IMI plc (IMI) Earnings Call Transcript

Hello, everyone, and welcome to the IMI plc Q3 Interim Management Statement. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Roy Twite, CEO, to begin. Roy, please go ahead.

Good morning, everybody, and welcome to IMI's Third Quarter Trading Update. I'm joined here today by Luke, our CFO. It was another excellent performance from our team in the third quarter. Organic revenue was 12% higher than the same period last year and is now 5% higher year-to-date, demonstrating the continued success of our growth strategy and the strength of our One IMI operating model. We delivered an outstanding performance in Process Automation, supported by rising global energy demand and our focus on high-margin aftermarket orders, which are now up 7% organically year-to-date and were up 1% against a strong performance in the third quarter last year. The Climate Control, Industrial Automation and Life Science % Fluid Control market sectors all performed well. There is strong momentum across the business, and we remain on track to deliver our fourth consecutive year of mid-single-digit organic revenue growth. And I am, therefore, pleased to reconfirm guidance. We continue to expect that full year EPS will be between 129p and 136p. With that, I'm going to hand back to the operator, who will manage the Q&A session. Thank you.

[Operator Instructions] The first question goes to Christian Hinderaker of Goldman Sachs.

I want to start on the Process Automation growth rate. I think you've called out what the year-to-date number was, but what was the quarterly figure? And then just how do we think about the quantum of the shipment catch-up that you flagged both with respect to process, but maybe elsewhere as well?

So in terms of Process Automation, obviously, the sales grew 26% in the quarter. That was shipment phasing, Christian, okay? So we still see Process Automation high single digit, maybe slightly higher, maybe 9%, 10% for this year in terms of shipments. No change to that. But what we've done is derisk the final quarter, which obviously, if you do the math, we expect to be flattish in terms of shipments versus last year. If you remember last year, we had an absolutely fantastic Q4 in terms of shipments and December, in particular, was massive. And what we've done is derisk that. So I'm really pleased with the team. Obviously, to be able to ship 26% more is excellent in terms of execution. And that really has been a long journey in terms of our investment in the factories, our investment in supply chains and obviously, the team. On the order side, in Q3, we were flat in the quarter versus last year, which was a very tough comparator. I mean, from memory, last year, aftermarket orders in the third quarter are up 10% and new construction was up 20%. So it was a huge third quarter. So I'm pleased we're flat. The difference really was mainly those big hydrogen orders that we won with VIVO in Q3 last year, which we said we were never going to repeat, right, because the grants that were given by governments and local governments were not repeated this year in hydrogen to that extent. So yes, we were flat in terms of orders. Year-to-date, I think the important number that we put in the release is that total orders outside of the multiyear marine order, which we called out last year are up 5% organically year-to-date. And we see, obviously, Christian, we do see good support from combined cycle gas, energy in general across Process Automation, obviously, on the back of what's happening with the energy demands for electrification and for data centers and AI. So we see good demand there I think we see good demand in Nuclear aftermarket at the moment for the sort of upgrades to the existing plants, the life extensions to the existing plants. And in time, we expect to see good demand on new construction in Nuclear, but that will obviously be a few years out. That's not something that's going to happen quickly. But in general, Process Automation, I would say, in good shape. We had a good look, Luke and I at the pipelines with Jackie and Robbie and the team and the pipelines of opportunity for aftermarket and new construction, and they look good. So yes, it's -- I would say, in terms of shipments, we are about where we thought we would be. Maybe the year-end will be slightly better than we thought at the half year for Process Automation. And in terms of orders, again, pretty much bang on where we thought. And that would lead, Christian, into what I would call good growth for next year, not at the high single-digit level. I don't think we'll be quite that good next year, but around the mid-single-digit level for Process Automation in terms of shipments.

Yes. Maybe just the second question you asked, Christian, was on shipment catch-ups in the quarter. So the group overall, as you know, grew 12% organically, and we think about 2% to 3% of that was shipment catch-ups and quite a bit of that was in the Life Science and Fluid Control sector, some in Industrial Automation and then a little bit in Process Automation, but only a relatively small impact from a percentage growth perspective in both Process and Industrial Automation, and then there was a reasonable amount of catch-up in Life Science and Fluid Control in the quarter.

Very helpful. Can I just squeeze one on IA -- sorry, Luke, go ahead.

I was just going to say we do think the catch-up is about done now.

Okay. Can I just squeeze one on IA? I guess just interested in any commentary around regional developments and I guess, the sort of underlying backdrop there. Obviously, data has been a bit mixed.

Yes. No, we had a good look at this. And broadly, all regions are broadly flat, Christian. It's -- I think industrial automation markets generally are still struggling a bit. We haven't yet seen the recovery we're hoping for. I think I said previously that sort of 60-day moving average was up, which it was. Now it's about flat in Industrial Automation. So still not yet seeing that investment. We all know it will come. It's just a question of when, and we've all seen these cycles before. But it's across the regions, Christian, it's broadly flat.

The next question goes to Lushanthan Mahendrarajah of JPMorgan.

I've got 3, I think. The first is on Process Automation and orders, and I guess, OE in the quarter. I appreciate there's a sort of, I think, GBP 9 million comp in Q3. I think ex that, were sort of new construction orders up 10% in Q3. Just wanted to check my math there. And if so, what are the key end markets driving that? I know you sort of called out power already, but just interested to hear what's driving that sort of OE growth there. The second question is on next year, if possible. I know it's early, but I don't got any initial thoughts. I know you've sort of touched on process already, but across some of the other end markets as well. And then also margin-wise, anything we need to think about? And then the third question is just on transport and the strategic review. Just any update you can give there? I appreciate the backdrop is probably tougher now than maybe we thought it was going to be 6, 7, 8 months ago, just if that's impacted your thinking in any way?

Three good questions, Lush. On Process automation orders, I think your math is about right. So orders in the third quarter were just over GBP 90 million. And yes, the hydrogen orders that you -- I think you are referring to, the comp on that is about GBP 10 million. So yes, you're right. If you did -- I think be careful what we strip out, I think, but if you did take out those sort of hydrogen orders from the grants from last year, yes, you'd be looking at about 10% growth in the quarter on new construction. I still think, Lush, in my mind, the sort of 5% it's very much a year-to-date business process automation. As you know, it's a longer cycle. So I still think that sort of total orders of 5% up organically year-to-date. If you strip out the marine order that we called out last year, I still think that's a pretty good guide. But as I said, we do see good opportunity pipelines in both combined cycle gas and in gas generally LNG and so on. Your second question then was about next year. So obviously, we haven't completed the budget reviews yet. We've sort of done some pre-budget reviews. But we saw one of the peers call out yesterday sort of 4% organic growth for next year in overall terms across the piece. And I wouldn't disagree with that. Again, I think mid-single-digit growth for next year looks to me at the moment about right, subject to sort of current market conditions carrying on. I think on top of that, our tax rate, unfortunately, will be going up next year. This year, we have benefited from settling some old tax cases. And next year, our tax rate will be going up to just over 26%. So that's worth getting into your models. And then the other thing, clearly, we are going to be -- we are already investing more in cyber. Having been through the cyber incident beginning of this year and seeing what else is happening, obviously, around the piece in the industrials, but more broadly in retail and automotive, we are going to be -- we are upping our game already. Luke talked about a bit about it on the last call, investing in the team, investing in the best systems, investing in training broadly across IMI. In all of this, it will probably cost us about 1.5p of EPS incremental next year. So again, it's an investment I absolutely believe we need having been through that attack earlier this year. And then your last question on transport, yes, tough market, particularly U.S., that is a regional effect where some of our customers have literally shut down for a week or more because of the lack of demand. So transport market, tough. The transport strategic review made very good progress in the quarter, I have to say. We've got a really strong team. As you know, we brought in some ex passenger car people last year. They are -- come up with a pragmatic ambitious plan, which was presented to the Board, accepted by the Board. It's a 5-year plan, obviously, in line with all of our plans. I talked a little bit about on the last call. Obviously, it's predicated on value engineering, new products of better margins and exiting, frankly, some of the lower-margin business. They've also built on that. There's more continuous improvement, lean and cost effectiveness that's gone into the plan as well. That's sort of a fourth leg of that plan. And then the fifth leg is all about working capital and particularly stock turns. And they've made good progress this year, and we can see good runway for next year as well. So they're very focused on improving the return on capital of that business. And indeed, by the end of the 5 years, getting the return on capital employed of transport to be pretty close to the IMI average. So yes, it's a good plan, Lush. They're very focused. Clearly, as you said, externally, truck market is not great, and we're very much focused on the internal plan, get our heads down to deliver those improvements. Does that cover all your points, Lush?

Yes. That was really helpful.

The next question goes to Colin Grant of Davy.

Just a question on 2 things really. Just firstly on margin development. Is there anything you can give us in terms of what you're expecting margins to do in the current year 2025? I mean you've got very strong growth coming through here and you're getting it in your higher-margin areas. Just any kind of view on the accretion that you might get in margin would be helpful. And secondly, just if you could give us an update on any thoughts looking into 2026 around potential share buybacks that you might look to try and do next year given the strength of your balance sheet.

Yes. Great. Thanks, Colin. I'll let Luke talk about share buybacks in a moment for next year. Just a couple of points for me. Margins, as I said, where consensus is for this year is our base case, looks about right. That would mean margins of about 20% for this year, which obviously, I'm very pleased with the team, Colin, because we started at 14% and we've made year-on-year progress towards that original target. As we go forward over time, I would expect over the sort of 5-year period, as I've said before, for those margins to tick up. And if you take roughly a 30% drop-through because we are going to continue to fully invest in the business, growth is our #1 priority. So we will continue to fully invest in the business. But we still expect to do around on average, obviously, it won't be every year around a 30% drop-through over that 5-year period, and that will take margins closer to sort of 22% over that period. Before I let Luke talk on share buybacks, I will just say the acquisition pipeline does look better than it's looked for a while. Of course, these things are very binary. And we're very, very disciplined about how we use shareholder money. And as you know, we are looking for returns above the cost of capital within 3 years, and we're looking to be not too dilutive to IMI's sort of 13% over a 5-year period. So we're very strict about that. But I would say, Colin, the muscles that we've built, particularly around aftermarket, Growth Hub innovation around the way we go to market commercial excellence, the use of data and obviously, our operational footprint, which I really say was truly world-class. And the way we can improve companies in that way means that we are more confident of generating those returns. So with that, I'll let Luke talk about share buybacks.

Colin, and looking at the year's free cash flow, I think we feel really good about the work we've been doing, particularly on working capital this year and particularly the inventory reduction work we're doing. So it's nice cash generation coming through there. And we've always said we'll look at our leverage and operate roughly between a 1x to 2x range. And at the half year, it was 1.4x. Subsequent to the half year, we completed the share buyback, paid the dividend. So sort of as we now approach the end of the year, we said we'll delever to around about 1.1x come the end of this year. And as we get into next year, we'll look ahead. And if we sustainably think we'll have leverage below x, we'll definitely look at initiating a share buyback. But I'd sort of echo the same as Roy, that we continue to have M&A as part of our strategy and look at that as well.

The next question goes to Jonathan Hurn of Barclays.

Just 3 questions, please. Just going to focus on some of the other subsegments. Firstly, just in terms of Climate Control, obviously, 5% growth. If we kind of look to Q4, there's a really tough comp, probably the toughest comp of the year. Do you think that business can still grow at sort of 5% in Q4? And if you can just give us a little bit more info about that sort of exposure to data centers and what you're seeing. I think we had 14 million orders of that last time you spoke about it, where we're sitting in that. Second question was just on sort of Life Science and Fluid Control. Obviously, a big spike up in growth, 13%. Can you just sort of break that out? How much of that is underlying? And where is that coming from? And how much of that is catch-up? And then the third question was just coming back to process, but just focusing on that sort of nuclear opportunity there. I mean, look, there's a lot of talk out there about what that market can ultimately be. Can you just sort of give us some more information about where you sit, where you're winning, what type of growth rates you expect? Just some sort of more color on that nuclear opportunity going forward for you in process, please?

As usual, Jonathan, you managed to find 3 new questions after everybody else [indiscernible]. Climate 5%. Climate has been growing at 5% pretty much year in, year out for the last 5 years, something like that, Jonathan. And it really has driven by overall requirement for energy saving principally in Europe, right? So it's a great growth track record. It does have a very difficult comparator in Q4. So I'm not sure if we'll quite grow that fast. But in the overall year, we'll be around that 4% to 5% level for climate. So very pleased with their performance. As you said, data centers is becoming an increasing part. It's only 2% or 3%, but that's come from nothing over the last few years, obviously, for data centers. And the pipeline is strong. And as I said on the last call, we will follow several years after those initial investment decisions on those data centers. So that's good for the future because that means with all that data center investment that's been announced, that gives us a very good pipeline. Life Sciences, yes, I mean, 13%. I'll let Luke talk in a minute about what was catch-up. Clearly, the catch-up side was on the Fluid Control side, and we flagged that at the half year. I still think Life Sciences an overall term will be about flat for the year, about flat for the fourth quarter. So we're not seeing that inflection point yet. Certainly, though, the mood music is better. And at some point next year, I'm not going to call first or second half at this point, Jonathan. But at some point next year, I would expect it to start to return to, let's say, low single-digit growth before eventually kicking up to more of that mid-single, even higher growth that we saw historically. And then on Nuclear, yes, I mean, Nuclear new construction, as I said earlier, is not going to happen quickly. These are long, long cycle projects. It's very good news for IMI. I mean this year, as you know, we won a big project in the U.K. already. I think Nuclear -- in terms of Nuclear new construction and aftermarket put together will probably be 7% or 8% of our orders this year, so ticking up nicely. Per reactor, we can get up to GBP 20 million worth of content around the valves and the strainers. And then on an SMR as well, that could be up to GBP 20 million worth of content as well. So again, longer term, but bodes well for the future as that starts to really kick in. Aftermarket will be up in Nuclear again this year. And that's the extension to the nuclear reactors that's already happening. And I expect to see more of that, Jonathan. And that aftermarket is just about the best aftermarket we have in terms of the capture rate. Obviously, a lot of it is regulatory and in terms of the margins because everybody competes very hard on new construction, as you probably remember, but then aftermarket can be an annuity for decades after that, a very good recurring revenue stream. Does that capture your questions apart from -- I'll just let Luke talk about [indiscernible] catch-up.

On the Life Science and Fluid Control organic growth of 13% growth in the quarter, but 3% to 4% of that was underlying growth and then the rest was catch-up. As Roy said, the most important thing is it's now brought us to where we thought we would be, which is 1% year-to-date growth and then around about that for the year.

Great. That's very helpful. Can I just have one just very quick follow-up just on that sort of aftermarket within process. Can you sort of tell us where that sits in terms of percentage of the division? I know it's been growing, but where are we kind of in that sort of AMOE mix? And where do you think you can go to in process?