry powder for further bolt-ons as we go forward. Maintaining our financial discipline. This one will return our cost of capital by year 3. And obviously, with the combination benefits, we see only great things as we go forward. And importantly, we'll look to close this out by the end of the year, sometime mid-December is the target, and we just have to go through some of the customary merger filings. But we expect that all to move relatively quickly. So yes, from my side, really excited to see the combination. A great fit with Beth and the Precision team. So with that, I think I'll just hand back to Roy to wrap up.

Great. Well, thanks, Dan. Thanks, Beth. I think in summary then, we are absolutely delighted with this combination of Adaptas and IMI. It fits perfectly well with our purpose and presents real opportunities to accelerate our growth in the very attractive life sciences sector, while making good sense from a financial returns perspective as well. So with that, I'm going to hand back to Seb, who's our call operator, and we'd like to take your questions, please.

[Operator Instructions] First question today comes from Alexander Virgo at Bank of America.

Thanks very much. Good morning to everybody. A very early morning to you, Beth. Nice [ accretive ] deal. I wondered if you could comment a little bit on that expanded addressable market. Do you need to put much in the way of investment in incrementally to be able to address that? How well invested do you believe the current portfolio is? And then final question, I guess, to Dan, just in terms of how much we ought to be factoring in around integration costs for the balance of this year and perhaps next as we think about pro forma numbers for 2022?

Beth, are you happy to take that part in terms of how well invested Adaptas is and how you tackle the $500 million?

Yes. And then probably the second half of that growth expansion that I mentioned could be potentially from some additional inorganic spaces that we'll need to explore in the coming months with the combined teams as well. So more to come on that front. But I think a good bit of that will come from our market growth rate and our natural combination of the portfolio as well.

And in terms of integration costs, Alex, we're not seeing a significant investment needed on that side either. I think Jay and Laura have built a really, really good business. We don't see a need to do lots of transformation there. I think there will be some integration costs. But of course, we'll start immediately at working on some of the combination synergies around procurement and supply chain, which I think will help offset that. So I wouldn't expect a big need to put a big number out there. I think it will get just absorbed into the results as we grow into 2022.

Did that answer your questions, Alex?

Yes, I'll get back in line.

I think what we're trying to get across through the presentation and the press release is that we're buying a fully invested business. And as Beth said, it's really the key technologies right at the heart of the spectrometer, which is why we like this so much. We don't use those words mission-critical lightly. The key product, if you like, that's been increasingly built into systems is the actual bit that provides a lot of the resolution for the instrument. So it's really, really mission-critical. And that, obviously, has built tremendous customer relationships. It's better going right back to the '80s, the [ build and bill ]. Adaptas on its own has been growing at 10% for the last couple of years. And obviously, we want to build our synergies, our product range, which fits naturally into a lot of those customers as the synergy sales. So yes, that's why we're pleased with the acquisition. Are there any other questions?

Our next question comes from Mark Davies Jones of Stifel.

Two questions, please: one strategic, one financial. The strategic one first. Obviously, you said the business model is similar and there are some overlaps on the customer side. But product set-wise, mass spectrometry is some way away from your traditional strength in the fluid management business. So does that mean you're prepared to look much more broadly across the subsectors of that Life Sciences opportunities you continue to grow? And how do you exploit those cross-selling benefits in practice? Those are the ones we should take on first.

Yes, Mark. That was great question. I think there's some things that are completely nonnegotiable for us. As you know, Mark. it has to fit with the purpose. It has to have elements of fluid engineering, use technologies that are actually very difficult to deploy. That has to have an applications engineering element to it. It has to be really mission-critical, right? That's been very, very important to the customer and really be core to the customers' competitive advantage. And as Beth said, this fits exactly with our OEM business model. It does broaden us out. It does open up new market opportunities. And that's what we've really described. I thought, again, Beth's team did this really well at the Capital Markets Day, talking about how we can go into adjacent markets, because just sticking with our core business is not going to lead to the sort of growth that we want. What we want to do is expand on our customer relationships, bring new technologies. And as you've already, I think, identified Mark, there's very little overlap within the product, right, which is for us is great because it really does enable us to move into that adjacency and grow faster. Beth, I don't know if there's anything you would add to that.

No, I think that's perfect in terms of the spaces that we're looking for, right? It really is that deep applications and technical expertise that differentiates, right? That's what we're good at and that's what's nice to add into the portfolio because it allows us to differentiate. So that's what we'd be looking for. And this case of Adaptas is right in that sweet spot of what works well for us. And there is the piece around the lab automation in this particular case that is newer for Adaptas. But we do have products in the IMI portfolio, which are -- there's some nice synergies there to really grow that together, I think, in kind of combining and will be accretive to our growth profile. So I think this one fits well. And I think we'd continue to look for other ones that may also fit that profile. But again, we wanted it to be a better world. We want it to be highly engineered and really have that differentiation in the market.

Great. The other one was a pretty straightforward one, which was has this business seen any distortion to trend from COVID? Obviously, there have been parts of the medical markets that have been boosted by it and businesses that have been hit. Is there anything in the trend rate and what we should expect for '22 related to that?

Beth, do you want to take that again?

Yes. I wouldn't say so. There have been some fluctuations in the business back in last year's numbers, but it's quite modest in the scheme of things, very different than our ventilator piece of the business. And we wouldn't be looking for any impact from that lessening into next year as well. And as I mentioned, they've got a nice strong pipeline actually going into next year of opportunities. And so we wouldn't expect any impact from post-COVID recovery on that side.

Our next question then is from Jonathan Hurn from Barclays.

Just a few questions from me. Firstly, just coming back to the outlook for this business. Can you just give us a feel of the size of the order book, where it stands at the moment and, essentially, how much visibility that currently gives you into 2022? That was the first one.

Right, Jonathan. Jonathan, the way this business works is that once you're on an OEM platform, as long as you provide good service, as long as the product quality is excellent, then basically you're on that OEM platform. And Beth, it's typically 7 to 10 years, isn't it? It's a very -- it's that sort of business, Jonathan, which obviously is tremendous in terms of the longevity of the way the order book works. But what it means is it takes you a bit longer to break it, right? So normally, you have to have a new platform, you have to provide the best products, which is what we're excited about because that's systematically what we've been doing in the part of Precision that we've already owned, right? And then you go into that platform and then you're in pretty much for the lifetime of that platform, Jonathan. So that's why we think, next year, order books in a good situation. The opportunities are looking strong in terms of the pipeline for next year. And that's why, frankly, we expect growth for next year. Beth, anything you would add to that?

No, I don't think so. That's exactly right.

Great. And the second one is just looking at the sort of the mix. Is it, firstly, most of it is OE? Or is there some kind of aftermarket within the business?

Yes, there is some aftermarket. Principally, it's an OE business. But Beth, what would you say, in overall terms, what would you put the number there in terms of aftermarket?

I would have to get back on the exact number for Adaptas particularly. I don't have it at hand. We did have a -- but what I would say is that on the market, there's probably about 65% of the market is aftermarket, but it does go through the OEM. So as you said, it is an OE business. The OEs tend to control the aftermarket as well. So we would have -- and this is similar to our Life Sciences business as well. We would own the relationships with the OEMs and they would manage the aftermarket, and we would sell the products for those platforms and supporting the aftermarket afterwards. So it tends to be combined in with the OEM figures as well. But I would say from a market point of view, it's probably about 65% of the overall market that I was talking about earlier as well for replacement.

Yes. So principally, we're selling to the OEMs, Jonathan, as Beth said. I think there's about $1 million worth of aftermarket only, of aftermarket business which is coming through Adaptas on its own. So as Beth said, principally our relationships with the OEMs and making sure we're managing that well.

That's very clear. And then the last one is just coming back to those operating synergies. Is there any type of some kind of number to that, of what you think the synergies could be?

We think the purchasing synergies are pretty good. Obviously, we've done a lot of work on this. And that's why we're confident, Jonathan. Just to sort of summarize it for you, as Beth said, that this will be in line with Precision's margins in the next few years in pretty short order. So yes, if you use sort of best guide on 20% sort of through-the-cycle margins, we think we could -- despite obvious integration costs and everything else, we can move that within the next few years.

Our next question comes from Robert Davies from Morgan Stanley.

One was just on the growth rate. I think you put in the slide deck that it was a mid-single-digit growing business and -- or the market was mid-single digit growing and the company itself has grown over 10% from '19 to '21. Is there any sort of market share gains in there? What was sort of driving above-market growth in the business in the last couple of years? That was my first question.

Thanks, Robert. Well, as Beth said, what they're doing successfully is going from very strong area within the components to building that out to more of a system level, Robert. So that's playing a key role in their expanded growth. And as Beth said, there's plenty more runway in that yet. Beth, would you add anything to that?

I would just add that over the last couple of years, Adaptas has made a number of acquisitions, which helped to expand their product portfolio. And I think what you're seeing is that kind of system sell and deeper relationships that Roy just mentioned by joining those portfolios together into that and really getting the best leverage out of that. So I would say that's where a lot of that above-market growth has come from and that share gain, by using that really deep technical and applications expertise to join those pieces together. And that's what we think adding IMI into that mix will even help that even further as well. So that would be where I would say a lot of that above-market growth has come from. And I think it goes a long way that they are very deep in this space. and have those really excellent relationships with the customers. And they solve problems, which is a lot of what we do as well. And that's been really helping these customers focus on their core technologies, and we're able to really leverage our expertise as well.

And then just a couple of follow-up questions. One was just the concentration of the customers themselves. Just be interested to know sort of what percentage of sales is the biggest customer?

So the biggest customer is about -- just over 20% of the sales, Beth, that's about right, isn't it? And then the second biggest is probably more like less than 15%. And then after that, you're talking sub-10% for the rest, aren't you? It's that sort of profile, yes.

Yes. Exactly.

And then my final question is just on, I guess, the product and the technology themselves. I guess why sort of mass spectrometry? Do you see any sort of significant threats within the market from other types of technology, whether it be chromatography or other types of spectra screening that you can -- other alternative technologies that are used within this industry? What's the biggest risk that you're kind of watching from a technology standpoint, that people would shift away from some of the products you're selling here?

Yes. I mean we've obviously been looking at this space for a while, and we did some very thorough commercial due diligence, Robert, in terms of the way this is all sitting. And obviously, the overall trend, as Beth said, is for sort of mid- to higher single-digit growth driven by the increasing need for analytics across, well, as you know, a whole variety of end markets, most of which are very attractive. So Beth, do you want to talk a bit about anything else that came up from the commercial due diligence in terms of threat?

I don't -- wouldn't say it's a threat per se, but I think it's something we see in this analytical space is that -- and it might be an opportunity and what's driving the growth rates as well, is that I think as we move forward in this analytical space, there's a need for, I guess you could call it, a little bit more of mobile applications or a point-of-use applications in the space. So that applies to mass spectrometry as well as other areas in analytical that we may play in. And I think it's about being able to really help differentiate with these OEMs, help get the package sizes smaller, help get the cost down, so that there can be more units more at the point of use, right? But I think if anything, that market trend would be something that we would need to stay on top of and really help be the solution providers that help the OEMs get there, to be able to provide that sort of lower cost, smaller package kind of devices to really help that point of use ease. So I think it's about being in the right place and continuing to innovate on that front.

[Operator Instructions] We currently have no further questions registered on the call. So I will hand back to the team at IMI.

Great. Well, thanks, Seb. Thanks, everybody, for joining us today. As you can tell, we are really pleased with this acquisition. We're excited about the combination with IMI. We see it's in a great space at the moment and one of our preferred spaces in terms of where we want to invest into. The business model fits exactly with that part of Precision, the Precision OEM business. And there's lots of opportunities to solve further customer problems, to solve industry problems actually. And the combination of Adaptas' customer relationships, their access to the mass spec market, but also to other instruments by those large OEMs with the combination, as Beth said, of our product range, is really quite exciting for us. So thanks very much for joining us, and have a great day. Thank you.

This concludes today's conference call. Thank you all very much for joining. You may now disconnect your lines.