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IMI PLC
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All right. Good morning. It feels like a really busy morning. Welcome to our IMS and to our strategy presentation. We have completed a deep dive on the data and the drivers across each division, and we're now satisfied that we have a clear understanding of our strategic priorities. I'm pleased to be able to report good progress on our plans to put the customer right at the center of our decision-making, more of which later. We are building on our platform of operational excellence, which has been established over the last 5 years. As far as recent trading is concerned, despite the worsening industrial markets, we do still expect second half profits to be similar to last year and so are reconfirming our guidance from July. Profits are being supported by our business improvement initiatives, including the previously announced GBP 35 million restructuring plan, which is on track to deliver the targeted GBP 20 million of savings in 2019 and GBP 30 million on an annualized basis. We are announcing today a further optimization program for Precision. This will deliver an additional GBP 35 million of annualized benefits at a one-off cost of about GBP 75 million. This new program has already been initiated, so we now expect our total 2019 restructuring charge to be about GBP 55 million. We have now completed our strategy review, which confirms a significant value creation opportunity. We recently acquired PBM, an attractive bolt-on acquisition, which was absolutely in line with IMI Critical strategy to access attractive long-term growth markets like pharma and food processing. We are assessing 20% to 30% of IMI Critical's revenue to determine its ability to meet our long-term growth and margin targets. Okay. With that, I'm going to hand over to Dan, who will give you the trading update.
Great. Thanks, Roy. Good morning, everyone. I'm pleased to be able to give you our trading update for the third quarter. Only 3 slides today given that this is an IMS. So this slide provides you with our year-to-date revenue performance, both on an adjusted and organic constant currency basis. Overall, the group's 9-month revenue of GBP 1.4 billion reflects a flat performance to 2018 on an adjusted basis, and when eliminating the impact of currency, 3% lower on an organic basis. For the third quarter alone, revenue for the group was 2% lower on an organic basis with each of the divisions delivering as expected. Looking at each division individually. Precision's revenue was 4% lower in the third quarter on an organic basis, as both the Industrial Automation and Commercial Vehicle segments experienced declines, particularly within Europe. The division still saw good growth in Asia and within its smaller verticals of Life Science, Energy and Rail. Regarding the Critical division, revenue in the third quarter was 1% lower on an organic basis, an improvement to the first half and in line with the order book phasing. Orders in the quarter were 10% down due to some large petrochemical and water orders last year. Orders year-to-date are 8% up versus last year. And margins in the order book are also higher when compared to the same point in 2018, which reflects an improvement in new construction due largely to project mix. And within Hydronic, third quarter revenue was 2% higher on an organic basis when compared to 2018 as the division maintains a good performance, particularly within its core European markets. The division continues to focus on rebuilding its margin performance through value pricing and targeted cost reduction initiatives. The estimate for our full year currency impact is also shown on this slide. IMI's results are being favorably impacted by currency largely due to the weakening of sterling against the U.S. dollar. This translates to an exchange rate tailwind for the full year of around 1% on both revenues and profits. So as Roy mentioned, we announced today a further program of rationalization in Precision, which increases the group's charge in 2019 to around GBP 55 million. While never easy, these actions reflect the market realities and they enable IMI to further enhance competitiveness by shifting our footprint to lower-cost facilities. We also removed complexity and continue to deliver efficiency savings from the foundation work over the last 5 years. The table provides you with a summary update, including the savings we expect in 2019 and 2020 as well as the full year run rate. Overall, the announced plans deliver a payback of less than 18 months, which is a combination of faster payback North American initiatives and Europe actions, which typically have a longer time frame. The mix may shift towards Europe as we progress into 2020, but we continue to believe our rationalization spend overall will pay back within 2.5 years. So on this slide, I've provided some additional financial updates. Firstly, just to remind everyone of the impact of the new lease accounting standard, IFRS 16. As reported in July, we expect the debt impact for IMI to be roughly GBP 91 million at the end of the year. Our EBITDA increases as well, meaning the overall impact to our key financial covenants is expected to be minimal. Second, we're pleased to have finalized the PBM acquisition in September. The funding was raised through our existing banking facilities. Although we are only into the first weeks of PBM, progress with its integration has been good, and both organizations are very optimistic about the opportunities from combining our people and capabilities. And finally, just to reconfirm that guidance for the full year remains unchanged from our results presentation in July. In the second half of 2019, we continue to expect that organic revenue will experience a decline similar to that in the first half when compared with the same period in 2018. Nonetheless, second half profits are expected to be similar to last year, supported by our business improvement initiatives. And in particular, regarding EPS, we currently see analyst consensus at around 71.5p, which we continue to be comfortable with. So with that, let me hand back to Roy for the strategy presentation.
Right. Thank you, Dan. This next section of the presentation covers 3 key areas: First, some detail on IMI and how we create value. Second, our progress on the immediate priorities.And third, our findings of the strategic review. So IMI today comprises 3 divisions with excellent fluid control engineering capabilities. Most of what we design and manufacture are engineered valves, actuators and control systems. And right across IMI, we create customer pull by solving industry problems through our applications engineering skills. So whether it's helping the truck OEM customers meet new emission standards, supporting LNG customers to build more productive gas plants or helping the HVAC consultants to design a more energy-efficient building, we create considerable value for our customers. And by focusing on and investing in our applications engineering resources, which is the Engineering Advantage teams in Precision, the Valve Doctors in Critical and the Hydronic College, we can intensify customer pull to build higher barriers to entry, even more value for customers and better margins and improved growth for IMI. We are also increasingly leveraging our shared competencies across the divisions, like within the digital space. A good recent example of this is where Precision is leveraging experience gained in Critical to develop a cloud-based predictive maintenance platform for its customers. And we have common value-generating processes, like our new growth accelerator for driving market-led innovation, our rejuvenated value pricing initiatives and our Value Engineering and lean programs, which are now acutely focused on delivering tangible benefits to the bottom line. Finally, IMI has award-winning leadership development programs, great talent across the group and a super strong graduate scheme. Okay. I'll now review progress on the immediate priorities that I presented to you back in July. I said that we needed to put the customer right at the center of our decision-making to enable a culture of sustainable growth. We also needed to flatten structures and to drive commercial accountability all the way through the organization. And finally, I said that over time, we would use our balance sheet to move IMI into more attractive market segments, which are underpinned by strong long-term growth drivers. So today, I'm pleased to say that we've made progress on all of those fronts. We have put the customer firmly at the center of our thinking and have already generated a significant step up in customer engagement across the organization by freeing up management time from more inward-looking activities. Massimo has upgraded his Precision team and is further aligning his organization with the key market segments for growth. Jackie has put a flatter regional organization in place in critical, which is focused on the end user customers to help better target new product developments and increase our aftermarket business. And Phil has upgraded his commercial leadership team in Hydronic. Overall, we have upgraded 30% of the IMI top 50 leadership group this year as we push hard for a much more commercial and financial results-driven culture. IMI's growth accelerator is now up and running and is certainly energizing our approach to innovation. Our 3 divisions are running a total of 12 sprint teams in the second half of 2019, a total of 80 of our best people and our future leaders working at pace to get close to customers and use our strong engineering skills to create solutions for industry problems. Each of the 12 sprint teams will have up to 100 customer interactions in a 3-month period, exponentially more than our previous approach to new product and business development. And in this way, we are building a culture of market-led innovation, which will result in a more outward-looking business with better commercial decision-making, customer pull new products and ultimately faster growth. On accountability, the exec team has been reduced from 11 to 7, and we are reducing the size of our corporate team, empowering the divisions to do more. Most importantly, we have already delivered boot camp training focused on improving P&L ownership to over 50 key managers and sharpened and simplified our management reporting. The new organizational structures will ensure all of our businesses have improved alignment to take better commercial decisions. This next slide shows the 5 shared initiatives that we are driving across IMI and that I talked about back in July. We are getting good traction on these with a leader for every initiative in each division and a thirst among equals to ensure best practice is spread right across IMI. Results are already apparent as IMI's margins did improve in the third quarter despite the forecast volume reductions from the downturn in the industrial cycle. Our rejuvenated value pricing initiative is showing real traction, generating over twice the 0.7% run rate of price increases that were generated on average over the last 4 years. We will talk in more detail later about IMI's markets and competitive position, but I wanted to mention here that we have already made a good start on using our balance sheet to increase our weighting in faster-growth markets by acquiring PBM Valve Solutions. PBM gives IMI access to the pharmaceutical and food processing markets, while IMI extends PBM's market access for its products globally. The early stages with PBM have been very encouraging with plenty of opportunity for creating real value, and we have a clear plan to achieve our business case. So we now turn to the output for the strategic review. And after briefly revisiting what we said in July, I will then walk you through our plans for each division. In summary, the key messages to take away from this review are as follows: First, we have greater clarity on how we will win in the key target markets for each division.Second, there is a strength in commercial emphasis across the group.Third, we will create higher growth and better new margins from a market pull approach to new products, using the sprint teams and the test-and-learn processes from the growth accelerator.Fourth, we have significant rationalization plans for Precision to deliver strategic and financial benefits.Fifth, we are assessing 20% to 30% of IMI Critical Engineering's revenue to determine its ability to meet our long-term growth and margin targets. We believe that once our strategy has been executed, with the associated footprint, new products and portfolio changes that IMI Precision has all the characteristics of a 20% margin business at the top of the cycle. Critical Engineering will be a 17% to 20% margin business with an acute focus on the aftermarket and higher-growth sectors, and Hydronic will be a 20% margin business. And this next slide shows how we think about the potential of our major business segments following the detailed review. You can see that the Precision sector businesses are already very attractive, high margin and good growth potential, and we will continue to invest in these businesses to sharpen our applications engineering competitive advantage. Our Factory Automation business needs some work on its products and service offering to deliver better growth and margins, which I will explain in detail later. You will also note that our Commercial Vehicle business is already reasonably attractive and can grow faster with better margins as we expand the business on the back of the upcoming emissions legislation in China and consolidate our manufacturing to best-cost countries. In Critical, we will improve the business' profitability through a focus on aftermarket growth and the new market sectors. We have done a deep dive on the aftermarket in Critical, and we are confident it will become a strong source of income for a long time to come. This includes fossil power aftermarket as our coal power aftermarket sales from Europe and the U.S. were less than 5% of Critical's sales in 2018. And within Asia, our coal installed base is largely within the cleaner supercritical power plants, which are expected to continue to run well into the future. We will improve Critical engineering by further reducing our costs in our new construction business and focusing on our upgrade valve business to extend our installed base. We will also push hard into the more attractive market segments, like pharma and food and chemical. In Hydronic, we have a clear path to 20% margins. We will improve growth rates by introducing well-chosen new products and acquisitions that we can rapidly grow through our strong brands and routes to market. So turning to the detailed review of Precision. We said in July that we would review its market segments and determine which we should prioritize for long-term growth. We also wanted to set out a plan to effectively manage the remaining complexity in Precision. So we have now reviewed the market segments in detail and identified the focus areas. To streamline the operations, we've recently announced 4 site consolidations, one of which is already complete. Equally, our value pricing initiative is well underway and is already delivering more than twice the average price increase over the last 4 years. Bimba was a good acquisition and is forecast to exceed our business case by year 3. Bimba presents very exciting, synergistic growth potential. Those of you that follow us on LinkedIn may would've noticed that we have just launched a whole range of new air preparation products under the Bimba brand. And in many ways, Bimba shows the way forward for Precision's Factory Automation business and how to compete with outstanding customer service. Bimba quotes 85% of their business within ours and looks to touch the customer 3 or 4 times before the competition has even quoted, effectively designing their customized product with the customer at incredible speed. Bimba then delivers the vast majority of their made-to-order products within 3 days.Having summarized what we have already done, I will now move on to Precision's future strategy on this next slide. Precision creates motion and fluid control solutions for its customers, differentiating through applications knowledge, engineering excellence and great customer service.Our focus is on 3 areas. First, growing the 5 key target sectors, including Commercial Vehicle, where we can win through product differentiation.Second, winning through outstanding customer service in the Factory Automation segment.And third, growing our aftermarket and smaller customers through our digital platform, Norgren Express. To accelerate this strategy, we will invest in acquisitions that consolidate our position in the 5 key market segments and enable us to win in Factory Automation. Having upgraded most of our core Factory Automation product range over the last few years, our new products will now be focused on rapidly upgrading our valve island offering, including digital connectivity and creating new product building blocks for the key target market sectors. To further streamline Precision, we will be investing around GBP 75 million over the next few years to considerably reduce supply chain complexity. We expect this to generate GBP 35 million of annualized cost savings. To enable this strategy, we have already moved away from a European Precision organization, which is represented on the left-hand side of this slide, where 12 manufacturing sites reported into a single operations director and will run almost independently from the commercial organization. We've now moved to an organization based on 3 businesses: Motion Control, Fluid Technologies and Commercial Vehicle. These business leaders now have technical sales, engineering and the factories all under their control so that they can make the right commercial decisions and quickly anticipate market demands.And this next slide shows how the Precision team focus on their most attractive market opportunities, who the competition is in each segment, what the addressable market is for IMI and how we win in each segment. Again, this how-we-win information has been formulated from a deep dive of our data and will inform future investment aimed at the continuous sharpening of our competitive edge. All right. Turning to Critical. I said in July that we would review the opportunity to use our strong engineering skills in new and growing market segments. We continued to realign our cost to the market realities in Fossil Power and review our product portfolio. Through a detailed study of the market, we ascertained that the most attractive adjacent segments were pharmaceutical, food processing and chemical. On the back of this, we then took the first strategic step and acquired PBM. We have also continued to diversify away from the weaker new construction fossil power markets and are tackling our excess capacity, spending around GBP 18 million of one-off costs in 2019, which is expected to deliver GBP 10 million of benefits this year and GBP 15 million on an annualized basis.In summary then, Critical strategy is to create great value for the end-user customers to accelerate our aftermarket growth and to move into attractive new markets. The focus here is in Critical, firstly, to increase our business in the growth markets like food and pharma; secondly, to continue our high win rates in the energy markets to increase our installed base; and thirdly, to focus on developing upgrade products and digital solutions for our end-user customers to drive additional aftermarket growth. The good news is that through our Value Engineering program and lean initiative, we have maintained our win rate at about 65% so far this year. We will be investing in acquisitions that increase our access to attractive markets to accelerate our aftermarket growth, and we will continue to invest in new products that create tremendous value for our customers by improving their productivity and their safety. And lastly, we are assessing Critical's overall product portfolio in terms of its profit potential and strategic importance.Immediately following his appointment, Jackie Hu has taken the opportunity to flatten Critical's organizational structure into 4 geographies, each with its own P&L, focused on generating close relationships with the end users and optimizing, both the new construction and aftermarket business. The new and old structures have been detailed on this slide. And this next slide is similar to one that I showed you for Precision and shows how the Critical team focus on and winning their most attractive market opportunities. IMI Critical has some very strong market positions based on its best-in-class engineering and applications knowledge.Turning to Hydronic. We said in July that we would explore the opportunities to win in attractive adjacencies and review the division's supply chain. Our strategic review has confirmed Hydronic is a great business with a clear pathway to 20% margins and improved business performance. The strength of our brands, which have taken many decades of customer training to build as well as the importance of the Hydronic College are the key ingredients to our ability to create sustainable value. And this, of course, is becoming more important in a world where 40% of energy is used in buildings, and society is demanding more comfort and is increasingly prepared to legislate to reduce carbon emissions and stop climate change.And in that context, we have recently pinpointed the Radiant heating market and the connected actuation and control market has been attractive due to their ability to substantially reduce energy consumption in buildings. So in summary, Hydronic strategy is to develop our strong brands and expertise in the Hydronic circuit and create innovative solutions that save energy and improve comfort in buildings.We are focusing on further strengthening our brands and improving our customer training to create increased customer pull for our products. We are also strengthening our project business by leveraging our Hydronic College at system-level, HVAC design engineers. And finally, our ambition is to move the business into faster-growing adjacent markets over time using the IMI growth accelerator processes. We will be looking to invest IMI's balance sheet in acquisitions that give us access to products, which we can rapidly grow by leveraging our established strong brands and routes to market. We will also be investing in new products, which enable connected HVAC systems to further reduce energy requirements while improving the room temperature control. The streamlining opportunity in Hydronic is in the supply chain, and we now have formulated the plan, which will reduce stocks while further improving customer service in 2020 and beyond. In Hydronic, the organizational focus has been on upgrading our commercial leadership as we focus on our customer pull model and cross-selling to drive profitable growth for the division.As you can see on this slide, Phil has already upgraded 75% of its commercial leadership team from both internal promotions and external recruitment.And this next slide shows how the Hydronic team focus on their most attractive markets. And as you can see, Hydronic wins through applications engineering, particularly through the Hydronic College. It is notable that IMI Hydronic has strong market positions and is focusing on building share in the faster-growing radiant heating and control markets. Moving on to capital allocation then. Capital spend in the next few years will stay at about the GBP 60 million to GBP 70 million level that we have seen over the last 5 years. We do see plenty of opportunity to invest in IMI with cash payback of less than 3 years. Our free cash flow will improve over time through our profit and margin improvement programs, which will allow us to continue with progressive dividends while looking to gradually rebuild dividend cover. Lastly, our strategy involves buying acquisitions with returns that must exceed IMI's cost of capital by year 3.So to summarize, the key takeaways from this presentation are that our margins did improve in the third quarter because of our immediate profitable growth actions and despite the downturn in the Industrial and Commercial Vehicle markets. IMI has flattened organizational structures, improved accountability within the business and created a much more commercial focus across the organization. We have a clear strategic roadmap built on footprint optimization and higher-margin new products that will deliver a fundamentally stronger business and a significant improvement in returns over the next few years.Divisional margins will move to higher levels through the cycle. The increased customer focus, continued investment in the business, lean tools for increased competitiveness and the new approach to create market pull new products will all enable faster growth.Right. With that, I'm going to stop there so that we can take some questions.
It's [ Jonathan Hurn ] from Barclays. I've just got 3 questions, please. Firstly, just coming back to those targets that you put out there. Obviously, there is a growth element within that. Can you just actually specify what the growth forecast -- or the growth assumption is needed to hit those targets by division, please?
Yes. So we'll do one at a time, Jonathan. I much prefer that when you hit maybe 3 in a row. So in terms of growth assumptions, I've been very clear about the margin targets for that reason, Jonathan, right? Precision is a 70% added-value business. So clearly, when it's coming through the bottom of the cycle or if it's in a downturn, it's very hard to maintain 20% margins. I think at the top of the life cycle, which, let's say, was last year, we did about 16.7% margins. What I'm saying about Precision is that next time we hit the top of the cycle, as long as it's not in the next year, if it's in a reasonable time span, we would have done the footprint changes, we will have brought through higher-margin new products. And we will, therefore, be at the 20% margin target. In terms of Hydronic, it's far less cyclical. So in Hydronic, we've got a pathway to 20% margins. And unless there's massive disruption, we're going to be at 20% margins in Hydronic. We've got very strong market shares. We tested the brand strength. We found out that 72% of installers in Germany would go to a different wholesaler to get their preferred brand, which in our case is obviously the Heimeier K head. And with that sort of brand strength, we see no reason why we won't move back to those 20% margins in Hydronic. As I said, it's not very cyclical. In Critical, we are looking at a series of changes for 20% to 30% of the portfolio has to quickly get in the right sort of shape or we will be looking at a different path for those businesses. Once we've done that, either they've hit the margin targets so we move them on, and we've got the renewed focus on aftermarket and those valves which provide a higher aftermarket. That will then become a 17% to 20% margin business. So in that way, we've dialed in the volume expectations, depending on how cyclical the businesses are. And what we know we can do in terms of either brand strength or aftermarket potential.
Second question, just on Critical on that 20% to 30%. Can you just give us an indication of where the margins are at that 20% to 30% now?
Yes. I think another way of looking at, Jonathan, that if part of the business can't meet our growth and margin expectations. If it fails to do that, and we were to exit those businesses, that will give us about 100 to 150 basis points of margin improvement for Critical.
Okay. And just the third and last question. Just coming back to that order book within Critical as you say mixed new constructions has helped the margin of that order book. In terms of that new construction, is that a one off? Or are we starting to see better margins coming through in the new construction side of the business?
Yes. I mean we chose those words very carefully, Jonathan, because what we're seeing at the moment in the growth areas is where we've got stronger technology and more ability to command a higher price. So generally, that's what we're seeing in terms of mix. I would say that in Oil & Gas generally, in the lower-technology areas, it's very, very hard to get any sort of price increase, Jonathan, because the bids are still wide open. There's plenty of competition. The competition are all suffering because of the demise of the fossil power new construction market and because Oil & Gas still hasn't really recovered, I would say, outside of LNG. LNG is a bit different and a bit stronger.
It's Andy from Jefferies. Coming back to Critical. On the chart, you had the blue bubble at the bottom, partly off the bottom of the axis. Am I assuming that if you look at the 20% to 30%, it's not going to be kind of job lot. You're going to be looking at every single individual part and some of this is loss-making because it's off the chart. Some of it is low-single digit. And we can kind of think about that. I suppose you've either 20 to 30 or nothing. Is that an effect? Is that effect on?
Yes. I think if you do, that's right. It's -- there's several parts in there, which are all under review. So it's not a question of selling it all together, if they don't meet the margin targets, Andy, it's more a question of making sure that we get good value for whatever we sell. I mean, you'll remember when we sold beverage and merchandising, we held out until we got the right price for that. And you have to do that -- to be prepared to do that. Those businesses actually are good businesses, the axis is not at 0. So don't think that, whatever you do. They're good businesses. They create good margins, good cash. They're obviously not in line with the parts of the business that create really high aftermarket content and high margins, yes.
On Hydronic, in your pack, there's 2 businesses which you're really focusing on, I was just flipping the pages, control, actuation and radiant systems. It looks like to me, you've got about 2.5% market share compared to 10% for the rest of the division. What gives you the right to win against Siemens, Honeywell and Belimo where you're tiny and conversely in radiant systems. Is it something that you haven't benefited from in the past, something you acquire? How do you get that in terms of market share for you?
So I think the opportunity within Hydronic is around the brand strength, which is just phenomenal. As I said, when we tested that brand strength, and you'll probably remember probably more than 10 years ago. Now when I was running Hydronic, it's a simple strategy, put more differentiated new product through those brands. And that was a period when we grew fairly quickly and certainly expanded the margins. And Phil's got exactly the same thinking is that we're excited to be able to use that brand strength, not just in radiator valves and balancing valves, which is a very good business. But into some of the faster-growing areas. So to do that, we've got to have a differentiated new products. In radiant heating, the competition is not the big guys. It's smaller competition than that. So it's not really a question of the competition. It's more a question of how do we solve problems within that area, within radiant heating, that the customer will value and then buy a product because it is branded one of our super strong brands and through the route to market, but as you know, we've got a great route to market in Hydronic. It's more a question of doing that. So that's where the growth accelerate processes come in. So as I said, Phil has got 4 teams running at the moment. But perhaps, Phil, do you want to just comment on what you're doing with the teams?
Yes. So we've got 4 teams running, all looking at different areas. All as Roy says, looking at what basic customer problems are out there and how can we solve them with our skills, our expertise and our products. So they go in and they're talking this masses of customer interaction going on at the moment. It's fantastic to see. And that's giving us all sorts of data which, in some case, is quite surprising. So there's -- we're finding out things that we weren't expecting. And I think that's good because that means that we can see problems at a different level and then come up with some amazing solutions for them. So I'm very optimistic about the growth accelerating work we're doing, and we can already see that, that will have an effect on our growth ambitions, particularly in those areas you've talked about. So very optimistic about it.
Thanks, Phil, well said. I'll just say, obviously, growth accelerates the innovation processes take time. They're fragile. And that's why we've got all the other profit improvement programs to move the margins, move the cash flow in the meantime. But over time, Andy, we are going to target the more attractive market spaces. We're going to use these processes. And it may result in an acquisition. It often will, a smaller acquisition that we can then expand the sales or sometimes it will result in a new product.
On Precision. You commented acquisitions to help win in Factory Automation. I'm assuming you don't mean you can't win without acquisitions. But can you just talk about what that means? Is that scale that you really need to kind of -- a lot more scale to kind of win across the board? Can you expand upon that for me? That'd be really helpful.
That is the perfect question. I wish I had asked these to answer. I really -- I really do. So on and off, I've been involved with Precision for about 30 years. And actually, probably over half of that time, I've actually been directly involved in Precision. And to be honest with you, we always were clear about the sector business. And we always knew how to win in sector business, right, because it's about applications engineering. And I'm including Commercial Vehicles in that. So the customer has a problem, whether it's to improve emissions on truck, whether it's to make their rice sorting machine go faster or more accurate. Whatever it is, the customer has a problem, and our applications engineers have always been good. And we've always won in that space profitably. And as we did the analysis, Massimo and I, we went through project by project at times and said, how do we win or how do we lose to get sort of real deep dive on this data. What was obvious to us that actually about 60% of Precision is that sort of business. So when I used to talk about, I think it was 48%, perhaps 6 or 7 years ago, but there's a process, fluid control part of that, Massimo, which is equally exciting in terms of its ability to us to use that business model. And that takes it to 60%. Then you've got the 40%, right? So that's Factory Automation. And I think everybody knows in this room that, that's much more difficult to compete in because there the competition is bigger, right? And that's why I said, here, we need to do some work. So what we learn and Massimo when he bought Bimba, it was actually a really useful view on how you can win on customer service without scale in Factory Automation. So we looked at our range in Factory Automation. Remember, Bimba's mainly an actuator company. It's given us probably the best actuator range available, it's fantastic. Mark, in his time, updated with Massimo, the FRL range. So we've got a world-class filters regulators lubricator range. What we haven't got is a valve item, which is part of the valve segment, which is truly world-class competitive. But Massimo, we're moving at speed, aren't we? We've set up an alliance with a really good supplier. Massimo and I were there about 3 weeks ago, and we set up an alliance where we can buy all the mechanical parts of that range, make it fully competitive. And of course, what we will add to that is all the electronics and connectivity, all the field bus systems, all the Ethernet systems that will enable that valve item to interconnect and connect in a digital way to the system. So once we've got that, we already have the mechanical part of that by the end of this year, beginning of next year. And we'll do all the interconnectivity, obviously, prioritized. By about the middle of next year, we should have most of that done. Then we've got a competitive valve range. And then Bimba showed us, we don't need to scale them. We need the segment of the market which values customer service. And remember, when I was talking about Bimba, I spent a bit of time on Bimba for a reason. They are quoting within hours, within hours. Most people in special products take days or weeks, right? And what they're quoting is a special product. So I think you know that our competition tend to have a standard product range, a big catalog and quote in that way. That's fine if you want to buy a standard product. If you want to buy something that's slightly special, which a big segment of the market does, and that's where Bimba's grown. If you want to buy a special item, they will touch the customer 3 or 4 times before the competition is quoted. Now we've got to get there, right, across the rest of the position. That's going to take a bit of investment, but we know how to do that. Now Bimba's sort of unlocked the code for us. And that every decision Massimo makes, every investment decision, is aimed at better customer service. So no, we don't need scale, but anything that could give us another competitive advantage. So we've got Norgren Express, right? Anything in the digital world that could give us a competitive advantage around scaling up, anything that gives us a competitive advantage in the platform products for the sector business, Andy, is obviously attractive to us. So that's what I mean by that part.
Mark Davies Jones with Stifel. A couple of questions about the attempt to shift the mix within Critical, really, 20%, 30% under review. Typically, the low-margin stuff has been the OE end of that business. So how do you get out of some of that OE stuff without sacrificing the aftermarket, which is key long term? And equally, there's a lot of focus today on the sort of food and pharma end of that business, still very small today, even with the acquisition, I guess it's GBP 40 million, GBP 50 million of revenue next year. So less than 10%. If you're looking to buy more in that territory, and equally, if you're looking to go more digital in Precision, aren't you going to have to relax some of those payback criteria because they are synergated? I remember acquisitions were a large part of the last plan, and you could never find the targets at the right kind of prices in those territories.
Yes. Good questions. Okay. So on OE in Critical, that's what we spent a lot of time looking at actually exactly that. If we don't have these products in our package, is that going to affect our ability to compete in the overall offer. And in the 20% to 30%, Jackie, we convinced ourselves through a lot of data. We looked at a lot of projects, Mark, to say, are these going to be -- and actually, when you look right inside the customer, it's slightly different decision-makers making the decisions. And we've satisfied ourselves on the projects that we've won in those areas, we would have won them anyway, right? So that's -- you're absolutely right. It was a question that we tore into.In terms of the product ranges, if they are highly profitable, if they are growing at the right rate, if they are in that top blue circle basically, then they will tend to have a higher aftermarket content. So if you look at our Remosa business, for example, it has already transformed itself in what has been a pretty sort of up and down Petrochem new construction market. So very much an upgrade valve business, where it gets into the installed base, and it helps these brownfield FCC units upgrade to be much more efficient. So that's a fantastic business. It's a transformed business, Jackie. In terms of margins and growth potential, it has been fantastic. And that's what we're looking for. So we will not just be -- we will not milk the aftermarket base, we will end up owning the new construction part and the aftermarket part of certain products and technologies, right? So we're not going to say, right, we're not going to do the new construction part of it. So hopefully, that answers your first question.The second question, yes, it's not easy to move into food and pharma. We did a lot of study with a third-party to really make sure food, pharma, chemical were -- everybody was making the right sort of money. They had the right sort of growth rate who -- what the potential acquisitions were. And as you saw, we managed to get PBM, which I couldn't be more pleased with that. They've got a great team. They've got a great customer focus, and they will help us get into those markets. So fantastic. That is not going to be easy. Our strategy of getting to 17% to 20% margins does not rely on an acquisition, right? So in fact, the whole strategy that we presented today is not dependent on some big acquisition. I don't want to give that impression at all, Mark. So please don't take that. Of course, though, if they come up, we will absolutely go for them. We will not break our rule though of being more than the cost of capital. And it has to create more than cost of capital in terms of returns after that 3-year period. We're not going to break that all because I think once you start to break that, we'll lose the financial discipline that we've had for decades. And I think that's a dangerous place to be. So yes, it will be difficult, but we won't break our rule.
Richard Paige from Numis. GBP 75 million restructuring in Precision is a big number, obviously, on the back of quite a lot of existing restructure in that business. Could you provide a bit more of an outline on that time frame and what's going on there, please?
Yes. So Richard, I mean obviously this is a sensitive issue. I've talked about the 4 that Massimo was literally going with straight away and obviously this is difficult for our employees, and we have to be super-sensitive to that fact. When we look at Precision, when we bought Bimba, we actually increased the number of sites to 34. Now within that, there's some fantastic sites which have engineering advantage that they sold, don't they, Massimo, and the capability and actually have improved significantly under Mark. So that's really good. It's given us a base to build around.Obviously, when we look at some of the 34 sites, they are not making the right sort of margins. They're not applying that sort of engineering advantage scale, all the very fast response to customers to win in factory automation. And over time, we're going to look at some of those and say, okay, our footprint should have lesser sites. In a GBP 900 million company or so, you can't sustain that much complexity.You'll probably remember, at half year, I talked about we still probably only dealt with 30% of the supply chain complexity within Precision. The rest of it will come as we consolidate sites, particularly into the better sites and obviously some of the best cost sites that we've got in Czech Republic, Mexico and China. And they are very, very competitive. So that's the game plan. We've announced for -- Dan can talk you through -- I know Dan showed you the slide in Germany in terms of rationalization. I'll let Dan talk you through that. In terms of timing, we'll do it over the next few years. We're getting on with it. We've announced 4. Clearly, it's key that we don't lose business on the way through. It is a complex thing, moving a site. And we don't want to lose any customer relationships that are from that site or any engineering knowledge we have to transfer it, Richard. So we have to treat it with the respect that is due. But just in terms of rationalization, timing and benefits, Dan.
Yes. I think you saw -- I mean we talked about I think at the half year, Precision around GBP 15 million of rationalization costs, which does go up to GBP 35 million. The savings for 2019, we said in July, GBP 6 million for this year. We're only going to get about GBP 1 million because obviously we're at the back end of the year. And GBP 10 million overall when we said it in July, now we're up to GBP 20 million. So the additional GBP 20 million that we've announced will deliver GBP 10 million, and it's going to take us into next year and probably into 2021 to fully realize those benefits.So that's the first GBP 20 million out of that GBP 75 million and GBP 35 million. So if you do the math, the remaining GBP 55 million, probably we'll launch over the next 2 years. So I wouldn't expect all of that to happen in 2020 because we do have to be deliberate and execute well. And then so the benefits on the remaining will flow as a result of those timings.
And so sticking with Precision, intrigued by the performance in Q3. Given the IA 4, it suggests that obviously the sector parts have done really well. Is there anything particular around those segments, the energy and...
The sector businesses are good businesses, which I know continue to do well and grow, and I think they're generally in pretty good markets.Now the issue for us is Europe, isn't it, Massimo? And Europe is still very, very tough. You can probably do the math, we're expecting Precision to be sort of 3% or 4% sales down for the full year. That means we're going to be 6% or 7% down in the final quarter. That's obviously Industrial Automation. Europe is the big hit, isn't it, and it's commercial vehicle coming off now as well. So I mean that's why we need to accelerate the GBP 75 million program because we haven't got the luxury. I think the first half of next year is going to be pretty tough at Precision, Massimo.
And one final one, sorry. And obviously, noting the pricing coming back into the story here. To what extent is that part of the margin -- well, have we -- how far in the last few years we've dropped the ball slightly on that side?
Yes. I think I dropped the balls a bit harshly. I think what -- coming back to -- we had a real operational focus, which was good because we've got some really good factories. I mean, again, we were out in Asia when we -- with the Board actually a couple of weeks ago. And these are really world-class factories and when the non-execs see them, they say, wow. So we've got the ability to respond to customers and all of that good stuff. We've got a good foundation.On pricing, the areas where we're getting it from is mainly aftermarket. So when you look at Precision factory automation, so if you take the 40% of Precision that's factory automation, about 1/4 of that is aftermarket. And within the bottom part of the sales, so to give you some numbers. Within Norgren Europe, which is a big chunk of Precision Europe, something like 15,000 part numbers are 90% of the sales; and over 20,000 part numbers are the last 10% of the sales. And that is all obviously aftermarket. It's not being sold to OEMs anymore. On the whole, it's being sold as replacement parts.And when Massimo and the team did all the analysis, we were selling some of those parts down for like EUR 150, EUR 200, EUR 250. And actually, we can't afford to make, pack, dispatch back for EUR 150. Whatever the standard costing system says, a standard costing system is not very good when the volumes fall to that level, right? So we've looked at all that, we have carefully manned the phones and said, look, let's see what customer pushback we get. Every single business review I've inquired, how much customer service have we pushed? Almost nothing, Richard, right? So really, we're being super smart about it. We're making sure that it's areas where we obviously need to make money. We don't want to penalize customers, but we need a fair price. And we are looking at other areas, where, like in Hydronics, where we've got fantastic market positions. We've got decent -- we're actually better than decent, good products, strong brand and saying, actually, we just need a fair price for these things now and making sure. And Phil has got in and renegotiated a lot of those deals and that's what you see. And that's why we know that Precision is a 20% margin business.
Could I just ask on Critical, obviously we're at kind of 13% now. You're talking about 17%. We've got 150 from the 20% to 30%. Could you talk a little bit about the bridge for the rest because it's still quite a significant jump up. The end markets are still challenging. So is that just the order book coming through? Is that any sort of pricing initiatives, a bit more color on what bridges the rest of that gap?
Yes. And we talked about it, because I think that actually, the Board said, Jackie, we've all got a lot of work to do. But potentially, that's the biggest step-up, right, from where we've been. And we've been in horrendous markets in Critical. I've got to say Jackie is just doing an outstanding job, as I said, of flattening the structure and really making sure that we're focused on the commercials now.The bridge, if you think about this year, Critical's margins are already going to improve in the second half. We've said that for a while. They're happy to make the maths work, and for Dan to be happy that we're going to be at 71.5p roughly, right? So that -- we're already there. Where is that coming from? It's certainly coming from, as I said in the statement, a change in the mix towards better areas that we think are going to carry on growing. So when I talked about the Remosa example, we can carry on growing there. When we talk about Naval Marine, that area has been growing. That's good for us in terms of margins.To switch to the focus on the aftermarket is not just the 20% to 30%. Within the rest of the area, there's more opportunity for upgrade valves, there's more opportunity for more parts. So there's other opportunities to increase both the volume and the pricing within the aftermarket in the rest of the business as well. Why do we feel good about over the next few years doing that? It's because, again, when we look at the margins in the order book right now, we see the trend continuing. So we think that if we carry on moving in that direction, plus we still have too much capacity in fossil power, which Jackie is already starting to address now, we still have more to do in that regard. So we still have too much capacity in some areas that we will address over the next year or 2, which will give us that final push up into that sort of 17% to 20%.
But you haven't put a number on those additional savings and further rationalization?
No, we have not done that yet. So that will come next year. We will start to flesh that out with the full year results in a bit more, because the first thing was to say, okay, with Critical, we are not happy with 12% to 13% margins. Let's look at the bits of the business, the 20% to 30% in detail. And then beyond that, what are we going to do with the rest of that business? So that will come more with the results in February.
And just the second one was on Precision. You obviously have kind of some idea from when you look at truck forecasts, how this division might look in terms of top line when you sort of think about trough margins going forward, I think they've been around 16% for this division. Do you think you can hold margins where they are going into next year, given what you see on at least the truck side in a potentially flattish industrial environment?
So if it wasn't -- you can comment if you want, Massimo. Yes. I mean, yes, it's always hard to call the cycle. We've met the last 4 recessions, and Wayne said, okay, we try to look at the leading indicators like PMI and say, what could it be? Obviously, 2009 was a complete exception. As I said, it's a 70% added-value business. So it is volume-dependent. What we see at the moment is that, actually, in Europe, it's going to get worse. And which is why we have to accelerate the GBP 75 million. It all depends on the extent of that trough as to how hard we're hit. What we're absolutely committed to is defending those margins through the trough. And as we come through it, just like we did in 2008, 2009, expanding those margins with the footprint changes to really drive us, as I said, the next peak to the 20% margins.
And maybe just a very final one. Just on the aftermarket side in coal and fossil power. Obviously, it's a very difficult environment. I mean how do we get reassured that, that kind of quite profitable part of the business doesn't start to see a more challenging pricing environment? You're seeing that in Europe and U.S. already, you mentioned about 5% of sales. Do we see that start to feed through?
No, I honestly don't think we're going to see a pricing problem. I never have in years and years. You've got to remember that in Fossil Power, in particular, it's some of our most demanding technology, right? So -- and that yes -- without getting too technical, you're dealing with 400 bar of pressure. This is super high pressure, super-heated steam. So believe it or not, they get -- water normally obviously evaporates at 100 degrees C, boils at 100 degree C, right? This is a 600 degrees C. So that's what's called that pressure, that steam is causing those parts to wear. People haven't -- apart from China a little bit, but generally across the world, haven't tried too much to swap those spares out because the downside is huge, right, because you're going to have an outage, effectively. And in some cases, in some countries, you're fined for that. So yes, we get a little bit of it. But we have to be care -- we have to -- more than anything, we have to have exceptional service. That's really what we have to have, isn't it? As long as we got exceptional service, we don't see much of that. So pricing has been good and will continue to be good. The issue will obviously be if decommissioning occurs, then obviously the volumes will go, right? And that's what we're super sensitive to. Obviously, there has been a level of decommissioning in the U.S. And what I was doing when I was giving you that number was saying, look, actually, only 5% of Critical sales came from that business, which is U.S. and Europe coal power aftermarket because some people think it's a much bigger number.Yes, we are supplying into gas power stations. But so far, that's been resilient. The rest of our coal power aftermarket's in places like Asia. And what I was saying was that in Asia, we never really won much business, did we, Jackie, in the sort of 300 megawatt, the lower Power stations because that's where Chinese competitors could compete and there wasn't any money in it for us. Where we did win was in supercritical power stations, tended to be 1,000 megawatt. And we think that they will be the ones that will run for the longest because they're more efficient. I mean I was in Shanghai, what, about 2 weeks ago, was it? The sky was actually clear. And what they've done is they decommissioned a lot of the old coal power stations that were creating a lot of this issue, whereas the new ones are much better for the environment. So that's what I was saying there.So yes, decommissioning will happen over time, absolutely. But I think our installed base right now is pretty resilient. I think just to give you an idea, again, our orders so far year-to-date in fossil power aftermarket are about flat. Last year, they were up, they're not -- we're not seeing the massive decline that some people have predicted.
It's Robert from Morgan Stanley. Just a few questions. One was, I guess, on the through-cycle growth assumptions. You've obviously gone over the last 10 years through a period of focus on margins and then a focus on growth. You seem to be kind of more going to the former than the latter. I guess what are you thinking as a sort of aggregate through-cycle growth assumption for the group over the next, I don't know, 2, 3, 4 years?
Yes. You've got to take into account the industrial cycles only to be fair here. I think that, that we are absolutely focused on growth. I mean we have growth running through our veins, Massimo, Jackie, Phil, so I don't want to give you that impression. What we are doing is taking the cost and aftermarket pricing opportunities in the whole that we think we can take that won't affect volumes. So where we've already gotten very high market share, it's very hard to get incremental market share. Where we've got super-sticky aftermarket that actually we won't get more volume whatever the price is, we just won't get so much margin. That's what we're doing, right? We are super focused on new product, which is a huge part of our growth 5-year plan, and we're super focused on improving our new products that come through so that they solve more of a customer problem. They're more differentiated and they grow faster than some of our new products over the last few years. So please don't -- I don't want to give that impression.Growth rates are very high because of the cyclicality of areas like Precision. I would say over the long term, this is going to be a GDP-plus business. And we can see areas that, as I've demonstrated today, where we think we can grow a lot faster than that as well. So we are focused on growth. We're just taking margin opportunity where it is.
And then maybe just around some of the incremental spend that you've got planned for the next few years. Maybe from an R&D and CapEx, so you obviously made quite a big push on that front over the last sort of 4 or 5 years. And you said you weren't really pulling back on the CapEx side. So where are we in terms of bringing some of those products up to speed? Because you went through a period where you were trying to sort of obviously reduce the number of sort of products you had available. So why are you still needing to spend so much, given you've gone through that 4- or 5-year period where you've kind of ramped CapEx, you've ramped R&D? Why do you not need to taper that now?
Because there's still plenty of opportunities, Robert, to get less than a 3-year cash payback. In terms of productivity, in terms of new products in terms of improving factory automation, responsiveness to market in Precision. In terms of all the strategic levers that I've outlined today, there are plenty of opportunities to get less than a 3-year cash payback, and there's nowhere I'd rather invest that money than to be able to do that within IMI. I feel really good about it.
And then maybe just a final one. You mentioned some further footprint rationalization. Can you just remind me, globally, how many sites you've got? And what's the end goal? Because it seems to be -- there's been quite a number of years where you've -- particularly in Critical, where you've been trying to reduce footprint or move footprint around. If you look forward in sort of 2, 3, 4, 5 years, what is the end goal for IMI? Have you got 20, 30 sites that you've kind of got one eye on saying, you know what? They're in the wrong place or they're serving the wrong markets or 5-odd -- can you kind of contextualize how you think of your kind of installed base?
Yes. So we went from 24 plants in critical to 16, and we pushed towards Asia considerably. So again, I was in our South Korean factory with Jackie and the Board, and it's fantastic. So we've moved the footprint where we had too many European factories in Critical heavily towards South Korea, China, India, where we've now got really good factories.So in Critical, the issue is obviously fossil power new construction, where we've just -- as I said, we just still got too much cost. And we're addressing that, and we're all over that. So that will continue to be the case. Beyond that, there's probably a bit more we can do as well, generally speaking. I think that a factory within Critical, some of our best factories are running close to GBP 100 million. If that sort of puts into context for you, and they're super efficient and really well run. So that will give you a rough idea of what we could do in Critical.Within Precision, because when we bought Bimba, I think we bought 9 factories, right, Massimo? So that's why we went up to 34, right? Because previously, we've obviously consolidated Precision. So in terms of our plans, as I said, we've announced 4. You can see the sort of savings that we're going to get. Again, it's a sensitive subject, so I don't want to get too specific on it. But let's just say that we will get the GBP 35 million, right? That opportunity is there in terms of the Precision supply chain.In terms of Hydronic, less so. It's a much more straightforward business, and we've got a fantastic factory in Germany. We think it's important -- it's a highly automated factory in Germany. But we think it's important that it actually is in Germany, because we've seen -- or I saw one competitor, gosh, 10 or 15 years ago, move that business out of Germany, and there was a reaction from the customer base. And we gained market share and they lost market share. So highly automated factory in Germany is a good place to be for that brand.In terms of some of the more manual processes, obviously we've got the Polish factory, and we will continue to make sure that we put more manual business in that Polish factory. But there's less to do in terms of the factory footprint. As I said in the presentation, there's more to do in terms of the supply chain and some of that area that we can do in Hydronics. We can actually improve customer service by consolidating some of the stock, and we can take some cost out while we're doing it.
And then maybe just squeeze one last one in. Maybe on LNG, if you could just kind of contextualize what's the current market dynamics there, given the recent moves in oil price, trade tensions? Will they/won't they sort of out of the U.S., just maybe kind of an update in terms of your pipeline?
Yes. So yes, it's exactly like you described it really. So we are tracking a total value of GBP 500 million worth of projects. We actually won 2 projects so far this year, the 2 really that have been available. Jackie won in both, haven't you, which was one in Canada. The other one is Arctic LNG. So that's good. Our LNG orders are running at twice -- over twice the rate of where we were at this point last year. So that would get you roughly, Robert, to about GBP 30 million of orders this year for Critical in LNG. Obviously, at the peak, we were at GBP 70 million of orders. Will it come back there? It's difficult to tell. We need projects to get through FID, the Final Investment Decision, and we monitor that very, very closely. And normally, 12 months to 18 months after that, we've got a good chance of getting the order. And then, as you know, we dispatched that order 12 months after that, and we get the aftermarket a couple of years after that. So it is a bit -- I know because we've got some good insight into some of the oil majors. And there's big debates, as you say, where the gas price is, everything that's moving the gas price. How much more are they going to invest? Certainly, it's in a better place than it was 12 months ago, put it like that. But there is uncertainty in it.
Mark Fielding, RBC. Just actually want to follow-up first on the previous answers, just in terms of Bimba. You flagged that you had 9 factories when you acquired it. You've also flagged that its model is a bit different to yours. I mean is there a shift in that model that actually needs a different manufacturing setup, that means you may be needing more factories to be reactive or a different structure that then impacts how you think about sort of restructuring the footprint overall?
Yes. I mean you're absolutely -- we are not -- there's really a few key sites within Bimba that is just great to watch, isn't it, Massimo? That when you go there, the way they are set up, which is why we announced that actually we were going to consolidate out of those 4, one of our factories...
IMI.
IMI factories into the Bimba factory because we want it in their business model. So what they do it's a lot around -- well, a couple of things, really. Configuration, so they have some clever IT packages that they've built, because you have to build them yourself that enable you to "complex" things quite quickly. They have tremendous knowledge as well, effectively costing engineers within inside sales or customer service that enables them to do that really, really quickly, isn't it, Massimo? And it's just a pleasure to watch. So yes, we're super mindful of that. We're certainly not going to break that or move that, and that's why we are taking one of the IMI sites and putting it into a Bimba site so we can copy that model faster.
So just going to -- but does that affect how you think about the restructuring of your wider Precision business. If you're trying to mirror some of that model, does it mean there actually are some sites you maybe don't close because it affects reactivity or...
Yes, it definitely does. All of that is taken into account, there's 2 aspects on that. For the 60% of the business, we have to retain the applications engineering skills that enables us to win in the sectors. For the 40% of the business, we -- Massimo, we were looking at the map of where all our customers are, obviously, like a heat map. And saying, right, we have to be in a position to deliver faster than any of the competition. So we are configuring Precision factory automation to be able to win on customer service. So that is absolutely central to our thinking as we think about the future footprint, yes.
And continuing on the Precision theme. You obviously identified these segments. Is the -- I'm not saying that they must therefore be good businesses, but is the meaningful profit variability at all across the segments or any mix effects to think about? You talked a bit in Critical having mix effects from certain areas? Do we see that in Precision in any way as certain areas grow?
So if you call them the 4 sectors plus Commercial Vehicle, the 4 sectors are all about the same. They're all good. They're all very as you can see from the chart, right? You can see from the charts, well, Commercial Vehicle is a bit less. At the gross margin level, it's 10 points less, right? But when you get to the bottom line, it's not as stark. And if you were to say, actually, without the commercial vehicle business, how does Precision, look? Doesn't look much different, does it, Massimo, in terms of bottom line margin.So it's an interesting thing. So although the gross margins are less, it's because you're serving a much smaller customer base, you can -- big OEM truck manufacturers rather than thousands of small factory automation customers or other sector customers. It's because the nature of those products is higher volume because you stick and mold on trucks. So it has far less complexity and, therefore, less SG&A than the other parts of the business. So it is less, but it's certainly not -- it's still a good business model. Yes. So -- but that's the only one really. And then the only thing you have to watch out for is if there's a swing in volumes quickly that obviously affects our results, as we've shown, because the gross margins change. And whereas if you were to extract it from the business with all of its fixed cost and everything, it wouldn't have a big effect. It does have an effect in the short term as volumes move. That's the only thing.
And just a final question. In terms of GBP 75 million, just the P&L versus cash side of things and how we think about the timing of that?
Yes, yes. Most of that will be cash, I mean, probably less than 5% overall is going to be noncash. I mean we obviously have to get into it. There'll be some noncash elements of that. But a bit of maybe some inventory write-downs and things like that. But yes, less than 5%. It will be cash.
And that's where you probably made the guidance you've given on timing for P&L will be timing for cash as well?
Yes. Yes, exactly.
Yes. There will be a bit next -- this year than the GBP 20 million. So don't think we won't be able to spend that GBP 20 million. What we will have done is announced, Mark, you know what I mean? So therefore, we have to take the charge in the P&L under the standards, but we want to spend all of that GBP 20 million. Very little of that GBP 20 million cash this year.
Andy Wilson from JPMorgan. Just to kind of, I guess, the broader one, right, just in terms of how to think about there's obviously an awful lot is going on in the group. And it's quite different by different divisions, and it's happened quite quickly, certainly quicker than we would've expected. What's the risk that we're kind of trying to do too much all at once?
Yes. We constantly think about what we prioritize, Andy. We constantly think about the talent we've got available and what we can do, but we have some golden rules. We have things like if we are going to do a site consolidation, there will be a full-time project manager, and they will be -- either have done a site consolidation themselves before or working with somebody that's got plenty of experience. They've done 10 of these things. So we have our golden rules in terms of project management, we'll make sure that we have short interval management follow-ups on what we're doing. So sometimes it's weekly, sometimes it's daily to make sure these things are on track or we'll adjust the resources. And I think as we showed in Critical through these teams that have done it before, we can move pretty quickly. And the issue in Critical is that you have to move the engineering skills because Critical is basically an engineering [ tool of the ] business. And so it is a complex knowledge transfer operation. Sometimes, from that perspective, at least, in Precision, you're more moving production lines, which are already running and making thousands of parts. And that is not easy at all. I'm not trying to say that, but it's easier than deep engineering knowledge to move.So yes, we've got plenty, but we are ambitious. We've proven that we can do it within Critical. And I think that, Massimo, we've certainly got the right level of project management. I think we've now got the right organizational structure and ownership in place. And I think we're confident that we can make this happen. And certainly, Massimo, just talk about the first one you did and how that went.
Thank you. As Roy already mentioned, we have announced foreclosure out of these 4. One is completed, and this is a transfer of the Chicago operation into University Park, which is the headquarter of Bimba, which is about less than 1 hour outside Chicago. So this has been executed very well, on time, on budget, even a bit better, to be honest. And we have now one of my executive member, Ian Morris, which is fully dedicated to a project that we are calling Fit for Growth because all what we are doing is to be better fit to capture growth as soon as the market will come back at the level we expect.So we have a very, very strict governance and rules and discipline, and we have put very, very good resources on this project because this is fundamentally important for us. So we feel very confident about the execution. Clearly, as Roy already mentioned, it involves people, it's very sensitive and it's very difficult because moving a plant in Precision is quite complex because it's not just a product, but it's about engineering capabilities. And sometimes the production quite -- often the products are quite difficult to be manufactured. So it's -- we appreciate how challenging the project is, but we believe we are doing everything to execute it smoothly.
I guess maybe just -- I guess it's kind of a follow-on. But just in terms of the kind of up-skilling of the talent you talked about in a number of different areas, but just thinking about what feels like a bit of a tilt from being quite internally focused around operations and kind of the go-to-market, are you confident that you have the right people for doing that? There's obviously been some change. And I imagine that's linked to that, but are we there in terms of having that set of people who can make a change to go-to-market guys? And just sort of wondering about where there's particular pockets within the businesses where you actually will see more new people come onboard there or more change?
Yes. I mean everybody, me included, have to deliver, right? Andy, I mean that's the world, right? So ultimately, it comes through in the results. And that's what means that we will get a chance to fight another day, right? So with that to one side, I think Phil's commercial organization is almost done, right? I mean he's done 75% of it, there isn't much left to do. And he's brought in some really good people, some of which are coming from the competition. Some of which have been promoted from within.If I talk specifically about the 30% that I talked about, the top 50 that we have changed this year, about -- the good news is about 3/4 of them have come from internal appointments. So there's been some really good people underneath, some excellent people that we now put in charge of some big chunks of the business that have proven in smaller pieces that they understand the business model, that they can grow a business, that they can generate the right returns, Andy. And that's actually what gives me my best days is when those people get promoted and really fly, it's fantastic.So I would say that the 30% of the top 50, let's say that something like 3/4 of it is done. Let's say that. And certainly, Massimo and I are much happier that we've come away from this operational structure, and now we've got the commercial structure and it's done in Europe and it's up and running. And as you can see, I think the early indicator is the price increases coming through as people thinking more commercially and running it as a business, not as a factory. So I think that's a really nice early indicator. But -- so we got it in Europe, Massimo is literally -- in the next 2 weeks, we'll have it in the Americas.
Next 2 days.
Next 2 days, right? He's ahead of me, right? So we will have it in the Americas, right? So then that's in place. And again, some of the people we're promoting internally have got a fantastic track record. And I have to think about my own career in IMI, it's been fantastic. And every time I've delivered, there's been something new, and that's a great opportunity for some of these people. Jackie's done, I mean -- Jackie moves at incredible pace. He's had his top 60 together the last couple of days at Heathrow Airport, just an exhibition hall down there, and they are now all doing their budget together. So we've got real pace in that division. And so yes, I'd say spending on the part of the business, we're either done or we're 3/4 done.
It's Ed from Citi. Just on the margin targets for the 3 divisions. How would you rank them on degree of difficulty relative to each other?
Good question. Good question, Ed. Well, this is going to sound horrible to Phil, right? But...
No.
You know what you're doing to me, don't you, Ed. But I think in terms of Hydronics, it was only at 15.9% margins when Phil came in. He's absolutely turned it around, not just that. Phil's now absolutely increased employee satisfaction within Hydronics, which is one of -- to me, one of the leading indicators of a business that's going places, right? And you can see -- so every IMI Way Day, we have a day every year, where we stop people actually for half a day and teach them about the values of the company. And we also ask them, would you recommend IMI to your family or your close friend. And that scale has shot up in Hydronics. So it's not just about that, but Hydronics has gone from 15.9% margins, and we -- you can see what's happening, right? We've got a very clear pathway to 20%. It's got very strong brands for all the reasons I talked about. So if you want to say which is the one that is not easier to do, but is more doable, let's put it that way, I think it's Hydronics.Precision, we've got a lot of work to do because we've got to change the footprint. We've got to take out the complexity. We've got to make sure every new product meets our margin aspirations, which means changing the way that we've been doing new products. There's a lot of work to do, but that business will be 20% at the top of the next cycle. I'm convinced we've got the capability to do that.Critical, in some ways, has the most difficult task because if you think of -- I always think about IMI, okay, where are the areas where you can get reasonable price increases, and where are the areas where it's tougher? And clearly, if you look at Critical, you can get price increases in the aftermarket to an extent. But in the 50% of Critical that's new construction, part of that, you can. But then there's parts, particularly in areas like Oil & Gas, where there's not -- there's not any pull in the market. You've got all the same competitors that we've always had quoting on less projects. That bidding process means it's difficult to hang on to the sort of returns we want. So I would put them in that order, actually. Hydronics, Precision and Critical, but I think that Critical will absolutely deliver that 17% to 20% over time. It will take us a few years, we'll have to make the changes we talked about, but then I think we'll get there. Sorry, one more question here.
One in the back.
There's one there. Katrina, yes.
I'm [ Abbi Parajuli ] from Baillie Gifford. If we could just talk about Hydronic again, but not on the margins, on the growth side of things. So could you tell me a little bit more about your strategy for growth there? Discounting perhaps a little the potential regulatory tailwind because it's sort of like waiting for a good Godot, it should happen. It just doesn't drive this -- the 20 50 deadline is there, but it hasn't. So I'm just curious about that. I'm also on this smart connected stuff, what exactly are you doing to move Hydronic towards that and more in that space?And on Critical, I'm curious about these new segments that you're moving into. What sort of margins can you expect? And what are the aftermarket implications, given they are slightly less severe? So looking down the line, what happens?
Great. Yes. So in terms -- just the Hydronics parts then. So in terms of the Hydronic strategy that I know works is where you really look at the areas in the Hydronic system that the customer is prepared to specify. So you literally go through in quite a lot of detail, and you say, okay, what are the bits that actually really control the energy use and the temperature control within the building? And would they be better to see a Heimeier branded, all brands effectively? Could we expand the distribution in the markets where we're really strong like Germany, like the whole of Scandinavia, the Nordics, Benelux, in those areas. And back in 2003 and 2006, we bought a couple of companies that actually paid for themselves on a cash basis within 4 years by doing exactly that, right?Roll on 12, 13 years, wherever we are now, right? Some of that, we want to be more connected. So what Phil has done is invest in, you take the valve. You then have an actuator that moves the valve. It's the actuator that's connected to the electronic system. What we are never going to do is compete with Apple and these guys, right, that are moving into this space. And even some of the big sort of traditional guys are saying, whoa. What we are going to do is provide the connected product that will enable better energy use, more efficient energy use and better temperature control because that's what we're known for. And those are the areas that we're looking at. So Phil, for instance, he's working on a smart valve. Do you want to just talk a little bit about that, Phil?
Yes. I mean basically, the valves we are working on like the smart valve, it's all about gathering data and putting intelligence into that valve so that it can make decisions rather not to use the building management system at times. So that's the sort of area we're looking at, and we're well on in our developments. We've already launched a number of connected products, we're already selling them. We're also looking at how can we get more data from existing products as well. So they are the sort of things that we need to do and are doing.The amount of data, I think, being collected in the world now is enormous. And so I think that a lot of our developments are moving towards putting more and more intelligence into the products. So that's where we are going. So it's exciting. And I think for our growth, we have to remember on our growth that there are some areas last year that we exited from because we felt we could never make the margins that we wanted to in. So in terms of a comparative basis, we are growing quite strongly, particularly in Europe at the moment. But clearly, you don't see that in the overall results.
Yes. Good point, Phil, I forgot to mention that point. But yes, so it's those areas. So clearly, we don't want to be the BMS provider, right? We think there's sub-loops in the system that we can improve the energy efficiency of by using data and feedback loops effectively to do that. And that's where that's targeted.On Critical, I think your question was in the new segments, what's the profitability? The best guide to that -- well, there's 2 areas for us that are quite new, call it that. One is obviously, PBM, and we published the data on that. Safe to say that PBM will be a 17% to 20% mar -- safe to say, right? That is where that business is. And the other area that's quite new for us is Naval Marine, where we've sort of moved in -- I wouldn't say brand new, because we also had a bit of business there, but we dramatically expanded. In fact, we times the amount of valves that we get on to a submarine by almost 2.5x on the next generation of submarines. So we've got great customer relationships there. And that's how we've done that. And again, that business is -- because it's got aftermarket, obviously, refurb of those submarines as well is actually consistent with our overall targets as well. So where we're growing -- where we want to grow, it's absolutely consistent with what we're talking about 17% to 20% margins.Good. Right. I know someone of you've got to get away, right, I know. So I'll just finish by saying, look, thanks ever so much for coming on a really busy day. I really appreciate it. And I have really enjoyed actually presenting you the strategy today. Thank you.