IMI plc (IMI) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining this webinar from Yellowstone Advisory. Today's company presenting is IMI, who released their fully results on the 1st of March. We're delighted to have with us today, Luke Grant, Head of Investor Relations and Group Financial Controller; and Edward Hann, Investor Relations analyst. [Operator Instructions] The format today's presentation, which will cover an introduction to the company and the recently released full year results. This will take approximately 30 minutes, and then we'll hand over to Q&A. [Operator Instructions] I'd now like to hand over to Luke Grant Head of Investor Relations and Group Financial Controller, to start today's presentation.

All right. Good afternoon, everyone, and thanks for the introduction, Alex. As Alex mentioned, I'm Group Financial Controller and Head of Investor Relations for IMI plc. And what we'll do today is I'll give about 15 minutes or so, just a bit of an introduction to the company that I'll start with now talk through this slide, which covers a little bit of the strategy and then some more of the strategic progression of the group over the last few years, and then I'll hand over to Ed, who will cover the results from the last financial year. Just so everyone's got the same footing, some of you all know as well, some of you won't maybe don't know IMI as well. So we are roughly a GBP 2.2 billion revenue group with about GBP 400 million profit and sort of operations all over the world. And what we really do is we are a made-to-order bespoke manufacturer or engineer of flow control products. So that could be anything from mainly valves and valve applications, and I'll talk through various different applications that we have that we sell, and it would always be looking for products that require specialist engineering knowledge. So we don't tend to do a lot of, what I'd call, off-the-shelf products. We have a few in our product portfolio across the group. But generally, always bespoke products that are controlling flow of motion, whether it be gas, liquid, and it could be in something like a heavy-duty truck. It could be in a power plant, it could be in a life science diagnostic machine. So we operate across a lot of different end markets, but always looking for opportunities in the flow control space. Good there. And so what brings us here today for the last sort of 4, 5 years, we launched in November 2019 the strategy that is currently running today. And that's built around the purpose, which is shown on the slide, breakthrough engineering for a better world. Another thing our purpose has resonated very, very well with employees, with our customers, with the CTC as well in terms of how we are doing things like doing -- reducing 90% of CFC emissions and power plants by implementing better valve technology with lower leakage or improving the ability to test your blood for pathogens by having micro dosing valves and sort of so where do we look? I mean the products that we are doing are helping to support a better world. And how we like to think of our business. So I talked about us being a bespoke manufacturer. And I think to do that, we have to have very, very good engineering capability, and we have to be experts working with and dealing with our customers. So customer satisfaction is absolutely crucial to our strategy. And in 2019, we also launched Net Promoter Score, which is the way that we measure our customer satisfaction. And you measure that from a minus 100 to 100. Any company sort of 40 and above would be considered to be industry-leading. Apple runs about the low 60s, which 1 of our businesses is roughly around about that level. But we're pleased to say that all 5 of the sectors that we operate in have an industry-leading customer satisfaction scores. So it really moved the dial forward over the last 4, 5 years significantly in terms of how we deliver to our customers and are they perceive us as a supplier. The second pillar of the strategy is market-led innovation and really, what that means for us is how we innovate new products, bring them to market and gain traction and growth a lot faster than we have been historically. So -- and we use something called the Growth Hub. So we have an innovation. But really, it's 40 or so concurrent teams that will be between 5 or 8 people, they're constantly testing ideas with the market, with customers looking whether or not there's significant problems for us to innovate solutions. And if they're not we'll quickly tell them. And we'll go through some different examples as well as to how we look at that. It's 3 or 4 years in now. I think the orders have gone from like GBP 6 million to GBP 23 million, to GBP 52 million last year. So 2023, there were GBP 89 million. So you can see how that the innovation pipeline is really, really growing. We've got over 10 projects now with more than 1 million orders come through that innovation hub. So really kind of stepping up the incremental organic growth in the business. And then lastly, I mentioned we're about a GBP 2 billion revenue group. And we had sort of over 50 manufacturing facilities, the complexity reduction, that's quite a complex manufacturing footprint relative to GBP 2 billion group, and we've been systematically going through and making our manufacturing footprint, supply chain, a lot more simple relative to history. So we've closed a lot of manufacturing facilities, put a lot of manufacturing now in Mexico, the Czech Republic and Poland and India, sort of they're in lower cost basis and also they're more consolidated. So we have a lot of supply chain risk I think that program is coming towards an end. But it has been going well, and that's what's helped some of the margin development. And actually, we took a step back in July last year. So I did a presentation with Yellowstone and Alex and the team last year. So since I did that last presentation, we've launched our financial framework, which is on the right-hand side of the page, which is trying to give a model to everyone just a very simple model of who we're trying to be. So organic growth of 5% through cycle, adjusted margins of 20% through cycle and then cash conversion above 90%. And then if we look at a fully burdened return on invested capital. So it adds back all goodwill, acquired intangibles, anything that we've spent in cash to really measure the return of the business to make sure they're accretive for shareholders. It's not just a balance sheet return on capital measure. And so I will move on to looking at how we are structured as a business. So in terms of how we think about that GBP 2.2 billion revenue business, we operate across 5 markets, and we have, this year, announced a new structure of our business. So previously, we were organized in 3 divisions that were called IMI precision, IMI Critical, IMI Hydronic. I think quite difficult really in terms of how we run the business to think of ourselves in focused markets before we did this change. So now -- we now have 5 global market sectors that we work towards, that we operate in, that we look to grow in. And that's what's shown on the slide. So now we think about ourselves as Process Automation, which is about 37% of the groups, so just shy of 40% is the largest sector we have. And that principally sells applications into the energy markets. So whether it be LNG, into gas into oil into nuclear. And then also 20% of that business is selling into marine and pharma. And yes, the markets of that business is operating and doing really well. So they are the harshest valves we do. It was in a facility Germany last year and nothing we shipped out valve that weighed over 80 tonnes. And then you have to close the roads at night in the facility to get the haulage truck in and out of the where the facility is. Just kind of give you a feel for the scale of which we operate in which as we move along, you'll see that we don't have very different scales that we operate in across the flow control markets we have. Industrial Automation, that operates mainly within factories and a little bit in rail. It's about 25% of the business. And what that does is things like pneumatic actuation and valve control. So the sort of things we would do is we -- and we talk about us being a bespoke manufacturer. So there are other players in this market that do more standard products, the products that we do would be things like we -- instead of doing a aluminum actuator that moves backwards and forwards, moving apart in the machine. We would bespoke manufacturer, stainless steel actuator, and that would be used for something like a harsh application like a wood chopping machine or something along those lines, and it would run for millions of cycles of operating which is very different to say how a standard product will operate. Climate Control, which is the third largest sector, it's just shy of the business. That's where we are selling. And you might have some of our products in your house, things like Heatmiser, which is a smart connected thermostat or we do thermostatic radiator valves, but also we do a lot of the balancing and control around big, large buildings, so we're in hospitals. We're on things like Maracanã stadium in Brazil. We did all the balancing around the Burj Khalifa as well. So we do all ends of both -- well, it's roughly 50% residential and 50% commercial and commercial buildings in that market. I think Life Science and Fluid Control, so everyone understands what that is. It's about 12% of the business, and it's roughly half of it is Life Science and half of it is Fluid Control. In Life Sciences, we do products that support with things like microdosing. There will be a valve that controls the dosing of reagent into your blood and then your blood will be tested for something like 240 pathogens in a testing machine that your doctor would send off to the laboratory. And we keep designing the latest machines that haven't yet been released are the ones that will now sit on a doctor's desk and they will test your blood within 15, 20 minutes while you're at the surgery rather than getting sent off to the lab. So the microdosing is getting smaller and smaller. And the other half of that business, the Fluid Control part, about half of that is food and beverage. And we sell into things like we do the [ holder bowls ] for coffee machines on some sort of Flow Control of liquid through a coffee machine, and we do a modern day farming technology, as an example, in larger farms be less and less prevalent in the U.K. just because the side of the farms, but you have geo mapping technology attached to valves at the back of a fertilizing tractor, and they will only open when the geo mapping technology tells you that the field isn't growing as fast as it could do to efficiently dose fertilizer, which is obviously much better for the environment, much more cost efficient. And lastly, on the 8% of the business, but we sell into heavy-duty trucks in Transport, about 40% of that business helps with diesel emissions reduction and wider sort of NOx reductions, which I think we've reduced NOx reductions over 90% on heavy-duty trucks over a number of years. And then also we do a lot of the thermal management, the chassis. We do the pneumatic actuators that control the seat for the driver. Hopefully that gives you a good flavor of what the business does. So always Flow Control, but across a number of end markets, always bespoking, manufacturing to a very tight specification for our customer base. And in terms of just how that looks like in the 2023 results, I'll just sort of quickly come on to this target -- this slide here. So I talked through the rough size of each of these 5 sectors. And I think what's really driving growth over a longer period for these sectors. So Process Automation, we talked about being principally an energy business. And I think there's a huge wave of investment going into the energy markets at the moment because of perhaps a bit of underinvestment over a 5-, 10-year period in the 2010s to now, seeing a lot of drive for each country having more of their own energy supply following Russia's invasion of Ukraine. And then also there's a big drive for decarbonization in that part of the industry. Industrial Automation, people are getting more expensive, it's going harder to get labor to do more manual tasks. So I think a lot of semi automatable production processes are now moving towards being automated, because the paybacks on those projects are getting a lot shorter. We're also seeing good growth drivers from reshoring across into the U.S. and into China that is helping support the growth of that business. I think the Climate Control business, I think a significant portion of Europe, it's mainly European business, Climate Control and a significant portion of Europe's energy usage is coming from buildings. So anything we can do to reduce energy usage and make the energy efficiency of a building or a home that is really where our products come in. And we're usually something like 3% of the cost of the system, and we influence about 30% of the energy efficiency or savings of the systems. We've got a really, really good niche within that market. And we do see great drivers from regulatory changes made, particularly in Continental Europe. Life Science and Fluid Control, I think the desire to live longer, to have better health and have better knowledge about your health is really what's driving a lot of the growth there. And then it can transport the smaller segment. It's more around emissions reduction, safety and comfort for the driver. And yes, there's also a regulation driving some of that. And you can see the fastest growth driver there for us is in Life Science. I think that's where we see the fastest growth over the long term. And Transport maybe a little bit slower, just really reflecting some of the cyclicality of that business. Yes. And in terms of just some examples of actual tangible things that we've done. I talked about our Growth Hub recently, sorry, earlier in the call and part of that, we have been starting to win some quite nice orders in hydrogen. So when we launched the strategy in 2019, I think hyrogen orders would have been less than GBP 1 million for the group. And we've sort of gone through the growth approach over maybe a 2-year period in identified areas like PEM electrolyzers and hydrogen refueling stations and been winning some nice orders there. So our electrolyzer business, which is the one that's shown in the picture, which is sort of roughly a 40-foot container that can convert fully green solar energy into hydrogen and store it for use at another time, has gone from, I think, 2 million orders in 2022 to 9 million orders in 2023. So significant growth year-over-year, and we see another route to good growth again into 2024 and beyond. Then hydrogen fueling stations as well has come from basically nothing few years ago to now about GBP 5 million worth of orders. It's a very harsh technology. Hydrogen is a very difficult molecule to store. So it fits right in our sweet spot of bespoking products for customers to sort of work in those environments. And then Heatmiser, which is actually -- it's a U.K.-based business up in Blackburn, it's probably the market leader in the underfloor heating space in terms of smart connected controls. We've now launched that product out in Germany and France, and we're going to keep rolling that out further into 2024. And then yes, the Adaptas acquisition, which is the largest one we've done in this strategic cycle. We're now working through the pipeline of synergy orders. We already won a few reasonable size orders last year and see a good route to continuing to grow the water pipeline growth of that business. And in terms of how we think about allocating capital within our business. So I think we've increased R&D as a potential of sales from 2.4% in 2019 to now 3.3% over the last 2 years. So that's about an extra GBP 20 million a year going into investment for growth into the P&L. Every single year, we're going to -- we've put a target out to keep that above 3% the growth that we've talked about and then we continue to invest capital into the business every year to continue fueling future growth. And then we've done 4 or 5 acquisitions, so deployed about GBP 400 million, GBP 500 million of capital into acquisitions which roughly equates to about 5% of revenue. And yes, I think those acquisitions are doing well. We have very stringent returns hurdles to make sure the acquisitions are delivering well for the business, and we're going to look to continue to do similar sized bolt-ons that like Heatmiser continue to sort of grow the business faster, be in faster-growing markets with higher margins than our core business. And then finally, obviously absolutely crucial is the dividends that we pay out every year, which we've increased 10% compound in the last 2 years. And I think we see a good opportunity to continue to progress increasing the dividend, and we have always said that we would consider share buybacks should our net debt to adjusted EBITDA ratio reduced below 1x, which we did, as you can see on the chart in 2021. And we'd certainly consider doing that again should that opportunity arise. Yes. And just looking at how the portfolios are for any of you that have looked at IMI a number of times over the last 10 years or so. I worked for IMI for 10 years myself or 11 now and sort of been here through this time. And you can see the geographic resin in the group acquired a little bit into North America. So I think the geographic rate of the group is a lot better in terms of looking at how we grow in the medium term. I think I'm sure everyone agree that U.S. is a great place to grow, and there's lots of growth opportunities out there. But I think importantly, at the bottom of the slide, we weren't particularly growing between 2014 and 2019, actually organic -- average organic growth was minus 1% through that period. And I think you can see through this strategic cycle, the first 3, 4 years, including COVID, obviously, which is challenging for many, many companies. We still manage the [indiscernible] sort of 3% plus organic growth and actually, the last 3 years have sort of been averaging above that 5% organic growth target we have. And I think it's now just about how we consistently compound that year-on-year. What's really helping support our organic growth as well as the focus on aftermarket we've had in the group. So the aftermarket content of our revenue has moved from 35% to about 45%, it's actually a little bit above 45% in 2023. So we can really see how we continue to grow the installed base that we have and harvest that over an extended period with lots of good growth market exposure. And ESG is really fundamental to the strategy, it's a better world strategy. So as well as what we are doing to support our customers reduce their emissions, make their processes more efficient, more productive, safer I think we're also -- since 2019, we've reduced our Scope 1, Scope 2 emissions by 29%. And then we've got our targets for net-zero by 2040 for Scope 1 and 2 and 2050 for Scope 3. So you've got to keep working on that. We really sort of ramping up reduction in water use as well, even if water isn't as significant. We don't use a significant amount relative to some other industries, but we're still working through reducing those. Yes, and part of -- I would say roughly 10% of our capital spend per annum now is going into pure energy efficiency projects, so things like solar EV rollout. You can see the car park in our California facility on the right. And then in a half year, we put another couple of facilities in the pictures, if you're interested that where we put more solar rollouts, but also doing more on energy efficiency. We've still got very high employee engagement, 77%, it was for this year, and then the Board is 44% female and the executives now 50% female. And then -- in terms of how that's actually delivered into financial results are a 5-year period since the strategy was launched, I think even given you've got COVID, you've got the invasion of Russia, Ukraine and various other things, supply chain crisis during this time. I think we've been very consistently growing profits now at a double-digit CAGR over this period. So just to sort of cap up on the strategy of the group sector. I think there's a purpose strategy that has been delivering both improved margins and better organic growth, which is resulting in more sustainable profitable growth. I think we've got a nice, attractive markets that supported by global macro trends that we talked through. We've got a nice portfolio of businesses that offers a lot of resilience to different cycles. And I think we've really demonstrated that well through COVID through the supply chain crisis through Russia, Ukraine in the last 4, 5 years, even sort of a recession in Europe last year, we still manage to [indiscernible] to bit of growth. We're very cash generative, which leaves us with a strong balance sheet, giving us a lot of flexibility to continue to address the dividend, continue to invest in M&A, think about share buybacks as well. And most importantly, the last one is that we're really helping our customers deliver well for their projects. So with that, I will hand over to Ed.

Thanks very much, Luke. So I'm going talk through our 2023 financial performance in a bit more detail. You go on to the next slide, perfect. So very pleased to report on the strong financial performance in 2023, we delivered 7% sales growth, 6% of which was organic. Our adjusted operating margin was at 18.7%. So that's 90 basis points higher than last year and getting closer to our 20% target. Adjusted profit before tax was up 12%, and we delivered significantly improved cash flow. Our complexity reduction program delivered another GBP 20 million of benefits in 2023. We expect to deliver a further GBP 15 million of benefits in 2024. And finally, [indiscernible] the order book within Process Automation is now at a record level, which will provide good momentum into this year, and we have proposed a 10% increase in the final dividend. Going to the next slide, please, Luke. Now this slide just provides a bit of a bit more detail on our financial performance. And you can see it was a very, very strong performance across the board as we made good progress with our purpose-led strategy. So I'm not going to talk through this in a bit more detail. So on the next slide, there's some more detail on our revenue and profit performance. As I mentioned, revenue increased by 7% to GBP 2.2 billion, and we delivered 6% organic growth, around 2/3 of which was price. And you can see that recent acquisitions have also contributed positively to our results. On the right-hand side of this slide, you can see that the adjusted operating profit increased by 13% to GBP 411 million, and organic profits increased by 10% and again, you can see we benefited from our M&A activity. And as you can see on both charts, there was no material FX impact in the year. So on the next slide, has got a bit more detail on our margin progression in the year. Now we've made significant progress delivering sustainable improvements in our margins since we launched our strategy back in 2019. And last year, we delivered margins at 18.7%, which is well up from the 14.2% we delivered in 2019. Now we are getting close to our 20% through cycle margin targets. And the good news is that we have a clear pathway to deliver on that commitment. So firstly, our complexity reduction program is progressing very well and should provide a further GBP 22 million of incremental P&L benefits in the next 2 years. And alongside some further growth in the attractive sectors that Luke has already talked through should see us delivering margins in line with our through-cycle targets. Going to the next slide, please just talk through the income statement quickly. As mentioned, strong organic growth in both revenue and operating profit in the year. I guess looking at the bottom half of the P&L, the net interest charge increased to GBP 23 million, largely reflecting the increased rate environment and adjusting items did increase last year when compared to the prior year period, largely reflecting to the progression of our restructuring program. And you can see right at the bottom there that our basic EPS or adjusted base EPS increased by 11% to 116.8p. So on the next slide, I will just talk through the performance in some of our key sectors. So look at the platform and starting with automation. Automation, that's the Process Automation and Industrial Automation sector that Luke talked through. So automation delivered strong revenue growth of 8%, both statutory and organic. Process Automation had an excellent year, delivering strong order intake as shown at the bottom of the slide. Orders were up 18% organically with a 23% increase in the aftermarket. Organic revenue was 14% higher than 2022 and 13% higher on an adjusted basis. And we have benefited from our own self-help initiatives, particularly in the aftermarket space where we're accelerating activity retrofitting both our own and our competitor installed valves. And we've also benefited from continued investments across the economy and energy security have seen particular strength in LNG, nuclear, downstream oil and gas. So Industrial Automation, the other part of the automation platform delivered a resilient performance in a year when PMIs were sub-50 in most territories for the most of the year. Organic revenue was in line with the prior period. At 1% on an adjusted basis, and we see continued demand for our solutions that automate processes in a competitive labor market. Turning to Life Technology, our second platform, the platform delivered a good performance in the year in a place of very mixed end markets. Revenue was up 6% and 2% on an organic basis. So Climate Control saw good demand for its energy saving products. Revenue was up 3% on an organic basis and 10% on an adjusted basis, so including the Heatmiser acquisition. So the recent slowdown in the European construction markets did impact sales in the second half. But the sector continues to perform resiliently due to demand for products that enhance HVAC system efficiency and give our customers the energy efficiency products that they're looking for. So Life Science and Fluid Control revenue was 4% lower than 2022, 5% lower on an organic basis. We did see customer destocking and reduced demand in the second half in line with the sort of peers in the sector. But the long-term fundamentals of this sector are strong, and we do remain very excited about the long-term opportunities for growth. So finally, Transport. So Transport revenue was up 14% when compared to 2022 and also at 14% on an organic basis. So growth was helped by our customer supply chains normalizing. We've also benefited from strong demand in China and India as we've seen some new contract wins on particular truck platforms over there. So we've also benefited from strong margin growth in both platforms, and that was supported by the continued progression of the complexity reduction program that we sort of talked about on previous slides. Move on to the next slide, please, Luke. So we did highlight this at our interim results, but I think it's important to flag that we do see a clear pathway delivering a step change in cash flow generation. And we took a big step last year. So you can see on this chart that free cash flow generated improved significantly from GBP 158 million in 2022 to GBP 234 million in 2023. So it's great progress. And we do see a clear pathway to delivering free cash flow in excess of GBP 300 million per year, and that will be through a combination of continued growth in our high-margin sectors and the delivery of our remaining complexity reduction initiatives. So just on the next slide, we've got a quick overview of the outlook statement that we issued to the market alongside our preliminary results. So based on the current market conditions, we expect full year adjusted EPS to be between 120p and 126p in 2024. And this guidance reflects strong growth in our Automation platform, supported by the record order book in Process Automation and continued resiliency in the Industrial Automation sector as the competitive labor market drives investment. Life Technology is expected to be broadly flat in the full year, reflecting continued demand right energy-efficient products in Climate Control, offset by softer markets in Life Sciences and Fluid Control and Transport. So our group operating profit delivery is expected to return to its normal phase in the year, which is an approximate 45-55 H1-H2 split, and we do expect further margin progression in the year towards our 20% target. Now as you can see in the bridge, we expect our interest charge reduced to about GBP 17 million in 2024, offset by a higher tax rate increasing from just under 22% to 24% this year. And we also see FX creating a headwind of around 2% on sales and profits. So that's all considered in the guidance and takes us back to our range of between 120p and 126p. So just to summarize and to wrap up before we move on to Q&A, some key messages from the presentation. So firstly, the purpose-led strategy that we set out in 2019 continues to deliver results. We delivered a very strong financial performance in 2023 with organic revenues up 6%. The adjusted operating margin up 90 basis points and our adjusted EPS at another 11%. So secondly, as announced in July, we've organized our group into these 2 platforms focused on 5 key market sectors, all of which are supported by long-term secular growth trends that we saw the delivery of sustainable, profitable growth. And third and finally, as I just outlined in the outlook statement, we are targeting another year of earnings growth and based on the current market conditions, we're expecting that this year's full adjusted EPS will be between 120p to 126p. Perfect. I think with that, I think we're handing back over to Alex for the Q&A session.

Great. Thank you very much, Luke. Thank you very much, Edward, for that introduction to the company. And I guess if you're new to the story, hopefully, the high-quality nature of the business came across -- we're now going to take Q&A. And if you do want to ask a question, please type it in at the bottom of your screen. We're going to try and cover as many as we can. So I'm going to kick off on a question that's coming on cash flow. So bearing in mind the strong cash flow, are there any future plans for buybacks?

Yes. So I think as we ended last year, our net debt-to-EBITDA ratio is about 1.3x, and we think about an efficient capital structure for us will be to operate on net debt-to-EBITDA ratio between 1x and 2x, and we delever about half times a year. So assuming we do no share buyback or acquisition during this year, our leverage will probably end up at about 0.8x at the end of this year. So I think based on our stated capital framework, we will definitely give some serious consideration to share buybacks should we get to the point that our leverage falls below time, which just said will be kind of towards the end of this year. So it may not be in this year, but certainly, if we head into next year, that would be a natural time to consider doing them. The only thing I would say is, of course, we continue to look at M&A and acquisitions and a healthy pipeline. We've done 5 acquisitions over the last 3, 4 years. So if we did an acquisition on it, we don't do a share buyback, but assuming we didn't know acquisitions then potentially.

Okay. Next question. How robust is your moat as a business in the sectors that you choose to focus on?

Yes. It's a good question. I would say very robust. I mean, I don't forget 45% of our revenues are aftermarket and we're basically a made-to-order business. So most of our products are specified by the customer. So once we're sort of in and on the platform, we have a very, very robust pace. We do have various IP, intellectual property and a lot of different of our end markets, but a lot of our sort of secret source comes from applications engineering. So it's something very, very moldable engineers that are able to bespoke existing products, as valves into a niche application like in Life Sciences, one of our valves is fully open and closed. It's about 1/10 of the width of your hair and within that, you have like 1,000 plus settings. So you got to get the idea of how bespoke and accurate the products are across our product portfolio. I think in process automation, just to quickly run through the 5 sectors on this year. most of the valves weigh well over a ton, if not 10, 20 tonnes. There are only a handful of people in the world that can do what we do. In some markets, there's only 2 players, let's say. So I think we're very well protected in that, which is our largest segment. Industrial Automation, of course, there are players like SMC, the big Japanese company, they tend to focus more on standard products. So I think where we compete with them, there will be less protection there rather, just to answer the question fully relative to the rest of our business. Clearly, we're working with smaller customers or bespoking parts. So that's sort of -- that's how we sort of see ourselves well protected and 40% of our business is aftermarket and Climate Control. We are influencing design specification, so that's how we influence in terms of getting our products in, and we are a premium product across all of IMI, we're a premium products. So I think I talked about us being 3% of the cost of the system, but 30% of the energy efficiency and savings of the system, which is really why we're at crucial part. I think in Life Science, says some Fluid Control and Transport, we're generally just working with larger customers. So there's maybe anywhere between 10 to sort of 30 customers in each of those 2 sectors. And we are bespoke in on specific platforms, whether it be a truck platform, like a specific truck Scania is making or something or in Life Sciences, maybe a machine that's someone like Thermo Fisher is making. So again, we're on those platforms for 3 to 5 years or so, depending on the life of a truck or life science diagnostic machine.

Okay. Did the growth percentages include or exclude inflation, i.e., are they real or nominal?

I would say that they include inflation to keep it simple for everyone. So I clearly in the last 2 years specifically, and Ed referred to the fact that 2/3 of our growth has come from price rather than volume. Price has been a larger component over the last couple of years. I think in a normalized period, we would probably expect pricing to be maybe like a 1.5% to 2%, something like that, just to kind of give you an indication of like how should we price to offset inflation versus volumes, which would be more like sort of 3% of the growth of the 5% growth target we have. If you maybe want to think about a decade, which is like roughly the sort of time frame I think.

How important is the U.S. inflation Reduction Act to drive further growth for IMI?

I think it's generally a good thing, I would say. So we have already seen a few contract wins, particularly in industrial automation as a result of that. Now we should remember that inflation reduction act would be things like -- is it been like a tax credit for our customers. So it's not sort of like an indirect benefit to us. Where we've seen it is a lot of investment going in, in the U.S. for production facilities that are really the sort of supply chain of EVs, electric vehicles in the automotive sector. And we're selling pneumatic actuators and valves into those facilities to support the production process, it's not always on the car itself, but just somewhere in the EV supply chain, maybe something more in the battery element at the function process. And also a lot of good wins in the agriculture space as well over in the U.S. So I think it is a soft tailwind for us. I think it's difficult to sort of -- it's not large enough for us to say, again, 2% of our growth will come from or something like that. It's more just marginal wins around the edges, but it's definitely -- we'd rather have it then.

There's been a big improvement in operating margins over the last 9 years to 18.7%. And you've got a through cycle target of 20% what does that mean for variability in a good year, could margins get to 24%, 25% and in a bad year, will they get back down to 15%, 16%?

Yes. So we ended this year at about 18.7% into 2023, and we've got the target for 20%. So I think we are particularly as we continue to improve the share of the business that sells into the aftermarket, it's gone from 35% to 45%. I think that makes us a much less cyclical business relative to history. And therefore, I don't see margins going along the ranges that you're referring to. And we sort of gave on the margin bridge that had presented, showing us going to the 20%, we gave a bit of an indication of how wide we see that window because the starting is 18.7% and the window we give looks 100 to 150 basis points plus or minus around the 20%. I think rather than letting margins get out of control and go up to 25%, which we could possibly do, right, as agreed just given the markets that we described, the pricing power we have and so on and so forth, I think much more important to us is about reinvesting for future growth and I talked about R&D as percent sales has gone up from 2.4% to 3.3%. So even with the margin improvement presented from 14.2% to 18.7%, we've got over 100 basis points of investment that have gone back into the business over that multiyear period. So we could already be at 20% margins today. I think much rather is a more sustainable, faster-growing route. So if you think about financial framework, 5% organic, 20% margins, we'd rather increase that growth target to say, 5% to 7% rather than 5% recycles as we get more confidence in the strategy and keep margins around 20% with a lot more investment going back into the business to fuel future growth.

Okay. Got a linked question that's come on the back of that. What's the margin on the aftermarket business?

It's very difficult to calculate as an operating margin, because you've got shared facilities. So we don't actually like to sort of sit and live and calculate that as such, because you've got new construction going through the same manufacturing facilities at the aftermarket. But probably our largest segment is process automation. To give you an example, and the gross margins of our aftermarket are 2.5x the new construction margins. That's where it's most extreme in the business. So the gross margins will be like 55% to 60% and in the aftermarket percent and the new construction business would be more like 20% to 25%. So still accretive relative to our operating margins. It's not quite a full razor-razorblade model, but it's slowing that. I think in Industrial Automation, which is the next biggest sector, aftermarket margins are probably around about 60s, but the new construction is more like 40%, so it's about 1.5x. In Climate Control, it's definitely got pretty attractive gross margins throughout, but you'd see sort of aftermarket margins north of 55% deftly. Life Science and Fluid Control and Transport, it's less of a new construction aftermarket player, right? We sell a product into a truck that goes into an emission system. It needs to just work period, right? So we don't really focus so much on the aftermarket. It's more about getting more content per truck or similarly for a Life Science diagnostic machine, you want it to work for the life of the machine, but we want to get more content per machine as the new platform comes on every sort of 3 to 5 years.

[Operator Instructions] I've got a couple of questions on EPS growth. So consensus EPS growth from analysts is only 2.7% at the bottom end and 7.5% at the top end. Are you expecting 2024 to be a tough year for IMI?

Yes. No, I don't think so. I mean I think our fastest growing -- our biggest segment, Process Automation came into the year with a plus 21% order book, which is a 9-month order book. So -- and we've already guided to double-digit growth for that segment and within our results. I would say the rest of the business has slightly tougher end markets. Industrial Automation that we alluded to manufacturing PMI is hovering around or even believe in the last 18 months, which would generally indicate low investment in factories I think Climate Control, it's mainly a European business and European construction is slow, albeit we're mainly a retrofit business. We're about 70%, 75% retrofit, something like that. So we're more tied to the kind of the aftermarket revenue stream there. But if new construction slows, it's not a help for us for sure. Life Sciences has had a tough period and then Transport, the truck volumes are due to go down. But I think if we really strip back our guidance of 120p to 126p, you said it's sort of a 3% to 8% growth target. Let's not forget there's a 2% FX headwind in there, which is kind of out of our control. We can't really do too much about that. And then also the new Pillar Two tax rules and the U.K. rate going up is also a headwind as well. So in its purest format, I think our guidance is for around about 10% growth, excluding tax and FX, which is kind of like governmental driven, all markets driven, right? It's not really something we can too heavily influence. So I still think we're planning on -- yes, if you ask me when we were doing the budget a few months ago, would we be happy with 10%. It's a bit stale.

How difficult is it to recruit staff with the right skills and what is wage inflation running at across your businesses?

Yes, I'll take the last one first. So wage inflation is around about 4.5% this year, something like that, which is compounding, don't forget on a year that was about 5% last year as well. So still running pretty hard, I would say, and particularly given some of our workforce are in Mexico, Poland, Czech Republic as well, you probably got 30%, 40% of the workforce in those 3 countries of east. And inflation is running in those countries at double digits. And we are, of course, consciously as an employer, making sure that everyone is on a living wage as well, which means as a large listed company, we are probably giving more than the average even in some instances to make sure we keep up with living wage in those areas.

I would say it's really interesting. I ask me about 18 months ago, so skill shortages, yes, you're definitely thinking about machines and things like that, can be complex again, certain locations. So as we've got a fairly diverse manufacturing footprint, as we discussed at the top of the call, actually anything material from a recruitment perspective, not really, no, because it tends to be very localized to does like an Amazon distribution warehouse gets set up 2 kilometers down the road. But even when things assuming happened one of our facilities out of the states and you saw high turnover initially and then actually a lot of those people came back as the working conditions may be better at IMI. People just like the sort of more let's say, family feel you get from a slightly smaller company, recognizing we have 11,000 employees, some of that move. But yes, not really, I think, at the moment, but it's always apply for top talent in whatever market, engineering, sales, managing directors and so on. So we're always focusing. But I think the better world strategy definitely has been a positive for us out in the market.

We've got a couple more questions to go through here. And I think we've got time to cover them both now. So the first one is what are the synergies between the different divisions?

Yes. So we are -- so as we look across the business, everything we do is Flow Control. So there's a lot of engineering expertise shared across the business, particularly in areas like hydrogen that we discussed and even process automation, the engineering director for the largest part of the business is the most severe valves actually has moved across into the Climate Control business. So we do share a lot of talent across the room. I myself have worked in 3 of different sectors over the last 10 years. So there's a good ability to share talent across the different markets that we have. I think there's some shared manufacturing, there's lot of shared offices, a lot of shared legal entities. So from a back-office perspective, we have things as well aligned as possible to make sure that we're running things efficiently from a cost perspective. And then I think the other thing is in the Automation business. Industrial Automation and Process Automation are doing very similar things just at a different scale. So we're now investing in software systems and those sorts of things across those 2 businesses now that we've put them together, which gives us a much bigger platform for investment and then similarly, in the other 3 businesses, the Climate Control, Life Sciences, Flow Control and Transport, they fit together really nicely, because we're always doing like a small component within a system, but our design engineers have to be experts in the heavy-duty truck, the HVAC system of a building or the life science diagnostic machine, and therefore, the engineering, the way we think about engineering in those areas are very, very similar.

I've got one more question come in. We've got 2 outstanding still. Who are the main competitors in the various divisions?

Yes. So Process Automation, the largest sector the main competitor there, I would say, is Emerson, the big U.S. company. And then after that, it probably trails off to a lot of smaller companies. You've got people like [indiscernible] in there as well in Industrial Automation. So yes, we're probably the #1, #2 player in the world in each of our markets in Process Automation. I think Industrial Automation -- you've got people like SMC and Festo. SMC is a big Japanese company, Festo a private German company. They're probably the #1 and #2 player in the world, we're probably #3, I would say. And then Climate Control, we're usually probably the #1, #2 player in the world in most of our markets there. You've got people like Danfoss, Albert's, being other companies that operate in that space. In Life Science and Fluid Control, we're probably the #1 player in the market. It's probably the reason why we think we'll grow faster in that segment relative to any others, maybe Parker would be an example of our competitor in that space. And then finally, in Transport, WABCO would be an example of [indiscernible] the #1, #2 player in the world.

Great. And then the final question. Can you indicate the sort of the typical market shares across your divisions?

Yes. So in process automation, we talked about [indiscernible] and Emerson as the major 2 capacities. I think we have something like 180,000 or so installed valves globally across 12,000 or so our plants and our competitors have about somewhere between 280,000 to 300,000, something like that. So we're about 35% of the market share, Emerson probably about 30%, and then it sort of quickly trails off into lots of different people thereafter. In Industrial Automation, we're probably about 10% of the global market share. It's a really fragmented market in that market. So there are lots and lots of players that do pneumatic actuation in valves, refractory automation. So it's relative to the market, it's a reasonable market share. Where are we next, Climate Control. Yes. And so we're largest company in Germany, is publicly printed numbers, but we have a market share kind of around 50-ish percent or something like that. So a pretty significant there. It's pretty high than in the other major markets over Nordics and Switzerland that we sell into. The Life Science and Fluid Control, quite difficult to get market share actually for that particular market, just given it's a fairly concentrated market, but I would say it's pretty high again. And then in Transport, we sell into all of the top OEMs in the world heavy-duty trucks.

Brilliant, Luke and Ed, thank you very much for the clear presentation and answering all those questions. Thank you to everyone for attending. As you leave today's webinar, you'll be asked to complete a shorter exit survey. We really appreciated if you could complete one of those. And just to remind people, we've got a couple of events coming up. We've got a webinar tomorrow for Kenmare Resources and a webinar on Wednesday for Rotork plc. And details of those are all on the Yellowstone Advisory website. So thank you again for attending. And look, we hope to see you all soon. Thank you.

Thanks, everyone.