IMI plc (IMI) Earnings Call Transcript & Summary

Hello, and welcome to the IMI plc 2023 Interim Results Presentation. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions] I'd now like to hand over to Roy Twite, CEO. The floor is yours. Please go ahead.

Good morning, everybody, and welcome to IMI's 2023 Interim Results Presentation. I'm joined here today as usual by Dan Shook, our Finance Director. Next slide, please. This slide covers the key messages from the presentation. And the first thing to say is that it was another excellent performance from the team in the first half. There is great momentum in this business, and we delivered 12% revenue growth, 7% of which was organic. Adjusted operating margins were up 140 basis points and adjusted profit before tax was up 17%. Our complexity reduction program delivered GBP 8 million of benefits in the first half, and our good working capital management has allowed us to deliver significantly improved operating cash flows. We're also announcing the next steps of our purpose-led strategy as we further align our business to key sectors to accelerate growth. I will provide more detail on the next slide. Finally, we are reiterating the guidance that we upgraded our May IMS. We expect that the full year adjusted EPS will be between 112p and 117p. Next slide, please. So today, we are announcing the next steps of our purpose-led strategy, Breakthrough Engineering for a Better World. IMI is always evolving. The sectors in which we operate have expanded and the way in which we help solve customer problems has strengthened. And as such, we're making some changes to our structure to further set us up for success. To build on our customer-focused journey and maximize our growth opportunities, we are organizing IMI into an Automation business and a Life Technology business. The aim is to accelerate, Better World growth by continuing to get us closer to our customers through sector-focused teams and align our world-class engineering capabilities. So effective immediately, Jackie Hu will lead the Automation business, which will leverage deep automation technology and applications expertise to improve productivity, safety and sustainability in the process automation and industrial automation sectors. This platform includes IMI Critical Engineering and IMI Precision Engineering's Industrial Automation business. Beth Ferreira will lead the Life Technology business, which will focus on technologies that enhance and improve everyday life, particularly in the areas of health, sustainability and comfort across the climate control, transport and life science and fluid control sectors. This platform includes IMI Hydronic Engineering and IMI Precision Engineering, fluid OEM and transport businesses. Reporting will be aligned across the 2 businesses and 5 sectors alongside our 2023 preliminary results announcement. Next slide, please. Our new structure aligns IMI to 5 Better World sectors, where secular macro trends will support sustainable, profitable growth. The long-term fundamentals in each of these key sectors is strong, and we have the ability to make a significant positive impact. Our Process Automation business will benefit from a renewed focus on energy security that need to reduce emissions and develop new green technology as well as our customers' continued investment in process efficiency and safety. We believe that this sector can grow at a 5% CAGR in the medium term. Industrial Automation can grow at 5% CAGR through the cycle. In the current labor market, the payback on our customers' automation projects is faster than ever, and we see significant tailwinds from continued investments in reshoring and demands for mass customization. Our Climate Control business specializes in delivering optimal building comfort, energy efficiency and connectivity. Our premium products play an important role creating the smart buildings of the future and helping our customers to meet their environmental and sustainability goals. Supported by favorable regulation, we believe that this sector can grow at 5%-plus CAGR. In Life Science and Fluid Control, we are helping our customers to improve their processes to diagnose disease early and support highly tailored, patient-focused critical care. With the demand for health care expected to increase substantially and scientific advances unlocking novel new treatments, we see this sector growing between a 5% to 10% CAGR in the medium term. Our Transport business sits at the heart of our customers' journey to reduce emissions and develop the next generation of commercial vehicles. We believe that this sector can grow between 3% and 5% CAGR in the medium term. Next slide, please. So before I hand over to Dan, I do want to provide a quick refresher on our strategy and how it underpins our new financial framework. So at the heart of our strategy is our purpose Breakthrough Engineering for a Better World. This is an incredibly powerful driver, which has unleashed the tremendous energy of our people and our partners to solve key industry problems, helping our customers become safer more sustainable and more productive. There are 3 key pillars to our strategy. The first is customer satisfaction. We provide world-class engineering expertise and excellent service to our customers. We have deep sector knowledge and know-how. Our focus is on solving our customers' problems. We have market-leading brands and we are achieving industry-leading customer satisfaction scores across IMI. The second is market-led innovation. Our innovation accelerator, Growth Hub, supported by selective M&A, enables us to develop breakthrough solutions to support our customers with their most challenging and complex engineering problems. And then the third is complexity reduction, and we continue to simplify and improve our global manufacturing footprint and demonstrate a resilient supply chain to support our customers. And the good news is that this strategy is delivering significant improvements in our financial KPIs. We have grown revenue at 3% CAGR between 2019 and 2022. Our operating margin has increased by 360 basis points, and adjusted profit before tax grew at an 11% CAGR. ROIC improved by 130 basis points to 12.7%, and full year adjusted EPS increased from 73p to 105p. So reflecting on the considerable success of our strategy alongside our sector-aligned operating model, our evolve portfolio and the renewed strength of our energy markets in process automation, we have revised our financial framework and set ambitious new goals for the group. We want to deliver 5% organic growth, 20% operating margin and 90% cash conversion through the cycle. Finally, we want to maintain our return on invested capital above 12% as we continue to create real shareholder value through acquisitions. With that, I'm going to hand over to Dan to talk through our first half results in more detail.

Thanks, Roy, and good morning, everyone. I'm pleased to be able to take you through our first half results today. So next slide. As Roy mentioned, a really strong first half as our purpose-led strategy continues to deliver. Revenue increased by 12%. Adjusted operating profit was up 21%, and our adjusted operating margin increased by 140 basis points as we made further progress towards our 20% through-cycle target. We also improved our operating cash flow during the first half and are increasing our interim dividend by 10%, reflecting our continued confidence in the business. Next slide. So firstly, some more detail around our strong revenue and operating profit performance. First half revenue increased by 12% to GBP 1.1 billion as we delivered 7% organic revenue growth and benefited from our recent acquisitions as well as a 4% currency tailwind. Adjusted operating profit increased by 21% to GBP 193 million. Organic profits increased by 13%, and we again benefited from our acquisitions and FX. I will cover it a little later, but the recent strengthening of sterling will obviously change the FX effect for the full year. Next slide. As Roy mentioned, we are aligning our business to 5 Better World sectors where we see a significant opportunity to create value and deliver sustainable, profitable growth. This slide shows how we performed across each of the key sectors in the first half. Process Automation had another outstanding period with 15% organic revenue growth and continued strong order intake. Overall orders were up 30% organically with a 26% increase in aftermarket. We have seen particular strength in LNG, marine and downstream oil and gas. New products continue to make a major contribution to growth, particularly through upgrade opportunities. Industrial Automation delivered a good performance despite more uncertain markets with revenue up 8% and 2% organically. We see continued demand for solutions that automate processes that help our customers improve labor efficiency. Climate Control organic revenue was up 5% as we continue to see demand for our energy savings solutions. Adjusted revenue was up 15% with the integration of Heatmiser progressing really well and providing a positive contribution to performance in the period. Life Science and Fluid Control grew by 1% with a 3% reduction on an organic basis. Underlying demand remains solid, although like many in this space, we have seen customer destocking in the first half. Transport was up 12% and 6% organically. We saw growth across all regions as supply chains began to normalize and have particularly benefited from a strong recovery in China. As you know, we are a fluid and motion control specialist, and we continue to successfully share our engineering talent and expertise across all these sectors, particularly across our Growth Hub teams. And a number of our key manufacturing facilities serve multiple sectors as do key support functions like procurement, IT and finance. We will finalize our reporting under this new structure through the remainder of the year, but you'll see the division detail included in an appendix -- in the appendix in this pack. So next slide, please. So looking at the income statement, as mentioned, we saw strong organic growth in revenue and operating profit, respectively, up 7% and 13%. As expected, the net interest charge has increased to GBP 12.7 million, largely reflecting the increased rate environment and funding for recent acquisitions. We continue to expect the full year charge to be roughly GBP 25 million. Adjusting items have increased when compared to the prior period, reflecting an increase in restructuring costs, which I will run through shortly and an increase in acquired intangible amortization following the 3 acquisitions completed in 2022. Our adjusted tax rate for the first half was 22.3%, and we expect this to be maintained for the full year. And finally, our adjusted basic EPS increased by 15% to 54p in the first half. Next slide. So continuing to cash flow, where we delivered significant improvement during the first half, supported by our profit performance. We saw a GBP 48 million working capital outflow in the first half with debtors increasing in line with our top line growth. Inventory levels increased by GBP 52 million, with investments to support the significant increase in process automation orders, which more than offset reductions across our other sectors. CapEx of GBP 36 million is about 1.2x depreciation and includes investments to support growth and our sustainability ambitions. We continue to see good opportunities to deploy capital into our core businesses to drive organic growth and deliver further productivity improvements. Our net debt has reduced from GBP 812 million at the end of the year to GBP 772 million at the half year with a net debt-to-EBITDA reducing to 1.6x, giving us ample capacity to continue to invest both for organic and inorganic purposes. Next slide, please. Given the importance free cash flow delivery is in fueling our future growth, I thought it would be good to review our recent performance and where our ambitions lie. While IMI is consistently cash generative, we do see a clear pathway to delivering a step change in free cash flow generation in the coming years. Starting with our 2022 figure of GBP 158 million, firstly, we invested GBP 85 million in working capital in 2022 to support customer deliveries. So we would expect this to normalize as supply chain settle back down. Secondly, we plan to conclude our complexity reduction program in 2025, and I'll update on that shortly. Including 2023, we expect to deliver a further GBP 42 million of incremental annual benefits. And this, combined with the elimination of the cash investment, will further boost free cash flow. And finally, continuing growth in our attractive end markets will further increase our free cash flow. Overall, we see IMI building over the next years to a free cash flow delivery in excess of GBP 300 million. Next slide. So given this free cash flow expectation, I thought it would be important to remind and reinforce our disciplined approach to capital allocation. Our priority is delivering consistent profitable growth, so we continue to invest in both our people and operations to accelerate breakthrough solutions to solve our customers' most challenging and complex engineering problems. This includes investment in Growth Hub, which is going from strength to strength and really embedding a customer-led entrepreneurial culture across the organization. Next, as you know, we have completed 4 strategic acquisitions since December 2021, and we'll continue to pursue targeted Better World acquisitions. These deals must be in attractive Better World markets like smart buildings, life sciences and automation. They must be scalable within IMI, and they must deliver returns in line with our strict financial criteria. The integration of our recent acquisitions is progressing well, and we continue to develop an attractive pipeline of bolt-on opportunities. And last, but certainly not least, we will continue to deliver returns to shareholders. Our progressive dividend is an important commitment we will maintain even while we invest in the business, both organically and inorganically. And should we see a situation where we expect our leverage will fall meaningfully below our target range, we will look to return additional capital to shareholders through share buybacks. You will remember and see on the slide that we did this in 2021, completing a GBP 200 million share buyback in that year. Since launching our strategy in 2019, we have effectively deployed over GBP 1.4 billion of capital, all while increasing our return on invested capital. Next slide, please. Next, an update on our complexity reduction program. We delivered GBP 8 million of benefits in the first half and continue to expect to deliver GBP 20 million for the full year. All projects are progressing to plan, and we still expect the overall program to come to its conclusion in 2025. Next slide. So final slide before I hand back over to Roy, the group outlook statement. Now as I mentioned earlier, it is important to note that the pound has strengthened since we last issued guidance in May. And given we make the majority of our profits overseas, we now expect to see an FX headwind of 1% rather than the 2% tailwind previously flagged. Despite the FX movement due to the resilience of our Precision business and continued strength in Critical, we are reiterating guidance. We continue to expect full year adjusted EPS will be between 112p and 117p in 2023. And finally, I'd just like to confirm that the divisional guidance issued in our May IMS remains unchanged. So with that, let me hand back to Roy to take you through the strategy update. Thanks, everyone.

Thanks, Dan. So the first thing I want to say is that our Better World strategy is clearly delivering results. We are building a track record of compounding profitable growth. And you can see on the slide that our adjusted EPS has grown at 13% CAGR since we launched our new strategy back in late 2019. Next slide, please. We are building a track record of successful acquisitions, underpinned by our disciplined approach to capital allocation and strict financial criteria. You may remember that we acquired PBM back in September 2019. PBM specialized in the development of high-quality industrial flow control solutions, with particular strengths in pharma and biotechnology. And this acquisition has been a real success story as well as providing further exposure to Better World growth markets. With secular growth trends, we have generated great synergies through scaling. The acquisition is on track to deliver our financial criteria in full. We delivered returns above WACC in year 3, and we are on track to deliver returns in line with the group ROIC by year 5. Next slide, please. I also wanted to take this opportunity to give you an update on our ESG progress. At IMI, we engineer solutions for our customers that are safer, more sustainable. Every day, our people are helping to improve energy efficiency in buildings. They're helping to improve medical analytical devices to save lives and reduce emissions, both in oil and gas and on trucks. Now whilst there are countless examples I could talk through today, I'd like to highlight how we're adding value to the hydrogen value chain. Hydrogen looks set to play an important role in the transition to Net Zero, and our focus on hydrogen is leading to some very exciting projects. Firstly, we are providing valves and actuators to support electrolyzers, which generate 100% green hydrogen. Secondly, our hydro green team are actively supporting the development of hydrogen refueling infrastructure with solutions that improve the reliability of refueling stations. Refueling stations will be key to unlocking the hydrogen economy, and we are well placed to capitalize. Third, the storage of liquid hydrogen also presents a great opportunity for us, and we are seeing some promising early wins, applying our technology to store hydrogen at cryogenic temperatures safely and securely. Finally, hydrogen fuel cell trucks, we see a great opportunity for growth here, largely as a result of the additional fluid control requirements on hydrogen fuel cell trucks when compared to traditional vehicles. We've actually been supplying products into nearly 3,000 hydrogen vehicles in China as well as into trucks being launched this year in the U.S., and we feel really excited about the future growth opportunities. We delivered GBP 7 million of hydrogen orders in 2022, and we expect to double that in 2023. And hopefully, this gives you a good feeling for how our Better World strategy is translating into sustainable profitable growth in rapidly growing sectors. Next slide, please. So we are committed to playing our 4 parts to address climate change and protect the planet by minimizing the environmental impact across everything we do. We continue to see great progress in reducing our CO2 intensity with a 26% reduction since 2019. And we are committed to a Net Zero target for Scope 1 and Scope 2 emissions by 2040 and for Scope 3 by 2050. We're also progressing initiatives to reduce our water usage, and we have improved and reduced our water intensity by 9% since 2020. Next slide, please. At IMI, we want to develop and empower our people to make an impact and to create a better working world. Employee engagement remains really high, and we are making good progress on gender diversity and are benefiting from the strong female representation on both our Executive Committee and our Board. Training and development remains a core part of our talent strategy, and we continue to invest in focused programs to ensure our people are able to progress and grow our business. Next slide, please. So to summarize then, the key takeaways from today are, first, that the purpose-led strategy that we laid out in late 2019 continues to deliver. Organic revenue grew 7%. The adjusted operating margin was up another 140 basis points, and our adjusted EPS increased by 15%. Second, we are organizing our business into 2 platforms focused on key market sectors, supported by long-term secular growth trends that will support sustainable profitable growth and our new financial ambitions. Third and finally, as Dan said, we are maintaining guidance. We continue to expect that this year's EPS will be between 112p and 117p. Okay. So I'm going to stop talking there and turn over to the moderator for the Q&A, please.

[Operator Instructions] First question comes from George Featherstone with Bank of America.

Well, I just wanted to pick up on something first, Roy, that you mentioned about payback periods for your automation proposition maybe never been better than they are currently. I just wondered if you could give us a sense or perhaps frame it for us just how much that has changed a year or is it more than that? Just help us with that.

Yes. I think for our customers, George, automation, as I said, [ and you know ] I've been involved in this business more than 30 years, right? So I think what's happened obviously is that across most of our major markets, labor is really scarce. And if you look at, obviously, material inflation is coming down, energy is coming down, but labor is still moving. It is still going through an inflationary period. And because of that and just the sheer ability to get people and I think -- there's a third thing as well, George, which I'd say is that supply chains, the robustness of supply chains is right up there in people's minds, obviously, given a period of quite severe disruption. And I think the companies that -- well, I know the companies that manage to supply customers throughout that period took share, right? And some of that stock, certainly for us, I've highlighted many times in areas where our competitors couldn't supply and we could, that gave us an advantage and some of that is stuck. So I think, George, all of that is combining to mean that when people look at the financial case for automation, in my opinion, it's stronger than it's ever been. And I think perhaps another effect on top of that is reshoring. And so people are reshoring generally to high-cost economies like the U.S. and there, you have to automate to stay competitive. So I think there's a mixture of factors that mean that when people look at a financial case for automation, it's stronger than ever, George. And now can't hear you again, George. So I hope you can hear me.

Sorry. Yes, I can hear you better. Sorry, it's obviously a problem with the line. The Precision business, I just wanted to maybe talk a little bit more about that. The IA growth seems to still be kind of disconnected a little bit from a historical correlation with PMI. So is there anything that you can see from your customers that would suggest have that sharp reconnection maybe in H2 at all or perhaps that was the case maybe?

Yes. I mean, so far, so good as you say, George. Looking at the PMIs, we would have expected a reduction by now. Beth and the team, they've done a great job really, 2% growth in the first half, much more resilient than people would have expected. Improvement in margins again as we take the complexity out of that business. So no, pleased so far. Clearly, PMIs have dropped further this month. So we are all over that, as you can imagine, George, with plan Bs in place, and we have forecast a reduction in sales in the second half because that's what traditionally happens. At the moment, having said that, George, we use our 60-day moving average, and it's only slightly down on last year in terms of order intake and there's still opportunity to sell out of the order book because the order book versus traditional levels is still a bit longer than it would normally be, George. So far, so good, but we've got a very keen eye on any changes in those order patterns and make sure we're ready with plan B if it does actually happen.

And then last one for me. The 3 cycle targets, obviously, very well considering. Thanks for providing those. The 5% growth, how should we interpret that? Is that more kind of a CAGR and there will be some plus and minuses along the way? Or do you expect to kind of be around that level on a per annum basis based on how you look to those end market dynamics?

Yes. It's the first example, George, right? So we expect there will be some pluses and minuses, I'm sure. But 5% is our, let's call it, our medium-term growth ambition. I think as you can see from our outlook, we're going to be close to that this year. And I wouldn't say the markets are easy right now. I think there's a mix as usual. I think that's the strength of the diversity of our business. I think that if you put all of our Capital Markets Day targets together, probably ended up with 4% to 5%. This is a move up to 5%. A couple of things in there. Clearly, critical outlooks improved dramatically. We haven't seen the critical markets like this for a decade. And if anything, Jackie, we did the review, business review. Jackie would say momentum is super strong in that business. And if anything, accelerating slightly, right? So we feel very good about where Critical is. And probably that, plus the fact that we made some nice acquisitions in some good spaces, life sciences, smart buildings, that we know we can build on for the future, the mix of business is improving. So we think that, yes, ticking it up to sort of 5% organic growth target through the cycle is a sensible place to be, obviously reinforcing the 20% margin for the business and a 90% cash conversion as well. And that means that, as I said in the presentation, we think we can start to become a compounder, as we have done over the last 4 years as we compounded EPS at 13% CAGR. So that's really just slowing out the financial framework for everybody so they can see what sort of company we're becoming.

Our next question comes from Christian Hinderaker with Goldman Sachs.

I've got 3 questions. Maybe we can take them in turn. Firstly, I wonder, please, can you give us an indication on how price and volumes are progressing across the different businesses as inclusive of whether or not we've got new price increases or if it's just price tailwind from last year.

Yes. I'll tell you that one and, Dan, chip in here by all means. No new price increases, obviously, we've got the price increases from the beginning of this year, George (sic) [ Christian ] obviously, right? But there's no midyear price increases like there were last year. We are winning the inflation equation. So no need for that. So if you look at our 7% growth, about 1/3 of that is coming through volume, and about 2/3 is coming from price. And again, George (sic) [ Christian ] just to give you a rough idea without getting into commercial sensitivities, pricing is a bit higher in Hydronic and is a bit lower in Critical, and Precision sort of through the middle, just to give you a rough idea. So yes, no new price increases and that, therefore, will as a comparator if you're thinking about your models start to taper towards the end of the year.

Very clear. Maybe you can comment as well on the destocking in Life Sciences organic growth at minus 3% for the half, plus 2 in the first quarter, assuming an equal weight, that's the minus 8 for the second quarter. I wonder if there are specific customers, regions, product categories that that's impacting more or less than others and how much of that relates to lead time compression.

Yes. Thanks, Christian. Yes, I think I was looking obviously at our U.S. peers earlier in the week, exactly the same story that -- Q2, you're almost bang on, actually, Christian, it's a 7% reduction for us in that segment, and it was sharp. And when we talk to customers, there's more to come in the second half. So that's obviously included in our guidance, right? So originally, I thought on the last call that, that would be finishing by the end of the first half. No, that's going to continue through the second half. And I think in overall terms, Christian, we think critical is now slightly better than we thought a few months ago. And obviously, that segment of Precision a bit lower. And I think, again, looking at what peers are saying, talking to some people in the industry, it's what's happening across that segment. And it's in analytical devices, which is obviously now, post adapters, the biggest part of that business for us now, Christian. So yes, it's worse than we thought, but it's happening across the whole piece. Anything you'd add to that, Dan?

Just that fundamentally, I think those businesses are still certainly 10% businesses. We are going to go through this period. Money cost money again, and I think we're seeing that starting to play through some of the end markets that we serve.

Yes. I mean these are life-saving devices, Christian. So that's a good point, Dan. So ultimately, the demand is there. That's for sure. And after a few years of very strong growth, there's a bit of a resale in the supply chain.

Fair enough. And then finally, on the comment of money cost money, the M&A targets have a value creation hurdle for ROIC to be above WACC, I believe, by year 3. I just want to understand the mechanics there in terms of whether that cost of capital is fixed at point of acquisition or if it's a moving target. And then secondly, how your cost of capital has evolved today versus, say, 2019 when you flagged the PBM acquisition earlier.

Yes. No, all good points. I think, question over to you, Daniel.

Yes. So it certainly has evolved and where we're sitting right now, it's probably more -- we're looking at hurdle rates more like 8.5% versus 7% for our overall weighted average cost of capital, and that's both sides kind of ticking up. Yes, I mean we don't get so analytical around changing targets. Once we have those businesses in, the focus is very much around delivering the synergies, both cost and revenue. I mean we showed in the presentation. Roy went through it, as PBM has become more integrated into the critical process automation business now, you can just see how we're able to move those ROICs up for those individual businesses. Certainly, as we look at acquisitions today, we have to have greater conviction that it's going to enable to achieve that 8.5% and let's watch and see where that number goes. So we really look at it at the point in time. But certainly, as we get through a bit of an inflationary environment, hey, that absolutely enables us to use the inflation equation to actually augment the profit. So overall, if anything, if we're buying the right businesses that fit really well with our market segments and we can integrate them quickly and effectively, we should be able to expand out those profits and drive towards that 12.7%, 13% ROIC we're sitting at today.

Yes. And I think that's the broader point really, Christian, is that, we have a very strong drive to increase our overall ROIC. We have a very tough measure, as you know. Christian, we write back all of the goodwill into the denominator. We wanted a tough measure. And we moved that up from, I think it was 11.3% on that measure back in 2019 to 12.7%. And therefore, we now put an underpin at 12% as we acquire that we want to drive returns on acquisitions reasonably quickly up to our group average. And we are incentivized on that as well, Christian. So we take it seriously.

We now turn to Lushanthan Mahendrarajah with JPMorgan.

A couple of questions, which I'll take it one by one, if that's okay. The first is on Hydronic, just how we think about that sort of H2 outlook because I think there's probably some slightly easier comps on sort of destocking and prebuying in Q2 last year, but we clearly sort read across the macro is a bit tougher. So just how we sort of think about that into H2 and actually into next year as well?

Yes, I think that's right. That is -- you just nailed the 2 conflicting trends there. I think the comp was tougher in Q2, will be a bit easier in Q3, but European construction market is tough. We have obviously got an energy saving angle on that, which I think will mean we do better than a lot of people. It's interesting looking at one of our peers yesterday was suffering already at a negative first half. So I think out of it all, we'll do okay out of this. But European construction markets are definitely tougher. Back to the cost of money, as Dan said, that's clearly having an effect. So we're actually calling the overall year modest growth. And I think that's probably a good description of where we see Hydronics. A lot will depend on the strength of the heating season. I'm sure you know that Hydronic [ does lot of ] business in the run-up to the colder weather in Europe. And a lot will depend on how much energy security is an issue, how much governments really push energy saving, as they did last year in that period. And a lot will depend on people's energy bills and how much focus they have on that and how much they then drive during that period. So I think you've called it right. We're thinking about modest growth for Hydronic for the year now because of the European construction markets. But we'll obviously let you know more as we come to our next update.

Okay. That's very helpful. And the second, which is kind of linked if we look at that sort of EPS guidance range for the year, I guess, what does the 112p imply in terms of your assumptions? And what does the 117p -- is that sort of -- sort of 117p industrials mention flat, for example, in the 112p down. Just to get an idea of what's in sort of the budget.

You want to peel back every layer of the model side. So I would say broadly -- I think broadly speaking, that, obviously, what could go even better than the middle of the guidance will be things like critical aftermarket, right? Jackie and the team doing a fantastic job with our strategy. Obviously, some of that critical aftermarket order book will be shipped next year. I think you understand that the upgrade valve part is on a similar lead time to new valves, i.e., 12 months plus, right, but some of the parts business is very strong. So that could obviously be a positive. Industrial Automation, as you said, could be stronger. We obviously forecast a decline, particularly in Q4. So it could be stronger if it is dislocating a bit from PMIs. So I think they are probably the 2 things that could go that way. Hydronics, as I said, could have a stronger heating season. People could really come back to front of mind. Governments can always underpin that like they did last year. If you remember, we gave an example in Germany, where the German government suddenly said all municipal buildings need to be 19 degrees C fixed because that would obviously help them through the way. So things like that can obviously help us. And on the other side, Industrial Automation might come up -- could come up a little bit more even than we think, even though we brought it down. So I think that would sort of be the mix of things that -- and remember, we do have a lot of shipping critical in December as well always. I know that's how they're in the market, but we have to deliver all of that, and I know that will mean that Jackie and the team won't get much of a Christmas break, right? And as I didn't for sort of 8 years now. So it's -- I'd say they're the sort of moving parts. So I missed any moving parts [ to that ].

The only thing transports operating nicely, 6% up in the first half. We'll expect that to go as well. There's nothing there that would indicate that's going to come off. But as we know, when the truck business starts, when they move, they move relatively quickly. So that's the only other area that we can see potentially going positive or negative. But where we see it today, I think we'll be fine on the CV side.

Yes. I mean, Lush, I suppose the only other thing, Dan, is what you said in the video, we would have upgraded again if it wasn't for FX, and FX has been moving around a bit, right? So that's probably the only other ingredient. And so yes, that's probably...

I think, that could go either way as well.

It can go either way, yes.

Okay. That's super helpful. And then just last one for me, just in terms of the change in sort of the reporting structure, I guess, could we get a bit more color on sort of some of the internal benefits, and perhaps some examples of sort of combining some of these sort of subdivisions, I guess, into some of these bigger divisions?

Brilliant. We are obviously super excited about this. And I'm really looking forward to the second half and Beth and Jackie and the teams really getting into this now because really what's happened, if you think about the last 4 years, we have driven very much a market segment approach, right? So as you know, Precision used to be organized regionally. Beth has done a really good job under the customer-first reorganization of making sure that globally, we have teams responsible for transport, for life sciences and process. And obviously, Hydronic has also focused on their markets and industrial automation, right? So we've got a really nice now set of what I would call market sector focused teams. And when Dan and I do the reviews, including the deep strategic reviews that we do, what's really pleased me now is that we've got sector specialists that really know their markets and they know how to win in their markets. And part of the inflection point with the new strategy has been that, knowing your markets, knowing how to win and then using our deep engineering expertise to really support customers solve their problems create growth. So now that, that has happened over the last few years, you obviously strategically look at the sectors and you say, okay, which of these sectors go best together to really enable us to optimize the use of our resources to grow faster, Better World growth. That's what it's all about. So you look at the 2 automation platforms and critical engineering obviously is really better described as process automation because you're automating, using valves, actuators and controls and increasingly software, you're using those technical capabilities to automate refineries, to automate combined cycle, gas power plants, to automate LNG compression plants and so on. And industrial automation is very similar. But in industrial automation, you're doing discrete automation of things like assembly plants, in pharma and other sectors, right, testing capabilities as well. So naturally, now that we've managed to get the sector teams, it makes sense to put those 2 sectors together and end up with a globally competitive GBP 1 billion-plus automation platform. And then we've also got what we call the light technologies. So all of these technologies, whether it's reducing emissions from buildings while making them comfortable, reducing emissions from trucks or whether it's building out our life-saving technologies in life sciences, all of those are life technologies. They make a difference and an improvement to everyday life, and they all have a very similar business model where we're working with the customer, engineering at the system level, whether it's a truck or whether it's an analytical medical unit and then making sure that our components improve the productivity or the safety or the sustainability of the whole customer system. So we're really important to the customer. So really, that's why those businesses -- it's now time to put those sectors together in those 2 platforms. And I'm really excited because I think that will help us propel for the next phase of the strategy.

We now turn to Jonathan Hurn with Barclays.

Just a couple of questions from me. I think first question, just following up on the last one and obviously, the new divisional structure, obviously, you've talked through. But Roy, is there some sort of hard synergies that you can get from those combinations? I think possibly in terms of sort of the sales synergies more than the cost. But do you think there's some good synergies that can come through from putting those businesses together? That was the first one.

Yes. Thanks, guys, for breaking up the questions. It makes my life so much easier than trying to remember, all right, I have 3. So the absolute focus of this restructuring is faster growth, right? So Jonathan, we've laid out the margin targets, 20% through the cycle. We've made really good progress, as you know. We're up from sort of 14% in 2019, roughly. We're almost 18% last year. We're well on our way to 20%. We want to achieve that target. Undoubtedly, there's bound to be some efficiencies in the new structure. We're very likely to reinvest them in future growth, right? As we have been more into the aftermarket area in the process automation business, more into digital analytical, we're investing in CRM, world-leading customer relationship management software right across the business. We're starting to use the data much more effectively, Jonathan, to really ascertain a granular where we win, how we win. So it will be much more -- there will be some efficiencies. I'm sure Jackie and Beth are very good at that, but we'll be reinvesting in the business in the front line to grow it faster.

That's very clear. And the second one was just on Critical, the order book, plus 32%, at the half year. Can you just sort of talk us through where that order book sits just in terms of margin? Are we seeing some margin progression in the order book? Obviously, there's strong growth in aftermarket coming through. And just how that feeds into '24? Are we still thinking that Critical can do sort of double-digit growth in '24?

Yes, really good. Well, if you look at it, Jonathan, actually, the orders in the first half, just -- well there is split on the presentation is that, the new construction was actually up 36%, aftermarket up 26%, right? So the order book margins, I would characterize as pretty similar to the previous period. So not a big shift in the order book margin. Clearly, with the extra volume, you're getting better overhead absorption. So that will obviously help. Plus, we've got more -- remember, we've got more restructuring benefits to come through in critical into next year. So we see a clear pathway as critical moves towards that 20% margin. And I would say that to your second point, that the order book is 32% up. As I said earlier, a big part of those orders are now for next year. Me and Jackie, we think it's very likely now that the order book will end up this year double digit ahead, right, in percentage terms, which means that next year, we expect to see very good growth again, Jonathan. So yes, we're certainly building for the future in what is becoming the process automation sector.

That's very clear. And maybe just one last one, just in terms of one of your earlier comments, obviously, you need a strong December. But in terms of sort of the book-to-ship that's left for Critical, what's that for the second half, roughly?