IMI PLC

LSE:IMI

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's IMI plc Interim Management Statement Call. [Operator Instructions] I also must advise that this call is being recorded today, Wednesday, the 28th of October 2020.And without any further delay, I would now like to hand over the call to your first speaker today, Mr. Roy Twite. Thank you. Please go ahead.

[Roy M. Twite, CEO & Director]

Well, thank you, Roman. Good morning, everybody, and thank you very much for taking the time to join us today. I'm joined on this call, as usual by Dan Shook, our Finance Director.I'm hoping that you have had a chance to look at the IMS, which we have pulled forward because we now believe that this year's EPS will be ahead of market consensus. I will take a moment to summarize a few key points before we take your questions.To begin with, I would like to thank all of IMI's employees for their continuing dedication during what remains an uncertain and difficult environment. As well as keeping our operations running smoothly, our teams have also succeeded in getting ever closer to our customers and in developing new innovative solutions to solve our customers' problems. And that, of course, is absolutely essential to our sustainable, profitable growth strategy.As far as trading is concerned, revenues have broadly followed the path that we described in July, albeit with 1 or 2 significant exceptions. The most important of those exceptions has been a stronger-than-expected surge in one-off ventilator related sales.The Precision team delivered GBP 40 million of ventilator-related revenue in the third quarter on top of our normal quarterly sales run rate of about GBP 6 million of ventilator business. This means that we now believe that full year one-off sales impact in Precision will be about GBP 85 million of ventilator-related business at a drop-through of approximately 50% based on the higher efficiencies that we achieved in the third quarter.Our current expectation is that ventilator demand will move back to 2019 levels in 2021. But I do have to say that neither us or our customers have good visibility of this demand. The enormous and successful efforts of our employees to safely ramp up production output in support of the urgent worldwide ventilator demand was frankly quite amazing. It was IMI at its very best.Elsewhere, we've also witnessed a slight improvement in demand when compared with both the second quarter of this year and our own expectations. Precision has benefited from a sequential recovery in the commercial vehicle market. Critical now has 98% of the orders required for sales this year and is on track to generate revenues about 5% down on last year. And Hydronic has seen sales improve sequentially from the second quarter to the third quarter as construction sites reopened.As far as costs are concerned, the work to structurally reposition the group by removing complexity and improving customer service is on track and is still expected to deliver about GBP 30 million to the bottom line this year. In addition, our expectation for the short-term cost containment measures remains unchanged and will save GBP 30 million in 2020. We currently think that about GBP 20 million of those temporary costs will return in 2021.These factors, including the one-off ventilator valve surge that we described, contribute to our improved guidance for 2020 EPS of GBP 0.74 to GBP 0.78, guidance that is conditional upon no further material coronavirus-related disruption.To close, I will repeat the comment that I gave in July, that I remain confident of achieving the margin targets that we set for the divisions with a corresponding improvement in business returns. Whilst the general market uncertainty around 2021 seems to be building, we remain prepared to respond should the necessity arise. Meanwhile, the fundamental strength of the business continues to improve with a real focus on customers, innovation and complexity reduction.With that, I'm going to hand you back to our moderator, who will manage the Q&A session for us. Thank you, Roman.

[Operator]

[Operator Instructions] Our first question is from the line Alexander Virgo from Bank of America.

[Alexander Stuart Virgo, Director]

I wondered if you could talk a little bit about current trading conditions, I guess, primarily in Motion Control and truck. Both of them are showing positive momentum, albeit I suppose, still down year-on-year. And if my numbers are right, your guide for full year of Precision implies Q4 down about 8%. So I'm just thinking about if you could talk to the conditions in Motion Control and commercial vehicle and particularly as we look forward to the momentum into 2021?

[Roy M. Twite, CEO & Director]

Yes. Thanks, Alex. So I think Motion Control, Q2 was about 16% down, I think, from memory, Dan, Q3 was about 14% down. Motion Control hasn't really picked up yet, Alex, when you look at Q2 to Q3. What I would say, though, is that Motion Control typically follows the PMIs. We -- I think, Alex, that we went back and we looked at the correlation between Motion Control and PMIs, and it was a pretty high correlator.So we would hope as we move through into next year that Motion Control does start to pick up. And I would normally feel that would be the case. Obviously, coronavirus is slightly different to previous recessions as we all know. But I think all things being equal, we would start to see that pick up.Commercial vehicles is different because we've already seen a pretty sharp pickup in the third quarter. So the second quarter was tough. As you know, a lot of the OEMs were forced to shut down. It's 50% lower in terms of our sales than the previous year. But then in the third quarter, I think we were about 24% down. And I think we think that if you look at our guidance that within that, commercial vehicles would continue to close the gap on last year. And as we go through into next year, I think we'd all hope we get a much better year than this year, given the really tough second quarter. So we have seen some good momentum in commercial vehicle. And yes, we would hope that will continue now through Q4 into next year, Alex.

[Operator]

Our next question is from the line of Andrew Douglas from Jefferies.

[Andrew Douglas, Equity Analyst]

I wonder if you can just talk to us quickly about Critical, order intake minus 23% with aftermarket down 4%. Just if you can give us a bit of a feel for what's going on, on the OE side? And then kind of, I guess, with the guidance for margins in Critical, looks like you're doing better than you previously thought, operational efficiencies, et cetera. I'm assuming they are structural in nature as opposed to just temporary cost savings. If you can just kind of confirm that and maybe add any color, that would be really helpful.

[Roy M. Twite, CEO & Director]

Yes. Thanks, Andy. Good to hear from you. I hope you're doing okay. Good. Glad to hear it. Yes. No, Critical, I think Jackie and the team has just done an outstanding job in terms of what is pretty complex set of restructuring to get that business fit for what will be a very difficult time in the oil and gas markets but also to get it fit for growth to go after more of that marine business.As you know, Andy, we've been very successful in LNG business this year. We're already something over GBP 50 million of orders in LNG compared to GBP 37 million last year. So where there are projects -- what we can control, I think we're winning well in. But clearly, the market is difficult. There are less projects around. I think in overall terms, both Jackie, myself and Dan actually, are okay where Critical is at the moment. Its order book is about 3% down on this point last year. And actually, the margins in the order book are up on the end of last year. So yes, that proper restructuring, which, as you say, Andy, is absolutely structural, does mean that you can see we've improved our guidance on Critical quite substantially, both in terms of sales, but margins are now going to be up this year. And we will keep that as we go through into next year.So it's very difficult to call. But as you know, Critical is the 1 with the longest order book. And if we had to call it today, 3% down in the order book, you'd say that's not too bad a guide on what we think is going to happen next year in terms of sales, Andy.

[Operator]

Our next question is from the line of Max Yates from Credit Suisse.

[Max Yates, Research Analyst]

I just had a quick question on the acquisition pipeline. We're seeing sort of quite a lot of activity sort of generally in the industrial space. And I mean, I was wondering how you're finding the current environment. Are you more taking the view that, obviously, there's a lot of uncertainty out there and sort of protecting the balance sheet right now is the priority and defending margins? Or is this something you're sort of pretty proactively looking at and considering at the moment? I guess I'm trying to understand, is this something that's likely to feature in the next 3 months and are there a lot of conversations ongoing? Or is it something that's slightly been kind of put to the back of minds in the current environment?

[Roy M. Twite, CEO & Director]

No, Max, I think in the position that we're now in, clearly, the results have been better. The cash flows have been a lot stronger. The balance sheet is in good shape. Clearly, there's a lot that can still happen. We're certainly not complacent. But certainly, we're now demonstrating a track record of making sure that we can respond when things get tough.And we're definitely on the front foot with acquisitions. I mean, 3 months, who knows, right? These are very binary events, as you know. But we do want to move IMI using those strong cash flows into longer-term growth markets, like we demonstrated with the acquisition of PBM last year, which is nudging us into the pharma space of Critical.And so again, there are a few that we are looking at, at the moment. And we're certainly on the front foot when it comes to those possibilities. Clearly, we are going to stick to our normal financial discipline. It has to be a good fit, and it has to move us into really attractive market spaces. But yes, no, I would say we're on the front foot, I'll describe it that way, Max.

[Max Yates, Research Analyst]

Sure. And would PBM from sort of certainly from style, but also, I guess, size be a reasonable kind of example of the kind of things that you're looking at, at the moment from a size perspective?

[Roy M. Twite, CEO & Director]

Yes. I mean roughly, I mean, they tend to be bolt-ons. So you'll be looking probably at spending anything from sort of GBP 50 million to probably GBP 200 million, something like that. We wouldn't be thinking about going much bigger than that at this stage, Max.

[Operator]

Our next question is from the line of Mark Davies Jones from Stifel.

[Mark Davies Jones, Associate]

Can I ask a little bit more detail around the ventilator spike? Can you remind me what the sort of exceptional sales were in the first half? So I guess what I'm getting at is, does the guidance imply already some moderation in Q4 in terms of the level of that spike. And what are the chances some of this spills into 2021 given the sort of second wave trends that we're seeing at the moment? Do you have any sense of that? Or have you built -- effectively have your customers built inventory ahead of that process, do you think?

[Roy M. Twite, CEO & Director]

Yes, good. Thanks, Mark. Yes. So first half, what we would call the sort of one-off surge sales were about GBP 35 million, Mark. So the third quarter, GBP 40 million was massive, right? And we said for the year, we expect about GBP 85 million. And remember, this was a major challenge for us because this is probably Precision's most sophisticated proportional valve, right? We had to increase the capacity 10x in Switzerland in the middle of COVID and that's what the team did. So there was obviously a ramp-up phase through Q2, which we were then sort of going full flat out through Q3.So that would say that we're going to do about another GBP 10 million of surge sales in the fourth quarter. So you can see a radical slowing. And what we see, to be honest with you, Mark, is that some of the sort of more temporary ventilator manufacturers, so you know that the sort of the key mega OEMs globally, like I won't put their names out there, but the real guys that make ventilator, that's what they do. And then there was a whole series of consortium set up by governments, the U.S. government, the U.K. government, to try and increase the number of ventilators very, very quickly. Well, those guys globally have now even -- some of them maybe even canceled a few orders.So definitely, the Western governments are feeling now that they've got enough ventilators at this point. As you say, it could change, who knows, right? And let's hope it doesn't. Let's hope that we get this sort of second and third wave under control. But our sort of base case is now that next year would return to about the same sales. In other words, there would be no surge ventilator sales next year, and we go back to about -- it was about GBP 23 million of underlying ventilator sales in 2019. Now we talked to all the customers, right, but they struggle like we do with getting any real visibility on this. And so that's our sort of base case rather than a sort of a forecast, I would say.

[Mark Davies Jones, Associate]

Understood. And how have you gone around that huge ramp in capacity without leaving effectively sort of orphaned plant when that demand spike goes away again?

[Roy M. Twite, CEO & Director]

Yes. So well, basically, we were running 7 days a week, 24 hours a day. So now what we've done already is stop working the weekends. And pretty soon, we'll stop working the night shift. And so we'll sort of wind it back down to a reasonable environment. I mean what we were asking the people to do, including the staff actually, which are manning the production lines, was not sustainable anyway.And then we have to buy above, Mark. It was about, I think, Dan, it's GBP 3.5 million worth of capital we had to put in. And obviously, we've got the cash back on that capital or we will have it back, sorry, Mark, by the end of the year.So we made sure that -- our primary aim is obviously to save lives. And I think -- well, we saved a lot of or helped save a lot of lives through what we've done. But in terms of just making sure that shareholders were okay with it, we've balanced it and balanced the books effectively.

[Daniel J. Shook, Finance Director & Director]

And Mark, we accelerated the depreciation on that capital, obviously, in line with the spike.

[Operator]

Our next question is from the line of Robert Davies from Morgan Stanley.

[Robert John Davies, Equity Analyst]

I just had a quick question around your sort of, I guess, medium-term strategy to all of divesting some parts of the kind of lower-margin Critical business. Just wondered, given obviously the volatile nature of the markets at the moment, I assume that took a bit of a back -- 1 on the back burner for the last few months. Perhaps you could just kind of update us on where that is? And particularly sort of within the portfolio, are there certain sort of business lines or regions that you're looking to exit there specifically?

[Roy M. Twite, CEO & Director]

So yes, no, the strategy remains exactly the same as it was. It's 20% to 30% of Critical under review. It has taken a back seat, to be honest with you, Robert, really 2 reasons. One is that -- so we've been winning some quite nice orders actually in that area of the business, and we have been improving both the margin in the order book and the margins that we're delivering. So still, it's under review that part of the business, they're pushing hard to improve the returns.Clearly, the issue, as you know, is that the aftermarket content is structurally less. And unless they can get more upgrade valve business, they're not going to fundamentally over the long-term fix those returns. So we've got that area under review. Clearly, as the business improves, our plan is basically to deliver this year, see where the order book is early next year. And then subject to that review, either say, right, we're going to retain these businesses or kick on and start the process.

[Robert John Davies, Equity Analyst]

And maybe just 1 follow-up, just around the -- some of the end market trends you're seeing within the Critical division specifically. What are your customers telling you right now? I mean, there's obviously mixed messages in terms of sites access and aftermarket spares and wear parts, all those kind of stuff. If you could just give us a kind of an overview of what you're sort of hearing on the ground across your sort of different customers, that would be helpful.

[Roy M. Twite, CEO & Director]

Yes. So well, let's start with the aftermarket, right? So the aftermarket was 4% down. Within that, the piece that's been hit hard is field service, pretty much the same as the first half. So field service typically is about 20% of that aftermarket, Robert. And it is at the lowest margins, as you know. It's sort of around 35% or so of gross margins and parts are almost double that, as you know. So the lower margin part is field service.It's a site access issue. It's also a sort of budget issue as well with our customers, where they're not shutting down the plants at the moment. They will have to, and they acknowledge that. And at some point, there should be a bit of catch up. But at the moment, we're certainly not saying that, right? They say we still got site access issues and field service will still be down in Q4.The other parts of the business in Q3, parts were down 10%. So we think that, that will -- sorry, parts were down 7% in Q3, I should say, 10% in the first half. And so there's a sort of improving trend, 10%, down 7%, and we think that will get better again in the fourth quarter. So that's important to us because that's where the margins are highest.Upgrades actually are up in the third quarter, and we're saying as well that we think they'll be up in the fourth quarter. And that's partly some of the innovation programs that we're doing to go in and replace competitors' valve with an upgrade value solution. So the most profitable parts of the aftermarket are actually doing not so bad. It's the field service that is definitely struggling.On the OE side, if I quickly characterize that. So yes, we've had, as I said, just over GBP 50 million of orders of LNG already this year versus GBP 37 million last year. And there's still a couple of orders to go for potentially are going to get pushed out in the sort of last quarter. And so we still see activity in the Middle East, in Russia and places like that, and not so much in the U.S., obviously, anymore. But we still see other opportunities to win a few more projects.So oil and gas, upper midstream for us year-to-date is still something like 50% up. So that's okay. Refining and petrochem customers, it's still not good, right? And they're sort of still reeling from a huge overcapacity they had when demand dropped through the floor in Q2, and we're 30% down in those orders. And I think that will take some time to recover. We're not predicting any great things for Q4 there in terms of refining and downstream.Power, power plus coal. Power now is tiny. I mean, it's GBP 12 million of new construction. Obviously, we've got some aftermarket still there. But in terms of new construction, it's only GBP 12 million year-to-date now, which is probably -- well, it's a fraction of what it used to be. And also fossil power used to be GBP 120 million. So that -- and we don't expect any more orders at all in coal power. Power overall is up because we won that concentrated solar power order. So they'll come along. That was GBP 10 million, they'll come along in lumps, but it won't be massive. It might be 1 every year or every couple of years.Our marine orders are down at the moment. This is the nuclear sub. We're talking to customers there, and we should get another batch of orders before the year-end. And actually the order book is strong and the outlook is good. So I'm pretty confident about that. So yes, overall, order book 3% down. Margin is up on the beginning of the year. And we've got some reasonable orders to shoot for in the fourth quarter.So yes, the third quarter was tough, second quarter was tough, but what the customers are saying and what the market is like, it's probably not as bad as those numbers are sort of showing, Rob.

[Operator]

Our next question is from the line of Andrew Wilson.

[Andrew J. Wilson, Analyst]

Quick one. I guess it's kind of an overarching one. But just interested in kind of how you're thinking about business today versus maybe 6 months ago because clearly an awful lot has changed in terms of markets. But operationally, it feels like the execution has been kind of been right on queue. I'm just sort of interested as you look into '21, and you kind of identified some of these parts for us but is it a case that you feel like the business is in the shape you want it to be in? Or is it -- are we going to have to further announcements of changes in terms of either restructuring or kind of reposition? Just trying to get a sense of sort of your confidence today versus, I guess, 6 months ago and obviously, while you've been in the role a little bit longer, so quite, I guess, a holistic question, but just interested in terms of how you're seeing it.

[Roy M. Twite, CEO & Director]

Yes. Thanks, Andy. I feel a lot better about the business really, ironically because I think that the way the teams have responded through what has been a period of very short interval management, as you can imagine, has been excellent. And we just had our IMI Way Day where we literally stop the whole business for half a day and we do a presentation, then we do a Q&A, we get a lot of feedback. And yes, it's just been fantastic. The whole spirit has been really good.So I feel good. I feel good about the way we're executing on the restructuring that we need to do. I feel good that we are stripping complexity out of the business because there's still a lot more to do on that. And I think just in terms of the markets, as you mentioned in the beginning, Andy, you would hope that industrial automation will sort of follow that PMI curve. CV will continue its recovery. But European construction, particularly Alpen with a high level of refurbishment and the fact that we're saving energy in building, now that eventually, that will get a bit of a tailwind from things like the Green Deal. So I actually feel, yes, despite the sort of -- I wasn't expecting the global pandemic and certainly didn't see that when we presented the strategy but actually, I think it's built my confidence in that strategic presentation and in the teams that we have, the people that we have.

[Andrew J. Wilson, Analyst]

And maybe if I can just squeeze...

[Daniel J. Shook, Finance Director & Director]

Sorry, Andy, Roy, I'd also say that the customer focus despite lockdown and people not being able to travel has really kicked in as well in the growth mindset. I think we've seen that a lot, and that came out in the IMI Way Days as well. People are really charged up about getting closer to the customers and driving the strategy forward.

[Roy M. Twite, CEO & Director]

Yes. To your point, take the sprint team, Andy, that we talked about, are now starting to -- well, in Critical, for instance, they won about GBP 4 million of orders now. And these are sprint teams that only pitched to us in the last sort of 6, 9 months.So things are starting to move on, and we're having many more customer conversations, as you know, each team is having -- well, typically well over 100 customer conversations. And we're starting to produce new products and new product concepts that actually solve customer problems across all 3 divisions. So you're absolutely right, Dan, it's well worth mentioning that.

[Andrew J. Wilson, Analyst]

I was just going to try and tag on, I guess, a follow-up, just because you mentioned it, Roy, in your comments that, just in terms of the EU Green Deal and potential that might have for Hydronic, appreciate probably a little further out than the kind of time lines we're talking about. But just whether even initially, you started to sort of position for that or how you see the business positioned, just be useful to get kind of high-level thoughts on that?

[Roy M. Twite, CEO & Director]

Yes. I think, well, that's really good for us. So the EU Green Deal, the commitment to go to net neutral by 2050 and now China's commitments should go net neutral by 2060 clearly means there's going to be a lot of investments and a lot of change and a lot of opportunity from both those regions.So yes, it will give a nice -- over time, over the next few years, it will give a nice, I think, tailwind to Hydronic and what Hydronic are doing. And a lot of their innovation is around digital now and really being able to make sure that buildings, particularly actually existing buildings are optimized in terms of their hot and cold water flows and therefore, their pumping costs and their energy usage. And we can make a significant difference, 15% to 25% worth of energy reduction.So that coming up in the agenda is obviously good for Hydronic. It's -- I think both of those commitments to net neutral though, Andy, are broader than that for us because we've now got several sprint teams, for instance, working on hydrogen. We've got 1 in precision that's working on hydrogen dispensed into commercial vehicles. I think Germany are putting about GBP 9 billion into the hydrogen infrastructure. And so we're sort of getting on the back of that, plus, of course, the production of hydrogen and our Critical division is investigating how do we play the biggest role we possibly can in that.So as you know, we've put out a new purpose for our breakthrough engineering for a better world at the end of last year. And the teams, the enthusiasm for the teams to use our engineering capability, the fluid engineering capability and Motion Control capability in those areas is massive. And it's enabled us actually to have our biggest graduate intake ever this year. We've actually got 35 graduates right across the world, 12 nationalities and actually for the first time in IMI's history, it's more women than men which is quite incredible already. So I think the whole pool of talent into that purpose and into growth and fundamentally sustainable projects is quite exciting actually.

[Operator]

Our next question is from the line of Jonathan Mounsey from Exane.

[Jonathan R. Mounsey, Analyst of Capital Goods]

I guess in the context of news flow even just last night coming out of France, I mean, you guys must have been seeing the infection rates rise across Europe much as we all have seen. And as we head into some form of second lockdown, how are you prepping for that? And how do you think it looks this time versus last time? I guess something in the guidance maybe tries to capture the risk there. But do you think -- I mean, last time, I guess, your factories probably weren't ready for things like social distancing. I guess this time you are. The temporary savings, is there more that can be achieved there if necessary? How are you thinking about adapting to a Europe that may be going to kind of a second wave of slowdown?

[Roy M. Twite, CEO & Director]

Yes. Thanks, Jonathan. I hope you're doing well, Jon. Yes, it's sort of sobering, isn't it? And we've just had a spike in Chicago, where as you know some of the big Precision plants are being pretty much from early February, which certainly when coronavirus hit Italy, we set up a central team, team met 3 times a week. And it was the whole executive plus it was health and safety, supply chain, group risk, where the whole team on a group comes.And what we did was actually was learn very fast from China. And as you know, we've got a pretty big Precision plant in China, Critical plant in China. And China, because they dealt with SARS, moved very quickly to do things like social distancing, use of PPE, lots of clean downs of the plant, and we adopted that globally at a great pace.What we've done since then, Jonathan, is roll out things like temperature sensing cameras. We've done even things like making sure that every service is obviously clean, but then some -- most of the services as well have further protection and people have got perspex and everything you can think of. As soon as we've sort of deployed it somewhere, we've tried to deploy across the whole of IMI. And I think the key thing that, that did was make people build safer work.Then what we noticed, Jonathan, was that some people were obviously getting infected outside of work, and particularly in places -- we had a problem in Mexico and so then we ran a whole sort of educational program about minimizing risk outside of work. And obviously, we made sure that only the minimum number of people in the factories were actually in the factories. Dan last year implemented Microsoft 365 Cloud system right across the business. And actually, we could get typically, I would say, 40% of our people that were working in a factory to work from home. And so we sort of again minimized the risk. Just in Chicago recently, there was a real spike, right close to our plant, and we actually managed to organize testing locally. And we did find some people who are asymptomatic and obviously asked them to self-isolate at home. So basically, all the things that sort of were learned in China, we adopted them pretty quickly and we've just built on those tools. Obviously, I've been doing the call every month with the top 200. We've had a separate management call specifically on coronavirus. We've got on the Internet. We've got all the tools, global purchasing setup, make sure that we've got the PPE we need to keep people safe. So yes, I think now, obviously, the factory is in a miles better position than they were when this first hit. I think on top of that, Jonathan, the next problem obviously was the supply chain, and we worked really hard, I mean, not just since coronavirus, but over the last sort of 3 years. I think the numbers in Critical are, we used to have 3,000 suppliers for Critical. We've now got, I want to say, it's about 900. But within that, whereas we used to have 60 single-source suppliers, I think we've now got 3. So constantly trying to reduce the risk, plus, of course, when a particular region was hit, we had China hit, obviously, then we had India hit, really looking to be agile to resource often back to our old suppliers actually. Interestingly, before we sourced to the best-cost countries, we're sourcing it back to higher-cost countries, but actually those higher cost suppliers in many cases have met the Chinese pricing because they want to hang on to the business. So it hasn't really cost us what I thought it was going to cost us. Obviously, it cost us more in air freight and things like that when we had to use air freight to make sure we deliver to customers. But on the whole, costs have not been materially affected. So yes, we're in a much better position. It does worry me because obviously, you mentioned France. I mean, some of our issues in Hydronic in France were because of the unions, the unions shut down the construction sites and then clearly, we're impacted then, Jonathan. So we're not immune, and all we can do is control what we can control and be the best we can be at that, and that's what we do.

[Jonathan R. Mounsey, Analyst of Capital Goods]

Do you have your own scenarios for -- I mean obviously, the thing about lockdown is demand just stops overnight, doesn't it? It's not a normal slowdown. And also it seems when knockdowns end, demand then ramps back up very quickly. That certainly is what seems to have happened in Q3. Are you kind of ready or more reactive or able to be and understand maybe which areas will get hit if territories go into a lockdown and which areas will remain resilient?

[Roy M. Twite, CEO & Director]

Yes. I mean, as you know, Jonathan, we've been pretty good at handling pretty sharp recessions, not just now, but over the last few decades, really. And yes, we know which areas tend to be hit. Ironically, we know trucks will be hit, and therefore, we've built a much more agile business in trucks, as I said, over more than a decade, right? But I think a couple of things really. One is the will of the people is incredibly important and making sure that they are not happy to respond, but they understand the reasons why, it's always about the why, I mean, why it's important that we have responded in this way. We can be flexible and therefore, we can service customers. And whereas some of our competition didn't do that, they shut down customer service and things like that, furloughed some people, we didn't do that. And our people understand that. So I think that's important. And I think generally, yes, you know that we are pretty good at making sure that in those areas that will be hit, we have a Plan B. And we're ready to execute the Plan B if we have to. And so yes, I think we're in reasonable shape from an agility point of view in terms of flexing costs.

[Operator]

Our next question is from the line of Will Turner from Goldman Sachs.

[William Turner, Research Analyst]

So many of the questions I've had, which is good. So I have 1 more for Dan. I think we should probably be assuming that free cash flow generation was strong again in the last quarter. Could you give us an idea of where the net debt is going now? And then kind of related is that, obviously, in the last couple of years, working capital as percentage of sales has been higher than what it was early on in 2012 to '13. And could you give us some idea on how you expect working capital to develop over the short and medium term, given how the mix of the business has changed with a greater share of sales to Precision?

[Daniel J. Shook, Finance Director & Director]

Yes. Will, yes, I was going to actually jump in as Roy was talking about the current state of play. I mean 1 of the things we are doing is we're selectively holding inventory in anticipation of some of the volatility, and that has helped us be able to serve the customers as things ramp up, and we'll continue to watch that. We clearly have Brexit as well and some of the moves that we work on -- that we're working on. Sometimes it's important to hold some inventory as we're moving sites. So there's a little bit of -- there is a little bit more inventory in the system right now, and we're probably comfortable holding on to that just to manage against the risk and the volatility that we're seeing at the end of the markets. But you're right, we are getting good free cash flow. We typically deliver cash in the second half of the year. That would be my expectation as we get -- we go into the heating season with Hydronic, et cetera.I would point out that we deferred the dividend payment in the beginning of the year, so make sure you put that in your model that, that went out in September as opposed to May. We're -- in June, we were -- the debt-to-EBITDA was around 1.2x. I think we'd be disappointed if we didn't actually get some improvement on that by the end of the year. And yes, I think as we go forward in terms of how this thing is going to play out, I think as we get through the pandemic, whenever that happens, and Lord knows when that will be, we'll be able to continue to work through some of the working capital we are holding.

[Operator]

[Operator Instructions] Our next question is from the line of Andrew Douglas from Jefferies.

[Andrew Douglas, Equity Analyst]

Just a quick follow-up on the temporary cost savings. You've guided to GBP 30 million of benefit this year with GBP 20 million unwinding next year. I appreciate it's impossible to call whether we're going to have a second lockdown and the implications, et cetera. But on your planning scenario, do we expect all of that GBP 20 million to come back in? Or are you going to work hard to not allow that because of the way that business practices have changed, et cetera? And am I right also then, therefore, by definition, we've got another GBP 10 million to come in '22? Or are you going to work hard again to not allow that to come back in?

[Roy M. Twite, CEO & Director]

Yes, Dan, let me go at that and then you can come in, Dan. So the GBP 30 million, when you look to the GBP 30 million that we're saving this year, there's a big chunk of that that's obviously, salaries, bonuses, that sort of stuff, Andy. And all of that will come back, I hope, next year. Obviously, if we hit a massive third wave, as Jonathan said, we will flex costs. I mean we have to, right? We totally get that. But the sort of base case is that things settle down, that we see the improvement in Motion Control that we normally see, that we see the improvement in commercial vehicles. We continue to see that. The construction in Europe, doesn't have the sharp downturn that we had in sort of April and May this year. And we just get back to sort of slightly better markets, right? And on that basis, clearly, those salaries go back, bonuses go back to more normal levels. And then the other big chunk of that GBP 30 million was things like travel, marketing, those sort of things. Now of course, travel will be reduced considerably pretty much forever, right, because we have proved that we can run this business with a lot more digital and a lot less travel, apart from the travel that's going to customers. And I think what's happening there is really we're trading off old relationships and what we need to do is to make sure, although we're building some new relationships digitally, I have to say as well. But inevitably, we want to get back and see customers.So when we're saying that, we said, okay, GBP 30 million out this year. Clearly, if there was ever another big shock, we would look to do a similar sort of thing, Andy. We look to soak some of that up within the business. But if things do return to a more normal basis for next year, then what will happen is about GBP 20 million of that will come back and GBP 10 million will remain saved because that is less travel and more digital and that sort of thing.

[Andrew Douglas, Equity Analyst]

And with regards to the permanent cost savings, can you remind us what the guidance for '21 benefits year-over-year, if you can?

[Roy M. Twite, CEO & Director]

Yes. So for '21, what we said was, I think in the future cost savings column, so if you look at the rationalization chart that we put out at the half year, in future years, based on the money that we've spent, there's going to be another GBP 32 million of benefits coming through. And what I said actually at the half year was that about 1/3 of that is what we would think that we would get actually in 2021, Andy. I now think it's going to be closer to half of that, perhaps GBP 15 million [Audio Gap] quicker than I thought on their restructuring projects, thanks to Jackie and the team. So I'd say it'd be more like GBP 15 million. So if you think about it, Andy, big blocks, this year, you've got GBP 40 million, GBP 42 million worth of one-off benefit in terms of the bottom line from ventilators. And then you've got about another GBP 20 million benefit from the one-off cost savings, the sort of belt tightening stuff. So it's about GBP 60 million, GBP 62 million there that we've got to get over in terms of a hurdle as we go into next year. About GBP 15 million of that will come from the rationalization projects. And then obviously, the rest of it should come from things like volume and the other improvement programs. That's the way I think about it.

[Operator]

Our next question is from the line of Michael Tyndall from HSBC.

[Michael Tyndall]

A quick 1 for me. I just -- I don't know if you can do this, but I'm wondering if we think about your growth accelerated projects and the market recovery, is it possible to kind of identify how much of what you've seen in terms of recovery is really self-initiated, it's the actual change in the way you're approaching customers, probably market share gains is the best way to think about it, versus actually markets just simply recovering?

[Roy M. Twite, CEO & Director]

Yes. I mean that's a really interesting question, Michael, and we probably need to get better at that, really focused on building an innovation program and focusing people on customers. I mean, clearly, well, certainly, we've had GBP 4 million of orders that we wouldn't have got without the innovation. That's 1 thing, right. But you're right, it's much deeper than that because we really are going after customer problems, not just through innovation, but their supply chain problems. So in Hydronic, I've been really pleased at how resilient Hydronic has been versus its peers. And that is definitely thanks to Phil and the team really changing the culture in that division towards going after customer -- our customers, but also our competitors' customers. and really providing excellent service around any particular problem that they've had.And as I said, some of the smaller competitors in Hydronic literally seem to shut their customer service department and that enabled us to win business. Now of course, the trick, Michael, is to make sure we hold on to that business as those competitors come back. And of course, we're going to do that through over service of those customers. We are going to be flat out trying to do that. But you're absolutely right. And I think there are other areas as well, in Precision under Beth. The whole Life Sciences team has just been tremendous, and they produced this campaign about making friends in adversity. And not only obviously in the ventilator area, but not only there, in -- actually in diagnostics and analytics, we definitely won contracts. And again, that's about GBP 6 million a year at the moment, but it's building. That, we wouldn't have won without a sort of new approach of really reaching out, teaching our people about how to reach out. We've got some pretty good processes now how to systematically do that and make sure that we've got that mindset that we're not just presenting what we've got, but we're really trying to understand their problems to make sure we're matching our capabilities to solve them for them. So yes, you're right. I mean, I couldn't give you a number, but I would just say it's definitely helping us.

[Operator]

Next question is from the line of Jonathan Hurn of Barclays.

[Jonathan Hurn, Research Analyst]

Just 1 question from me actually coming back to Hydronic, the often overlooked division. But if you kind of look at the performance in Q3, obviously, it was minus 4%. Your guidance for the full year is minus 5%. So it kind of implies that we have a deterioration in the fourth quarter. Is that correct? And if so, where is that coming from? And then just sort of following on from that, just in terms of the margin, obviously, you're taking actions there putting through self-help measures. Margins are flat this year. Does that division start to return to margin growth in '21?

[Roy M. Twite, CEO & Director]

Yes. Well, I mean, I'll start with your second. I mean, certainly, We expect the market to be better next year than this year for Hydronic, Jonathan, mainly because Q2 was so tough. I mean, I've never seen -- I think April sales for Hydronic were sort of, I don't know, 20% down and May was similar is that sort of level, Jonathan, as you know, you studied IMI for a long time, right? That just doesn't happen to Hydronic.So obviously, it's different. As the other Jonathan said, right, if you get a lockdown across the construction side, that's an issue. And in some countries, that could still happen. You probably know that, what is it, about 1/4 of that business is in Germany. And they haven't taken the French path so far. I mean they could do, but they haven't. They kept the construction sites opening on the basis that that's 1 of the more safe places to work and as long as people are at distance and using PPE and all the other stuff, they've allowed them to continue.So it's difficult to predict the exact course of governments but if you look at what's happened so far, you would think the market would be better next year, and you would certainly think that we'll make margin progress again next year, up on, what is it, the 18% that we are at the moment.So I think it's been a good result we've done in the team this year because they've held the margins at 5% lower revenues. We do expect Q4 to be slightly worse. You've done the math, obviously, in Q3, perhaps sort of 6% down or so in Q4, Jonathan. And that's really because It's partly a distributor stocking issue. We think we've got a little bit of restocking in Q3, I mean a little bit. But it's also a bit of the uncertainty.And whereas in Q3, Dan, I think we had about 96% of construction -- sorry, no, it's 100% of the construction in Q3. I think we're forecasting that about 96% will be open in Q4. And it's some of those ones in France and other places, Jonathan, that will be a bit slower. So you're right, it's a small change, but it is a slight reduction in our forecast. I have to say though that October trading so far has been quite good. So this is like literally, we get 3 weeks' worth of orders in Hydronic, it's a very short-cycle business. But you're right, we are forecasting to be slightly down in Q4.

[Operator]

No further questions, please continue.

[Roy M. Twite, CEO & Director]

Sorry, Roman, did you say no further questions?

[Daniel J. Shook, Finance Director & Director]

I think that's it, yes.

[Operator]

Yes, sir.

[Roy M. Twite, CEO & Director]

Great. Excellent. Well, thank you very much, everybody, for joining us. I do appreciate it as such short notice. I know it's half-term week but we did feel that because, obviously, the business was performing ahead of this year's consensus that we needed to move quickly. So I really appreciate it. I hope you all stay safe and keep well. Thank you very much. Bye-bye.

[Operator]

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