IMI PLC

LSE:IMI

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and welcome to today's IMI plc's interim management statement call. [Operator Instructions] I also must advise you that this conference is being recorded today.And I would now like to hand the conference over to your first speaker today, Roy Twite. Thank you. Please go ahead, sir.

[Roy M. Twite, CEO & Director]

Thank you, and good morning, everyone, and thanks for taking the time to join us today especially given the short notice. I am joined on this call by Dan Shook, our Finance Director. I will summarize some important points before we take your questions. Thank you.We would like to thank all of our employees for their tremendous efforts and continuing dedication to our strategy and to our purpose, breakthrough engineering for a better world. Their dedication has delivered many strong results for the first quarter. Group revenues were up nearly 8% organically versus the first quarter of last year and 2.6% ahead of the first quarter 2019. Margins, profits and cash was also ahead when compared to the first quarters of both 2020 and 2019. As you can see, the growth was very broadly spread across all 3 divisions. For the balance of the year, the improving trends in our major end markets and continued delivery of our growth and cost initiatives are expected to enable results that will more than offset currency headwinds. So we are upgrading 2021 EPS guidance to between 81p and 87p. We are also making real progress on our strategy launched in November 2019 to generate sustainable, profitable growth.Summary. We are absolutely clear on how we will win in each market segment that we compete in. We have developed a more customer focus and more commercial culture, which is being embedded right throughout the organization. We are reducing complexity, for example, in a number of sites that we operate in, whilst increasing the utilization of our most efficient operations. We have built a Growth Accelerator capability, which is already starting to generate growth through market-led innovation. During this progress, we are also raising our expectations for the group's sustainable margin delivery. Over time, we now expect our margin to become a sustainable 18% to 20% margin business.I'll take each division in turn. Precision will deliver 20% margins through the cycle by executing on its growth initiatives including high value-add new products, by further reducing complexity and consolidating its operational footprint and by improving SG&A efficiency. Critical now expects sustainable margins of 20% by executing on its growth initiatives in both the installed base and in attractive growth markets and by further delivering cost efficiencies particularly in the way that it serves its New Construction customers and by addressing its lower-margin business. Hydronic continues to target 20%-plus margins by executing on its growth initiatives, which are underpinned by its expertise in energy-efficient buildings and through further cost efficiencies from supply chain complexity reduction. Crucially, these improved targeted returns will be delivered while continuing our investments for growth. Given both our strong operational performance and the accelerated delivery of our strategy, we are also announcing a program to buyback shares up to a value of GBP 200 million. This will provide for a more efficient balance sheet while still leaving ample capacity to continue investing in growth, whether organically or through acquisition. We estimate that with this buyback, our gearing at the end of the year will be around 1 net debt-to-EBITDA.Finally, we will be hosting an investor and analyst event later this year to share more detail on the growth and operational initiatives underpinning both our strategy and our ambitions.So with that, I'd like to hand the call back to our moderator, who will manage the Q&A session for us. Thank you.

[Operator]

[Operator Instructions] And we have questions that came through, sir. The first one is from Andrew Douglas from Jefferies.

[Andrew Douglas, Equity Analyst]

It's Andy Douglas from Jefferies. Just one question, really. So that [indiscernible] one now-a-days. I want to understand more why you have put out new margin targets. Clearly, it's a cracking update, your business is flying, and you've got a lot of confidence. But we only heard from you a month or so ago and the valuation and I think the market expectations of what of you guys was kind of under what we had in terms of margin targets. What was the reason for putting out more quite aggressive margin targets, which kind of leave you a slight harshest of fortune now, if we do go into a slightly more trickier world over the next kind of couple of years? Clearly, it's very exciting, but just want to understand the mentality behind that, please.

[Daniel J. Shook, Finance Director & Director]

Yes, brilliant, Andy, and exactly the right question. I think, Andy, there's a few things on there. We laid out the strategy in November 2019, which was obviously 18 months ago. And we were crystal clear about what we were going to do with IMI in terms of customer-focused culture, improving the commerciality. We went through the strategy in terms of how we were going to win in each sector. And we went through how we were going to take a huge amount of complexity out of the business and, therefore, cost and enable growth through reducing that complexity as well, Andy. And 18 months ago, obviously, that first year, we changed about 30% of the top 100. We took the executive down from 11 to 7. We actually obviously made some other management changes. And so an awful lot of change, Andy. But as you know, I've worked for IMI for over 30 years now. And I did have a ranged division. We did have a pretty good idea about strategically where we needed to go. And that was all well and good. And we were making great progress in those first few updates.Then of course, COVID hit, and we dealt with that. And again, I was incredibly proud of the way the whole team responded to that. And actually, that could have been very, very destabilizing. But with things like the ventilator challenge, with the ability to flex the costs across the rest of IMI, which the other teams responded to, but more importantly than that, with really the relentless progress on the strategy through every update was really good to see, Andy. And practically every project, we were either actually achieving or actually getting ahead of our progress. And you saw -- I think we -- well, we pretty much continuously upgraded what we expected in terms of savings. And crucially, those savings were hitting the bottom line.So we went through last year, and there was a lot of moving parts in last year, Andy, as well that we were managing, as you know. So some huge ups but some very big downs as well. And what's really happened is we've had a much more -- let's call it, a much more typical first quarter where we've really seen the normal business rhythms hitting their stride again. And we've also made tremendous progress again on some of the restructuring projects. And so we've upgraded, as you can see in the note, the savings for this year from GBP 15 million to GBP 22 million. And the growth that's coming through from new products is now starting to be quite tangible. So we did talk at the update and we -- a couple of months ago about Critical. They got GBP 6 million of orders from Growth Accelerator, brand new, very innovative new business last year. We're well on track to get to the GBP 20 million this year, which is a major step forward for Critical. And as you know, Andy, the other 2 divisions are only about 12 months behind. And in fact, Hydronic, in their 9% growth in the first quarter, about 1/3 of that was from new products. Now that is the first time in many years that we've seen new products in Hydronic, not just replacing and improving the sales of existing product, but genuine new product breaking through and providing growth. And so we got to the point really where we looked at the margin targets. We obviously do our long-term plan, present our strategic plan to the board. We've been grilling that, Dan and I. But there are, I would say, on top of what we presented, the momentum in terms of that November '19 strategy there are clearly more opportunities in the manufacturing footprint in Precision. There Beth has come in and clearly identified more opportunities in SG&A in terms of streamlining the SG&A in Precision, while investing much greater sums in terms of Growth Accelerator and new product innovation. And Jackie has just done a fantastic job on Critical in terms of moving the focus of that business to the Aftermarket, to the upgrade valve business in the Aftermarket, to improving the 20% to 30% to streamlining his costs on the new production business. And Phil, of course, we've got the sort of nice tailwind of of the sort of green investments. And again, the first quarter was helped because governments like the German government are starting to already incentivize the green investments. And we just felt, Andy, that we can fully invest in this business. But still through the complexity reduction and through the better quality growth, actually, we need to move these sustainable margin targets up. We need to make sure that the market is pretty up-to-date with where our thinking is internally. And of course, that's what we've done today, Andy. So now I'm absolutely delighted, as you say, when I first presented those margin targets, they look stretched and they were stretching, right? But now there is now so much good momentum in the business. And the team's in place, the people in place, just that culture is really coming through. So yes, that's why we've done it, Andy.Yes. Thanks, Andy. Are there any more questions? Moderator, are there any more questions? So we seem to have lost the moderator, Roy. Bear with us, all, please.

[Roy M. Twite, CEO & Director]

He's probably having a few tech problems. Like a few people have had this morning, I think, Dan.

[Daniel J. Shook, Finance Director & Director]

Yes, exactly.

[Andrew Douglas, Equity Analyst]

Roy, Dan, can you hear me or not?

[Roy M. Twite, CEO & Director]

Yes. I can.

[Daniel J. Shook, Finance Director & Director]

Yes.

[Andrew Douglas, Equity Analyst]

Dan, were you about to say something when you -- when I said thank you to Roy?

[Daniel J. Shook, Finance Director & Director]

You heard my little -- the only thing, Andy, is look, we accept that there's still going to be cyclicality in our business and some of our markets may go up and down. But as you know, we're working on that as well. And particularly with Jackie and Critical transitioning more to an aftermarket business and certainly the growth initiatives, we're looking to see to smooth that out as we go. And also, as Roy said, the flexibility that we demonstrated last year in terms of flexing the cost base makes us much more confident that we can weather the ups and downs. And we all know that's going to happen, Andy. But yes, the new margin targets kind of accommodate that as well.

[Andrew Douglas, Equity Analyst]

Okay. And then on the share buyback, up to GBP 200 million, I'm assuming that isn't GBP 200 million only if you make an acquisition, is that right?

[Daniel J. Shook, Finance Director & Director]

No. We'll announce it, and we can cover that now as well. I mean as we looked at where we're going, and you'll recall, the free cash flow that we were generating back a few years just wasn't sufficient with the margin improvement and the growth we're getting through. We absolutely get comfortable we can return the capital to shareholder, keep the balance sheet in a more efficient place. As Roy said, we think we'll end around one time, so you can back engineer all you want on that one, Andy, to figure out where we're going to end the year. But that still gives us ample capacity to continue to pursue the bolt-ons. We all know there's a lot of capital out there chasing deals. We've been building those relationships with the bolt-ons that we really think are natural fits with IMI. So my expectation is we'll continue. Yes, we'll continue, and we've got the balance sheet capacity even after the share buyback we announced today.

[Roy M. Twite, CEO & Director]

Thanks for pointing, Dan. We still got plenty of headroom to do bolt-ons. And I'm really sort of -- I think the moderator seems to have got knocked out. Are you there, moderator? No, I think we've lost the moderator. So I think what we're going to have to do is, if you've got a question, can you just raise the question verbally? I'm sorry about this.

[Daniel J. Shook, Finance Director & Director]

I think they're on mute, they're muted, so I don't know if they want to e-mail you and me, Roy. We could pick them up off of email.

[Roy M. Twite, CEO & Director]

Yes, that's a shame, isn't it?

[Daniel J. Shook, Finance Director & Director]

Yes.

[Roy M. Twite, CEO & Director]

But I think you're right. I'm not sure -- I guess Andy is going to ask another 10 questions for everybody.

[Andrew Douglas, Equity Analyst]

I'll keep on going if you want. No. No. I'll not do that.

[Roy M. Twite, CEO & Director]

No, I mean, okay, everybody, I really apologize for that. I'd love to take your questions today, obviously. I mean we've -- as I said, Andy, we're really pleased with the progress in the business. The momentum in the business is obviously accelerating across IMI, and that is coming from the cultural change that is well underway. And we are confident of delivering an IMI with sustainably higher margins and returns. And we are very focused on the growth. I was pleased with the focus, with the growth that came through in the first quarter. And clearly, through our market-led innovation program, we expect to grow faster than our market uptime. So I'm really sorry, we'll have to leave it there. Please, if you do have questions, do e-mail them through to John.

[Andrew Douglas, Equity Analyst]

Roy, I've been asked by a few people to moderate via Bloomberg. I've got 4 questions coming in. Do you want those? Or do you...

[Roy M. Twite, CEO & Director]

Andy, you are a superstar. Thank you, Andy.

[Andrew Douglas, Equity Analyst]

Can you ask Roy about the 3 businesses in Critical that are under review, what is the update there? Can we talk about the price environment and how that is comparing with the cost environment and talk about the regional differences across the 3 divisions, please?

[Roy M. Twite, CEO & Director]

Yes, absolutely. Good. Okay. Thanks, Andy. Differences, so we're seeing -- if we take the short-cycle business really Precision, I think, being one, right, we've seen tremendous strength in Asia and particularly China. And so that was up more than 20% first quarter. Europe was up. The second, I think it was up about 7% or 8% there. And U.S. was a couple of percent, right? So that's roughly how it breaks down. And I think that's fairly typical for industrial companies right now. We are pleased, obviously, with the strength that's coming through in the PMIs because, as you know, Precision normally follows that 3 to 6 months later. So that gives us further confidence in terms of the sort of short and medium-term outlook. So that's the sort of reason. So price, we've got very good price discipline in the business, really making sure that, that's part of that commercial culture. I have talked through quite extensively before about where we can get price in IMI, places obviously like the Critical Aftermarket; there's Precision Aftermarket, which is sort of 15% to 20% of that business; and Hydronic through super strong brands and leading market positions. So we are ahead of the pricing curve, as you would expect. We do put hedges in place. Obviously, copper is a big one for us in terms of Hydronic and, to a lesser extent, in terms of Precision. But we do put hedges in place, which allows us time to make sure that, that pricing put through before the cost hit us. So we're well on to that, Andy. And then in terms of Critical, I think, was the third one, the 20% to 30%. So the update on that is the same as it was a couple of months ago, we're obviously improving it fairly quickly, as you can see from the numbers. But it's still not in that sort of 20% region where the rest of Critical is. And so it's still under review. I think last time I said the jury is still out, and that's exactly the same position now, is that until we can prove that we can develop the aftermarket content of that segment of the business and streamline it further in terms of costs, and therefore, it is in a sustainable 20% margin position, then we're going to keep it under review. I think what was that 3 questions, Andy. Did I cover those okay?

[Andrew Douglas, Equity Analyst]

Yes, I've got 3 more, if you want. Well, if you have.

[Daniel J. Shook, Finance Director & Director]

We've got one from Will at Goldman around how the order book has developed. And Critical and the order intake, obviously, the first quarter was a decline. Roy, do you want to grab that one?

[Roy M. Twite, CEO & Director]

I don't know I'll come back to you, if that's okay, Andy.

[Andrew Douglas, Equity Analyst]

Of course.

[Roy M. Twite, CEO & Director]

So yes, the order book in Critical, yes, order is down 10% in the first quarter Aftermarket, though orders crucially were up 15%. And really, on New Construction, we're pretty convinced it's just timing. If you remember in the first quarter of last, we got something like half of our LNG orders for the full year. And we still see upside in new construction on the marine orders. We still see that. We still see upside as a comparator. Obviously, the comparators get easier on Critical orders as we go through the year because COVID really only obviously hit after the first quarter last year. But we still see rebound upside in terms of downstream and petrochem exactly the same as I reported a couple of months ago. So we think that's timing, Will. And we think that overall orders for Critical will be up this year on last year, which will obviously provide a good springboard as we go into 2022. The other good thing about getting those Aftermarket orders in the first quarter is it really strengthened our book to ship situation for this year as well. And again, we see Aftermarket is an area of strength for this year. So hopefully, that answers Will's question.

[Daniel J. Shook, Finance Director & Director]

Yes. So here's another one. Sorry, Andy, I'm taking over. This one from Mark Fielding, talking about Hydronic, Roy. How much of the Q1 demand strength is bounce back? And then margin targets are unchanged at 20% plus, but has confidence increased? You did note the plus as a potentially higher.

[Roy M. Twite, CEO & Director]

Yes. Thanks, Mark. Yes, exactly. I don't want to put a cap on margins. That's obviously not what this is about, right? What's about is, is making sure that we fully reinvest in growth, and that's what we're going to do, right? So as I said on the last call, Mark, right, is the drop-throughs improve, we want to invest more and more the growth engine, in the Growth Accelerator and really create more and more market led innovation. That, as you know, is the whole game plan. But in Hydronic in the first quarter, very roughly, Mark, out of the 9%, about 1/3 of it we think roughly was sort of catch-up, right? So that's partly wholesale is stocking up a bit because obviously they're worried about supply chains. And our operations team in Hydronic have just been superb, I have to say, making sure we haven't had supply problems, but some of our competitors certainly have. And the other part of the catch-up was around installer catch-up. So installers obviously in some of our markets are now working day and night to catch up on work when they haven't been able to do that previously because of the lockdowns. So we think about 1/3 of it is catch-up. About 1/3 of it, we think, is new products, right, and genuinely new product that's creating brand-new growth, which, again, Phil has just transformed that in that division. And then the other 1/3 is really the markets and what's going on there. And obviously, you know that we're very strong in Germany. About 25% of that business is German sales. And the German market has been pretty much strong throughout actually, and that's a real area of strength for us still. So hopefully, that answers Mark's question. Anything you'd add to that, Dan?

[Daniel J. Shook, Finance Director & Director]

No. No. I think it's -- I think you've nailed it. Next one, got one from Richard Paige at Numis, actually 2 in here, Roy. How should we think about H1, H2 weighting? Strong Q1 sales growth and Q2 comps very easy, we've seen that full year guidance could still be a bit light. Thank you for that, Richard. And then restructuring increases, this is more easier asking the questions and answering them, Roy, and I kind of like this. We started to increase benefits to GBP 22 million. Better execution or acceleration of benefits already planned. Should we expect reduced benefits in future years? Why don't you take the first, and I'll take the second?

[Roy M. Twite, CEO & Director]

Yes. Dan, your line is just disposing up a little bit. I don't know whether it is for everybody else or not.

[Daniel J. Shook, Finance Director & Director]

Yes, yours was a bit with technical issues. Yours is now choppy as well. How is that? Is that any better?

[Roy M. Twite, CEO & Director]

Yes, a little bit. Just I think -- okay, I don't know if anybody can hear me, perhaps, Andy, if your line is open, can you hear me clearly?

[Andrew Douglas, Equity Analyst]

[indiscernible].

[Roy M. Twite, CEO & Director]

Now I'm not hearing Andy very clearly. Okay let's hope everybody can hear me. In terms of half 1, half 2 phasing, I think it's going down much more on year this year. So it's going to be a lot more what you might now expect and say something like a 2019. So I'd expect it to [indiscernible]. I say if there's some new variant of coronavirus that is found, obviously, that would affect our guidance, right? And we've made that clear. [indiscernible] sales and margins obviously improved in the second half. Critical customer budgets more, [indiscernible] will obviously improve in the second half. We expect normal tick-up, so if you look to 2019 or 2020 in terms of a tick-up for second half margins. Precision is much more heavily weighted. Although [indiscernible] is picking up, we could see a stronger second half as well because I think you're aware that the motion of precision tends to buy the PMIs 3 to 6 months later. So I would characterize the half 1, half 2 weighting. Dan, do you want to talk about [indiscernible] benefits?

[Daniel J. Shook, Finance Director & Director]

Yes, I can try. But give me a thumbs up or thumbs down if the sound is okay.

[Roy M. Twite, CEO & Director]

You're better now.

[Daniel J. Shook, Finance Director & Director]

Okay. Yes. In terms of the -- we upped it a little bit. I think it's -- Richard, it's more about the better execution and acceleration of benefits. However, as we go forward, as Roy already said and underpinning some of the longer-term market targets as we've upgraded those, particularly within Precision, as Beth has gotten in and looked at those, the way in which we can restructure to get closer to customers and drive a bit more efficiency on the SG&A, we'll expect to see perhaps a bit more, not going to -- we do have a bit more work to do there, so we'll give you a full update in July.

[Roy M. Twite, CEO & Director]

You're still distorted, Dan.

[Daniel J. Shook, Finance Director & Director]

So we just -- we can either try to dial back in or just call it there, Roy, Because it's -- no, you're distorted as well at least on my side.

[Roy M. Twite, CEO & Director]

Okay.

[Daniel J. Shook, Finance Director & Director]

I'm sorry, really sorry about these technical issues, everybody. But as I said, you've got a rough sense of the momentum in IMI. We're not going to arrange an investor event for a bit later in the year. And hopefully, that will give us a chance to give much more flavor about what we're building. So thank you for joining today, and I do appreciate you for stepping in. Really appreciate that. Thanks, everybody.

[Roy M. Twite, CEO & Director]

Thank you. Bye-bye.

[Operator]

That does conclude our conference for today. Thank you for participating. You may all disconnect.