IMI plc (IMI) Earnings Call Transcript & Summary

Thank you, Kathy, and good morning, everybody, and thank you for taking the time to join us today. I am joined here as usual by Dan, our Finance Director, and I'll just take a moment to summarize some important points in our IMS before we take the questions. So to begin with, I'd like to thank all of our employees for their excellent efforts and continuing dedication to our strategy and to our purpose, Breakthrough Engineering for a Better World, particularly given the current global events. Group revenues were up 9% versus the first quarter of last year and up 5% organically, while first quarter margins were slightly improved compared to the same period last year. This is obviously despite the ongoing supply chain constraints and considerable inflationary pressures impacting our sector. Despite that supply chain disruption, our customer-led strategy saw the Precision division achieved record customer satisfaction scores. And order momentum continues with first quarter orders for Precision and Hydronic combined exceeding sales by 8%. So our book-to-bill ratio was 1.08 in the first quarter for those 2 short-cycle divisions. The critical order book was broadly flat despite the impact of Russian sanctions. We now have over 40 Growth Hub teams running globally, which have more than doubled the rate of order intake in the first quarter and remain firmly on track to deliver GBP 40 million of orders in the year. For the balance of the year, we are reconfirming our 2022 EPS guidance to exceed GBP 1. Following the exit of the Russian market, we have updated guidance for Critical, though, with revenue and operating margin now expected to be in line with last year. We also continue to make real progress on our strategy launched in 2019 to deliver sustainable profitable growth through our customer-first complexity reduction and market-led innovation initiatives. Given this progress, we are raising our expectations for the group's sustainable margin delivery. Over time, we now expect IMI to become a 20% margin business through the cycle while continuing our investments for growth. Delivery of these better returns will be supported by the benefits from an extension of our footprint optimization program. This will increase total program costs by GBP 35 million. With that, I'm going to hand back to Kathy who will manage the Q&A session for us. Thank you, Kathy.

[Operator Instructions] Our first questions come from Max Yates from Credit Suisse.

Just my first question is around the comments on margins. So you talked about margins being sort of slightly up year-over-year. I just wanted to understand does this comment sort of pertain to all the divisions? Or is it only sort of Precision and Hydronic? And maybe just as an extension of that, obviously we've seen a lot of costs taking another leg up in March and April. And I just wanted to understand kind of is there any risk that we see kind of a temporary dip in margins in Q2 as we start to see those sort of higher cost internalized? Or do you still feel relatively comfortable with how price cost is evolving over the next couple of quarters even at these higher raw material rates?

Yes. Thanks, Max. So across the 3 divisions, Precision is pretty close to last year on an underlying basis. Hydronics is slightly up, Critical slightly up, Max. So that gives you a sort of view on how it's going across the divisions. Precision had a more difficult comparator because from the IMS, the ventilator surge was still continuing. I think it was about GBP 8 million worth of ventilator surge in Q1 last year. So on an underlying basis, Precision is doing well. And I think what the divisions are demonstrating is really good pricing power. I went through this on the last call so I won't go through it all again, but it's obviously around their differentiated technology, strong brands. All of that, plus what we've built really in the last couple of years is stronger pricing capability around data analytics, around commercial awareness and all of that side of things. So yes, I was really pleased in the first quarter because there was a steep ramp-up in costs in the first quarter. As you know, our labor costs basically hit us from the 1st of January. So the remaining costs that you're referring to that potentially could hit us are more around the sort of materials and energy side, which we watch carefully. I think out of all the quarters, Q2 will be the most difficult quarter, I do agree. But we certainly hope that by the half year, we're sort of at least equal with, if not slightly better than last year. That's our overall position.

Our next question will come from Michael Tyndall from HSBC.

Mike Tyndall. One question for me, I guess. Just in terms of supply chain disruption and orders, are you seeing any evidence of people ordering to kind of safeguard future supply? I guess curious about the duration of the order book and whether or not we're starting to see activity that's perhaps not entirely related to underlying demand?

Yes. Thanks, Mike. Mike, I mean, in Critical, I would say, no, broadly because it's just not the way that business works, as you probably know, is very much project-based. You don't order 2 Critical valves for an LNG compression station, right? So incredible I'd say broadly now, and it's about a 9-month order book. In Precision and Hydronic, probably because the same as us, we were obviously putting in stock. I mean our on-time delivery out of Hydronic in the quarter was about 95%, 96%. And obviously with the amount of supply chain disruption going on globally, in the short term, you have to have extra buffer shot stocks to enable you to do that. And Mike, we've said consistently, we are going to favor market share gains, customer service over working capital efficiency at this point and what's happening in terms of disruption. So I would say that there's bound to be some of our customers doing the same things in Precision and Hydronic, but there's also pent-up demand the other way. Clearly, when we talk to our construction customers in Hydronic for instance, they will tell you that they're short of other parts, and that's actually been worse in the first quarter and in April where they can't get things like even boilers because they're supposed to be coming out of China, and that's holding up construction projects, which is holding up the demand for our product. So I think you've got 2 effects going on and it's highly complex to see what real end demand looks like. I'm sure you're wrestling with that. But at the moment, what I'll say that's why I gave that 1.08 number in -- which we don't normally give those numbers. But on the short cycle business, the fact that orders were 8% ahead in Hydronic and Precision combined, at least in the shorter term, over the next sort of month or 2, shows that demand for us at least is still good.

Our next question comes from Mark Davies Jones from Stifel.

Just a quick one on China. You mentioned it just briefly there, but are you seeing any new impacts in terms of supply chain issues as a result of recent lockdowns? Is that impacting either your own production or your ability to source some key components?

Mark, not right now. In fact, our China position -- I mean I've got to say our people have been absolutely heroic in China in terms of what they have done. And I think by the end of this week, we'll have 50 people back in the factory, which is quite amazing, really. And obviously, we're looking after those people absolutely to the best of our abilities. But actually, China is 9% of our overall sales. About 5% of our factory production comes out of China and most of that feeds China, Mark. We are not seeing any particular new issues yet from the lockdowns. I think inevitably, for our customers, it's going to slow them down at some point, right, because we all know the amount of boats not processing through the major pool comes to be an effect at some point. What we all hope is that the lockdown did seize. I did read that they were able to at least get outside for a while over the weekend. And our sort of base case, Mark, is that this eases by the end of quarter 2, right? And then things get better from there. So I'm really hoping to say of the people, that's the case. So the answer to the question is no, not right now, but there's got to be some secondary effects at some point from this length of shutdown, I would think.

Makes sense. And if I can sneak in just a clarification. In terms of order growth and indeed revenue growth, can you give us some indication of what the price element of that versus volume might be because obviously prices are now coming through pretty strongly from the year 1 margins?

Yes, it is. Yes. So price for IMI is it's sort of the 3% to 4% level. It's higher in Hydronic obviously because of the raw materials that Hydronic uses, obviously uses a lot of copper and uses a lot of zinc. It uses quite a bit of energy, Mark. So that's been hit hardest in terms of inflation. And Precision is slightly above the average and obviously Critical is below because in Critical, it's price -- as I've explained before, Mark, you're often creating a brand-new valve. It's not comparable to what you did last year so you price it as you're basically quoting it. So it works in a slightly different way, but that gives you an overall feel of where we are.

Our next question is from Aurelio Calderon Tejedor, Morgan Stanley.

It's Aurelio from Morgan Stanley. My question is around the Critical order intake. And I guess, obviously you flagged a very strong aftermarket, but OE in life was down quite significantly. So I wonder how much of that is just phasing of new projects? And how much of that is Russia business that you're not doing any more? I don't know if you can disclose a little bit more around that.

Yes. So Russia -- Critical is hit hardest by Russia, Aurelio. You probably noticed, right? So for Critical, Russia was about 4% of the business So that's why we're saying this year, we think Critical will be broadly flat, in line with last year, partly because of that Russia impact. Critical is also a lumpy project-based business, right, much more than the other 2 businesses, which are much more sort of short cycle flow businesses. And so what we think is that it is just order timing. Order opportunity in Critical would point to the fact that this year, we're going to be broadly flat. Aurelio, you probably hopefully caught the Capital Markets event on Critical last year which says that, over time, we will increase the aftermarket content at Critical that's good for 2 reasons really. One is because obviously the margins are a lot higher in aftermarket Two, it's less cyclical the aftermarket, right? So it's very important that we drive what we call our upgrade valve strategy and keep pushing more of our valves into the field to solve customer problems when they get about either one of our valves is coming towards the end of its life or a competitor's valve that we can then replace and then we get the parts and use after that. And that's very key to creating the sort of business we want Critical to be. So this year, we would expect aftermarket orders to be up a bit and new construction orders to be flat to sort of slightly down by the end of the year.

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

I wondered if you could just give us a bit of an indication of phasing and cadence of your incremental costs on restructuring and when you would anticipate seeing the benefits, and perhaps how we should attribute that across the group?

Yes. Thanks, Alex. Spot on. So Dan, obviously, at the full year results was that 3 months ago, Dan?

Yes.

Published all of the phasing of everything except for the GBP 35 million. So I'm sure Alex is referring to the GBP 35 million. So we think, Alex, that we will -- obviously, I'm sure everybody on the call knows what we do is we consult locally with our people first before we give anything specific away on public calls like this. But what we think, Alex, is that, that will be announced early next year in terms of announcement, which means the charge will probably go into next year in terms of a P&L charge. And then the cash flow, the cash outflow on that charge would happen probably middle to later on next year, most of it. And then the benefit -- so broadly, this year, we're getting about GBP 10 million worth of benefits from the overall program. Next year, we think that will be over GBP 15 million. because of the timing of the projects. Right now, we're actually consolidating 3 larger factories. And the projects are all going on time to budget. In fact, some of them even come in slightly under budget now. So we -- progress is good, and that just means that more than GBP 15 million worth of benefits will drop through next year.

Our next question comes from Jonathan Hurn from Barclays.

Obviously, just one question. I wonder if you could just sort of dig a little bit deeper and give us a little bit more information about the strength you saw in industrial automation with growth, 16%. I mean, obviously PMI was slowing with Q1 peak and things can obviously sort of start to wind down as you go into Q2 and Q3, just sort of the outlook comments there as well, please.

Yes. I mean really pleased with that, to be honest with you, Jonathan. I think you saw it at the Capital Markets event, right, that has reorganized precision around its markets, and I'd be pleased with the team in there. They're starting to make some real progress at the innovation programs starting to deliver in terms of customer intimacy and really approaching our customers to solve their problems with that mindset. And industrial automation is an area which is absolutely prime for that sort of differentiation. So I'm really pleased with what's happening, great growth. Obviously, 16% is against, I would say, a slightly weaker Q1 last year, Jonathan. So it's not going to continue quite at that rate. But as I indicated across Precision, orders are still coming in well right up to date, Jonathan, right up to this last week. And the -- if you think about the makeup of Precision, transportation orders are pretty flat, right? So, and that's because our customers are constrained. So actually, it is IA still that's doing well. What's interesting is, I mean, we obviously look at our own capital budget, Jonathan, and we always consider because everybody is talking about the possibility of a European recession and so on. And of course -- so the way we think about it, Jonathan is, we still got great opportunities to invest our capital in automation more broadly. And right now, we're sticking with plan A, right? We want to invest. We want to get the returns. But of course, we do have a plan B if things turn, Jonathan. So that's the way we think about the world. And other people I talk to are taking a similar approach. So right now, for us, it's still about investing that capital and getting those returns.

Our next question will come from Mark Fielding from RBC.

Roy, can I just ask, I'm sorry -- I did miss just the very start of the call, so you might have clarified this, but when you talked about the new group margin target increasing to 20%, the sort of around that, the GBP 35 million, that's a cost number. Have you given an indication on the likely benefit number that we're aiming to from that? I just wanted to look at that was the cost side. And I suppose within that then, are there any divisional changes given that if you put together your divisional targets and knock off central costs, you don't get to quite 20%. So is there any particular divisionally to where things are happening? And then the final bit of that same thing is what do we think about as the time line for this 20% number?

Thanks, Mark. Well, in terms of the overall group margin, well, it's to the divisions first, right? So by division, we now think they're all 20% plus, right? So they've all got room to move above 20%. Clearly, Precision trucks Critical, Mark, and that's why we're saying 20% through the cycle, right? So I think I know that everybody on the call appreciates that, but I just want to remind you of that. In terms of moving to the 20% target and the GBP 35 million, Mark, I mean, we think we're going to get GBP 13 million to GBP 14 million of benefit from that particular project. Obviously, that builds on what Dan presented at the full year results. So we will give you that normal full detail on the restructuring charge and benefits at the half year results and put the normal table together. But as I said, about GBP 13 million to GBP 14 million benefits from that GBP 35 million. And obviously, not all of the GBP 35 million is cash, Mark, as well. Something like $5 million is noncash.

And just rounding out that bit at the end. So just when do you think about this 20% number as an achievable number?

Yes. I mean over the next few years -- there's so much going on in the world, right, Mark? But we focus on what we can do. And as you know, since, what, 2.5 years now that we presented the strategy, we've gone from sort of 14% margin to over 70%. So we've got great momentum in the business. But there's some external factors, and you know what they are, supply chain in fact, which, to be fair, today haven't really slowed us down. But in terms of that mix, the secondary effects of what's happened in China and all of that, there's so much to pay. But I think the best way to say, Mark, is over the next few years, we'll be there.

Our next question comes from Max Yates from Credit Suisse.

Just a quick sort of follow-up, Roy. I mean just thinking about, obviously, everything that's happening in Europe with energy security and trying to reduce oil consumption, I mean, I guess there's some kind of fairly obvious sort of benefits around LNG for your business. But maybe if you could just walk us through when you look at that situation in Europe and you think about kind of energy security more broadly, where would you expect to see the biggest benefits? And if you could kind of help us just walk through how we should think about that for your business, that would be helpful.

Yes. Thanks, Max. Yes, I mean, obviously we see opportunity, right? And I would characterize most of it as sort of medium-term, Max, because as you know, it takes a while to actually build an LNG-receiving terminal in Germany. As you're talking about building, I actually think that Europe is absolutely serious about this now. So I think it will happen over the next few years personally. I think it has to happen, right? But the sort of broader areas that we see are things like LNG. So receiving terminals for us, they're worth about GBP 3 million or GBP 4 million each. And obviously, there could be quite a few of those happening across Europe. We see opportunity in the compression stations on the LNG side, that can be GBP 10 million to GBP 15 million. Obviously, they're starting to build more capacity. They're increasing the capacity in places like the Middle East. So we see areas that is obviously, the pipeline gas isn't coming through. There will be more global LNG capacity. So as you said, that's good for us. And then we get the parts annuity after that. There's strong margins on that. Shorter term, probably some of the gas and even coal-fired power stations, there will be life extensions. And obviously, you know that, that is -- we're doing about GBP 50 million to GBP 60 million in the aftermarket on coal, something about the same on gas as well. So again, that's high margins. Nuclear for us, very important. It used to be very important. So it used to be about GBP 50 million a year on the new construction side. And obviously, post-Fukushima, the new construction side came off completely. But for us, again, we can do sort of GBP 10 million per reactor. So again, this is medium term, I would say, Max. But in the medium term, that will give us opportunities. As you know that we won the projects on Hinkley Point. We're well positioned on all reactor types, actually. And we're also working with a big U.K. customer on the SMRs as well. Now small module reactors won't be important until probably 2030. And they won't really take off until 2035, right? But again, another sort of good opportunity for us in the future. And then lastly, I think is, again, it's sort of more medium term, but hydrogen, right? And we're now winning orders in about 5 applications in hydrogen. So these are the 5 we focus on, again, I went through in some detail, so I won't go back through all of that. But we're starting to win some nice orders, and it tends to be sort of 1 million, 2 million, 3 million at this point, but we're certainly getting interest. We are building our plant in Sardinia, a new plant. We're moving it effectively a kilometer or less. And we've got fantastic engineers. It's the Remosa acquisition we did in 2012. But in the plant we're moving into, it's going to be carbon-neutral. And basically, that's using our valves, actuators and control systems to create hydrogen, when it's sunny using the solar panels and then use the hydrogen to create energy when it's not. And it's quite interesting. We've actually now got a letter of intent for that system to go into another battery, a third party, and that's important because that's a reference. So we can see opportunities that other companies will want to do the same as us, and we think we've got the solutions to that. So hydrogen sort of medium term are the same. So yes, they're probably the bigger -- have I missed any there, Dan?

No. No. I mean we've already talked about the cryogenic hydrogen in the valves that we do, the vacuum insulated, and that's just our engineers and our technology positioned really well there.

Yes, that's right. So Max, I think that gives you the sort of broad scope. So yes, obviously, in the medium term, there will be opportunity across those.

That's helpful. Just a very quick follow-up on capitation. I mean, I guess we sort of look at valuations and things are kind of coming down across the market. I mean do you see this as an opportunity? Or is the uncertainty kind of making it difficult to engage with companies at the moment? And so just, I guess, what is the thinking about how easy is it to try and get deals done in this environment and maybe in the balance of this year? Or are you thinking maybe leaning more towards kind of share buybacks and continuing to return capital to shareholders as you did last year? Just trying to understand whether that was sort of more of a one-off or that's something that may continue going forward.

The way I would say, Max, is we obviously prioritize organic growth and capital for organic growth, right? Then acquisitions really. We're delighted with adapters. It's had an excellent first quarter. And the opportunity to just building at one of the 3 batteries that we're consolidating -- we're actually consolidating its life science precision dosing technology that we're consolidating into adapters because it's got a really good manufacturing campus, but that's not the only reason. The reason is that it has such intimate relationships with the big customers that the cross-sell capability of things like that precision dosing. And again, this will not happen overnight because these life sciences customers, they have platforms and you generally have to wait for the next platform, not all the time, but generally, you do. But yes, so we're really excited about that. So because we put the business development team into the divisions and because we've more than doubled the resources, actually, our pipeline does look pretty good, I would say. You never get an acquisition until you get it, right? It's one of those sort of binary events. But I would say the opportunities at the moment, Max, look pretty good in -- particularly in building efficiency areas and particularly in industrial automation. Right now, those areas, I'd say there are some potentially some opportunities in there. So we will do share buybacks when our balance sheet starts to become efficient like it was becoming last year. And when we don't think that in the immediate future, there's sort of opportunities to do the right sort of acquisitions, but our priority will be growth, build the company, do the acquisitions. Dan, anything you would add to that?

No. No, I think it's, yes, I think the pipeline is there. So we're going to -- we feel pretty comfortable with our balance sheet as it stands today. As you know, we're nice and cash-generative every year. So that just continues to build the dry powder. We will do share buybacks when we're comfortable that, that doesn't restrict us for more bolt-ons. Roy, yes, a good point.

To answer your question, okay, Max?

That's perfect.

Thanks, Max.

[Operator Instructions] We currently have no further questions. I will hand you over to your host, Roy, to have closing remarks.

Well, thanks again for joining us today. I appreciate your questions and your interest. I hope we've given you another sort of sense of the accelerating momentum across IMI and how we continue to execute on our strategy and how we remain confident of delivering higher growth and better returns over time. Thank you very much, everybody.