IMI plc (IMI) Earnings Call Transcript & Summary

Thank you, and good morning, everybody. Thank you for taking the time to join us today. I am joined here, as usual, by Dan, our Finance Director. I will just take a moment to summarize the highlights from our IMS before we move to Q&A. And I'd obviously like to begin with a very big thank you to all of our employees for their continued support, commitment and contribution towards delivering our purpose-led strategy, Breakthrough Engineering for a Better World. It has been another excellent performance as we recorded our ninth consecutive quarter of organic growth. Group revenues were up 16% versus the first quarter of last year and up 8% organically, with all 3 divisions delivering improved margins. Integration of our recent acquisitions is progressing well, and it's unlocking exciting new opportunities for growth and delivering synergies in line with our business cases. Our restructuring program continues to reduce complexity and remain firmly focused and on track to deliver the expected benefits. In Precision Engineering, lead indicators have continued to be resilient, particularly in Industrial Automation. Organic revenue for Precision Engineering grew by 4% in the quarter, with Industrial Automation organic revenues 3% higher than the same period last year, while Life Sciences delivered organic growth of 2% and transportation was up 10% on the same basis. Critical Engineering had another excellent quarter. A real highlight for me has been the organic order intake, which was up 50% on the prior year, including a GBP 26 million order within our Marine sector, which covers deliveries in the coming years. We set out a plan to accelerate aftermarket growth when we launched our strategy in 2019. And the hard work from Jackie and the team over the last 3 years is clear to see. Organic orders grew by 47% in the period for aftermarket. And this aftermarket growth has been driven by many of the division's self-help initiatives with upgrade orders up 87% to nearly GBP 50 million in the quarter. A number of the aftermarket orders are nuclear and petrochemical and will not be shipped until 2024. The good momentum in new construction has also continued with 55% growth in organic orders during the first quarter. The order book is 36% higher than the same period last year, reflecting the continued strong demand in our energy and Marine end markets. We now expect that critical organic revenues will be up low double digits, slightly increasing from our previous high single-digit guidance. Hydronic Engineering organic revenue was up 12% as we continue to see demand for our energy saving products. Adjusted revenue was 25% higher than the same period last year with Heatmiser integrating really well and providing a positive contribution to performance in the quarter, slightly ahead of our business case. Following a strong first quarter performance and based on current market conditions, we now expect 2023 full year adjusted EPS to be in the range of 112p to 117p. We continue to expect that IMI Critical and IMI Hydronic 2023 organic revenues and margins will be higher than 2022. But based on the latest market indicators, we now expect that IMI Precision's 2023 organic revenue will be broadly in line with 2022 with margins higher than last year. We remain confident in delivering our growth targets and the 20% operating margin target through the cycle and over time. Okay. With that, I'm going to hand you back to the operator, who will manage the Q&A session for us. Thank you.

[Operator Instructions] And our first question today go to George Featherstone of Bank of America.

First one would just be on the strong start of the year in Critical. How should we think about the visibility that you now have in this business and on that very strong order book?

Yes, I think that the whole environment for process automation, Critical's environment has obviously taken a step up. I think probably, George, we've been surprised at how quickly some of the orders that are coming through to improve energy security and around LNG and things like that for countries. So yes, it's a strong environment. And we have been very good, obviously, about this year, which is why we raised the guidance now to sort of low double-digit growth in Critical. But George, I mean, the other good news for us is we're already building next year's order book, right? And we would think that all things being equal, that the order book at the end of this year in critical will be double-digit up again. So we're feeling very good about the environment. Our win rates are high. Actually, every market now in Critical power, oil and gas, obviously, LNG, obviously, depends, you've seen that GBP 26 million order that we've won in there. Every single market now is a strong tailwind and Jackie and the team are just doing really well in terms of winning. So yes, we feel good about this year, and we're starting to feel better about next year. And the other thing I should add, actually, George, is that aftermarket orders up as high as they are, obviously, you've seen a big part of those upgraded valve orders, which has been the strategy for a while, but now it's been helped by the market as well. Those upgrade valves are obviously on a similar lead time as a new valve. So they are actually shipped -- the ones that we won in the first quarter, most of that will ship next year as well. So we're feeling good about this year and increasingly good about next year, George.

And then maybe one on Precision. Your outlook [Indiscernible] is a bit more positive than it was in the full year results. What's driving this? And has the business decoupled in any way from the lead indicators that you normally track in this particular cycle?

I think I'll be very brave to say that, George. It's a big helping driver. I think the positive news is Industrial Automation sales were up in the first quarter, 3%, that back the team that was really good to see that come through. Actually, the order book at the end of the first quarter in Industrial Automation was up slightly as well, George. So that was good. Talking to customers, and we said the lead indicator, market leading indicators, even the PMIs didn't come up as much as some feared. So we definitely feel better about the second quarter. And we -- I suppose, the sort of third and fourth quarter, we haven't got brilliant visibility. And actually, within our guidance, so within the 112p to 117p, we are still forecasting that the second half will be worse for Precision than the first half. So hopefully, George, there is a level of decoupling, right, and actually, we do better than even that. But we're still being a little bit conservative, hopefully, because consumers will still come under pressure. We know with interest rates continuing to rise with energy costs higher. So at some point, we're not forecasting a decoupling. We would certainly like to see a decoupling though, George, and that would be great news. And I suppose the other thing to say is that certainly, in the market, the reason why we think we're doing a bit better than we thought is all around the pressure on automation because of the higher labor costs and the need to automate supply chain. So that underlying driver is still strong.

The next question goes to Christian Hinderaker of Goldman Sachs.

First, I want to talk about your thoughts on the sustainability of the current demand, I guess, within Critical, in particular and as it relates to new construction, I think if we back out the GBP 26 million Marine order, it looks like Critical order growth was around 20%, but that's with outside of the 1Q '22 comp. I just want to understand the context here in terms of price cost, but also what's sort of fundamentally driving that in terms of customer behavior. You talked about lead times now being more than 9 months. I guess, I wonder how that changed versus history and whether that extended lead time is effectively meaning that your order intake is growing at a higher pace? And then I'll come back to [Indiscernible].

Brilliant question. Yes. On sustainability, I mean, we feel very good about the Critical market. And I think there's a lot of activity, Christian, I would say, right now. And as we continued into April, we're still seeing very strong activity in Critical. So -- and I think most people feel that LNG, in particular, is going to be strong for the for the foreseeable future, right? For the medium term, it's going to be strong. And it certainly feels like that. And particularly investment activity in the Middle East, particularly is very, very high. And it's -- that's good because we mentioned that we have put our own facility in the -- into the Middle East, which was completed sort of third quarter last year. And now Jackie and the team are starting to reap the rewards of that as well. So we feel very well positioned for the Middle East. Our win rates are really high. And then you've got the receiving terminals, obviously going into Europe, China. And our win rates in China have been very, very high as well. So LNG, I think Christian feels very, very good to us at the moment and good for the foreseeable future. The rest of oil and gas is also strong, and you can see that across some of our peers as well. So we think that's in a good position. We actually -- if you look at the comparator, it wasn't a weak comparator for Critical by any means. And we called out that defense order because we'll deliver that over the next few years rather than our normal sort of 12 to 18 months. But you have to put some of that order back in, right? You can't just strip the whole thing out. So I think, yes, new construction feels strong. Aftermarket still feels very strong. As I said on the last call, operators work in their facilities hard in conjunction with our aftermarket strategy, which is far in all cylinders. So I think we feel pretty good about the sort of -- the sort of next periods, if you like, in terms of Critical demand, Christian.

Maybe we can come on to the supply chain side, I guess, both on your side of the business. I think at the full year results, we were talking that you'd have some customer destocking and issues with component supply and electronics and also freight. I just wonder how that's developed in the quarter?

Yes. It's gradually getting better, I would say, Christian. So how has it affected us? Well, I think in Hydronics, we've benefited actually in the first quarter from some wholesaler restocking. And so if you probably look to underlying sales in the first quarter, they'd be 2%, 3% lower if it wasn't for something like that, Christian, if it wasn't for some wholesaler restocking. So I think that's -- obviously, it hit us in the fourth quarter last year, as you know, it's slow growth. I think it was down at 2% in the fourth quarter, but it came back strongly, as you can see in the first quarter. The other areas affected us is in Life Sciences. So we only grew at 2%, and that is definitely customer destocking. Underlying demand is the opposite there. It's up sort of mid- to high single digits in terms of our customer sellout. So we feel good about sort of Life Science recovery second half. And then more generally, I think we're starting to see much better supply now of electronic components. We've seen that into Heatmiser now, which is reassuring. And Heatmiser grew double-digit first quarter. So we're starting to see that ease. So I think generally, things are getting better. Both are getting in supports faster and even electronics is starting to improve, Christian. So yes, I think we feel better about supply chains right now.

And the next question goes to Andrew Douglas of Jefferies.

Three questions from me, please. You kind of answered this, but I wouldn't mind just going into a bit more detail on LNG. In terms of the progress that you're making there, do you think this year is when you win all of your awards for the next 2 to 3 years? Or do we still see awards coming through in LNG over the next 2 to 3 years, which means that we have 4 to 5 years visibility, if that makes sense. And just on that, the win rate comment. My understanding is, particularly with one of the -- your larger customers that you pretty much win all of their LNG work. Is that still fair? So that's my first question. Second question is just on transportation inside Precision. Plus 10 is a good number given the backdrop. Can you just give us a little bit of help from a regional perspective, U.S., Europe and China, just to see where the strength is there. And then, Dan, no free pass for you, I'm afraid. Could you just talk to us about cash, how cash is doing in the first half or I guess, first quarter, first half? Any thoughts for year will be good?

Well, Andy, thanks for bringing Dan into the conversation.

[Indiscernible]

Sorry, the one question I missed, Andy, it was the one about 10%, you said. What was that?

[Indiscernible] a nice number.

Yes. Got it. Got it. No, it's very good. And then again, Beth, Steve and the team doing a great job actually in that segment, really, please. Yes. So LNG awards. I talked to a customer very recently, a big customer in the last week, Andy, on LNG. And they feel that there will be further awards, right? This LNG contribution to energy security is going to be pretty significant, right? So yes, I think awards over the next 2 to 3 years, as you said, is the base case. It's the most probable outcome. And I still think we're really only seeing the sort of beginning of this. There's going to be more receiving terminals, more compression terminals. And yes, I think LNG is a vital part of energy transition as well. Win rates are high, Andy. And again, Jackie and the team, and this is, as you know, a years worth of work, years worth the value engineer, making sure we're competitive, make sure what Jackie's added is really strong customer coverage. Obviously, as you know, into the aftermarket, really, we implemented CRM. It was a big and difficult investment, as you can remember. But all done a few years ago, and now our mapping of the installed base is, well, very strong. And then we throw on top of that growth hub and the innovations with things like retrofit 3D aerosol and those teams. And so win-rates are really high. And, yes, we are strong in LNG exactly as you indicated, Andy. Transport, yes, interesting. So transport. So actually, within that, rail was the strongest, as you probably expected, Andy, rail really strong. And that is actually strong, pretty strong globally. In terms of commercial vehicles, we're obviously seeing a China rebound, right, as we expected. And that's probably the biggest call out, I would say, in terms of the regions. And then Dan, on cash, anything I mean [Indiscernible]

Yes. Good first quarter, Andy. And as Roy already said, the supply chains are getting a bit better. So we're getting at some of the stock and bringing that down now with the orders coming in with Critical, there'll be an offset there because we'll need to start building for those orders. But overall, I think we're still on track for a good first half, but I'd still say we'll probably see more of the cash delivery in the second half of the year as we go through.

I wouldn't talk...

Yes. And probably one thing I should have added is that CV was up across all the regions. So China's strong rebound is the big standout, but is up across all the regions, yes.

Yes.

The next question goes to Jonathan Hurn of Barclays.