IMI plc (IMI) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the IMI plc Interim Management Statement. My name is [ Seb ], and I'll be the operator for your call today. I will now hand the floor over to Roy Twite to begin the call.

Thank you, and good morning, everybody. Thanks for taking the time to join us today. I'm joined here, as usual, by Dan, our CFO. Hopefully, you've all had a chance to read through the IMS this morning. Now I am going to take this statement as read, so we can get straight into Q&A. But I would just like to highlight that the group's first quarter performance was in line with expectations with 4% organic growth. So as such, we are reconfirming guidance. We still expect that 2024 full year adjusted EPS will be between 120p and 126p. So with that, I'm going to hand back to the operator who will manage the Q&A session for us. Thank you.

[Operator Instructions] Our first question today comes from Lushanthan Mahendrarajah from JPMorgan.

I've got 2, if that's okay. The first is, if possible, can you give us any color on April trading, please? And I appreciate the Q1 comps, in particular, are quite tough to get an idea or of sort of run rate. And then the second question is on Process Automation. Would it be possible to get some color on sort of order intakes? Did ex that marine order and just the aftermarket split there, if possible?

Yes. So I start with April, we've got the April sales numbers in. I think probably the sort of -- there is -- industrial automation is actually better. So instead of minus 5% last -- at the end of April, it was minus 3%. So that's really encouraging, particularly when I look at some of the comparatives that have been published over the last weeks. It's nice to see us doing pretty well actually in industrial automation. The next the good news is that climate control, as you know, was minus 4% at the end of the first quarter. It was actually flat now year-to-date at the end of April, which when you consider the comparator last year or the first part of last year, wholesalers were restocking. We had Halo-B if you remember, was our product that we put out to help the German municipalities to hit this 19 degrees C target to save energy. So I'm actually pretty pleased that business as usual is showing a lot of resilience. And obviously, very strong in terms of energy savings. So that's good news. Again, I think everybody appreciates, pretty difficult European construction markets. Yes, so they're probably the 3 big changes. Overall, Life Tech instead of minus 6% at the end of the first quarter was actually minus 2% at the end of the first 4 months. So again, pretty much in line with where we thought it would be and it puts us in a good position to really sort of get probably flat this year across Life Tech. So quite encouraged by what's happened in April. Clearly used to move around a little bit. And always in IMI for years, we've looked at March and April together, just as Easter moves, it does have a bit of an impact. So reasonably encouraged on the April situation. On Process Automation, you're right. So last year, we called out this big marine order, which, as you know, was a multiyear order. So if you strip that out of last year, it would mean that first quarter order intake was actually plus 8% overall. So again, it's going nicely. I guess, very strong comparator last year. I mean, very, very strong first quarter last year. On the aftermarket side, so again, if we look at year-to-date April, aftermarket is plus 7%. So again, as it gets super strong comparator. Actually, I can't remember the last -- what the first 4 months was, but I know the aftermarket in the first quarter last year was up 49% for Process Automation. So to be ahead of that year-to-date is encouraging. Does that answer your question, Lush?

Yes, that was really very helpful color.

Thanks, Lush.

Our next question is from Christian Hinderaker from Goldman Sachs.

My first question would be on climate control and you touched on a little bit there in terms of the weakness in construction, that you've also cited strong underlying demand for energy-efficient products. Just keen to unpack that a little bit. I mean what are the assumptions built into the full year guidance for this business you're able to comment on dynamics in terms of inventory in the channel and maybe elaborate on that point of weakness in broad-based demand versus strength in demand for energy-efficient products?

Yes, nice question. I think it has traditionally been a very resilient business. And you've heard me, Christian. If we go back to 2009, I think it was down 4% and actually profits were up. And it's a super resilient business, partly because of the energy saving, partly because of its value equation as well, where it's only 2% or 3% of the cost of the system, typically our kit, but it can contribute energy savings up to 30%. And it's -- so it's really strong. The brands are strong, it's good pull-through, and it's always been very resilient on pricing power as well. So you put all that together, and we said pretty much consistently that this year, despite a lot of people saying, well, Europe infrastructure markets really, really tough place, which they are. We've said consistently, we think we'll carve out growth this year. And clearly, we are flat year-to-date April against a very strong comparator. We still think that will be the case. On the inventory side, I think this -- last year, there was definitely sort of restocking wholesalers in Q1. We're picking up much less of that. I think, generally speaking, Christian, because of where interest rates are, most people are keeping a careful eye on inventories. And so I think there's a general trend to make sure they've only got what they need for customer service. And clearly, supply chains are generally better than obviously they were during COVID where they were keeping more safety stock. I think, Christian, when I go talking to the wholesalers, most of that COVID situations are wound and we are in a more normal situation as far as our stocking levels are concerned right now. So from what we can see, no real big change due to stocking, restocking in Q1.

Just turning to the divestment of industry mechanic within Life Sciences. Should we read that as implying the pro forma business today is actually 1% better than guided, Am I reading that right?

Yes. I mean, broadly speaking, it's just under 1%, rounds to 1%. But it's not actually a Life Science business, I should just say that. It was on the fluid control side of that sector. So I'll just be absolutely clear about that. And we actually acquired it. I think it was sort of 2006, something like that. We [indiscernible] them with a whole bunch of other assets that -- and it's got some interesting high-pressure regulation technology. But what we found was that it got ex growth apart from hydrogen. So obviously, we're applying that technology to hydrogen. So what we were able to do, Christian, is move the products that were applicable to hydrogen into another one of our businesses within Fluid Control, so that's great because that's the business growing. But the rest of it really gone ex growth for us. And so being able to move that on a reasonable multiple on it was exactly the right thing to do for us, reduces complexity as well and helps us, again, nudge the mix of the business to higher growth. So yes, that -- if you look at all of that put together, it rounds to 1%. It's obviously slightly less than 1%. But Dan, I think, it all depends [indiscernible].

Yes, probably about [ 0.5p ] of earnings impact. So yes, so embedded in this is a bit of a little upgrade to our guidance because we can hold it with the divestiture. [indiscernible].

Yes, that was very clear, and thanks for clarifying on Fluid Control. Maybe just finally, capital allocation, we talked in March about the implications there potentially. But can we touch on the M&A landscape within that framework? You've done 4 acquisitions, I think, in the last 3 years. Just eager to understand where the focus is there in terms of scale, whether there are particular segments where you would prefer to do M&A and what the current sort of pipeline is looking like?

Yes. No. So scale will -- as you know, we like bolt-on. So we think sort of everything up to GBP 300 million or slightly beyond that is good for us in terms of scale. We like those bolt-ons because we're always looking to accelerate growth. So we're always looking for us plus the acquisition. It enables us to grow past the latest one and you know the plans for that, Christian. So we love that sort of scale, a nice bolt-on. In terms of segments, we really like Life Sciences, Smart Connected Buildings and Automation. That's really the 3 areas that we really like. Clearly, if there was a nice automation asset where we could accelerate the aftermarket growth like we've done in Process Automation, that sort of thing is very attractive. So again, we're us plus then, 1 plus 1 equals a lot more than. So that's what we're really after. Hopefully, that gives you a private pipelines [Technical Difficulty] good actually. But again, we're pretty particular as well. So I'd say pipelines look good. Opportunities look okay. If we don't get to the point where we can deploy the capital through acquisitions, really, you can see how strong cash flow is becoming and we'll be moving over the next couple of years to GBP 300 million of free cash flow will be done. So at that point, we'll obviously look at other means to return money to shareholders. Dan, do you want to talk about the conversations with shareholders?

Yes. And everybody -- well, by and large shareholders want to keep their own optionality. So share buybacks make the most sense. I think we've talked about it in March. We started the year at 1.3x. If we don't unlock, we'll probably be below -- well, we'll probably do half a turn, so we'll be below 1x. And I think that's when we get very comfortable. We have the dry powder for the pipeline and probably a little bit more. So that's when we'll start thinking about a share buyback, Roy.

Our next question is from Mark Davies Jones from Stifel.

So at the full year, you talked about the rolling average, I think, order intake at IA turning sort of generally positive right at the end of the year. I wondered how that should continue through the year-to-date. Obviously, the macro picture there still seems very mixed, particularly in Germany. So what are you seeing in terms of order flows?

Yes. So IA was slightly positive, as you said, Mark. It's now slightly negative on the 60-day moving average. And U.S. is very slightly down. Europe is slightly more down. So yes, it's probably a bit of a full spring. I've obviously checked all the peers, as I said. And we're probably slightly outperforming. But it's -- I think still the industrial landscape is reasonably tough. As I said, the good news on IA is that it was minus 3% versus minus 5% by the time we got to the end of April, so some recovery in April. And again, that's largely due to working days with Easter moving around and things like that. But in terms of orders, slightly down on that 60-day moving average, Mark.

And then slightly more bullish from the transport number in Q1 was exceptionally strong in a tough market. I know there's some lumpy stuff going on in Asia. But if you're still looking for flattish for the full year, does that now seem a bit conservative?

I mean good operational performance, right? So -- and Asia was our strongest area, Mak, still and new products coming through. So that was encouraging, 19%. But when you look at all the commentary and you listen to the big OEMs in the U.S. and Europe, they're expecting volumes down, right? And that varies between sort of minus 5% to minus 15%. So there will be an element of catch up in our numbers as well as the new products. So we still think for the year, it's going to be -- certainly, our guidance is based on slightly down sales for the full year. And I would say, whereas other markets will obviously improve throughout the year, we think that this is one that is going to go the other way. And particularly, when you look at the comps as well, Mark, remember that second half of last year, was very strong for transport for us.

Our next question is from Harry Philips from Peel Hunt.

A couple of questions from myself. It's not often see a 27% positive number in my statement. So just really more thinking about the sequencing of how process evolves through the year? I mean, obviously, the order book is there, and we know it's going to have a cracking year, but 27% was certainly more than I thought it was going to be. And just to follow on from Mark's question around the sort of Asian exposure of transportation. I'm trying to remember if you've given this number, but just how big is the sort of Asian content within transportation at the current time, particularly with the new contract wins that you've booked in recent times, please?

Yes. I'll let Dan come on to transportation. It's growing substantially, transport in Asia, Harry. Last year, I think it doubled, but I'll let Dan come on to that in a minute. On Process Automation, you've got to say Jackie and the team doing a fantastic job. Because the book-to-bill, Harry, in Q1 was 1.3%. So despite 27% growth, now obviously, always shipping is a bit low in Q1, and you all know that Q4 is high for Process Automation. But even so, I'm really pleased with that. Really pleased with the 7% aftermarket bookings growth over the first 4 months as well, given the tough comparator. But the sheer operational excellence in a project-based business to deliver 27% growth, is also phenomenal. So I couldn't be more pleased with Jackie and the team in terms of what they're delivering on Process Automation. Yes, you know it's a lumpy business, Harry. You know it's project-based. So it's not going to run at 27%. We stick with our sort of overall guidance for Process Automation. It's going to be sort of double-digit growth in that, let's say, around 12% sort of organic growth for this year in terms of sales. So it will flatten out. And already April flattened out a bit. Yes, I'm really encouraged and it's always good as you know, Harry, to get it in the books, right? So you know it's nice to get a really strong start for Process Automation. So thanks for that.

Just quickly [ question ] from that. Sort of things like pricing in automation, is there any sort of issue around that? Or is that a compensation to come down the line?

No real issue in pricing and automation. It's pretty much what you expect, right, which is that we're seeing pricing in the market holding up well. As always, Harry, I can't remember, whenever that's been an issue. And then on the Industrial Automation side, strong brands, good market positions, pricing flowing through. So no, issue on pricing.

Harry, 20% in Asia for transport still, about 15% India and China. So those are the big markets. And so it's definitely growing faster than the rest of the business at this stage, but it still kind of rounds to that 20% of the overall transport business.

Our next question comes from Stephan Klepp from HSBC.