IMI plc (IMI) Earnings Call Transcript & Summary

Welcome, everybody, to IMI's preliminary 2021 results presentation. Our next slide, please. Well, this slide has the key messages from the results, and the first key message is that sales were up 7% and organic profits were up 18% on 2020. Organic revenues, profits and margins improved in all 3 divisions. And our growth hub teams managed to deliver GBP 23 million of brand-new business. So the momentum is definitely building in Growth Hub, and the customer focused culture that comes from Growth Hub is certainly starting to permeate throughout the whole of IMI. We did complete the acquisition of Adaptas in the very attractive life science sector, and the early workshops with Adaptas are validating our business case. Our ESG agenda is also gaining pace and is generating real enthusiasm across IMI. And finally, we do expect to make further progress, both financially and strategically in 2022. So with that, I'm going to hand over to Dan for the financial review.

Thank you, Roy, and hello, everyone. Pleased to be able to take you through our 2021 results today. So next slide. So summary results for the year, as Roy mentioned, good progress across all divisions, leading to strong profit growth and margins up 140 basis points. So a few things to highlight on this slide. As part of Precision's reorganization, their business serving energy customers was transferred to critical engineering, where it was combined into the division's existing organization. The amounts that's shown on the slide, relatively small, but it is enabling greater focus in this area by bringing it together. Second, you'll see that corporate costs were lower in the year, and this was helped by a one-off property sale and some continued temporary savings from the pandemic. So we'd expect that figure to be around $26 million for 2022. And finally, you can see currency headwinds of about 5% in 2021, and we're currently forecasting for about a 1% headwind for 2022. So next slide. So looking at the income statement below OP, first thing, interest expense is higher, but that is due to a one-off credit in the prior year. For 2022, we'd expect that figure to increase due to the Adaptas financing. Restructuring costs are slightly higher. I've got some more detail on that in the next slide. And finally, if you do the math, the tax rate on our adjusted results was 20% in the year, helped by a small one-off benefit, which took us down from our normal 21%. We expect that to return back to 21% this year and go up after that as new U.K. rates and other tax moves are enacted. Next slide. So our summary on rationalization, projects continue to advance well, figures are largely unchanged from the half year presentation, although Critical was able to accelerate some benefits into 2021. Precision is advancing customer first and its European footprint consolidation, which will support margins and growth going forward. And we will continue to assess and execute projects that support our long-term business strategy and competitiveness. Next slide. So in terms of operating cash flow, as expected, it was lower due to working capital investments both to support the growth and to protect our supply chains during the recent global disruptions. CapEx of GBP 57 million was higher than 2020, and we'd expect that to increase a bit in 2022 as we continue to see good paybacks for our internal investments. Next slide. Regarding net cash flow, we have the two big numbers in the center, the acquisition and the share buyback. It means leverage ends 2021 at 1.5x, still a comfortable figure, which provides us capacity for further bolt-on activity. Next slide. So getting into each division. Precision Results were very good with organic growth of 7%, despite the ventilator headwind and margins up 80 basis points. You'll see strong growth across most segments outside of the ventilator affected life science space. The Adaptas integration activities have started really well, and the division is also making good progress with its customer first and Growth Hub initiatives. Therefore, for 2022, expectations are for further organic growth in revenue and margins. Next slide. So Critical Engineering also delivered well in the year, advancing its strategy focused on aftermarket and new growth markets. Margins reached 18.1% in the year. You can see that orders were up in aftermarket, which was driven by strong parts growth. New construction orders were also higher, supported by marine and refining and petchem. The division continues to build its pharma activities as well through PBM and is already winning orders within the hydrogen production value chain. For 2022, we see Critical continuing to deliver organic growth with slightly higher margins. Next slide. And in Hydronic, the division delivered very strong growth across all its key markets. New products continue to play an important role in delivering growth, and we are particularly pleased with the progress of our connected product offering. You can see that all product lines were up double digits. Margins exceeded 20% in the year. For 2022, we expect further organic growth with slight margin progression versus 2021. Next slide. And a final slide for me, regarding the group outlook, we are looking at an adjusted EPS in excess of 100p. And two key inputs for those figures: Average shares of 259 million, the full effect of the share buyback; and a 1% currency headwind. So with that, let me hand back to Roy for the strategy update.

Thank you, Dan. Next slide, please. Right, I do want to touch on our purpose, which as you know, is breakthrough engineering for a better world, which is absolutely focusing both our people and our partners on solving industry problems, problems like enabling our customers to move rapidly towards 0 carbon emissions. We are obviously looking to play a major role in that evolution as the world requires more and more low carbon solutions for buildings, for trucks, for industrial processes and other problems as well, problems like enabling safe, reliable and effective industrial automation, problems like helping our customers speed up analytical testing in life sciences to reduce the cost for the patient. As you know, our business model is focused on creating both value today and value tomorrow as we deliver those solutions. And creating value today for us is about ever improving customer service, putting the customer right at the center of everything we're doing. It's about stripping out complexity from our business to enable it to grow faster and create better returns. And it's about continuous improvement, doing things better every single day. And value tomorrow is focused on our Growth Hub, and our Growth Hub is creating market-led innovation and how the sprint teams are starting to create more and more differentiated new products, much of which we showed you at the two capital markets events last year. And these new products, products like Adaptix, Aerosol, Retrofit3D, Smart Valves, all of those ones that we presented are being pulled by customers into the market because they directly solve those customers most key problems. Next slide, please. And in 2021, I'm absolutely delighted to say that we won a total GBP 23 million of Growth Hub new business. GBP 20 million of that was in Critical, which remember, started the process about 18 months ahead of the other 2 divisions. And as you can see, the pipeline continues to build. Our goal is almost to double those orders in 2022 to something like GBP 40 million from Growth Hub. With that new business contributing to our better well purpose, helping our customers produce safer, more sustainable and more productive solutions. Most importantly, that Growth Hub culture continues to move across our business and unlock incredible energy from the sprint teams, from sprint teams acting on value today, all focused on solving customer problems and internal customer problems that help ultimately make our service to the end customer better and better. And I hope you really did get a flavor of those problems that we were solving and the solutions at the capital markets events, which, of course, is still available on our website. Next slide, please. So this next slide is all about our ESG agenda. And I have to say that our purpose, breakthrough engineering for a better world, is a unifying driver. It's a unifying cause, which is really progressing the culture of the company. 80% of our employees in our engagement survey last year said that they would recommend IMI to their friends and family. That is a historic high, and it was a very proud moment for me actually to receive those results. We significantly improved our communications and engagement last year. We launched a whole new communications platform right across IMI, and now about 7,000 of our employees can see every day our progress and project wins. They can see all sorts of initiatives that we're taking to further the ESG agenda, for instance. And it's just an excellent platform that everybody is engaged in. In terms of inclusion and diversity, we've gone from 0 women on the exec a couple of years ago to 42% now. And we are absolutely on track to halve our carbon intensity by 2030. And, in fact, we made a 5% reduction in 2021 alone. We retained our AA rating on MSCI. We reentered the FTSE4Good, and we've made a new promise this year that we will be carbon neutral, including offsets, by 2014. Next slide, please. And this next slide is a summary slide of the division's plans and their progress against our financial ambitions. And as you know, in Precision, Beth and the team are implementing their customer first project, streamlining the organization around global market segments, reducing complexity and investing around 100 growth roles, including digital, product management and sales. Precision are also investing in Growth Hub, and are now scaling Adaptix to reduce waste in industrial automation and both of their hydrogen projects to reduce emissions from transportation. The Precision team are also reducing complexity in their business by progressing their site consolidation plans. Over time, these initiatives will help generate a Precision division capable of 5%-plus growth at 20% margins through the cycle. Chris is going to focus on growing their aftermarket business while keeping their win rates high and expanding into new attractive markets like pharma, marine and hydrogen. We believe that over time, Critical would be capable of 3% to 5% growth at 20% margins. And Hydronic are making the most of the sustainability tailwind, scaling new digital products like TA Smart as well as actuation control solutions, which enable further energy savings in HVAC systems while creating a comfortable indoor climate. Hydronic is already a highly resilient business and is now generating 20% margins, and we believe that the division is capable of 5% or more sustainable growth. Next slide, please. So to summarize then, the key takeaways from today are, firstly, that the strategy that we laid out just over 2 years ago in November 2019 is absolutely on track. That strategy, which boils down to customer first, complexity reduction and market-led innovation all to generate better returns and higher growth rates is being well executed by our teams. That strategy is being executed with passion at pace and with growing excitement as we make real progress. The second point is about our culture. And our culture is certainly purpose-driven. It is about breakthrough engineering for a better world. It's about an acute focus on our customers and understanding our customers' problems and solving them at pace. It's about strengthening our partnership with those customers and innovating to make them safer, to make them more sustainable and make them more productive. And thirdly, as Dan said, we expect this year's EPS to be greater than GBP 1, despite the continuing headwinds from supply chain disruption and inflation as well as obviously further incremental investment in the business. So if we put all that together, it certainly supports our overall ambition to create sustainable, profitable growth to move IMI to an 18% to 20% margin business, growing at 5% through the cycle. Okay. Thank you very much. We will now go back to the operator who will orchestrate our Q&A.

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

I've got three. I guess I'd maybe start with quite a broad one. But Roy, so really just trying to understand what does the guidance of exceeding 100p really mean in terms of obviously, theoretically, that becomes quite a big range, but just to try and get a sense of kind of what messaging you're really trying to get across with that. But also, I guess, some of the considerations that have gone into setting that guidance, given there's a fair amount going on in the world and also IMI. So just various kind of puts and takes, I guess, thinking both top line and then things like cost inflation, et cetera.

Perfect, Andy. Do you want me to take that question first? I think you said you've got 3 questions, but it's great -- you're thinking great about that. Yes, it makes it easier for me. So in terms of guidance, as you said, we obviously do our normal detailed divisional reviews. We look at all of the moving parts. What we're really saying is that in the round, we read updated consensus at about 102p to 103p, and we're perfectly comfortable with that. And to sort of let you into the sort of inside story, originally, we were going to put a top end on that guidance. But actually, our markets at the moment are strong, particularly the market is industrial automation, obviously, life science underlying market, if you take out the ventilator moves. Obviously, construction in terms of energy-efficient buildings, those markets, as you can see, the Q4 exit rates were good. And on top of that, the Critical order book is up 3%, right? And the critical order book is our longest order book. It's about 9 months. So when we put all that together, we're perfectly comfortable with guidance being in line with updated consensus, 102p to 103p. But there is room on the upside in terms of market momentum potentially. And potentially, there's also room on upside in some of our self-help. And I'm obviously talking about Growth Hub. I'm obviously talking about pricing, that pricing inflation equation. And I'm talking about our ability to do further cost efficiencies, Andy. So it became quite difficult to put a narrow guidance around it. And I have noticed that not many companies are guiding at the moment. But through our detailed reviews, as I said, perfectly comfortable with where consensus is at the moment in terms of markets. There are a lot of moving parts, as we all know, globally, in terms of external influences. So we wanted to make sure that we underpinned it at about GBP 1. But potentially, there's some upside from there as well, depending on how events pan out externally, mainly. Does that answer your question, okay, Andy?

Yes. No, very helpful. I was just trying to get an understanding of, yes, the kind of puts and takes within that. I guess second thing, I wanted to ask about supply chain. You mentioned it in, I think, just on the last slide and with regards to '22 as well. But it doesn't seem that -- I guess, how to phrase this. Obviously, it doesn't seem like the challenges have been there to the same degree it appears. I suspect they probably have, but it doesn't seem as visible in the numbers, and it doesn't seem that it's something you're particularly talking about, which suggest maybe you feel reasonably good about how you've handled this. So I guess just trying to get an understanding of whether that's fair because it's perhaps just not as visible as it has been as maybe some of the other companies you've reported.

Yes. I mean I'm just so proud of our supply chain teams. I've said on a previous call, Andy, that I don't think we've ever had a better supply chain team than we've got now. They actually won the President's Cup conference a couple of weeks ago, and it was just fantastic. And Andy, it's not just what they're doing there because they're working harder than ever now, right? And we're chasing suppliers just like everybody else. We're trying to make sure we're top of the priorities of our suppliers just like everybody else, right? And that is a daily thing that we're doing. No doubt about it. And absolutely, supply chains -- and probably, I would say they're probably where they were about 3 months ago, but where they were 3 months ago was a very difficult position. But the work is the culmination of the last few years' worth of work, where we have consolidated our suppliers, particularly in Critical but also to a level in the other divisions as well. And what that does is give more business to less supplies, which obviously takes you up their list in terms of priority. And we dramatically cut the number of single source suppliers as well. So we're far less dependent on those single-source suppliers, right? We used to have more than 60 single-source suppliers in Critical. We've now got 6. And then in Precision, which has a more complex supply chain, we've put something like 1/3 now of all of those suppliers under specific contracts, and they're beneficial to our suppliers, and they're beneficial to us. So it's a real win-win, right? And all of those things have culminated in a better position for us in terms of serving our customers. And I think what that's done actually in a couple of places, it's allowed us to actually take some share because some of our particularly smaller competitors have definitely been suffering. I would say, though, Andy, there are definitely two areas that we are feeling it as well. One is, obviously, with our truck customers, I think everybody knows that. And actually, in the fourth quarter, despite the fact that the underlying sales in Precision, so when I say underlying, I'm just adjusting for ventilators, we're 19% up. Actually, within that, our transport business, which is mainly truck and a bit of train, was only 4% up. And definitely, our customers there are working their production lines far less hard than they would be if had availability, particularly to more electronic components, right? So that's definitely one area. And the other area is in bills are in Hydronics, where construction projects are still being slowed down by the availability of some supplies, some materials, some components actually as well. So I would say, yes, it's -- it was definitely in the fourth quarter. We felt it like everybody else did. But as I said, I'm very proud of the teams and really the only 2 areas, I would say, with trucks and construction, Andy.

And then I guess finally, just around capital allocation. Because if I sort of look at the year-end net debt EBITDA, it's a bit misleading because you clearly completed on Adaptas but didn't then get the earnings in '21. But if you sort of -- if I look at the balance sheet going forward, it seemed, I think, from the Capital Markets Day, that there's a bit more maybe, I guess, activity and effort towards looking at M&A maybe with a bit more productivity than when, I guess, more going on internally within the group. How are you sort of thinking about that pipeline and then I guess, capital allocation in terms of M&A versus, obviously, the buyback that you did this year or last year?

So Dan, in a second, I'll let you talk about capital allocation. I'll just talk about the M&A pipeline. I absolutely agree, Andy. I mean we got the business development resources in the divisions. They've been in the divisions now for what, a couple of years. And they're closely associated all of them with Growth Hub. So they are becoming very familiar with our markets with the sort of industrial problems that we can sell. And what that's doing is bringing more and more ideas to the pipeline. So I can honestly say in my tenure, the pipeline has never looked better, obviously, without COVID, right, which slowed us down a bit. But right now the pipelines look really good. And I think the quality of the businesses in that pipeline would really help propel our growth in the same way that I think Adaptas will, right? And I visited Adaptas a couple of weeks ago, and it's crystal clear how those teams are now working together. Our team and the Adaptas team are becoming one, the excitement, the opportunity for 1 plus 1 equals a lot more than 3 as we look at further at the commercial synergies. So -- and our pipelines have got more and more of those companies. And Andy, you know we're very strict in terms of capital returns as well though. And so obviously, whether we get some of those or not, we'll see in time. But Dan, do you want to talk about capital allocation?

Yes. Sure. Yes, Andy, you'll see a debt-to-EBITDA around 1.5x. I think that's very comfortable. And clearly, that doesn't have the impact of denominator yet of the Adaptas coming in and the synergies as Roy talked about. I mean without any additional M&A, we should see that number come back down to around 1, 1.1, maybe 1.2 as we go through. That still gives us lots of capital to deploy against our M&A pipeline. So it feels quite good. I think as we go around and we'll go and see the shareholders in the next couple of weeks, the feedback has always been pretty consistent around them looking for us to deploy the free cash flow that we've got and not distribute it back. But yes, we'll continue the discipline if we get to the end of 2022, and we're down back at around 1x, we'll revisit the share buyback. But right now, I think we're in a very comfortable place. As Roy said, the Adaptas acquisition add to the gates really, really well. And a lot of that has to do also with the cultural alignment as we've gotten in. It's a great, great team that's come in, and we're looking for great things.

Our next question comes from Michael Tyndall with HSBC.

Just a couple of questions for me, if I can. Can we talk a bit about Growth Hub? So GBP 23 million of incremental orders in FY'21, looking to double that in '22. I don't know whether you can give us the split. I guess what I'm curious about is, is it accelerating in Critical. So it was GBP 6 million in '20, GBP 20 million in '21. Does that number grow again in Critical? And then where I'm struggling a little bit is to kind of square that with the 3% to 5% growth, because at GBP 20 million, we're already at 3% of the orders and sales at Critical. I just wonder how -- if the underlying markets are strong as well, does that not give you quite a lot of scope to actually go through the top of that 5% growth objective because you've got this incremental orders coming through? Second question, just around the restructuring. It looks like numbers haven't really changed, but the time line seems to be moving a bit. Am I reading that the right way? And are you finding more things to do as you go through it? Or is it just it's tricky because it involves people, it involves businesses and sometimes it takes longer or sometimes it doesn't?

Yes. No, Michael, so Growth Hub, yes, I couldn't be more delighted really with the way Critical, and the other two divisions have now embraced that. And Michael, eventually we'll come away from reporting these numbers because actually, the effects of Growth Hub, obviously with 700 people, right, having participated are much bigger than the innovations. It's affecting the whole way that our sales teams go to market, right? Because rather than share of the customers trying to sell them what we've got, we are now really trying to make sure that we are solving their issues, right, optimizing their systems, whether it's their HVAC system, whether it's their industrial automation machine. That mindset, to me, is so much more powerful. When you're trying to compete on differentiation at the heart of that is customer value creation, and that's where you got to focus the whole organization, and that's what's happening. So that's really good. Now as to whether we'll go through the 3%, well, we just set the 3% to 5%, right, which seemed ambitious, I think, at the time. We're a long way off of that, I would say, Michael, right? I'm totally comfortable with Critical at 3% to 5%. Remember, the vast majority of critical is dealing in areas like oil and gas, and the long-term prospects for that will be, let's say, a flat market. And then obviously, what we're more excited about in the longer term, Michael, is things like hydrogen, right? Because hydrogen will obviously inflate some of those petrochemicals in -- certainly in heavy industries, cement, steel, maybe aviation. So -- and that's where we're focused in terms of future growth. So I think before we raise the target, we should consistently hit the target. I think to your question about Growth Hub Critical will grow their orders again in Growth Hup this year. Yes, absolutely. Critical, remember, I've got, I said, 18 months, probably 18 months, 2 years, something like that, headstart on the other 2 divisions. And it definitely takes time, right? When I talked about test and learn at the Capital Markets event, it is really like that. It is really test and learn. And I think we even gave the stats on how many projects failed. And in the early days, it can be up to half the projects fail. And what we have to do is learn from those failures, right? Because it's difficult to create this sort of innovation. But I'm really excited about what we did last year with Growth Hub. As I said in the sort of formal presentation, also excited about the projects. They are now moving into scaling. And what it's doing is fundamentally shifting customer centric towards customer-centric culture, but also we're developing a lot more digital capability now. And you can see, for instance, again, in Hydronic, right, in the construction markets, the big building owners will not only be expected to save energy, they'll be expected to prove that they're saving energy and monitor it. And that's exciting for us, obviously, because we can play a major role in that. So yes, Growth Hub, intrinsically good news. But I'm not about to push up Critical's growth targets and so we've achieved them for a while. In terms of restructuring, the overall numbers are the same. We overdelivered last year, as you know. So I think at the half year, we said we delivered GBP 22 million. We actually delivered GBP 25 million. We've always said that in this next phase, things are going to get more difficult, right? And I think we said that we have announced -- we did say we have announced a major European, Central European factory, the closure of that within Precision, right? And so that is a big deal because there's lots of complexities with making sure that all of the consultation with all of the European Works Council, everything is done absolutely correctly. And then there's all the operational issues of moving a complex factory. So we wanted to make sure within Precision, we've obviously now done 4. So we started at 32 packages. This is that pre-Adaptas, right? And we've moved down to 28. And we just made sure that we could manage these projects effectively because they're complex, and we have to measure it. We've done that. We're very pleased with the results. Now we're taking on a much bigger factory. The price is also equally bigger, but it will take us longer to get, which is why the benefits from that closure, very, very small this year, very, very small, but would obviously come into next year. The price is not only cost reduction because, obviously, you're taking a high-cost factory, which is complex and you're moving it to a lower-cost area in the Czech Republic. The price is also a massive complexity reduction. And that's why I've made complexity reduction one of the pillars of the strategy because complexity slows your growth down all the time. It impairs your customer service. And this -- by doing this, we can streamline supply chains, and we can make our responses to customers much, much quicker. So did I miss anything, Dan, in that?

No. I think it just proves out over and over again just as on the side, you'll recall, Mike, we consolidated our warehouses in Hydronic as one of the programs as well. That was a key element in this last year of making sure our on-time delivery and our customer deliveries were really well executed. We didn't let them down. And a lot of that had to do with the single hub of inventory going out across Europe. So yes, you can't stress enough the complexity reduction you get as you consolidate down to a couple of high-caliber facilities, Roy.

That's a really good point, Dan. So like I talked about, Hydronics potentially taken, obviously, so they grew at 15% organic last year, taking a bit of share of some of the smaller competitors. And partly, that's because their on-time delivery with the consolidated warehouse stayed at between 90% and 95%. I can promise you in this supply chain disruption, that is pretty fantastic, actually. And as you move warehouses together, you consolidate the stocks, then the standard deviations of demand are smooth, right? And then suddenly, you get much better availability. That's a good point there. Thanks, Michael. Does that answer your questions, okay?

Absolutely.

Our next question comes from Jonathan Hurn of Barclays.

I just have three questions, please, one on each division. I think firstly, just focusing on Critical. Could you just talk a little bit about the strength that you're currently seeing in the aftermarket? I know you noted that obviously parts demand is good. But can you talk a little bit about upgrades because obviously that's a key focus for you within Critical and also just give us a flavor for how service is coming through as well, please?

Yes. Jonathan, yes, as you know, aftermarket is such a core part of the critical strategy. We laid that out at the Capital Markets event that we did. I'm really pleased because upgrade valves -- so this is where -- and this is central to the aftermarket strategy, right? We go into the installed base. We upgrade either one of our own valves or one of the competitors' valves. That upgrade valve business has grown at 13% CAGR since 2019 -- 2013. So I mean that's really nice momentum because not only does that obviously give us the business, and upgrade valves typically are at around twice the margins on new construction valves. So it's important in its own right. But the other thing, obviously, gives you the parts annuity in the future. So that's really good. Our parts business has also grown over the last 3 years. Obviously, it's been hit by COVID, but it's grown at a smaller amount. Field service, obviously, is not, right? Because field service has been hit -- field service is something like -- I think it's about 15% of our aftermarket business, something like that. And it has been hit basically because of site access during COVID, restrictions on travel during COVID. So what it tells me is that the remaining field service business is very, very resilient, right? Because in some cases, we've had to fly people. In some cases, even on private jets when flying hasn't been done into specific locations. Because as you can imagine, these locations, some of these processes are creating more than $1 million a day worth -- much more than $1 million a day worth of output, and they can't not have a correct maintenance outage, because these are the Critical applications. So field service has come down. It was actually up slightly last year. I think, Dan, it was up maybe 5% or something like that, that sort of number. So it is gradually recovering. But I think over time, it will be a gradual recovery to field service. I don't expect a big rebound. I don't think, Jonathan.

That's very clear. The second one was just on precision and particularly on Industrial Automation, obviously, up 17%, in '21. Can you just give us a little flavor of how it's performed in Q4? What's driving the strength? Is it market share gain? Or is it essentially just that sort of lag relative to the PMIs? And as we go into '22, how do you see that industrial automation side of Precision playing out?

Yes. So Industrial Automation -- yes, so fourth quarter Industrial Automation sales growth was 23%. So that's obviously really, really strong. For the whole year, it was 17%. And if you look across the various regions in Precision, it was strongest obviously in APAC, and it was strong in China. So Industrial Automation, there's tremendous momentum at 23%. As we've come into this year. order is still strong. Order book is still in good shape. I'd say in Industrial Automation, the positive thing is that, well, across Precision, I should say, we gained 3% on genuine new product last year, and a fair share of that was Industrial Automation, Jonathan. So I wouldn't claim that we're gaining share yet. I would just claim that we're holding our own in Industrial Automation. I think we did gain share in trucks, and I think we did gain share in life sciences in Precision, particularly on the back of all the work we did on ventilators and the extra contracts that, that's led to. But I think industrial automation, it's probably fair to say that we're holding our own.

Yes. PMIs are still in positive territory. We've got to watch it. I think the order book is also -- although we don't talk a lot about the order books in the other two divisions, we still have a really nice entry point into 2022.

Yes. And Dan has made -- yes, it's a good point on PMIs, right? Because I think you all understand that historically, through sort of, I think, it's 3 or 4 recessions, basically, the PMIs give a pretty good 3- to 6-month leading indicator on industrial automation markets, right? At the moment, for us, they're all sort of 55 to 60 at the moment, Jonathan. So that normally, on top of the sort of incoming orders, gives us some reassurance in terms of what is happening going forward. I think the only area in Precision that has obviously come under pressure is transport. That is mainly trucks. As I said, and that's only 4% growth in the final quarter. And definitely, our customers are still experiencing disruption. And to be honest with you, it's difficult to get a really clear view on where that's going. The good news on that is that we are definitely making headrooms in China. So China obviously announced China 6 diesel emissions regulations. And our business in China on trucks has gone from basically 0 3 years ago to GBP 18 million last year, and we see further growth again this year. And then the other good news on China trucks, Jonathan, is that we've now got our hydrogen technology, where basically we're involved in the flow of hydrogen into the fuel cell plus into the heat management of the fuel cell as well. We've now got that technology on almost 3,000 buses and trucks in China as a pilot working with a couple of the biggest OEMs. So that's not going to do wonders this year. But for the future, as particularly Asia is heavily investing in hydrogen technology, hydrogen fuel cell technology, that's obviously exciting.

That's very clear. And then just last one, just on Hydronic again, just on sort of the growth outlook for the '22. Is there still some installed a catch-up do you feel to come through for Hydronic in '22? Or is that kind of run its course in '21? And also previously that the CMD last year, you talked about the demand driver coming from legislation. I mean what kind of impact do you feel that can have for Hydronic in '22?

Yes. So that's basically about four questions already. Right. Okay. So in terms of it's -- no. No, Jonathan, great. Very, very relevant questions. Now I think in terms of installer catch-up, I think a lot of that was done, I want to say, by the autumn. I think from what we understand, Jonathan, they work their socks off basically weekends, holidays to catch up by then. I don't think there was too much installer catch-up in the fourth quarter, for instance. There's a second element to that, though, which is wholesaler stocking. And some increase their stocks, some decreased in fourth quarter. It's difficult to say exactly, Jonathan, as you know, across all of those stocking points. But my sort of assumption is it was somewhere near neutral, some in that fourth quarter, right? I still think they're holding more stock than they used to, though, right? So when you come to this year, so [ you need to be ] like us, right? We're carrying more stock than we would in normal times. When those supply chains finally bed down and when they show a few months, if not, quarters of stability and we get our trust back, I think there's probably some wholesaler destocking to happen at some point, right? We roughly estimated that, and you've got to keep saying, right, these are incredibly rough figures. But in our business review, we roughly estimated that, that could hit sales by 2%, Jonathan. So that's another element. The third element, Jonathan, which is still happening is supply chain disruption to those -- to that construction market, right? So there were definitely projects being slowed down because they can't get other suppliers other than our equipment, right? So that is a very complex picture in Hydronic. And again, you would hope that at some point this year, that would start to improve. So there's sort of things going different ways there, which is why we put our guidance to try to pick through all of that and said, okay, we actually still expect good growth this year, partly because of the fourth point, which is what you said, we expect a tailwind from those incentives around energy efficiency buildings this year. And what we said is that this year, we do expect a tailwind. Over time, we think that tailwind will be anywhere between 1% growth depending on how fast those come in and how fast that works its way through to the market. But yes, we do expect that to help with the tailwind towards that overall good growth this year, Jonathan.

Our next question comes from Robert Davies with Morgan Stanley.

My first one was just on the decision to move the energy business out of Precision into Critical. That's obviously been a bit of a discussion point, I think, for the last few years of what the rationale for having that. My understanding was it was always sort of smaller pneumatic type of valves rather than the big kind of larger critical heavy-duty valves. So I guess why now? What was the sort of trigger point for deciding that was the right thing to do?

Yes. Great. So Robert, effectively, the energy -- Critical is an energy business fundamentally, right? And so we wanted to align that business with its end markets. The end users are pretty much the same people that you will all know and love in oil and gas. And so we saw as a natural thing to move that business across. There are also synergies actually in Marine as well, some of which we've already got. You can see it actually in some of the energy numbers in the detail, in the order intake increased last year. So better synergies in terms of the market, which is good for that business because we should be able to make it grow faster, number one. Number two, it takes the complexity out of Precision. So as you know, core part of the strategy, right, take the complexity out. We've been reducing the number of sites. Beth is aligning the whole of precision around its markets. And obviously, we want to focus Precision on excellent markets, right? Industrial automation, life sciences, and transport, right? And not just transport, but energy-efficient, low-emission transport. And that becomes very clear now. And certainly the business reviews that we do, Dan, are just so much clear now because that is aligned globally around that structure. And we get a much better view of the sort of competitive dynamics in the market now than I've ever had in my sort of almost 3 years in the job. So that's the rationale in terms of making the move. As you said, and I've been building to this for a while now, I think probably 1.5 years, 2 years is what I've been thinking about this over. Ultimately, we want to be aligned with the markets. As you said, though, Robert, right, it's a different size of valve. Critical makes big valves fundamentally, right? And Precision makes small ones. But to me, the more important thing was to align around the market than to rely around the factories. Because the factory that we've moved is a self-contained factory. It's run exceptionally well. And moving that operation into Critical is, to me, not the big issue. The big issue is how do we grow faster? And to do that, we need the synergies from the common markets. Anything else to that, Dan?

Clearly, the catalyst as Beth was restructuring, as you said, made us want to look at it again. These businesses have always collaborated really well, but now under one team led by Jackie, we're just seeing the acceleration already, and the orders come through as they really tighten up with the customers.

Yes. And I do apologize to all the analysts in the finance community.

Internally as well.

Because I know Dan and Luke and everybody are working flat for the last 6 months to align everything. But for the medium term -- no. Actually, for now, Jonathan -- Robert, it's the right thing to do for the business.

And then another question, just -- and it might be slightly tricky. But just in terms of your employee feedback, where you said 80% of the employees recommend IMI. I guess, kind of interesting to hear kind of the feedback in the 20% that wouldn't. What was it within the business that people think needed to be changed though that they weren't happy about?

Yes. So that's a great -- that's the way I always look at it as well. Robert, I think we -- and obviously, that is not the most motivating way to look at it. But no, it's really interesting. So 80% of people say they would recommend IMI to their friends and family. Actually, 80% -- we've used that number in the annual report, which is why I referred to it, right, because it's a constant number. But actually, 85% of people said that IMI was a great place to work. So yes, not everybody would recommend it to their friends and family, right? I certainly wouldn't want my daughters working in IMI for lots of reasons you can imagine, right? They've got to go and find their own way in the world. But they think it's a great place to work, 85%. On the other 15%, Robert, it's very much in pockets, right? So we have definitely got some factories, some of them that have been exposed, as you can see from our numbers, right, to some rationalizations and big changes. And we've got some pockets where we need to do a better job in terms of motivating those people towards the purpose and really refocus them on the possibilities for the future rather than what might have been happening to them at that time. I would say in summary, that's the overall reflection of that, let's call it, the 15%. Dan, anything on that?

Yes. And certainly, you can -- we dive into the detail with the site leadership, and that gives us -- it gives us good ideas as to how to, at a very local level, change the way in which things are working to try to move those numbers up. And yes, and there are consequences of our site leadership can't get that. I think development is an area we're absolutely focused on as well. I think that's the other thing that comes out of the broader element, making sure people can fulfill their career aspirations and giving them, whether it's locally, and certainly if they're willing to be a bit mobile, making sure they have all the resources, first of all, and then all the guidance and the development that we can give them so that they can achieve their career ambitions as well.

Yes. So we're determined to improve that number as you say, Robert. You really want everybody to do that. But if you look at it -- we look at it versus the benchmarks, I think there was, I want to say, Robert, 15 benchmark questions, something like that against a huge database of companies, and we were above on every single one, sometimes substantially above on all the questions. So say, 14 out of 15 from my memory and on one, we were the same as the industry benchmark. So I think it's an opportunity to improve, but I'm really pleased with the progress as well.

And then my final one was just, I guess, around some of -- picking up on some of those points around restructuring and footprint and balancing the growth sort of initiatives for the company, you mentioned the big precision installation where you were making some changes. But are there other sort of larger facilities that you sort of got your eye on them in the next 2 to 3 years? How do you sort of juggle that against the disruption that you potentially cause to the sort of growth in the new projects you're bringing to market? How do you sort of kind of get the relative moving parts correct there and not kind of disrupt the business and the organic growth improvement that IMI is trying to bring to market as well.

Yes. It's always a very well thought-through decision that is not taken lightly, but all of those reasons, plus the social reasons as well as you can imagine, Robert, right? So for us, yes, it has to have a reasonable payback, obviously. But as I said, it's also about how much can we take -- complexity can we take out of this company? Because we know that over the longer term, that will help us grow faster. And if we can shorten supply chains, improve our response to customers, that is obviously really, really important. We also look, Robert, at the site itself. We look at these things like it's Net Promoter Scores, it's customer service, it's culture. And so all of that is taken into account in our decision to make sure that we're actually -- once we've gone through all of this pain, we're going to build a better company for the future. So what we've laid out, and as you can see, a lot of the savings now are going to start to come from Precision. Actually, so that is that big site I referred to in Central Europe, plus there's another site actually in the U.S. that we're working through, starting to work through now as well, again, won't hit that much this year, a little bit this year, but will affect next year. And it won't surprise you that we're consolidating into Mexico. So our major very efficient, very customer-focused factories are Czech Republic, Mexico, India and China. Plus, we've got other very important factories in higher-cost economies, which have got great engineering capabilities, great responsiveness to local customers, and they're very important to us as well. So all of that is in the mix. And what we're looking to do, Robert, is improve the profitable growth rate of the whole company for the future and balance out, as you said, local disruption, which is why we've been very careful and we tackled a few smaller sites first to make sure that, that muscle that you need and all of that process, right? And these GaN charts are over 100 -- so over 1,000 lines on them in terms of how you move a factory that all of that process is well embedded and people have learned and have done that before we move on to the next one. So we'll continue to take that decision. You've probably done the math, Robert, right? Even when we've done what we've announced, we're still going to have a lot of factories, right? And again, we'll look at that in our strategic planning and decide whether that's the right number or whether there's more opportunity. Certainly, for instance, with Bimba, when we acquired Bimba, we acquired 9 factories, right? And so then you have to look again at your footprint and say is that really the optical footprint to win in the future? Or do we need to adjust it again.

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

A couple of questions in terms of follow-up. I wondered if you could talk a little bit about pricing dynamics, I guess, through the year and then as things stand and looking into 2022, probably more a question for Hydronic and Precision given their business models, but that's the first one.

Yes. Thanks, Alex. Yes. Well, obviously, as we announced on some of the calls, we recognize inflation early. We always thought it was going to be pretty sticky. We could see what was happening to copper prices. We could see, obviously, a bit after that what's happening to labor inflation. And every company that wants to retain its talent right now is obviously based with that. And I was really pleased because the teams reacted early. As you say, with Critical, in the new construction part of Critical, obviously, we price projects. We -- then if we win them, we immediately lock in the material costs. And so we know the margins we're quoting at. And the margins in the order book are slightly better than they were 12 months ago because of the aftermarket mix coming through. So put Critical to one side a minute. In terms of Hydronic, well, we've got absolutely fantastic brands. We've got leading market positions. Our technology typically costs 2% or 3% of the cost of the HVAC system, only 2% or 3%, but it can affect up to 25%, even 35% of the energy used in that system. It can affect the capital cost considerably at the system. If a system is better balanced, you need far less of the other components in the system. So we've got a good position, and we're well on to passing that inflation that's coming through into Hydronics through to customers in a careful, considered way. Obviously, there's more inflation coming still, Alex. I think we all know that. Energy costs right, being a prime one. We'll monitor that as we go through. And we have the flexibility to go back and say, actually -- and this isn't just us, Alex, this is everybody, right? Everybody knows that this is on the agenda. And our customers are hearing it from practically all of their supply base. And so we're on that. So Hydronic would have been the biggest issue, because remember, Hydronic uses a lot of raw material, uses a lot of things like gun metal, which use brass. They use zinc, and we've got our own foundries in Hydronic, right? So they're all automated. They're all in automated machine, automated. And what that means is though that those cost increases tend to come straight through to us. So we're on top of that. We're passing it through. In Precision, we tend to buy already added value components in a lot of cases. Sometimes we do the machining. But what our supply chain team have done is a really good job of consolidating supply and resisting a lot of that cost coming through the system in Precision. Plus, they're doing value engineering exercises to improve the design and take costs out. Plus, we're passing price through in all of the sensible places. So again, deep analysis, deep segmental analysis of the various parts of the business. Obviously, aftermarket is a key place where we're passing through price. Obviously, smaller customers that are buying very special systems out of Precision, we're passing through price there. And in overall terms, Alex, I feel good about what the teams are doing to stay ahead of the inflation the costs are coming through the system. So it's giving us something extra to manage, but we're managing it pretty well at the moment, Alex.

Okay. Great. Second question was just on the Energy business that you've moved across. So one factor in operating very well already. It's margin dilutive, I guess, to Critical. What is it that can happen there that's going to get that margin up to the sort of 18% to 20% number that you're targeting? And then I've got one final housekeeping question, which is just Russian-Ukraine exposure, which, I guess, is predominantly in Critical.

Do you want to just talk about that?

Yes. Yes. Obviously, we're watching carefully. Thoughts are with everybody on the ground out there. We don't have any employees in Ukraine. We, obviously have a team in Russia. We're staying close to them. 2% of our overall turnover, and as you said, Alex, largely in Critical, but we do sell both of the other divisions go through that central team. So yes, watching it carefully, we don't see it as a big direct impact at this stage. But yes, well, I guess I'll leave it there.

Yes. I agree with Dan. Yes, definitely thoughts go out to those people affected. That's a sad situation. In terms of energy -- the energy business, well, number one, Alex is growth, right? So you saw the orders are well up last year, and it's a good drop-through. It's a good margin business, that energy business. Yes, it is dilutive at current volumes to Critical. But Jackie has a clear plan as he's done with everything else, right? You'll remember the 20% to 30% as well as I do. And that 20% to 30% this year, assuming we hit our plan, is going to be almost nondilutive to Critical. It's that good, right? And you think about where that came from Alex. So Jack has a clear plan. It's about increasing the overall size of that business. it's also about value engineering. The operational effectiveness in terms of the productivity of the key factory is good, but there are other cost efficiencies, definitely which Jackie will get out within that business. So yes, we -- again, a bit like the 20%-30% we're confident that, that won't be dilutive within a few years. It will be a bang in line with the rest of critical, which as you know, our ambition is to get that to be a 20% margin business.

Right. So I guess it was 21% in 2020, wasn't it? So the 72 orders that we took in, in 2021 convert that sort of -- or much closer to that margin than the 14 odd that you can see in the 2021 numbers. Is that the right...

Yes. I mean the orders rose nicely. Remember that the previous years orders we're obviously hit by COVID as well, right? So it was running a bit lower. So its fixed costs are a bit higher, so exactly, Alex. You get lovely leverage as those volumes come through. They did invest Alex, actually GBP 1 million extra in growth last year as well, mainly in Asia. And again, that's cost as the volumes come through, we'll pay back quickly.

Our next question comes from Harry Philips of Peel Hunt.

Just a couple of questions, please. The first is just in terms of respirators, obviously, big swings in the last 2.5 years. Is it now a sort of should we view it as a pretty much a neutral situation and it doesn't cause a disruption certainly to how the numbers look going forward? And then secondly, just around the Growth Hub and the opportunities there. I mean should we assume that Growth Hub's margins, particularly, say, gross margins, would be higher than other elements of the business? Or is that too simplistic?

They are accretive. I'll take that one first. Yes, they are accretive to their business segments, Harry, which is obviously -- which is what we want, right? Because as we grow, we want to be at naturally that sort of 18% to 20% margin business, right? So they are accretive, yes. And that comes from the fact that they have a lot of value for customers, Harry. So yes, that's fairly straightforward on Growth Hub. On ventilation, Dan, do you want to talk about that?

Yes. Yes. Probably just a little bit left. We did about 11 million more than our base 2019 level, Harry, in 2022. So -- and that was mostly in the first quarter of last year. So it's an 11 million headwind for us and Beth to overcome. On the flip side, obviously, as Roy already said, the relationships that were built and all the good things that happened during that ventilator surge, I think, helps us with the overall life science business and the fluid OEM sector in best business. So yes, a little bit of a remaining headwind but clearly sets us up really, really well.

In the medium term, Harry, as well, we estimate that the installed base of our ventilators has gone up from something like 350,000, something like that, to about 600,000. And obviously, over time, they get replaced. And so our installed base over time probably have a positive impact on those sales as well, probably not this year, though, right, because it's probably going to be hopefully overcapacity in the ventilator base, right?

Yes. Indeed.

The next question comes from Alasdair Leslie with Societe Generale.

Just a follow-up on the comments you were kind of making earlier in relation to Hydronic and seeing a tailwind from energy efficiency in centers and buildings this year. I was just wondering if that's kind of in relation to the EU renovation strategy. Because I think most of the companies we've kind of been speaking to were sort of similar construction exposure you've been indicating that might be more of a -- sort of have a more tangible impact, I'd say, next year, so i.e., in 2023. So just wondering if you could -- what you're kind of hearing from your operational guys today about the kind of implementation of those national strategies across some of your key markets. Do you see that process moving along and translating now into specific incentives and funding? And maybe you could touch upon which markets you're maybe most excited about at this stage.

Yes. I think, well, you know Germany, right, incredibly important to that business. It's about 25% of Hydronics, Alasdair, right? So -- and what I love about Germany is one, it takes energy efficiency incredibly seriously, right, and making people follow the standards. Two, it's a really professional industry. These are installers that do a proper job. I think the average cost of a residential heating system in Germany, I think, is twice or 3x what it is in the U.K. Alasdair. Because the quality that's built in, the energy saving that's built in and everything else. So obviously, Germany is very important. Scandinavia is very important, which is similar in many ways to that sort of German market, and then Benelux. And what I would say, what Phil told us in the business review was that there are local incentives happening. So you're right. I'm not sure much of this is actually really EU Green deal yet, but there are local incentives, which, as Phil described, are basically skewing installer behavior. So if you've got tons of jobs on your books, right, but it's skewing that towards the more energy-efficient programs. And the countries that Phil mentioned was France, in particular, and then the parts of the Netherlands as well is the two areas that he's mentioned where that's happening, Alasdair. And if you want a bit more detail on that, I'm sure that John could set up a call with Phil. But that was the sort of overview, Alasdair, of what's happening.

Our final question comes from Mark Fielding with RBC.

Just a couple of follow-ups. One, just following up actually from Alex's question earlier where you're talking around sort of pricing. I mean, obviously, when you, Roy, took over as CEO, you noted a sort of renewed focus, particularly, I think, in Precision on pricing in general. Being overtaken a bit by the whole sort of supply chain issues and rising input costs generally. But I suppose more structurally, where do you feel you are in terms of that pricing strategy? And is there more to work on in that? Or is it all now going along as you wish in that area? And then the fact of the result that's a bit linked is the other thing you talked about back then was also SG&A reduction in the group? And do you feel like you've got SG&A set at the right level now for where it needs to be? Obviously, that's been part of the cost savings in the last couple of years, too.

Brilliant. Well, I'll talk about SG&A first, and Dan just chip in. So there's definitely more room to go on SG&A, definitely. I mean, principally in Precision, right, because as Beth is streamlining -- and some of the savings we've indicated actually after doing exactly that. But as we streamline the whole division around the markets and as we consolidate the factories, we need less, let's call it, back office overhead to run that business, right? As it becomes less complex, we need less -- what we are doing though is reinvesting in growth areas, right? So more engineers, obviously, more salespeople, more digital marketing, more product marketing into those areas. So what we'll see is a reshaping of SG&A towards the growth agenda. And last year, as I said, we invested quite a bit more in the end and 50 basis points worth of incremental investments. So the margins went up despite the fact of that investment. This year in our plan and in our outlook, we've included actually more than that, again, incremental investment because we want to grow this business faster, right? And that was probably the biggest crisis when I took over. Really, when you compare to store peers, we weren't growing fast enough for a long period of time, and you know that's my ambition to change that trajectory. So I'd say there's a reshaping of SG&A, but there will be some reductions as well as that comes through in Precision. Anything else to add on SG&A, do you think, Dan?

We don't talk about the ERP and the systems infrastructure as much, but clearly, that's an enabler of exactly what you're just talking about. As we get our systems a little bit more streamlined, we bring in, quite frankly, more data and business intelligence folks. We don't call them statisticians anymore. It's actually enabling us to get up the right data as well and do it in a much more streamlined way. So yes, as you say, I think there's more we can do with our systems, which actually takes away work that people didn't want to do anyway and redeploy those folks into much more business partnering activity.

Yes. And into the sprint teams as well. So that's what we saw in SG&A. On pricing, yes, when I came in, I felt that we needed to increase our commercial acumen, as you say. And we did that, right? For the first 2 years, and I'm probably going to get these numbers slightly wrong, but we again, by very careful segmentation, we're not going to go to our big customers, right? And our big customers, the biggest ones are about 2% of sales, something like that. Obviously, people like the commercial vehicle customers. You don't just go into them head on. You have to use other techniques like value engineering and all the other stuff, right? But very careful segmentation basis, particularly looking at the aftermarket, particularly looking at where we were selling into the aftermarket small value items that were very, very special, things like that, we got better at that over the first couple of years. And thank goodness, right? Because as we face this inflationary environment, we actually got a muscle now that we are using to make sure that we stay ahead of inflation. And that really is the name of the game now, to make sure that we keep up that momentum. And it's a moving piece, isn't it? Because just when you think -- you roughly understand where material pricing is, and obviously, we've got some hedging in place, then your energy costs are moving or like last year, when freight costs were moving and staying on top of that, as I said, we've got really good supply chain teams. We resist as much as we possibly can in terms of cost inflation but then pass through where we can. And that's how I describe where we are. So I wouldn't -- I don't think there's massive upside on pricing now, but I think that it is enabling us to come through a more difficult inflationary period so far, so good.

And Can I just ask one other question, which is just in terms of actually this year's growth because I basically asked Dan to come along and fill in my model for me, practically. When you talk about the sort of growth rates are higher and slightly higher, is it fair to think, I think, Precision obviously, you've got the 3% order book. Do we -- sorry, not Precision, Critical. Do we think of that as a good guide? And a wider question is, basically, do we think this year, you're also hitting those longer-term target growth rates in the divisions?

Yes. It's a difficult one isn't it, because there's so many moving parts at the moment, as you can imagine, externally. I think Critical, yes, it's the best guide we've got. Let's put it that way. There's still GBP 300 million roughly of book to ship to get in Critical, right, just to put it into perspective. But best guide we've always had. And, Mark, you know, it normally plays out, right, is the 3% order book growth. So if you say that slightly higher, then obviously, we expect the other 2 decisions to be a bit better than that, right? That's what we think, and that's what's in our guidance. But you know there's plenty of moving parts. The supply chain difficulties. There's now tremendous difficulties in Eastern Europe. Nobody really knows how that's going to pan out, right? There's lots of other moving parts. But the way we saw it, as we put together that guidance is pretty much as you described.

We have no further questions on the phone line. So I'll hand back to Roy for any closing remarks.

Right. Well, thanks for your questions. I think I'm pleased with the results. I think we've set out another good set of results. And remember, we upgraded, I think, twice or 3 times last year. So I think that was good to get that final result through at the end of the year. I think the momentum is good in the business. I think we are now investing heavily in our growth engine. And as I said, if you think about it by the end of this year, then margins could have been at least another 100 basis points higher or being well with our plan based on the level that we're investing in our growth engine. I think that has to bode well for the future and really creating that quality growth company that is our aspiration. Thank you.