IMI PLC

LSE:IMI

Earnings Call Transcript 2022-Q2

[Operator]

Welcome to today's IMI plc 2022 Interim Results Presentation. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions]

I'm now going to hand over to Roy Twite to begin. Roy, please go ahead.

[Roy Twite, executive]

Good morning, everyone. And welcome to our interim results for 2022. I'm joined here today, as usual, by Dan Shook, our Finance Director.

Next slide, please. Okay. This slide covers the key messages from our presentation. And the first thing to say is that it was another strong performance from our team with 7% sales growth and 13% profit growth against a strong comparator. Despite high levels of inflation and disruption in the global economy, profits and margins improved again in all 3 divisions, assisted by our self-help initiatives.

Growth Hub is getting stronger and stronger, creating a customer-led growth culture. We have over 40 Sprint Teams working right across IMI, creating solutions in exciting markets such as industrial automation, smart buildings, life sciences and hydrogen. And we actually generated GBP 22 million of Growth Hub orders in the first half and we're well on track to beat our target of GBP 40 million of orders for this year.

Following the Adaptas life sciences acquisition, in December last year, we have now also acquired Bahr, which opens up the electric actuation market adjacency for the IMI Precision team. We are increasing the interim dividend by 5%. And you will remember that we increased our through cycle margin target to 20% in May.

Lastly, before we go to Dan, we are reiterating our guidance that EPS will be above GBP 1 this year, up from 73p when we announced this strategy in 2019.

Okay. So with that, we will now turn to Dan.

[Daniel Shook, executive]

Great. Thank you, Roy, and hello, everybody. I'm really pleased to be able to take you through the first half results today.

If we can go to next slide, please. So first an overview of revenue and operating profit for the group. As Roy already said, a really solid result with revenue growth of 7% and operating profit growth of 12%. Despite supply chain and inflation headwinds, all 3 divisions have delivered improved profits and margins in the first half, with group margins increasing 70 basis points.

On corporate costs, although you can see that the level was higher in the first half, you may recall there was a property sale in the first half last year, which provided a one-off benefit of GBP 1.5 million. We managed corporate costs closely and expect that figure to be about GBP 26 million for the full year. The primary investments we are making for growth continue to be managed within the divisions to ensure they are customer focused and targeted towards the best opportunities.

So next slide. So continuing down the income statement, you'll see that both the interest charge and acquired intangible amortization have increased. And this is largely related to the Adaptas acquisition late last year. Also, on the slide is a GBP 9 million charge for the exit of our Russia business. IMI strongly opposes the invasion of Ukraine and fully supports all sanctions.

So in March, we decided to end all new business in and international deliveries to Russia. Then we fully divested our Russian subsidiary to local management in May. The GBP 9 million charge reflects the loss on disposal and working capital write-offs taken against projects primarily in Critical Engineering. Finally, on this slide, the adjusted tax rate for the first half is 21%, a rate we'd expect to continue for the full year.

So next slide, please. So an update on restructuring, our normal slide here. The activity is progressing as expected, with GBP 7 million of benefits delivered in the first half and a full-year expectation of GBP 10 million. We announced an expansion of restructuring activities in May as part of the revised margin targets for the group. And that GBP 35 million, of which GBP 30 million is cash is reflected on the slide for Critical.

This addition increases the overall program benefits by GBP 13 million. We've also revised the cash costs impact favorably by GBP 15 million, due to finalizing the sale agreement for a German property and to other projects savings. In 2023, we expect to deliver GBP 20 million of the GBP 40 million future year benefits shown on the slide. Overall, these projects reduce complexity and improve our long-term competitiveness and continue to deliver cash paybacks of 2 years to 2.5 years.

Next slide. So continuing to cash flow. As you will see, operating cash flow was lower than last year, and this was driven by increased CapEx and working capital investments. We chose to build targeted stock balances within Precision and Hydronic in the first half to ensure we continue to serve customers well, despite global supply chain challenges. This has paid off as our customer service scores are at an all-time high. And while we will look to manage these balances lower in the second half, we will continue to prioritize customer responsiveness.

The CapEx increase reflects timing of key investments supporting our footprint initiatives. We expect a lower spend rate in the second half, so about GBP 65 million to GBP 70 million for the full year. With these investments and the successful acquisitions in Precision, our net debt has increased to GBP 760 million, but our leverage position remains within our target range, so provide space for further bolt-ons.

Next slide. Okay. So getting into the divisional performance. Precision had a strong start to the year. Including Adaptas, it grew revenue 18% with organic growth at 7%. Profits are up 20%, and margins improved 30 basis points to 18.2%. The industrial automation business unit grew organic revenue 14%, with good growth across all regions. Precision Fluid OEM was up 5% as strong process control growth offset life sciences, which had the last of the ventilator surge sales in the first half of last year and that was about GBP 10 million.

You can see that Adaptas nearly doubles our life science business, and both trading and integration activities are progressing really well. Our Transport BU saw flat sales in the first half, as some growth in Asia and the Americas offset lower production in Europe. Our CV demand has been held back by component shortages within the truck OEM space. And in terms of Precision outlook, we continue to expect both organic revenue and margins to be higher for the full year versus 2021.

So next slide. So in terms of Critical, the division continues to progress its strategy well, focusing on driving growth into new markets and through its extensive aftermarket opportunities. The division delivered GBP 19 million of Growth Hub orders versus GBP 5 million in the first half of 2021, including further wins in hydrogen production and transportation applications.

Aftermarket orders grew 17% led by refining and petchem growth, as well as at in LNG spare parts. New construction orders were lower, impacted by a reduction in Catofin new build activity in Asia, although we did see increased orders within the LNG and upstream oil and gas space. The overall order book finished 3% higher than June of last year. And that increase was after a de-booking of Russian business of about GBP 20 million.

Margins in the order book were also higher, reflective of continued pricing discipline and the higher aftermarket mix. Sales were 3% lower than the first half of 2021, and reflected the timing of new construction shipments. Despite the lower sales, operating profits increased 7% supported by the mixed shift as well as Critical's continuing efficiency programs. Margins are up well, again, 150 basis points to 15.6%. On outlook, given the order book position, which reflects higher new construction shipments in H2, we are expecting both revenue and margins to be broadly flat for the full year.

So next slide. And in terms of Hydronic, good first half results with organic revenue of 5% against the first half of last year, which had some installer catch-up activity. The division has grown 18% organically since 2019. Although always hard to fully determine, we believe that there was a little destocking in the first half, as the divisions on-time delivery has consistently been in the 90s, so customers have gained comfort in holding less safety stocks. The growth was led by our TA balancing and control products, which includes GBP 2 million of Growth Hub orders from our expanding TA-Smart control valve project activity.

We also saw strong sales in our water quality Pneumatex products, both in their core Swiss market and through cross-selling into the Nordics. Profits increased 8% organically, and margins have remained above 20%. In terms of outlook, we continue to expect revenues to be higher than 2021, with margins slightly higher to maintain that 20% plus position, while continuing to invest for growth.

Next slide. So the group outlook slide, first some housekeeping. As always, we have our FX and pension slides in the appendix. You'll see that we are currently showing a favorable currency impact of around 3% for the full year on both revenue and profits. Our overall pension position improved again. And as a result, we have agreed with our UK trustees that we can stop further contributions into the UK scheme. That will preserve GBP 3.5 million for the second half of this year and GBP 7 million annually thereafter. We also have first half revenue detail for both Critical and Precision, showing the impact of the energy business transfer and the Precision business unit splits. So on the group outlook, as Roy already mentioned, we continue to expect to deliver over GBP 1 of EPS in 2022.

So with that, let me hand back to Roy to take you through the strategy update. Thanks, everyone.

[Roy Twite, executive]

Thank you, Dan. Well, this next section is a follow-up on our strategic progress.

And if we could move to the next slide, please. So this slide shows the progress that we have made since we launched our refresh strategy towards the end of 2019. Despite COVID and several material geopolitical events, we have made good progress on our financial KPIs. Last 12 month revenues are up 3% versus 2019. Margins are up 320 basis points. Profits are up 29%, and ROIC has moved from 11.4% to 13%. And I think you'll remember that the strategy laid out clearly which markets we were focused on, and how we were going to win in each of those market segments. And really, there was 3 key pillars of our strategy.

First was a customer-focused culture. Second was complexity reduction. And third was to create real-market led innovation, which we certainly operationalized through our Growth Hub. I think the good news is that we've engaged the vast majority of our employees in that journey, with 87% of them now saying that IMI is a great place to work.

Our customer service scores, as Dan said, are also at all-time highs, with clear improvement plans to take our service to even higher levels in the future. And margin improvement has come despite the incremental annual investment of over GBP 30 million in our growth capabilities. Our investment in Value Tomorrow, which obviously includes sales engineers, marketers, digital specialists and software engineers.

Next slide, please. So this slide shows a summary of our financial objectives. And it is an updated version of the slide we showed at the Capital Markets event. And as you know, in Precision, Beth and the team are implementing their customer-first project, streamlining the organization around global market segments, as well as reducing complexity by progressing their site consolidation plans. Beth currently has 3 major site consolidations underway, which will increase our ability to grow and combined will bring over GBP 15 million of benefits to the P&L next year.

Precision are also investing in Growth Hub and are now scaling their Adaptix workholding solution, which reduces waste in industrial automation and are starting to scale their Hydrogreen project, which reduces emissions from transportation. Over time, all of these initiatives will help generate a Precision division capable of 5% plus growth at 20% margins through the cycle.

Critical is successfully growing their resilient aftermarket business, while keeping their win rates high in new construction and expanding into the attractive markets of pharma, marine and hydrogen. And we believe that over time Critical will be capable of 3% to 5% growth at 20% plus margins.

And Hydronic are certainly making the most of the sustainability tailwind, scaling new products like TA-Smart, their new digital valve, as well as actuation and control solutions, which all enable further energy savings in HVAC systems while creating comfortable indoor climates. Hydronic is already a highly resilient business and is now generating 20% margins. And we believe that the division is capable of 5% plus sustainable growth.

Next slide please. And as you know, this next slide is a real favorite of mine because it just shows the sheer amount of market-led innovation that is being generated right across IMI, helping to create a real culture of customer focus and ultimately, growth. The reason that we have been able to complete 2 acquisitions in attractive markets with great strategic fit in the last 7 months is that we put our business development resources right into our Growth Hub a few years ago, and then increased those business development resources.

Our business development teams now have a much better understanding of attractive market adjacencies and how adding a particular acquisition to IMI creates a real scaling opportunity, i.e., why IMI plus the acquisition equals a lot more than the sum of its parts. Critical's aftermarket growth is accelerating because of Jackie's real focus and the products and services being created through Growth Hub.

Our 800 employees that have now been involved in Growth Hub are also taking the market knowledge that they gained and applying it to creating more value today. Growth Hub has created a completely different mindset, a real focus on how we can solve our customers most acute problems and create real value both for them and for us.

Next slide, please. And as you know, we have a very disciplined approach to inorganic growth. And on this slide, we have reiterated our criteria for a good bolt-on acquisition for IMI. The potential acquisition must fit with our purpose. It must be in an attractive market like industrial automation, smart buildings, life sciences or clean energy. And it must be already demonstrating good product market fit by its above market growth rate and by its strong gross margins.

We are looking to ensure that we can sustain those strong growth margins through high barriers to entry and the acquisition should be scalable through IMI's global sales and service network. In addition, the business case must create shareholder value. So ROIC, return on capital must be greater than our cost of capital by year 3. And then, of course, we want to rapidly move the acquisition towards IMI's current ROIC of 13% or more. The good news is that we have completed 2 acquisitions in the last 7 months that we believe absolutely meet these criteria in full. And these are acquisitions that will both enhance IMI's growth and returns.

Next slide, please. So this next slide gives a bit more detail on our most recent acquisition, Bahr, which was completed on the 9th of June. We think Bahr is an excellent electric actuation business, which is both growth and margin accretive to IMI. An electric actuation is the closest adjacent market to our pneumatic actuators. Our IMI Precision customers are buying both pneumatic and electric actuators, and we will now be able to sell them both solutions. Our plan is to rapidly scale Bahr's high-added value products and systems through our Norgren brand and sales and service network.

Next slide, please. I also wanted to take this opportunity to give you a very quick update on our ESG progress. Our purpose Breakthrough Engineering for a better world is our true unifying driver. The energy across the company to halve our CO2 intensity for Scope 1 and 2 is incredible. And it's absolutely backed by a series of sensible investments like solar panels and LED lighting. We also now have a good estimate of our Scope 3 emissions, and are rapidly formulating a plan to radically reduce these emissions and meet our ambition of being net zero by 2040.

We are also making progress on the social aspects of ESG, with 82% of our employees recommending IMI to their friends and family, and our total recordable accident rate falling again in both 2021 and in the first half of this year. We are also supporting our employees mental health through a variety of support mechanisms and will soon have a complete global well-being framework in place. Our female representation on the exec has gone from zero a few short years ago to 43% today, and we are improving in many aspects of inclusion and diversity.

Next slide, please. So I will finish now and then we will go to Q&A. And the key takeaways from this presentation are that our strategy is absolutely crystal clear and is delivering improved returns. We are absolutely clear on how we will win in each market segment that we operate in. We are clear also on how we create value both today and for tomorrow. And for us, value today comes from improving customer service, scaling where we are winning, reducing complexity in our business and continuous improvement.

Getting better every single day. Value tomorrow comes from our Growth Hub. It comes from our growth culture, new products and acquisition synergies. And our strategy is improving our business. It's improving our results as evidenced again in the first half of this year with profits up 13%, and in our outlook statement which remains unchanged at over GBP 1 of EPS, up from 73p in 2019.

Okay. So I'm going to stop talking there. And turn over to the moderator for the Q&A, please.

[Operator]

[Operator Instructions] Our first question comes from Will Turner of Goldman Sachs.

[William Turner, analyst]

I have a couple of questions. The first one is on Critical. So obviously, I know these things take quite a long time. And yes, orders weren't exactly booming in the first half, but the outlook must have surely improved. And I wondered if you could just comment on how you're seeing the outlook. What is quotation activity like in LNG, but also the other markets like oil and gas and nuclear?

[Roy Twite, executive]

Right, Will. Well, I'll start with that one there. Yes, Will, I was pleased with a couple of things. Obviously, Critical sales slightly down in the first half, that's just sales phasing because of the China lockdowns. We'll catch that up. And we still fully expect Critical will be in line with last year. Remember, we've taken Russia out of Critical. And remember that Russia was 4% of Critical, right?

So Critical was hit the hardest of all of our business as we came out of Russia. But I'm really pleased we're out of Russia now. It's a lot of hard work to do that. But we did it, I think, in the best way possible for all the stakeholders. In terms of the Critical orders performance, I was really pleased actually, Will, because the aftermarket and you know that the margins in the aftermarket on a percentage terms of 2.5x what they are in new construction, aftermarket order is up 17%. That's obviously on the back of a lot of the Growth Hub work, a lot of the Growth Hub orders came into Critical aftermarket from those projects that we presented at the Capital Markets Day.

So I was really pleased with that. New construction orders are always going to be lumpy. We picked up a bigger refinery order last year, obviously, not repeated at this point this year. But we do feel in the second half that we will close a lot of that gap, and actually new construction orders for this year will end up flat to slightly down and will continue to see good growth in the aftermarket, Will. So actually, we feel pretty good about the second half for Critical in terms of orders.

In terms of activity, as you said, it's way too early, right? I think it takes a few years to build even an LNG receiving terminal, let alone a compression terminal. So oil and gas generally, I would say, aftermarket strong, people are running facilities harder. So you can see that in the numbers. In terms of new construction, yes, there's more activity. In terms of quoting and so on, that will take time, Will, for sure.

[William Turner, analyst]

Okay. Great. The one thing I've been thinking about recently is within the Hydronic division, obviously, it's mainly European exposed, a good proportion of it. I know you don't disclose the exact amount, but a good portion of it is residential. How is the transition towards heat pumps, which is gathering serious momentum across Europe, going to impact the Hydronic Engineering division. And do you sell a lot of components directly into the gas boilers? Or is it just the hydronic piping systems around?

[Roy Twite, executive]

Yes, Will, so we don't sell anything into the gas boilers, right? So everything we sell controls the fluid, once it's been heated or cooled, right? And so for us, we are reasonably agnostic to the actual heat source, except heat pumps, the temperature difference is lower, right, because boilers normally work at about 60 degrees. So heat pumps obviously work lower. And so what that means is you need actually better control, because you've actually got a lower temperature coefficient to play with. And that means lower flows and more controls required.

And so that actually helps us a bit. And certainly where we're going in terms of the smart valve that we talked about in terms of control and actuation, which is a quickly growing part of that business, we expect to see that part grow. And we expect to see the connected part of Hydronics business grow as you need more and more control to make sure the temperature in the building is correct and absolutely minimize the energy cost, Will. So yes, it's not a big effect. But it's a nice long-term trend, put it that way.

[William Turner, analyst]

Okay. Okay. Sure. And final question. You're obviously on quite a bit high leverage and obviously the cost of financing is going up. Has there been any kind of changes on the capital allocation? Are you going to focus a bit more maybe on -- or could we just expect a little bit slower M&A activity? And then once we've done, then I suppose we've -- so in terms of like debt refinancing, is there anything major coming up in the next 12 months to 24 months that we should be aware of?

[Roy Twite, executive]

So Dan, do you want to start and then I'll talk a bit about M&A when you speak about...

[Daniel Shook, executive]

Yes. So we're sitting, if you do the math and it's on the slide, 1.8x debt to EBITDA, still very comfortable in our kind of target range of wanting to operate between 1x and 2x. I think that still gives us some dry powder. But as you know, we're always selective on deals we do, and Roy can talk more about our M&A pipeline. In terms of liquidity and debt maturities, we are always pretty conservative. And in fact in June, we termed out some of the Adaptas and Bahr debt out multiple years. So really have nothing maturing of any substance until 2025. So from that perspective, I think we're in good shape. The fact that we did term it out will increase the interest charge in the second half of the year. But still we're talking all-in interest rate. Interest charge this year maybe around GBP 16 million. So still comfortable and I think still some dry powder for the right acquisitions.

[Roy Twite, executive]

Yes. And that's all I was going to really add is that, we are pleased with the 2 acquisitions we've done.

[Daniel Shook, executive]

Absolutely.

[Roy Twite, executive]

We've seen Adaptas trading really well. We're actually consolidating one of our older plants into the Adaptas manufacturing campus. The main thing about that is, well, it give us a nice saving, but it's much more about the cross-sell, right, which is that, that Adaptas team has wonderful customer relationships and we really want to expand the sales and distribution of those products.

So we're pleased with that. Clearly, we just closed on Bahr and there's lots of workshops going on to add electric actuation to our offer. Our customers, the next category they buy to pneumatic actuation is obviously electric actuation. So we think that's a nice fit. And we love the Bahr business model. It's small, but it's very customer-service orientated, like where we are taking the rest of IMI and it configures complex systems very, very quickly.

So we're pleased with those 2. And that's the sort of acquisition we like to continue to do. As Dan said, we still think that we've got acquisition firepower just from debt and the pipelines look a lot better. As I said in the presentation, now that we've got the business development resources in the divisions absolutely aligned with Growth Hub and we've expanded those resources, we're quite excited about the pipeline and where we can go with. So I hope that answers your question in full.

[Operator]

Our next question comes from Jonathan Hurn of Barclays.

[Jonathan Hurn, analyst]

I just have a few questions, please, if I may. Firstly, can I just start off with Precision. Obviously, looking at industrial automation, that sort of Q1, Q2 performance was pretty consistent and pretty decent. Obviously, you did very much a short cycle business. How do we think of industrial automation to you going into the second half? That was the first question.

[Roy Twite, executive]

Jonathan, yes, as you said, actually, sales were up in the second quarter. Obviously, it was a slightly higher comparator last year, but yes, 2 good quarters from Precision. I think as I said in the presentation, right, Beth is doing a great job, streamlining Precision around its markets. And that's obviously enabling it to grow faster, but also at better margins, right, as we streamline around that. So pleased with that. The sort of 3 weeks since the results we've looked at it and actually orders holding up fine. We're not at all complacent about that, Jonathan. Our basic philosophy now is we're going for growth still. So we're running the growth projects hard, but we've got good Plan Bs. And I ran Precision, as you know, during 2009 and we came out of that actually very quickly and in very good shape, dramatically expanded the margins as we came out the other end of that recession. We know the levers to pull. And Beth and the team are making sure we've got Plan B ready. But so far, Jonathan, so good, I would say.

[Jonathan Hurn, analyst]

Great. The second one was maybe just on a similar thing. Obviously, looking to FY '23, I think you said the cost savings are going to be GBP 20 million for that year. Can you just sort of split that out? How that sort of breaks down between the divisions?

And second, just following up on that, obviously, things get tougher. There's still obviously an additional GBP 20 million of savings out there. Can any of those be brought forward to maybe offset what could be a tougher '23?

[Roy Twite, executive]

Yes. So Jonathan, that's right. So future savings in total from our projects to decomplexify the business of GBP 40 million, that's right. And what we're saying now is that we think we can get GBP 20 million of that next year. So that's another upgrade. I think we're at GBP 15 million at the IMS. We now think we can get GBP 20 million into next year. And as I said in the presentation, about 3/4 of that GBP 50 million will come through in Precision. That's because we're currently consolidating 3 sites. All projects are on time to budget. Beth and the team doing a great job of managing those projects. So I'm really pleased with that.

I think in terms of pulling more of the GBP 20 million, of course, we'll look at that. We'll definitely look at that. It's always a balance though, Jonathan, right? And you know that we will always prioritize customer service and make sure that our customers are happy because that's more important for the long-term health of the business. So we will definitely look at that. If things get tougher, there are obviously other levers we can pull, all of which we pulled in 2009, if things get a lot tougher, Jonathan. And we will do those things as well, right?

So you can imagine what they are. Obviously things like material cost -- generally, our material costs tend to drop if there is a recession. You can see copper has already come down from $10,000 a tonne to $7,500 a tonne, right? And our purchasing teams are already on that. So there is plenty of other levers on the big budgets that we can pull, if we need to, if things get tougher next year.

[Jonathan Hurn, analyst]

Great. Thanks. And then just one final quick one, just on Critical. Obviously, the order book was plus 3% at the end of the first half. I mean, how much visibility do you have in that business? Do you have visibility through to pretty much the end of this year? Do you have anything sort of booked in for '23 to give you a little bit of a support there?

[Roy Twite, executive]

Yes. Yes, no, we do have some orders already for '23. Typically, the new construction part of that business, the 40% of that business is on 12-month lead time. So typically, we have, I would say, as we come up to the IMS in November, we'll have some idea about next year. We normally try and say, okay, the order book at that point -- and we think it will be up at that point will give us a reasonable guide into what's going to happen next year. And then, obviously, we get aftermarkets book-to-ship and you can see that so far aftermarket has been going really well, Jonathan.

[Jonathan Hurn, analyst]

Maybe just -- can I just squeeze one just on the aftermarket strength in Q2, obviously, which is a big step up versus Q1 to [ confirm ]. I mean, obviously, I can't push you probably there. But do you feel that you can take in sort of market share within the aftermarket?

[Roy Twite, executive]

The aftermarket is really going absolutely in line with the plan that we presented at the Capital Markets Day, right? So Jackie and the team are doing a fantastic job of, number one, making sure that we understand not only where our assets are. I'm trying to remember the numbers now, Jonathan, but there's about -- we got about 160,000. I think that's right.

[Daniel Shook, executive]

Yes.

[Roy Twite, executive]

Installed severe service valves. And the competition have got something like....

[Daniel Shook, executive]

280,000.

[Roy Twite, executive]

280,000. So with the Growth Hub projects, and a combination of very good coverage of those assets in terms of sales resources and the Valve Doctors, right, because it's quite complex, particularly the upgrade valve part of that business because effectively, you're persuading the customer that when they have their outage on their LNG compression station, trust us when they brick-fire it back up in a few week's time, our better solution will be up and firing, right? And as you know, Jonathan, right, they could be talking well over a $1 million a day of revenue.

And that's really the beauty, if you like, of the Valve Doctors, the fact that they've got decades of experience, their PhD level, fluid control engineers because they understand exactly what's going on in that valve. And that's why they are convincing the customers. And when the plant starts back up, it's firing up, the noise has gone out of the system, the valves working reliably, quietly, vibration free. That's what convinces customers to come back and use us again. So yes, I think -- and I don't really look at quarters in Critical even in the aftermarket, right, because it is a lumpy business. But I do look at the first half and I do think that with a better market admittedly, but with all the hard work Jackie's team are doing, to drive that 17% aftermarket is obviously a great, great outcome and we're very pleased with that.

[Operator]

Our next question comes from Mark Davies Jones of Stifel.

[Mark Jones, analyst]

If I can start on the supply chain logistics side of things, obviously, it's been a challenge for everybody over the last year or so. Are you seeing any signs of progress on that? And can that unlock both a bit of the working capital through the back end of the year, but also I guess the CV market, which has been held back by them?

[Roy Twite, executive]

That's exactly what I was going to say, actually. You're absolutely right, the CV market -- our customers are still suffering, right, Mark, particularly in China. So China is what, GBP 18 million, GBP 20 million of our business and obviously, they've been really suffering with all the lockdowns and the effects out there. But not just China. Across the world, electronics is still the issue for our truck customers, for sure.

The other area is our construction customers in Hydronic. It's interesting actually because we were talking about things like heat pumps earlier. Clearly, the supply of several items outside of IMI supply is still being hampered by all of the supply chain repercussions. So I'd say that's still the 2 areas where our customers are being affected. Aside from that, yes, we're definitely affected. And that's why we put some extra stock in position, as Dan said, we've absolutely had to because lead times on a lot of items, Mark, have got out. So you're left high and dry really. You can't supply customers and clearly, we've -- I'd say, avoided that massively through the hard work of the supply chain teams. And I would say, Mark, outside of China, because China has had a difficult Q2 with the lockdowns, but outside of China, I'd say things are just a tiny bit better, right?

So there's still daily issues to deal with. And it's always small things, right, you -- suddenly you can't get O-rings or stuff like that for the sake of a small item and you can't ship your product. But I would say that outside of China, just very slightly better, things like the ports are starting to clear on there and things like that. So just slightly better. But it's not massively better. As Dan said, all things being equal, we would start to reduce the amount of safety stock we've got in the second half.

And Dan, do you want to talk about where we think we might end up?

[Daniel Shook, executive]

Yes. I think -- yes, because what we've done is we've targeted the raw material and it's mostly in that space, Mark. So we can start buying that down as we see the lead times come back on bar stock and basic commodities, which we expect will happen, but we're going to watch it. That should enable us to deliver a much better cash flow in the second half. And if you look at what we delivered last year, we were building a bit of stock last year in the second half. So we should beat that, an expectation, again without any more acquisition activity in the second half, we should get our gearing back down to around 1.4x or 1.5x again and extend that dry powder for the right acquisition opportunities.

[Mark Jones, analyst]

Great. Since you've answered that [ truthfully ] and helpfully, I'll ask you a really impossible one, which is, have you done any work on what the implications might be if this gas supply situation into core Europe particularly Germany worsens, both in terms of your directability to produce in any of the plants or indeed the knock-on effect through some of your end markets?

[Roy Twite, executive]

Yes. We've done a bit, Mark. We actually did some last winter because we were even worried then. Interestingly, we were most worried about the UK last winter. Now, obviously, for different reasons, we are obviously worried about Germany and Italy. So we've done some work and we can mitigate some of the effects. So trying to understand exactly what might happen is tricky. But if we're suddenly forced to a 3-day week in some plants, in Critical, broadly depending on how long it goes on for. But broadly, we think we're okay, right, because we have those longer lead times to soak up some of the effects.

So broadly, we think we'll be okay. But obviously in the shorter cycle businesses, it will be a lot harder in Precision and Hydronics. So what we're doing is making sure things like we can run 3 shifts on those short days, use the night shift when there's more likely to be energy availability. All of those sorts of things we've been looking at as our contingency plans. But inevitably, there will be some effect. If we go to a 3-day week for a prolonged period of time, inevitably there will be some effect, Mark. And you know, obviously, from the annual report all of the splits of our business in terms of how much is in Europe and so on.

So yes, we're doing sort of the best contingency planning we feel we can do. So I should add to that as well. Our supply chain, part of the reason that we are still supplying and probably nibbling market share in some places is that we got much stronger supply chain. So I have talked before, Critical, for instance, a few years ago had 60 single source suppliers. Now we've only got 6.

In Precision, we've got more duplication across the supply chains and we've got more suppliers under contract, preferential contract, which helps us get us up the queue. But what that means is that generally, we've got more redundancy in the supply chains to allow us to deliver from different places. So yes, we won't be able to mitigate all the effects if it's drastic, but we are reasonably well-placed to offset at least some of it, I would say.

[Operator]

[Operator Instructions] Our next question comes from Michael Tyndall of HSBC.

[Michael Tyndall, analyst]

The first one might seem a little grumpy. So I apologize. But just on momentum, if I look at Q1, organic growth was up 5%, Q2 -- or rather first half at 3%. And then if I think about the FX tailwind, which was previously kind of nothing is now 3%, but the guidance is unchanged. Can you just talk a bit about momentum? Was there a specific impact in Q2? We saw it with others in April and May. What's the exit rate look like?

And then on a more positive note, just picking up on your higher engagement and more employees in the Growth Hub. You've pretty much done a full-year figure in orders in the first half. Is there a good chance that we might actually see more than double in terms of Growth Hub orders for full year?

[Roy Twite, executive]

Yes. I'm actually going to start with the happy one and then I'll let Dan talk a bit about guidance. But, yes, the higher engagement, yes, I'm delighted with that. We've literally just got the results. And when I started, I think, employee engagement, I think it was about 74%, which is pretty reasonable.

On the same measure, we're now 87%. And I know somebody said on the last call, that means 13%, but remember we're asking people do you think IMI is a great place to work, right? Not a good place to work, a great place to work. And I speak to a lot of people and to get that percentage of employees feeling that, as you said, 800 been through Growth Hub now.

And we had a little lunch with the Board actually with sort of 10 or 12 of our top talent a couple of days ago. And just talking listening to them about Growth Hub and how are they now applying it to their day job. That mindset, if you like, of making sure we engage with the customer, but on the basis of finding out what the customer's problems are, not on the basis of trying to sell them what we've got, right, which as a customer in everyday life is a massive difference. And then obviously trying things, right?

One really validating is that the problem, but then trying things in a very low cost way, right, literally trying concepts, literally trying sketches, trying rapid prototypes, right? Not spending a year and a half developing something and then trying it. So failing fast that whole concept. I'm just listening to these people, talking about how they apply that in their every day roles as well, how it becomes value today is really exciting for me.

So again, I'm really pleased with that. And as you said, great delight for us that we're at GBP 22 million of Growth Hub orders. And yes, now we think we'll beat the GBP 40 million for this year, obviously, could be more than double. It's really helping Critical aftermarket as you can see. Hydronic starting to get off the ground now with its digital more connected offerings and we want to accelerate Hydronic in that direction for obvious reasons.

And Precision, actually in hydrogen starting to win and with its workholding Adaptix, which we showed in the Capital Markets Day and that really starting to gain some traction. And then of course the funnels starting to bring through more at the beginning as well, more ideas coming through from conception. So yes, I'm really pleased with that culture. And as I said, I think it will affect us in every day as well.

Dan, do you want to just talk about guidance and why we kept it over GBP 1?

[Daniel Shook, executive]

Yes. I think if you look quarter-to-quarter and Roy already said you got to be careful with things like Critical, and he already mentioned the China lockdowns certainly held back Q2. And we had all -- some interesting comps in the prior period with the ventilator surge and the installer catch up. But sequentially, the position is still very good. Now as we go into the second half, we've got more -- the full effect of Russia coming through.

You're right we'll get a little bit more help from currency. But also looking out into the fourth quarter, we're trying to call it as we see it. I think what's nice is, despite the Russia impact in all of our divisions, all 3 found ways to offset it. And that's why we could hold on to the same outlook for the full year. And also maintaining that GBP 1, in excess of GBP 1. I think consensus overall is around 102 right now. And that feels about right. And there are -- there's some ups and downs, currency helping Russia coming out. But overall, it still shows good momentum for the second half.

[Roy Twite, executive]

Yes. And probably just a little bit of hesitancy around China lockdowns as well.

[Daniel Shook, executive]

Yes.

[Roy Twite, executive]

So yes, I think probably for us, the geopolitical stuff has got a bit worse and probably things like our aftermarket orders in Critical, Growth Hub, stuff like that has got a bit better. So we've sort of called it, as Dan says, 102 consensus. We're sort of okay with that.

[Daniel Shook, executive]

Yes.

[Roy Twite, executive]

I hope that answers your question.

[Operator]

Our next question comes from Bruno Gjani of BNP Paribas Exane.

[Bruno Gjani, analyst]

I was just wondering whether you could help us with the mix at Precision. So as we look out to H2, at least in my mind, it seems more likely that transport start to perform within the division from a top line perspective, while at the same time growth at IA rapidly fades. Is there anything you might be able to say regarding mix and what we should expect for H2?

[Roy Twite, executive]

Yes. I mean, I won't comment on your prognosis. Obviously, if transport does lift, it will reduce margin slightly, Just backed on its own, but there's also, as I said, plenty of self-help going on in Precision as well and things like our purchasing teams. And again, I think I've talked before about purchasing teams. But Daniel will know about the purchasing team in Precision is pretty good -- and not pretty good, it's excellent.

[Daniel Shook, executive]

Top-notch.

[Roy Twite, executive]

It's top-notch. And they're already all over that, right? So there will be sort of all sorts of things going on. We still feel happy that Precision has made really good progress towards that 20% margin target. We feel good about the Precision team under Beth. And we feel good about, as I said, the GBP 50 million of extra savings we're going to deliver next year, which will again help Precision. All things being equal and maybe you're right, if IA comes up a lot, then obviously we'll have to offset that. But at current market conditions, let's say, Precision makes another step up towards its 20% margin target next year, which is obviously great considering where Precision has come from over the last 2 years.

[Bruno Gjani, analyst]

So I just guess the Precision's margin was broadly flat or slightly higher in H1. So what's giving you the confidence that the margin will be higher for the year as a whole? It implies that the H2 margin will see perhaps a more significant step up year-over-year.

[Roy Twite, executive]

Yes. What gives us confidence is the ongoing self-help, right? It's the ongoing self-help that we're doing. The same self-help that's driven us from what 16 odd percent to 18%. The same things I've talked about at the Capital Markets Day, the absolute customer-first initiative, which is streamlining Precision around its customers, the savings coming through. You notice that we got GBP 10 million of savings coming through from the footprint improvements this year. GBP 6 million of that is in Precision. So those same things that have driven us to this point will take us forward obviously.

[Bruno Gjani, analyst]

Got it. Got it. And just a final one. Are you able to elaborate how much of that organic sales growth was due to pricing and what was the volume component within that? And if you could do that at a divisional level, that would be great.

[Roy Twite, executive]

Yes. Well, I'm certainly not going to do that because, obviously, it's commercially sensitive, right? We've got customers to deal with. But in overall terms, I can help you. In overall terms, pricing is around 5%, and then, obviously, you've got the effect of Critical, which, as you know, we price individual project. There is no real pricing comparison. Each project in Critical is obviously very different year-on-year. But in overall terms, it's about 5%. And the only thing I would say, the next question is always, well, on a Hydronic, it's obviously a bit higher, partly because Hydronic is hit by inflation harder because there is heavy copper content and all of those things. So it is higher. And people say what does that mean that Hydronics volumes are actually down.

Yes, of course, they were slightly down, but you have to remember, Hydronic sales were up 20% in the first half of last year as all the installers caught up after the COVID. And the vast majority of that 20% was volume not price. So you're just dealing with a more difficult comparator situation. Yes, we feel really good about Hydronic over the medium term, because it saves energy, right? And that is going further and further up, government agendas and our customers agenda. So yes, I think overall terms, I think, yes, it's a good position.

[Bruno Gjani, analyst]

And now that certain input prices are rolling off, at least on a sequential basis, should we see these costs fall further? How would you expect your pricing to evolve? Do you think today's prices can stick? Or do you start to get some of that back?

[Roy Twite, executive]

Well, certainly my experience from 2009 is that 90% plus of the pricing sticks, right? There is the odd situation where you have to get some pricing back. I don't think it will take a genius to work out. That's the bigger customers with a great long-term growth prospects. But the vast majority -- and if you think about IMI, we now got about 50% of IMI into much higher margin, much more resilient areas, right?

So again, very different from 2009. We've almost doubled the size of life sciences, for instance. The aftermarket in industrial automation, we think is now around 30%. Hydronic is now bigger and highly resilient, right? I think the sales in Hydronic in 2009 were only down 4%, right? So a whole variety of reasons. The Critical aftermarket, I should talk about, that is now 60% of the orders in Critical, right? Clearly, a resilient business, plus you've got oil and gas, which is generally moving in the right direction. So in overall terms, I think we know the levers to pull. We're certainly ready to pull them if we need to. But at the moment, certainly trading is in pretty good shape.

[Operator]

We have no further questions on the line. So I'll hand back to Roy for closing remarks.

[Roy Twite, executive]

Great. Well, thanks again for your time today. We do appreciate it.

I think in summary, it's been a good first half. We're really pleased with the progress of the teams right across IMI actually. And we're very much looking forward to the second half and to continuing the self-help, to continuing the execution of the strategy and continue the good progress.

Thank you.