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Earnings Call Analysis

Q2-2024 Analysis
IMI PLC

IMI Delivers Strong First Half Performance

IMI reported a strong first half with 5% organic revenue growth and 6% organic adjusted profit growth. Adjusted operating margin increased by 10 basis points, reflecting progress towards a 20% through-cycle target. The company saw a 19% growth in Process Automation due to strong order intake, including a significant Marine order. IMI also announced a proposed 10% dividend increase and a ÂŁ100 million share buyback program. Maintaining its guidance, IMI expects 2024 full year adjusted EPS between 120p and 126p. Future growth opportunities in Hydrogen and energy-efficient climate control for data centers were also highlighted.

Strong Performance and Strategic Execution

IMI had a robust first half, reporting 5% organic revenue growth and 6% organic adjusted profit growth. Adjusted operating margin increased by 10 basis points, moving towards a 20% through-cycle target. A confident step forward was the 10% hike in the proposed final dividend. The strategy focuses on customer satisfaction, market-led innovation, and complexity reduction, projected to achieve sustainable improvements in key financial indicators.

Detailed Financial Performance

The company achieved GBP 1.098 billion in revenue, impacted by recent disposals and the foreign exchange, which created a 3% headwind. Adjusted operating profit reached GBP 196 million, showing 6% organic growth despite disposals and FX challenges. Statutory results for revenue and operating profit also showed growth of 1% and 2%, respectively.

Sector Performance and Outlook

The Automation sector stood out with 9% organic revenue growth and a 100 basis point improvement in margins to 18.4%. Process Automation saw strong order intake, driven by a significant GBP 33 million Marine order. Organic revenue in this sector increased by 19%. Life Technology faced a 1% decline in revenue due to mixed end markets, though Climate Control held steady with 1% organic growth despite poor conditions in the European construction market.

Order Book and Cash Flow

Process Automation’s order book showed continued strength, requiring additional working capital investments. The company reported GBP 130 million in operating cash flow and reduced net debt to GBP 606 million. Net debt to EBITDA fell to 1.2x, at the lower end of its target range of 1 to 2x. A GBP 100 million share buyback program was announced, expected to be completed over the next six months.

Management and Strategic Changes

Roy Twite announced Dan Shook’s impending departure as Group CFO by 2025, commencing the search for a successor. Jackie Hu was appointed Chief Operating Officer, with all five sectors now reporting directly to her. The transition aims to improve customer engagement and share best practices across sectors, accelerating company growth.

Guidance and Financial Targets

IMI reaffirmed its full-year adjusted EPS guidance of 120p to 126p, assuming an end-of-year share count of 259 million. Despite facing FX headwinds, increased interest expenses, and maintaining its disciplined capital allocation strategy, the management remains optimistic about achieving these targets through sustained organic growth and strategic acquisitions.

Platform-Specific Insights

Process Automation's strong performance was underpinned by orders in Marine, LNG, Hydrogen, and Upstream Oil & Gas, with Process Automation overall seeing orders increase by 9%. Industrial Automation saw a 4% decline in revenue due to softer markets in Europe and the Americas. Transport, however, grew 13% organically, supported by strong growth in Asia and regulatory tailwinds.

Future Growth Opportunities

IMI’s better world strategy has accumulated profitable growth since its launch in 2019, with an EPS CAGR of 12%. The company is scaling its high-margin aftermarket business in Process Automation, shifting focus to customer service, and tapping into the evolving Climate Control market driven by AI and data center demands.

Operational and Strategic Challenges

The company continues to face mixed results in certain segments like Life Science & Fluid Control, where organic revenue dropped 13% in the first half. Nonetheless, it remains poised for growth when the end markets recover, leveraging its high standards of innovation and adaptability across different geographies and product lines.

Earnings Call Transcript

Earnings Call Transcript
2024-Q2

from 0
R
Roy Twite
executive

Good morning, everyone, and welcome to IMI's 2024 Interim Results Presentation. I'm joined here, as usual, by Dan Shook, our CFO.

Before I start, I would like to let you know that after nearly 10 years with IMI, Dan Shook, Group CFO, has decided to step down from the IMI Board in 2025. I've got to say that Dan has been an absolutely fantastic partner to me, particularly over the last 5 years as a genuine CEO and CFO partnership. I would certainly really miss Dad when he actually does leave. But now -- between now and then, there will be many opportunities for me to thank him for his incredible contribution to IMI. We'll obviously now start the process to find his successor.

This slide covers the key messages in the presentation. The first thing to say is that the first half performance was completely in line with expectations. We delivered 5% organic sales growth and 6% organic adjusted operating profit growth. The adjusted operating margin was up another 10 basis points, and our complexity reduction program delivered GBP 4 million of benefits in the first half.

I am pleased to announce that we are increasing the interim dividend by 10%. And in line with our disciplined approach to capital allocation, we are also announcing a GBP 100 million share buyback program. Finally, based on current market conditions, we are maintaining guidance. We still expect 2024 full year adjusted EPS to be between 120p and 126p.

Next slide, please. In July last year, we aligned our business to 5 customer-focused sectors to accelerate better world growth. This structure has been really well received by our people and by our customers. And along with the successful rollout of our new visual identity and values, this has played a crucial role in transforming us into One IMI.

We have made significant progress in the last year, and we are now taking the steps in the evolution of our operating model. I'm, therefore, pleased to announce that with immediate effect, all 5 sectors will report into Jackie Hu, who was appointed Chief Operating Officer of IMI.

Beth Ferreira stepped down from her role as CEO of Life Technology and as a member of the Executive Committee on the 10th of June. And Beth will be leaving the business at the end of her notice period. On behalf of the Board and the Exec Committee, I would like to thank Beth for all her hard work since she joined IMI nearly 4 years ago.

I'm really excited about this next step. It will bring us even closer to our customers and give us the opportunity to share more best practice across our sectors, ultimately helping us grow faster.

Now before I hand over to Dan, I would like to provide a very quick refresher on our strategy and our financial framework. We continue to make good progress delivering our purpose-led strategy as our people solve key industry problems and help our customers become safer, more sustainable and more productive.

As you know, there are 3 key pillars to our strategy: improve customer satisfaction, market-led innovation and complexity reduction. These pillars are embedded into everything we do, and they are driving sustainable improvements in our financial KPIs, ultimately supporting the delivery of our financial framework.

As a reminder, we want to deliver 5% organic growth, 20% operating margins, 90% cash conversion through the cycle and we want to maintain our return on invested capital above 12% as we continue to create real shareholder value by deploying our capital both organically and from targeted M&A.

With that, I'm going to hand you back to Dan, who will talk through our results in more detail.

D
Daniel Shook
executive

Thanks, Roy, and good morning, everyone. As always, I'm pleased to be able to take you through our first half results today.

So next slide, please. So it was a strong first half as we delivered 5% organic revenue growth and 6% organic adjusted profit growth. Our adjusted operating margin increased by 10 basis points as we continue progress towards our 20% through-cycle target. Adjusted basic EPS was 1% higher than prior period and was impacted, as expected, by adverse currency and tax rate movements.

Cash conversion was lower and reflects further working capital investment, mainly to support the Process Automation order book. And finally, I'm pleased to announce that we are increasing our proposed final dividend to 10%, reflecting the continued confidence we have in the business.

Next slide. So firstly, some more detail around our revenue and profit performance. Revenue increased to GBP 1.098 billion with underlying business growth mostly offset by the impact of recent disposals and foreign exchange, which created a 3% headwind in the first half. Adjusted operating profit increased to GBP 196 million. We delivered 6% organic growth, again, partly offset by recent disposals and foreign exchange.

Next slide. So looking at the full income statement. As mentioned, we saw strong organic growth in both revenue and operating profit with statutory results up 1% and 2%, respectively. The net interest charge was in line with expectation at GBP 8.7 million as our net debt position has reduced by GBP 166 million since June of last year. We saw a reduction in adjusting items in the period, largely reflecting the timing of our restructuring program. This program delivered GBP 4 million of benefits in the first half, and we still expect to deliver GBP 15 million worth of benefits in the full year.

Next slide. Now looking at platforms and sector detail. The first thing to say here is that overall performance was in line with our expectations. Starting with Automation, Automation delivered strong growth with revenue up 9% on an organic basis and margins increasing 100 basis points to 18.4%. Process Automation had an excellent first half with strong order intake, up 9%, as shown at the bottom of the slide. Similar to last year, this includes a significant order, GBP 33 million within our Marine sector, which covers deliveries over a number of years.

In addition to the Marine order, we have seen particular strength in LNG Aftermarket, Hydrogen and Upstream Oil & Gas. Organic revenue for the sector was up 19%. Industrial Automation delivered a resilient performance against softer markets in Europe and the Americas. Revenue was down 4% on an organic basis.

And turning to Life Technology, as expected, the platform's revenue was down 1% organically in the first half due to very mixed end markets. Climate Control, again, demonstrated its resiliency, delivering 1% organic growth despite the weaker Europe construction markets and a strong prior year comparator. Demand for our energy saving products, particularly in balancing and control, remains strong.

Life Science & Fluid Control organic revenue was 13% lower than the prior period, which was as expected given the strong first quarter comparator and continued softness in its markets. The long-term fundamentals of this sector are strong, and we remain excited about the opportunities for future growth when the end markets recover.

Transport revenue was up 13% organically. We continue to benefit from strong growth in Asia and our new product launches, supported by favorable regulatory tailwinds. As you can see, the Life Technology operating margins reduced to 17% in the first half, reflective of the lower sales and some mix effect between the sectors.

Next slide. Regarding our cash performance, the continued strong growth in the Process Automation order book and our normal seasonality have led to additional working capital investments in the first half. We delivered GBP 130 million of operating cash flow and reduced net debt to GBP 606 million at the half year. Net debt to EBITDA also reduced to 1.2x, towards the bottom end of our 1 to 2x target range.

Next slide. And as you all know, we maintain a disciplined approach to capital allocation, including a commitment to an efficient balance sheet. And so today, we announced a GBP 100 million share buyback program. We'll look to transact this buyback over the next 6 months and still expect both our debt and leverage levels to come down at the full year, giving ample headroom for organic and inorganic investment.

Next slide. So the final slide before I hand back to Roy, the group outlook statement. As Roy already mentioned, we are maintaining guidance. We still expect full year adjusted basic EPS to be between 120p and 126p. Our guidance assumes that the number of shares will reduce to 259 million at the year-end, with the accretive impact of our share buyback program largely offset by an increase in interest expense. We also see more FX headwind than the 2% included in the previous guidance.

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

R
Roy Twite
executive

Thanks, Dan. The first thing I want to say is that our better world strategy continues to deliver results. We are building a track record of compounding profitable growth. And as you can see on this slide, the adjusted EPS has grown at 12% CAGR since the strategy was launched in 2019, and we expect further growth in 2024.

You can see on this next slide a reminder of how we have successfully improved the quality and the resilience of our portfolio over the last decade. We have rebalanced the geographic mix of our revenue. We've grown the aftermarket content to around 45% of sales in 2023, and we have increased our exposure to attractive long-term markets like life sciences, smart buildings and automation. The good news is that this hard work is clearly delivering results, and we have seen a significant improvement in our financial KPIs since the strategy was launched back in 2019.

Okay. I wanted to spend some time today giving you a few examples of how our better world strategy is delivering sustainable, profitable growth. Firstly, we continue to accelerate high-margin aftermarket growth in Process Automation. We are successfully deploying our innovative Retrofit3D technology to upgrade both our own and competitive hours. We're winning market share in the installed base and delivering GBP 14 million of orders in the first half of this year just on Retrofit3D. This growth in our projects, obviously, has grown very, very quickly from its inception in 2019.

Secondly, our continued focus on customer service, technical support is unlocking some interesting opportunities in Industrial Automation. A great example here is how we are supporting a large Chinese electric vehicle OEM, helping them to expand their manufacturing footprint across Southeast Asia. In addition to our best-in-class technical solution, we were able to offer customer service locally, which was truly excellent. That, married with really good technical support, helped the customer unlock their maximum productivity benefits from our solution.

And finally, the rapid expansion and demand for data centers, fueled by artificial intelligence, is presenting a really exciting opportunity for Climate Control. Data centers can consume up to 50x the energy of floor space of a typical commercial building, and they must be cooled to work efficiently. Installing energy-efficient climate control solutions is, therefore, absolutely critical to data center performance and profitability. We delivered GBP 5 million of data center orders in Climate Control in the first half, and we're really excited about the opportunities for growth from here.

Creating a better world is absolutely at the heart of our purpose in IMI. Our carbon intensity continued to improve in the first half, and both platforms are progressing actions that will continue to reduce our Scope 1, 2 and 3 emissions. We remain on track to deliver our longer-term targets. We also saw a significant reduction in health and safety incidents in the first half. And whilst we remain committed to an accident-free workplace, this is excellent progress. I'm also very proud to report that employee engagement remained very high in our recent survey and was up at 79% right across the global business.

So to summarize then, the key takeaways from today are, firstly, that the better world strategy that we launched in 2019 continues to deliver results. I'm really pleased to report strong organic revenue and operating profit growth, up 5% and 6%, respectively. Secondly, we are taking the next steps in our evolution of our operating model as we adopt a new One IMI structure. This promotes the sharing of best practice right across the group with an acute focus on accelerating growth. Third and finally, as Dan said, based on current market conditions, we are maintaining our guidance. We still expect this year's full year adjusted EPS to be between 120p and 126p.

Okay. So I'm going to stop talking now and hand over to the moderator for Q&A.

Operator

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

L
Lushanthan Mahendrarajah
analyst

I've got a few, if that's okay. Firstly, on Life Technology margins to the second half, I guess, how much of those GBP 11 million of restructuring benefits are in Life Technology? And then I appreciate the mix impact in H1 as well from -- in Transport being lower margin. I'm not sure you can tell us different margins between the 3 businesses. But did you at least -- is it quite a substantial sort of difference between Transport and the other 2 in terms of the potential swing we could see the other way in the second half?

The second is on Process Automation. Just on that Marine order, clearly, this is the second big one you've won now in 2 years. I guess, how repeatable are these types of orders? Is this really it? Or is there something that could happen perhaps not every year, but are there these sorts of projects out there where -- which you can keep on sort of driving that?

And then the third one is just on Hydrogen. I think the order number there has gone from GBP 3 million to GBP 22 million year-on-year in the half and a quite big move. I guess, what exactly are these orders? Which divisions are they in? And in terms of deliveries, are these sort of multiyear contracts? Or are these sort of shorter in terms of deliveries? They're my 3 questions.

R
Roy Twite
executive

Brilliant. Lush, thanks for your questions. So the first one was about Life Technologies and the opportunity for improvement in the second half, yes, we think there's the 2 big effects, as you said, Lush, right, which is that the majority of the GBP 11 million of restructuring benefits that we're going to deliver in IMI in the second half will come through in Life Tech. So that's one big supporting factor.

And then the second thing is the mix that you recognize. And while it is obviously commercially sensitive to break down margins any further, I think everybody knows that the mix effect in the first half has worked against us. And the mix effect in the second half will definitely work for us because, as we forecast all year, Transport will have a more difficult second half and the comparators in Life Sciences get a lot easier.

So yes, put all that together, what that means is that we actually think that Life Tech full year margins will actually be slightly up. So you can imagine the -- what's going to happen in the second half, Lush. So yes, and that is backed up by what we've seen in the last couple of months, Lush, as well. So we're really not expecting anything miraculous in the second half.

Second question was all about Process Automation. Yes, I mean, first of all, well done to Jackie again, right? Because you got to recognize that Process Automation overall orders up 9%. Remember that they were up 30% in the first half of last year. So it's really building a very, very strong order book. And that Process Automation is almost 40% of IMI. So to have that strength of order book for the rest of this year, but also as we go into next year, is really impressive, and I'm really pleased with that.

Yes, of course, there are other opportunities within Marine. And what's really happened there, we've put some new management into Marine, a long-standing IMI person I've known for many years and one of our best lean people. A couple of years ago, they went in. And now we are recognized as one of the best suppliers in that market area, and they're absolutely flying. So we are picking up more orders and there's more opportunity, for sure. So yes, the answer is yes, Lush, we're quite optimistic about that.

Third point is Hydrogen. Yes, it's really picking up now, Hydrogen. There's 5 applications that we work across the whole of IMI. So -- and again, as I've said many, many times, we're not putting any big balance sheet investments into this. We're really modifying existing technology. We're using our oil and gas capability often. So the ability to handle complex materials, the ability to make sure we can seal very light gases, all of that capability and those products, we're moving across into the hydrogen industry, which is pretty exciting. It is growing pretty quickly.

The biggest single application is using our valves, actuator and what we call the balance of plant, all of that technology, digital technology, to enable a niche of smaller-sized electrolyzers. And the sort of projects we're winning are things like localized hydrogen, making hydrogen from obviously solar power locally and then using that and dispensing it into hydrogen fuel cells. And actually, the single biggest order was in Italy, and it's actually on a train system that's going to run on hydrogen fuel cells from the airport to the city center.

So -- and that's the sort of thing that we're seeing in Europe. They do require ultimately, obviously, government funding at the moment, but the overall prices are coming down and down and becoming more and more competitive. So our pipeline, Lush, so again, if I was to tell you our pipeline, you'd probably put the share price through the roof, and I don't want to do that because these projects do require funding, but there are a lot of projects out there for hydrogen that we're working on.

So yes, it's very encouraging. And of course, all of that came out of Growth Hub, right? And those projects -- in fact, I think every single hydrogen project we're doing came out of that Growth Hub thinking where we go in, we find customer problems and we solve them at pace using our technology. And that's what's really gratifying, Lush. Does that answer your questions okay?

L
Lushanthan Mahendrarajah
analyst

Okay. Yes, that was brilliant.

Operator

The next question comes from Christian Hinderaker from Goldman Sachs.

C
Christian Hinderaker
analyst

Dan, sorry to hear of your departure, of course, Dan. I want to start on Process Automation, if we adjust for the Marine order, I get to 2.4% organic order intake. You obviously had a very strong comp last year, and you talked to some of the areas of strength. I guess just curious if there's any other areas that have slowed. I don't know if you want to look on a sort of 2-year stack basis, but how is sort of market activity holding up? And how do we think about the second half?

R
Roy Twite
executive

Yes. I think to be fair, Christian, if you're going to strip the one-off out of this year, you got to strip it out of last year, right? So I think you probably, Dan, get back to not far off...

D
Daniel Shook
executive

Pretty close.

R
Roy Twite
executive

Yes, I think close to 8%, is it?

D
Daniel Shook
executive

I think GBP 26 million, I think, last year and GBP 33 million this year. So...

R
Roy Twite
executive

So I think, Christian, if you're going to strip both sides out, then you're still at pretty good growth rates. And obviously, within that, Christian, as you know, the really encouraging is aftermarket where the margin is at 2.5x, gross margin is 2.5x what they are in new construction. That carried on growing at 8%. And for me, that's the really good long-term opportunity for IMI. That installed base, we can make it more efficient, we can make it safer, we can make it emit less pollutive emissions.

So -- and that coverage that Jackie has put in place, backed with growth, have the ability to innovate into that space, leaves us pretty excited. So yes, I think to answer your question, overall market activity is still good and plenty opportunities across oil and gas, across hydrogen, as we're just talking about and, of course, the aftermarket, right? So no, we feel pretty good about the activity in that space right now.

D
Daniel Shook
executive

And let me just jump in. Thanks, Christian. Just to clear -- just to make it clear, everybody is fine, and I'm not going anywhere anytime soon. I will miss everyone. But it's been 25 years where the family has really supported me in my career. So this has been a decision where I put the family first. So -- but everybody is good, and let's not talk about it for the next 9 months.

R
Roy Twite
executive

Deal. That's a deal.

C
Christian Hinderaker
analyst

It does. Maybe another on Climate Control, if I may. A little bit of growth there. I think consensus was for an organic decline. One of your peers has reported a decline closer to 7% in the half, and we've had a number of the OEMs in the heat pump space warning in recent weeks. Just want to understand what your take is on that strength. Is this market share gain? How much effect is there, if any, in terms of distributor inventory rebalancing? I think there's a bit of uncertainty in this market, so keen to clarify.

R
Roy Twite
executive

Yes, no, fair question. Well, I've looked to the peers as well, Christian, and it does make our performance look reasonable. And I think we always said this year, we expected to carve out some growth. For me, it comes back to the energy efficiency proposition of this business. It's got incredibly strong brands, good market positions. We have spent decades training customers in how to use the product. If they use the products correctly and they balance buildings, then they can save around 35%, typically around 35% of the energy cost, that is obviously incredibly important to the end user, while creating a comfortable indoor climate.

And often, temperature in buildings is one of the things that people are sensitive to. I'm sure everybody on the line is, right? When it gets really hot, you don't like it; when it gets too cold, you don't like it. So I think it's that value proposition, remembering that our products are typically only 2% or 3% of the cost of the system, but they can have a massive effect on the comfort and on the temperature within the system.

And energy efficiency has definitely gone up in the agenda. There's no doubt about it. Energy security, energy efficiency is up the agenda, and there are regulations. And the annoying thing about regulations, if I'm completely honest, is that they can come and go, but the overall tide, the overall flow of regulation is definitely in the favor of energy efficiency. So that's why I think we're well placed to continue to carve out some growth.

Operator

The next question comes from Hemal Bhundia from UBS.

H
Hemal Bhundia
analyst

I guess just one to follow up on Lush's question. Could you give a bit of color on how much of the Process Automation is LNG and Hydrogen? And secondly, on transportation, what are you hearing from OEMs regarding second half orders and activity?

R
Roy Twite
executive

Yes, I'll take Transport. Do you want to talk a bit about Process Automation, Dan? I'll start with Transport. Do you want to start?

D
Daniel Shook
executive

Yes. No, I can jump in. I mean LNG continues to be strong. And actually, we're seeing much more in the aftermarket space. Clearly, there was a bit of changes with Biden's move on LNG trains in North America. But what, quite frankly, happened was more of the LNG projects outside of the U.S. just kind of jumped the queue. So we're still seeing good activity there on the new construction side. But with the installed base, actually, we had a really nice first half of LNG orders.

And I think Upstream Oil & Gas is still doing well. And I suspect people are recognizing, with all the electrification going on, certainly gas is going to be the transition fuel for us for some time. And we are still seeing very good demand for gas-fired turbines and our turbine bypass valves. So yes, so all of that, I think, is playing well. As you know, as Roy already talked about, the Marine orders are in good shape.

Our expectation as we move forward with all of the upstream activity is we'll begin to see more and more downstream and petrochemical activity on the new construction. As that part of the industry starts tweaking and changing the way in which they're managing the feedstocks, I think that's going to give us some good legs. And clearly, we're very set for the rest of this year, which sets us up for next. And yes, we see that going quite well.

R
Roy Twite
executive

Yes. So I think the normal sort of upstream move through to downstream, that's a good point, Dan. But I think the specific question was, what percentage of the business is Hydrogen? So in Hydrogen, I think, in Process Automation was about GBP 19 million of orders in the first half. And then the percentage of LNG overall, new construction aftermarket, it's just over 10%, I think, Dan, of Process Automation.

And then on Transport, so Transport -- so what OEMs are saying in the U.S. and particularly Europe, second half is going to be slower. And as we've said -- I think at the beginning of the year, we actually said we expected Transport to be slightly down this year. Obviously, we've done a bit better than we thought in Transport, but we still expect to slow down in the second half.

And remember, the second half of last year, the comparator gets much more difficult. So we expect this over -- this year now in Transport to be flat to slightly down is where we'd call it. So slightly better than we thought at the beginning of the year, but still a more difficult second half. That's what the OEMs are saying.

Operator

The next question comes from Mark Davies Jones from Stifel.

M
Mark Jones
analyst

I got a few things. Can I take them separately because they're a little bit different? The first was just, can you -- I'm sure there are lots of moving parts here, but can you give any rough guidance on price versus volume in that first half growth rate? And in particular, are there any parts of the portfolio where price is now coming under pressure?

R
Roy Twite
executive

Yes, brilliant. I'll thank -- and thanks for spacing them out, Mark, because we're [ making a run hill down ]...

M
Mark Jones
analyst

Makes life easier, yes.

R
Roy Twite
executive

I can't remember the first one. So 5% organic growth, Mark, roughly half and half price and volume in that first half. Price under pressure, I mean, obviously, there's lots of competitive situations, but I would say no real change. If I look versus a year ago, no real change to now. We've still got real pricing strength overall.

And Mark, I think you know where we've got particular pricing strength, obviously, areas like the aftermarket, areas where we've got super strong brands. The normal places, Mark, what we do in our segmentation and making sure that in overall terms, we're basically offsetting inflation. And that's what we've done in the first half. And in the full year, we'll look to offset or even maybe slightly beat inflation, I would say, in terms of our overall model.

M
Mark Jones
analyst

Great. Second one was really focused on Industrial Automation, but more generally, your view of the sort of short-cycle outlook because that's the one thing that might have gotten a little worse as we've gone through this year. I think we're expecting a better second half. Leading indicators in places like Germany and China is still pretty grim. So have you changed your view in any way on that part of the business?

R
Roy Twite
executive

I think probably slightly, you're right, Mark, because look at the PMI in Germany, it's still -- that was at 43.5 last print, right? I mean it's still pretty tough out there. And we're seeing it in all the industrial companies. So I think, again, from what I've seen so far, we're slightly outperforming. We're slightly more resilient than other people.

But yes, I think what we're saying about Industrial Automation, if we look at our 60-day moving average, Mark, it's still slightly down, very slightly down, right? So yes, we're not seeing any real recovery yet. It will come, it's just a question of when. We're certainly not banking on any recovery in our outlook, right, as we've said consistently.

M
Mark Jones
analyst

Excellent. And then my last one was just on the management changes and the structural part of that. I understand what you're trying to do. But going forward, does that mean you run the business, possibly you then end up reporting the business on the 5 underlying units rather than the 2 sectors that were recently formed? How does that shift? And does it give more responsibility to the heads of each of those 5 units?

R
Roy Twite
executive

Yes. I mean, ultimately, those 5 sector heads are obviously very, very important, right? And I've been working very closely with 3 of them, as you can imagine, over the last, what, 7 weeks, is it something like that? So absolutely, they're pivotal to our success. We are becoming market sector experts, which is where I wanted to take the company because that's when you truly understand the sector and hear customers' problems and where you play, how you win, right? And as I've said on previous calls, the clarity of the strategy at the sector level is becoming better and better and better, and that is obviously contributing to our overall growth.

Having said that, the platforms remain incredibly important. And obviously, too much data at the sector level is commercially sensitive, as you can well imagine, Mark, right? So we don't want to be stupid in terms of that situation. So in terms of the way we look at the business, we still look at it in terms of 2 platforms, and that's the way we're going to continue to report.

I'm delighted Jackie -- the most important thing for me is that Jackie moving into that role. I think you've all seen what he's done with Process Automation. He's already starting to do that, obviously, with Industrial Automation, really getting good market coverage, really good understanding using data, using CRM to really make sure we've got the best market data we can possibly have and then backing that up with some really good innovation coming through from Growth Hub. And accelerating that development across the whole group is obviously what really excites me.

D
Daniel Shook
executive

So no need to redo your model again, Mark.

R
Roy Twite
executive

No, if that's what you're asking.

Operator

Next question comes from Andrew Douglas at Jefferies.

A
Andrew Douglas
analyst

Two quick questions for me, please. Going back to Process, we talked about replacing competitors' valves in the last presentation. Is that momentum still continuing? Or have your peers figured out what you're doing and tried to offset that? So what's going on in that, please?

R
Roy Twite
executive

Very good question. Very good. No, as we've said before, it's actually very difficult. It's easy thing to say, isn't it, Andy, right? But it takes a minimum of 7 years to become a valve doctor, right? Because it's back to the point that if you -- this is not ordinary aftermarket, right? This is aftermarket in big process plants, big LNG plants, big combined-cycle gas power stations. And so to convince somebody to change to something that isn't the OEM, you've got to have technical expertise, you've got to have a brand, you've got to have a proven track record, you've got to have references. It's not easy. Believe me, I've tried to do it, Andy, myself, it is not easy.

So the good news is, I think last year, in the first half, we roughly doubled the value of competitor valve upgrades. And in the first half of this year, we're up 5%, again, Andy. So yes, we are continuing that momentum. I was a bit worried having done that huge jump because, obviously, some of these valves are huge, right? You know, Andy, some of these Remosa valves, Z&J valves, these are -- this is what I would call a bit lumpy, right? But no, we've grown another 5% in the first half of this year.

So we're continuing to -- and as you know, what it does is 2 things. One is we get a nice margin sale, and roughly the margins in upgrades are twice what they are in new construction because you're dealing with the end user. They get all their value from the upgrade and the quality, but also then you get the parts as well, which is, as you know, is the real -- the good margin stuff. So yes, it's still moving in the right direction. Thanks, Andy.

A
Andrew Douglas
analyst

Perfect. Well done. Can I ask Mark's question slightly differently? In terms of management change, I'm assuming we've seen no change at the SBU level?

D
Daniel Shook
executive

The president -- the sector President level, you mean?

A
Andrew Douglas
analyst

At the sector President level.

R
Roy Twite
executive

The sector President level, Andy. So at that level, very little change, I would characterize it as, obviously, Phil retired, what was that, last year -- in the last year, was it? And Stefano came in, Stefano is up and running. And obviously, I've been dealing with the directors, I've said, for the last weeks. And within Process Automation, Jackie was the sector President effectively. But his #2, Roby, is now moving across. So he's been promoted into that position. So he's got the capacity to make sure he can get into the other 3 sectors, Andy. So I would describe it as sort of minimal -- it's good news, really, because it's internal progression and some promotion in there. So I think the feeling on the ground is excitement.

A
Andrew Douglas
analyst

So nothing in Life Tech?

R
Roy Twite
executive

Nothing what?

A
Andrew Douglas
analyst

Nothing in Life Tech?

R
Roy Twite
executive

No, no, no.

D
Daniel Shook
executive

No.

A
Andrew Douglas
analyst

And where do we think Jackie can make the most difference in Life Tech? Because it feels to me like Life Sciences is -- once the market recovers, you're back to good growth. Transport is just when the market gets back to good growth and Fluids when the IP recovers, the [ MD is in shape ]. So where can Jackie make the most difference there?

R
Roy Twite
executive

I think, Andy, because all of those things are sort of external effects, right? And in IMI, we always say control the controllables, right? Whatever happens in the market, we want to outpace the market. So how, as an industrial company, how do you do that? You better customer intimacy, better customer service.

So effectively, the 3 ways to grow, and I know you know this, it's pretty obvious, right? One, you need fantastic customer satisfaction. And I should say that in IA, Industrial Automation, Net Promoter Scores are now at 60, right? And that is world class. So they're at 60 in Climate as well. So 2 areas now where we move customer service to very, very high level. That's the first way, right?

Keep the customers you've got and make them very, very happy. Once they're very happy, obviously, try and sell them more of your existing product, all right? Once you sell them more of your existing products as much as you can, then obviously, what we want to do is sell the more new product. And that's where growth accelerator really kicks in and innovation, and that's what we always see as the opportunity.

So really, those 3 steps, which is what Jackie has been obviously relentlessly going after in Process Automation, that will be very similar and really accelerating the success of growth, et cetera. It's a Growth Hub across those 3 sectors because what we want to do is just keep compounding organic growth whatever is happening in the cycle. And that's always been my ambition, Andy, is to almost divorce ourselves from that, right, and just really make ourselves a structural growth company as I see it.

A
Andrew Douglas
analyst

Okay. Perfect. And the last question, and I'll jump back in the line, GBP 100 million buyback, nice stuff there, earlier than I expected, but well done. Does that change the message on M&A in terms of size of deals, your ability to do deals? Can you do an M&A -- 1 or 2 pieces of M&A and a buyback? Can you just flesh that out a little bit?

R
Roy Twite
executive

Yes. So I mean we feel that a good deal for us is a bolt-on, maybe just over GBP 300 million to -- well, GBP 20 million, to be frank with you, if it's the right deal. So we like those sort of bolt-ons because they play to our strengths. We know those markets. Us, plus the acquisition, the reason we're buying it is because we can accelerate the growth, 1 plus 1 equals a lot more than 2.

So we still see those opportunities, Andy. But Dan has always said that the balance sheet efficiency, the best for us is between 1 and 2x net debt to EBITDA. And it doesn't take a rocket scientist to work out that pretty soon -- second half cash flow is always stronger right, just the seasonality of the way payments come through, that in the second half, if we didn't do anything, we were going to be down to 0.8 net debt to EBITDA, right? And so just to maintain that overall, you do the math, [ spare the ] GBP 100 million share buyback, it still leaves us GBP 0.5 billion, Dan?

D
Daniel Shook
executive

Yes, exactly.

R
Roy Twite
executive

Of dry powder, right?

D
Daniel Shook
executive

Yes. With EBITDA above GBP 500 million and 1x, it gives us the spare capacity to go after it. And the pipeline remains there. As you know, we get into processes sometimes -- well, we walk away from a lot of things as well. We want to be disciplined. And we recognize you push those multiples on transactions too high, then it gets very hard to generate the shareholder value. So we're selective and -- but the pipeline is still absolutely there. And more and more of those sector Presidents are playing their role to get into their sectors and find those really nice bolt-ons that we can bring into the fold.

Operator

The next question comes from Jonathan Hurn from Barclays.

J
Jonathan Hurn
analyst

Just a few questions from me, please. Firstly, just in terms of the guidance range, obviously, that's 120p to 126p. You're flagging increased interest costs and obviously the FX headwind. And now we think -- if we look at consensus, it kind of sits in the middle. But the question really is, what needs to change? Or how can we actually get to that top end of guidance at 126p? What is kind of underpinning that, please?

R
Roy Twite
executive

Yes, brilliant. Yes. So Jonathan, yes, as you said, really, we've done 2 small upgrades this year, right? Because we sold that small business, I don't know if you remember that. And then, obviously, exchange rates have gone up against us by about another 1.5%, right? That's really what's happened.

So that's why we firmly believe that when we looked at all the business plans, that 123p is a good place to be with a range around it. And of course, the range around it, to get to the 126p, Jonathan, it's the normal things, right? More book to ship aftermarket in Process Automation. IA does make a bit of a recovery Q4. Climate, you could see a way that Climate -- because the comparator gets easier second half, but actually, the growth that we show will be higher in the second half. And the whole energy saving thing, as I said, proved to be resilient against strong comps. So you can see where Climate could improve. And then, obviously, everybody is waiting for a Life Science recovery, right? And again, we're not banking on any of those things, but they are the sort of things that could push us to the top of that range, Jonathan.

J
Jonathan Hurn
analyst

Okay. Okay, very clear. And the second question is just on Automation. Just in terms of that profitability improvement, obviously, 100 basis points year-on-year, but I know you don't disclose it, but can you just sort of give us a little bit kind of how that breaks down between Industrial Automation and Process? Obviously Process is increasing margin, but in terms of that 100 basis points, is all of that attributable to Process in terms of increasing it? And in terms of Industrial, what's happening there? Are margins going backwards a little bit?

R
Roy Twite
executive

Yes, I mean I think -- yes, broadly, yes. I think that's broadly right. So more than 100% of the margin increase was Process Automation, as you'd expect, because we're seeing good growth, good aftermarket content. So that will be broadly yes. And then IA, volume is down. Jackie is doing a good job in terms of overall defense of the margins, but they are slightly down year-on-year, yes.

J
Jonathan Hurn
analyst

Okay. Very clear. And then lastly, just in terms of the order book for Process Automation. If we look at it in sort of monetary terms year-on-year, big increase obviously coming through in new construction. I think if we look at aftermarket, it's a lot smaller. But what's sort of underpinning that? Is that all the Marine in terms of new construction, but are you also seeing sort of good demand in new construction from other areas as well?

R
Roy Twite
executive

Yes. Well, obviously, we talked earlier, Jonathan, about Hydrogen, right, which is really stepping up from a small base. Oil & Gas is staying at a similar high level to last year where it shot up in terms of new construction. And actually, power, as Dan said, Jonathan, power is new construction side holding up really well. So over -- there's nothing I looked at across the segments, Jonathan, and thought this is a turning point down. It's -- market activity is still good.

Operator

The next question comes from Thomas Rands from Davy.

T
Thomas Rands
analyst

My questions have been asked. But just 2 clarifications just on transportation. Just the Q1 update, so it feels as if the second half outlook has improved or got work. Are you saying you're still expecting a slower second half versus the first half? I just wanted to kind of clarify the timing of the comments and is it slightly better or slightly worse than what you're expecting in the last kind of guidance, please? And I'll come up with a second question.

R
Roy Twite
executive

I think, so much from memory, it's -- remember, this is 8% of our business fiber, from memory, second half Transport is pretty much where we thought it would be. It's just the first half has been a bit better.

D
Daniel Shook
executive

Yes, a little bit better.

R
Roy Twite
executive

That's really it, really. So obviously, talking to our customers, there's really 14 big truck customers globally that make up a huge part of that business, as you can imagine, Thomas. Most of the information is public because they're public companies, right? And so we use that, we use a mixture of forecast like the ACT forecast. And I don't think our second half has changed materially, Thomas, is the answer.

T
Thomas Rands
analyst

Okay. Great. And the second one was just on Life Sciences and the kind of the destocking that we've seen through the first half. Are we -- do you still see a bit of that? Is it very customer dependent? Anything you can add on that would be great.

R
Roy Twite
executive

Yes. So the way I'd characterize it is that last year, first half, it came down pretty sharply, orders I'm talking about. Second half, it's stabilized, and we're pretty well stabilized at that level. So it's sort of that's what's happened. And again, we said at the beginning of the year, we're not going to call a recovery. We're not calling a recovery, right? And hopefully, it does happen sooner rather than later, but we certainly not put that into our outlook.

Operator

We have time for one more question, so we'll move to the line of Harry Philips from Peel Hunt.

H
Harry Philips
analyst

Two swift ones. Just in -- just trying to gauge the comments around where working capital goes in the second half because obviously, as you said, you have the seasonal sort of buildup. But with the order activity, particularly in Process, how does that sort of normalize or perform its normal seasonal pattern in the second half?

And then the second is just in terms of 19% organic growth in Process during the first half, 9% increase in the order book notwithstanding the Marine order, what sort of delivery sort of trajectory we're looking at in the second half and then on into '25? Because it looks like now you're going to get pretty good cover through the bulk of '25 right now in terms of showing good sort of mid-single-digit growth as the bare minimum for that year.

D
Daniel Shook
executive

Harry, yes, you're spot on, we'll still see the order pattern improve in process. So there will still be investment in working capital there. I think it will be offset by our normal seasonality in places like Climate where we do a lot of the sales and cash collection. That's why, yes, expect, as I said earlier, I think, we'll try to get it around 90% cash conversion for the full year. That will give us, yes, probably 100% cash conversion for the second half. So we'll absorb the continued growth in the order book in Process Automation by pulling cash down in the other areas.

R
Roy Twite
executive

Yes. Unless, hopefully, Process Automation -- we keep increasing the order book and that we'll need the working cap, right? But yes, in terms of our base case, Harry, I think that's exactly right there...

D
Daniel Shook
executive

Yes, I think that's what we're forecasting.

R
Roy Twite
executive

So that's great. And then your second question on Automation, you're absolutely right, Process Automation, we now think will grow a bit faster in terms of sales this year, Harry; Industrial Automation, a little bit less. Net-net, Automation is pretty much, overall, pretty much bang where we thought it would be for the full year, which is going to be pretty excellent organic growth and I would say pretty similar to the first half overall for overall Automation, Harry. Very high single digit...

H
Harry Philips
analyst

And then a couple of -- yes, and that cover obviously building via Process for '25 as well, so that underpins sort of stretches further out and gives the other businesses more time to recover if it is in the back end of this year, I guess?

R
Roy Twite
executive

Yes, exactly. I mean, on average, I think we've now got a 10-month order book in Process Automation. Again, book-to-bill first half was just under 1.3. So of course, there's phasing. We know that. We sell them a lot more in December. We know all of that. But still, the first half of almost 1.3, that -- with a 10-month order book, that's, as you say, starting to provide good air cover for first half of next year.

H
Harry Philips
analyst

Yes. I think 1 or 2 of your peers will take that, but then that's really helpful.

Operator

Those are the questions we have time for today. So I'll hand back to the management team for concluding remarks.

R
Roy Twite
executive

Excellent. Well, apart from one thing, which is obviously I'm going to miss Dan. But that's not now, is it, Dan? That's for next year, right?

But until then, I think we are really excited. I'm really excited about the management change and Jackie going over all 5 sectors. I really think we're going to see an acceleration of best practice across particularly the areas of customer coverage and innovation, the things that Jackie has done really well in Process Automation, really excited about that. And we're looking forward to delivering more performance and more progress in the second half.

Thank you.

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