Good morning, everyone, and welcome to the IMI plc interim management statement. My name is Seb, and I'll be the operator for your call today. I will now hand the floor over to Roy Twite to begin the call.
Thank you, and good morning, everybody. Thanks for taking the time to join us today. I'm joined here, as usual, by Dan, our CFO. Hopefully, you've all had a chance to read through the IMS this morning. Now, I am going to take the statement as read so we can get straight into Q&A, but I would just like to highlight that the group's first quarter performance was in line with expectations with 4% organic growth. So as such, we are reconfirming guidance. We still expect that 2024 full-year adjusted EPS will be between GBP 1.20 and GBP 1.26. So with that, I'm going to hand back to the operator who will manage the Q&A session for us. Thank you.
Thank you. If you would like to ask a question, please press STAR 1 on your telephone keypad. If you would like to withdraw your question, please press STAR 2. Our first question today comes from Lushanthan Mahendrarajah from JP Morgan. Please go ahead.
Hi. Morning, guys. Thanks for taking my questions. I've got two, if that's okay. The first is, if possible, can you give us any color on April trading, please? I mean, I just appreciate the Q1 comps in particular are quite tough just to get an idea of sort of run rate. And then the second question is on Process Automation. Would it be possible to get some color on sort of order intakes? Did X. That marine order and just the aftermarket split there as well, if possible. Thank you.
Brilliant. Well, good morning, Lash. Yeah. So if I start with April, we've got the April sales numbers in. I think probably the sort of variances are Industrial Automation is actually better. So instead of -5%, Lash, at the end of April, it was -3%. So that's really encouraging, particularly when I look at some of the comparatives that have been published over the last weeks. It's nice to see us doing pretty well, actually, Industrial Automation. The next bit of good news is that Climate Control, as you know, was -4% at the end of the first quarter. It was actually flat now year to date at the end of April, which when you consider the comparative last year, the first part of last year, wholesalers were restocking.
We had Halo-B, if you remember, was our product that we put out to help the German municipalities hit this 19 degrees Celsius target to save energy. So I'm actually pretty pleased that that business, as usual, is showing a lot of resilience and obviously very strong in terms of energy saving. So that's good news against, I think everybody appreciates, pretty difficult European construction markets. Yeah. So they're probably the two big changes. Overall Life Tech, instead of -6% at the end of the first quarter, was actually -2% at the end of the first four months. So again, pretty much in line with where we thought it would be and puts us in a good position, Lash, to really sort of get probably flat this year across Life Tech. So yeah, quite encouraged by what's happened in April. Clearly, Easter moved around a little bit.
And always in IMI, for years, we've looked at March and April together. Just as Easter moves, it does have a bit of an impact. So reasonably encouraged on the April situation. On process automation, you're right. So last year, we called out this big marine order, which, as you know, was a multi-year order. So if you strip that out of last year, it would mean that first quarter order intake was actually +8% overall. So again, it's going nicely. I guess very strong comparative last year. I mean, very, very strong first quarter last year. On the aftermarket side, so again, if we look at year-to-date April, aftermarket is +7%. So again, and that's against a super strong comparative.
Actually, I can't remember, Lash, what the first four months was, but I know the aftermarket in the first quarter last year was up 49% for Process Automation. So to be ahead of that year to date is encouraging. Does that answer your questions, Lash?
Yeah. That was a really, really helpful color. Thanks very much.
Thanks, Lash.
Our next question is from Christian Hinderaker from Goldman Sachs. Please go ahead.
Yeah. Morning, Roy. Morning, Dan. My first question would be on climate control, and you touched on it a little bit there in terms of the weakness in construction, but you've also cited strong underlying demand for energy-efficient products. Just keen to unpick that a little bit. I mean, what are the assumptions built into the full-year guidance for this business? Are you able to comment on dynamics in terms of inventory in the channel and maybe elaborate on that point of weakness in broad-based demand versus strength in demand for energy-efficient products? Thanks.
Yeah. Nice one, Christian. I think it's traditionally been a very resilient business. You've heard me, Christian. If we go back to 2009, I think it was down 4%, and actually, profits were up. It's a super resilient business, partly because of the energy saving, partly because of its value equation as well, where it's only 2 or 3% of the cost of the system, typically our kit, but it can contribute energy savings up to 30%. So it's really strong. The brands are strong. It's good pull-through. It's always been very resilient on pricing, good pricing power as well.
So you put all that together, and we've said pretty much consistently that this year, despite a lot of people saying, "Well, European construction market's really, really tough place," which they are, we've said consistently, "We think we'll carve out growth this year." And clearly, with flat year-to-date April against a very strong comparator, we still think that'll be the case. On the inventory side, I think last year, there was definitely sort of restocking wholesalers Q1. We're picking up much less of that. I think, generally speaking, Christian, because of where interest rates are, most people are keeping a careful eye on inventories. And so I think there's a general trend to make sure they've only got what they need for customer service. And clearly, supply chains are generally better than obviously they were during COVID, where they were keeping more safety stock.
I think, Christian, when our guys are talking to the wholesalers, most of that COVID situation's unwound, and we're in a more normal situation as far as our stocking levels are concerned right now. So from what we can see, no real big change due to restocking Q1.
Thanks, Roy. Just turning to the divestment of Industrie Meccaniche within life sciences, should we read that as implying that the pro forma business today is actually 1% better than guided? Am I reading that right?
Yeah. I mean, broadly speaking, it's just under 1%, rounds to 1%. But it's not actually a life science business. I should just say that. It was on the fluid control side of that sector. So just be absolutely clear about that. And we actually acquired it. I think it was sort of 2006, something like that, with Orton and with a whole bunch of other assets. And it's got some interesting high-pressure regulation technology. But what we found was it had gone ex-growth apart from hydrogen. So obviously, we're applying that technology to hydrogen. So what we were able to do, Christian, is move the products that were applicable to hydrogen into another one of our businesses within fluid control. So that's great because that's the bit that's growing. But the rest of it had really gone ex-growth for us.
And so being able to move that on, we've got a reasonable multiple on it, was exactly the right thing to do for us, reduces complexity as well and helps us, again, nudge the mix of the business to higher growth. So yeah, if you look at all of that put together, it rounds to 1%. It's obviously slightly less than 1%. But Dan, I think you're putting GBP 0.005 on it.
Yeah. Probably about 0.5p of earnings impact. So yeah. So embedded in this is a bit of a little upgrade to our guidance because we can hold it with the divestiture.
Very clear. Thanks, both. Then maybe finally.
Sounds very clear.
Yes. That's very clear. Thanks for clarifying that it's fluid control. Maybe just finally, capital allocation. We talked in March about the implications there, potentially. Can we touch on the M&A landscape within that framework? You've done 4 acquisitions, I think, in the last 3 years. Just eager to understand where the focus is there in terms of scale, whether there are particular segments where you would prefer to do M&A, and what the current sort of pipeline's looking like. Thank you.
Yeah. No. Perfect. So scale, as you know, we like bolt-ons. So we think sort of anything up to GBP 300 million or slightly beyond that is good for us in terms of scale. We like those bolt-ons because we're always looking to accelerate growth. So we're always looking for us plus the acquisition enables us to grow faster. Heatmiser is the latest one. And you know the plans for that, Christian. So we love that sort of scale, nice bolt-on. In terms of segments, we really like life sciences, smart connected buildings, and automation. That's really the three areas that we really like. Clearly, if there was a nice automation asset where we could accelerate the aftermarket growth like we've done in process automation, that sort of thing is very attractive. So again, we're us plus them. One plus one equals a lot more than two.
That's what we're really after. Hopefully, that gives you a flavor. Pipelines here now look pretty good, actually. But again, we're pretty particular as well. So yeah, I'd say pipelines look good. Opportunities look okay. If we don't get to the point where we can deploy the capital through acquisitions, clearly, you can see how strong our cash flow is becoming. And we'll be moving over the next couple of years to GBP 300 million of free cash flow. I won't be done. So at that point, we'll obviously look at other means to return money to shareholders. Dan, do you want to talk about conversations with shareholders?
Yeah. And everybody, well, by and large, shareholders want to keep their own optionality, so share buybacks make the most sense. I think we've talked about it in March. We started the year at 1.3. If we don't unlock, we'll probably be below well, we'll probably do half a turn, so we'll be below one time. And I think that's when we get very comfortable. We have the dry powder for the pipeline and probably a little bit more. So that's when we'll start thinking about a share buyback, Roy.
Yeah.
Understood. Thank you, guys.
Brilliant. Thanks.
Our next question is from Mark Davies Jones from Stifel. Please go ahead.
Thank you. Morning, Roy. Hi, Dan. So at the full year, you talked about the rolling average, I think, order intake at IA turning sort of gently positive right at the end of the year. I wondered how that had continued through the year to date. Obviously, the macro picture there still seems very mixed, particularly in Germany. So what are you seeing in terms of order flows?
Yeah. So IA was slightly positive, as you said, Mark. It's now slightly negative on the 60-day moving average. And U.S. is very slightly down. Europe is slightly more down. So yeah, it's probably a bit of a full spring. I've obviously checked all the peers, as I said, and we're probably slightly outperforming. But I think still, the industrial landscape is reasonably tough. As I said, the good news on IA is that it was -3% versus -5% by the time we got to the end of April, so some recovery in April. And again, that's largely due to working days and Easter moving around and things like that. But in terms of orders, slightly down on that 60-day moving average, Mark.
Thank you. Then on slightly, well, bullish front, the transport number in Q1 was exceptionally strong in a tough market. I know there's some lumpy stuff going on in Asia. But if you're still looking for a flattish for the full year, does that now seem a bit conservative?
I mean, good operational performance, right? And Asia was our strongest area, Mark, still, and new product coming through. So that was encouraging, 19%. But when you look at all the commentary and you listen to the big OEMs in the U.S. and Europe, they're expecting volumes down, right? And that varies between sort of, well, -5%-15%. So there will be an element of catch-up in our numbers as well as the new products. So we still think for the year, it's going to be certainly, our guidance is based on slightly down sales for the full year. And so whereas other markets will obviously improve throughout the year, we think that this is one that is going to go the other way.
Particularly when you look at the comps as well, Mark, remember that second half of last year was very strong for transport, right, for us.
Okay. Great. Thank you very much.
Thanks, Mark.
Thanks, Roy.
Our next question is from Harry Philips from Peel. Please go ahead.
Good morning, everyone. A couple of questions from myself. It's not often to see a 27% positive number in either my statement. It's just really more thinking about the sequencing of how process evolves through the year. I mean, obviously, the order book is there, and we know it's going to have a cracking year. But 27 was certainly more than I thought it was going to be. And just to follow on from Mark's question around the sort of Asian exposure of transportation, I'm trying to remember if you've given this number, but just how big is the sort of Asian content within transportation at the current time, particularly with the new contract wins that you've booked in recent times, please?
Yeah. I'll let Dan come on to transportation. It's growing substantially, Transport in Asia, Harry. I mean, I think last year, it basically doubled. But I'll let Dan come on to that in a minute. On Process Automation, I've got to say Jackie and the team are doing a fantastic job because the book to bill, Harry, in Q1 was 1.3. So despite 27% growth, now, obviously, always, shipping is a bit lower Q1, and you all know that Q4's high for Process Automation. But even so, I'm really pleased with that, really pleased with the 7% aftermarket bookings growth over the first four months as well, given the tough comparator. But the sheer operational excellence in a project-based business to deliver 27% growth is also phenomenal. So I couldn't be more pleased with Jackie and the team in terms of what they're delivering on Process Automation.
Yes, you know it's a lumpy business, Harry. You know it's project-based. So it's not going to run at 27%. We stick with our sort of overall guidance for process automation. It's going to be sort of double-digit growth in that, let's say, around 12% sort of organic growth for this year in terms of sales. So it will flatten out. Already, April flattened out a bit. But yeah, I'm really encouraged. And it's always good, isn't it, Harry, to get it in the books, right? So it's nice to get a really strong start for process automation. So thanks for that.
Just quickly coming on from that, sort of things like pricing in Automation, is there any sort of issue around that, or is that a conversation sort of to come down the line?
No real issue in pricing and automation. It's pretty much what you expect, right, which is that we're seeing pricing in the aftermarket holding up well. As always, Harry, I can't remember whenever that's been an issue. And then on the industrial automation side, strong brands, good market positions, pricing flowing through. So no, no issue on pricing.
Harry, 20% in Asia for transport, still about 15% India and China. So those are the big markets. And so it's definitely growing faster than the rest of the business at this stage, but still, yeah, it still kind of rounds to that 20% of the overall transport business.
Fantastic. Thanks very much, indeed.
Thanks, Harry.
Thanks.
Our next question comes from Stephan Klepp from HSBC. Please go ahead.
Yeah. Morning, Roy. Hi again, Dan. Just two ones. Many have been answered already. Book-to-bill was one of mine as well. So Process Automation, again, with its strong growth, I know you're not talking about that in the statement, and I know and I appreciate your project contract, but should we see as well operational leverage coming through? I mean, you talked about it. Aftermarket, very stable, very strong, good margins. But shouldn't we see as well now scale effects coming through from that high growth number that you've been executing?
Yeah. It's a good question, Stephan. So we are obviously investing heavily in process automation, right, because we're investing in the growth up. Growth up orders in the first quarter were almost double the first quarter of last year. So the amount of innovation coming through, particularly in process automation, is, frankly, fantastic. So we're investing in that. We're investing in more aftermarket sales engineers, obviously. We've done really well. Jackie's done really well unlocking the code of the upgrade valves, that strategy we presented in quite a lot of detail back in the capital markets presentation. I think aftermarket growth since then, we targeted 5%-7%. I think it's actually running at an 11% CAGR. So obviously, we need to we are investing behind that. We need to. It'd be crazy not to.
So we've always said that once we get to sort of 20% margin overall through the cycle, that's where we're going to be. We're not just going to rinse this business. We're not just going to keep operational leverage without investment. It can't work like that. You can't sustain a 5% growth, which is what we're going to do, industrial company, without the investment going into the business. And I think that's what we're going to do. So yeah, I think what you'll see is, again, margin improvement this year in Process Automation. But don't expect us to drop through huge percentages because we are going to keep investing, Stephan.
Okay. Super. And then the second one, I think you implicitly answered that. So price volume in CC and IA, that would be just interesting as well.
Yeah. So I mean, overall, we're not going to break it right down quarter by quarter, Stephan. But overall, it's pretty much exactly what we said, Stephan, which is we've got 4% growth in the first quarter, roughly half and half price and volume, pretty much exactly what we plan to do. And yeah, I think actually, we summed it up pretty well, I think, at the beginning, Stephan. Actually, although markets are moving around, we forecast sort of demand and supply pretty closely, haven't we, Dan? The better RF1 forecast in terms of price and volume. So yeah, I think we're in good, solid shape.
Super. Thank you so much.
Great. Thanks, Stephan.
Our next question is from Jonathan Hurn at Barclays, please. Please go ahead.
Hi, guys. Good morning. Just a couple of questions if I can. Firstly, can you talk a little bit about cash generation in the quarter? I was just thinking, obviously, strong growth in process automation. Have you had to increase inventories there? Has that been a little bit of a drag in terms of sort of cash generation in the first quarter? And then obviously, going through the rest of the year, how do we sort of see that dynamic playing out? Are you still having to invest in inventory, particularly in process, to deliver those orders?
Yeah, John. And then yeah, as the order book grows and as we said in March, we expect the order book to be big to be larger at the end of the year versus the beginning. There will be a need for some inventory to go in to manage that order book. The rest of the portfolio, I think, will still see a good evolution. We still have some safety stocks to cover customer service. We think we can pull those down as we go through the back end of the year. So overall, I think we're going to continue to progress towards that GBP 300 million of free cash flow. We still have the restructuring program happening in 2024, and that's about GBP 30 million-GBP 40 million of cash outflow in 2024. So that'll probably hold us south of that 300 target, but we're getting very close to it.
Yeah, first quarter cash was a little bit soft, but that's just normal seasonality and the Process Automation order book growth.
Okay. That's very clear. And the second one was just on profitability. Obviously, you've touched on that for process. So can you just give us a little bit of cover in terms of profitability you saw across the business in Q1 and how you expect that to phase through the year, please?
I think margins in the first period have been pretty similar to last year, actually, Jonathan, which I think is really good because the comparator, obviously, to last year was tough in the first quarter. So that's why, obviously, we're sticking with our guidance. We're going to see the benefits of the restructuring coming through as the year progresses. I think we get two-thirds of the benefits of the restructuring in the second half, roughly speaking, Jonathan. So I think you've got GBP 15 million coming through this year, another GBP 7 million coming through next year, which lines us up nicely, obviously, depending on what happens in the macros and stuff, but pushes us towards that 20% margin target. So yeah, I think we're doing a pretty good shot, Dan.
Yeah. Yeah. I think mix in the Life Tech sector will probably hold margin back a little bit in the first half because it's more heavily weighted towards Transport. And as that kind of normalizes and shifts in the second half, we'll see a better margin performance in Life Tech in the second half. But overall, still expectations for margins growth across both platforms.
Okay. That's very clear, guys. Thanks very much.
Right. Thanks, Jonathan.
Our next question comes from Mark Fielding at RBC. Please go ahead.
Yeah. Morning. Just a quick follow-up on process automation. And you very helpfully provided that book to bill at 1.3 times. But I suppose you mentioned the sort of phase factors. I mean, how do you think we're going to end the year in terms of book to bill in that business? It is a sort of slightly longer order book than some. And how do we think about the sort of cycle evolution from here? And then secondly, could you also provide just a bit more color on the sequential trends you're seeing in the life sciences business just so we can get a feel for how that's evolving and where that sits versus the full-year outlook for that business?
Yeah. Brilliant. Thanks, Mark. Okay. So we think we're going to end the year with the order book up in process automation, Mark. So as we said, sort of double-digit growth on sales this year and actually pretty well placed for some good sales growth next year as well, obviously, in current markets, right? So that's broadly where we see it. On life sciences, sequential orders in the first quarter are slightly up on the fourth quarter of last year, Mark, but there are some scheduled orders in there as always. So I'm not getting too excited, but it does look like we've at least bottomed out in terms of life sciences orders, which means that sequentially, as we go through this year, obviously, the comparator gets a lot easier, right, because you'll remember sorry, was it the first four or five months of last year, Dan?
It was pretty good, and then it fell right off, right? So that's really where we are at the moment in terms of sequentials.
Great. Thank you very much.
Thanks, Mark.
Our next question comes from Rory Smith at UBS. Please go ahead.
Hi. It's Rory. Yeah. Thanks for taking my question. I think there's still a question to be asked on process, although I appreciate we've spent a lot of time there already this morning. That is, you mentioned cracking the code of the valve upgrade work. Is there anything you can add additionally just on how much of the strength in the aftermarket is sort of underlying strength, and how much is IMI taking share in that particular area? Thank you.
Yeah. It's a really good point, Roy. Clearly, maintenance budgets are strong right now. So you're absolutely right. And there's no doubt about it. People are running their assets harder, right, since everything's become a lot more scarce following the Russian invasion of Ukraine. So that is definitely helping us. There's no doubt about it. The wind is at our backs on the aftermarket as well as new construction. I think what's encouraging is that, and I said this on the last call, Rory, that so a lot of what we do is obviously replace our old valves in the field. That's our classic upgrade. We've got a lot better at that. We've put in CRM, the IT systems. We've got a lot better understanding of where our assets are.
We look at the patterns using data analysis, a level of AI to try and find out exactly what valves are likely to go wrong when. So when are they going to start to wear, in what conditions, and what sort of valve, and all of that? So again, Jackie and the team have done a wonderful job with data analytics and all of that side of things. And that is helping us go to customers and help them upgrade valves. So that's great. On top of that, though, last year, the sales value of our competitor upgrade valve business roughly doubled as well. So that is where, obviously, we're starting to understand which of our competitor valves are likely to go wrong and when, Rory, and preempt that. And then obviously, it's tough, right?
You go to these customers, and a lot of the times, they'll obviously go back to the OEM supplier. If they've had a problem with some sort of service with that OEM supplier, then our brands are super strong. Well, we've proven that we are able to upgrade some of the competition's valves. That's what I really mean. That whole sort of ecosystem, business system of being able to upgrade both our own and competitor valves has really helped us. To give you a rough idea, I think, Dan, last year, our competitor upgrade valve business grew to 35 million valves.
Yeah. Yeah. So it added about 3% percentage points on the growth for the overall business.
Yeah. The aftermarket, it was sort of.
66%.
67%. Yeah. So that gives you a rough idea, Rory, of the sort of self-help now going on within that business.
I mean, yeah, that's a very specific idea. No, that's great. Thanks very much.
Great. Thanks, Rory.
Our next question comes from Alexander Virgo from Bank of America. Please go ahead.
Thanks very much. Morning, Rory. Morning, Dan. Sorry if I joined a little bit late. So if this has been asked, feel free to tell me. So I wanted to dig a little bit into what you're seeing on the discrete side in Industrial Automation. And in particular, if you could talk a bit about the end market color behind the you're down 5 or so in Q1. And I appreciate that was in line with what you were expecting. But as you think about how things play out for the rest of the year and in particular, what we're sort of seeing around China and the implications of that pulling through for Europe, that would be super helpful. Thank you.
Yeah. Thanks, Alex. Yeah. We did cover some of this. So you're absolutely right. You look at all the other discrete automation prints. I think we've done slightly better. I'm pleased with that. We're actually at -3%, Alex, first four months. So for the time we had in April, we're at -3%. So again, it was a better April. And as I said earlier, it's partly because of Easter, right, a number of working days. And in IMI, we always look at sort of March and April together to stop all that sort of movement. So we're at -3% year to date. China is weaker. There's no doubt about it. Asia's weaker for us. I talked about the 60-day moving average earlier on the call, and so it was slightly down. Asia is down, and that is being dragged down by China.
So we're seeing a similar thing. And as you say, Alex, that doesn't just affect China. A lot of our German OEMs and other European OEMs will be exporting into China, and they're feeling it in their order books as well. So yeah, I think at the moment, it's slightly down overall Industrial Automation. And we still think it's going to be a tough year. You saw the American PMI print, was it last week, Alex? And again, it's not exactly filled with confidence at this point. So I think we're perfectly happy with our forecast, which is we think that this year is going to be a sort of resilient year for us, but no great growth. We're not forecasting any great growth in our outlook.
That's great. Thanks, Roy.
Thanks, Alex.
We have no further questions on the call at this time, so I'll hand the floor back to management.
Well, thanks ever so much for joining the call. It's another period of good progress for IMI. We certainly look forward to catching up with you at the half-year results. Thanks, everyone.
This concludes today's conference call. Thank you all very much for joining.