Welcome everybody to IMI's preliminary 2021 results presentation. Next slide, please. Well, this slide has the key messages from the results, and the first key message is that sales were up 7% and organic profits were up 18% on 2020. Organic revenues, profits, and margins improved in all three divisions. Our Growth Hub teams managed to deliver GBP 23 million of brand-new business. The momentum is definitely building in Growth Hub, and the customer-focused culture that comes from Growth Hub is certainly starting to permeate throughout the whole of IMI. We did complete the acquisition of Adaptas in the very attractive life sciences sector, and the early workshops with Adaptas are validating our business case. Our ESG agenda is also gaining pace and is generating real enthusiasm across IMI.
Finally, we do expect to make further progress, both financially and strategically, in 2022. With that, I'm gonna hand over to Dan for the financial review.
Thank you, Roy, and hello, everyone. Pleased to be able to take you through our 2021 results today. Next slide. Summary results for the year, as Roy mentioned, good progress across all divisions, leading to strong profit growth and margins up 140 basis points. A few things to highlight on this slide. As part of Precision's reorganization, their business serving energy customers was transferred to Critical Engineering, where it was combined into the division's existing organization. The amounts are shown on the slide, relatively small, but it is enabling greater focus in this area by bringing it together. Second, you'll see that corporate costs were lower in the year, and this was helped by a one-off property sale and some continued temporary savings from the pandemic. We'd expect that figure to be around GBP 26 million for 2022.
Finally, you can see currency headwinds of about 5% in 2021. We're currently forecasting for about a 1% headwind for 2022. Next slide. Looking at the income statement below OP, first thing, interest expense is higher, but that is due to a one-off credit in the prior year. For 2022, we'd expect that figure to increase due to the Adaptas financing. Restructuring costs are slightly higher, and I've got some more detail on that in the next slide. Finally, if you do the math, the tax rate on our adjusted results was 20% in the year, helped by a small one-off benefit, which took us down from our normal 21%. We expect that to return back to 21% this year and go up after that as new U.K. rates and other tax moves are enacted.
Next slide. Our summary on rationalization. Projects continue to advance well. Figures are largely unchanged from the half-year presentation, although Critical was able to accelerate some benefits into 2021. Precision is advancing customer-first and its European footprint consolidation, which will support margins and growth going forward. We will continue to assess and execute projects that support our long-term business strategy and competitiveness. Next slide. In terms of operating cash flow, as expected, it was lower due to working capital investments, both to support the growth and to protect our supply chains during the recent global disruptions. CapEx of GBP 57 million was higher than 2020, and we'd expect that to increase a bit in 2022 as we continue to see good paybacks for our internal investments. Next slide.
Regarding net cash flow, we have the two big numbers in the center, the acquisition and the share buyback. It means leverage ends 2021 at 1.5x . Still a comfortable figure, which provides us capacity for further bolt-on activity. Next slide. Getting into each division, Precision results were very good with organic growth of 7%, despite the ventilator headwind and margins up 80 basis points. You'll see strong growth across most segments outside of the ventilator-affected life science space. The Adaptas integration activities have started really well, and the division is also making good progress with its customer-first and Growth Hub initiatives. Therefore, for 2022, expectations are for further organic growth in revenue and margins. Next slide. Critical Engineering also delivered well in the year, advancing its strategy focused on aftermarket and new growth markets.
Margins reached 18.1% in the year. You can see that orders were up in aftermarket, which was driven by strong parts growth. New construction orders were also higher, supported by marine and refining and petchem. The division continues to build its pharma activities as well through PBM and is already winning orders within the hydrogen production value chain. For 2022, we see Critical continuing to deliver organic growth with slightly higher margins. Next slide. In Hydronic, the division delivered very strong growth across all its key markets. New products continue to play an important role in delivering growth, and we are particularly pleased with the progress of our connected product offering. You can see that all product lines were up double digits. Margins exceeded 20% in the year. For 2022, we expect further organic growth with slight margin progression versus 2021. Next slide.
A final slide from me regarding the group outlook. We are looking at an adjusted EPS in excess of GBP 1 . Two key inputs for those figures, average shares of 259 million, the full effect of the share buyback, and a 1% currency headwind. With that, let me hand back to Roy for the strategy update. Thanks.
Thank you, Dan. Next slide, please. Right. I do wanna touch on our purpose, which as you know is breakthrough engineering for a better world, which is absolutely focusing both our people and our partners on solving industry problems. Problems like enabling our customers to move rapidly towards zero carbon emissions. We are obviously looking to play a major role in that evolution as the world requires more and more low carbon solutions for buildings, for trucks, for industrial processes, and other problems as well. Problems like enabling safe, reliable, and effective industrial automation. Problems like helping our customers speed up analytical testing in life sciences to reduce the cost for the patient. As you know, our business model is focused on creating both value today and value tomorrow as we deliver those solutions.
Creating value today, for us, is about ever improving customer service, putting the customer right at the center of everything we're doing. It's about stripping out complexity from our business to enable it to grow faster and create better returns. It's about continuous improvement, doing things better every single day. Value tomorrow is focused on our Growth Hub, and our Growth Hub is creating market-led innovation and how the sprint teams are starting to create more and more differentiated new product, much of which we showed you at the two Capital Markets events last year. These new products like Adaptix, Aerosol, Retrofit3D, Smart Valves, all of those ones that we presented are being pulled by customers into the market because they directly solve those customers' most acute problems. Next slide, please.
In 2021, I'm absolutely delighted to say that we won a total of GBP 23 million of Growth Hub new business. GBP 20 million of that was in Critical, which remember, started the process about 18 months ahead of the other two divisions. As you can see, the pipeline continues to build. Our goal is almost to double those orders in 2022 to something like GBP 40 million from Growth Hub with that new business contributing to our better world purpose, helping our customers produce safer, more sustainable, and more productive solutions. Most importantly, that Growth Hub culture continues to move across our business and unlock incredible energy from the sprint teams acting on value today, all focused on solving customer problems and internal customer problems that help ultimately make our service to the end customer better and better.
I hope you really did get a flavor of those problems that we were solving and the solutions at the Capital Markets events, which of course are still available on our website. Next slide, please. This next slide is all about our ESG agenda, and I have to say that our purpose, breakthrough engineering for a better world, is a unifying driver. It's a unifying cause, which is really progressing the culture of the company. 80% of our employees in our engagement survey last year said that they would recommend IMI to their friends and family. That is a historic high, and it was a very proud moment for me actually to receive those results. We significantly improved our communications and engagement last year.
We launched a whole new communications platform right across IMI, and now about 7,000 of our employees can see every day our progress, project wins. They can see all sorts of initiatives that we're taking to further the ESG agenda, for instance, and it's just an excellent platform that everybody's engaged in. In terms of inclusion and diversity, we've gone from zero women on the Exec a couple of years ago to 42% now. We are absolutely on track to halve our carbon intensity by 2030. In fact, we made a 5% reduction in 2021 alone. We retained our AA rating on MSCI. We reentered the FTSE4Good, and we've made a new promise this year that we will be carbon neutral, including offsets, by 2040. Next slide, please.
This next slide is a summary slide of the division's plans and their progress against our financial ambitions. As you know, in Precision, Beth and the team are implementing their customer-first project, streamlining the organization around global market segments, reducing complexity and investing around 100 growth roles, including digital, product management, and sales. Precision are also investing in Growth Hub and are now scaling Adaptix to reduce waste in industrial automation and both of their hydrogen projects to reduce emissions from transportation. The Precision team are also reducing complexity in their business by progressing their site consolidation plans. Over time, these initiatives will help generate a Precision division capable of 5%+ growth at 20% margins through the cycle. Critical are focused on growing their aftermarket business while keeping their win rates high and expanding into new, attractive markets like pharma, marine and hydrogen.
We believe that over time, Critical would be capable of 3%-5% growth at 20% margins. Hydronic are making the most of the sustainability tailwind, scaling new digital products like TA-Smart, as well as actuation and control solutions, which enable further energy savings in HVAC systems while creating a comfortable indoor climate. Hydronic is already a highly resilient business and is now generating 20% margins, and we believe that the division is capable of 5% or more sustainable growth. Next slide, please. To summarize then, the key takeaways from today are firstly, that the strategy that we laid out just over two years ago in November 2019 is absolutely on track. That strategy, which boils down to customer-first, complexity reduction and market-led innovation, all to generate better returns and higher growth rates, is being well executed by our teams.
That strategy is being executed with passion, at pace, and with growing excitement as we make real progress. The second point is about our culture, and our culture is certainly purpose-driven. It is about breakthrough engineering for a better world. It's about an acute focus on our customers and understanding our customers' problems and solving them at pace. It's about strengthening our partnership with those customers and innovating to make them safer, to make them more sustainable and make them more productive. Thirdly, as Dan said, we expect this year's EPS to be greater than a pound , despite the continuing headwinds from supply chain disruption and inflation, as well as obviously further incremental investment in the business.
If we put all that together, it certainly supports our overall ambition to create sustainable, profitable growth, to move IMI to an 18%-20% margin business growing at 5% through the cycle. Okay, thank you very much. We will now go back to the operator who will orchestrate our Q&A.
As a reminder, if you'd like to register a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two, and please ensure you're unmuted locally when speaking. Our first question comes from Andrew Wilson with JP Morgan. Andrew, please go ahead.
Hi. Good morning, everyone, and thanks for taking my questions. I've got three. I guess I'll maybe start with quite a broad one, but right, it's really to try and understand what does the guidance of exceeding GBP 1 really mean in terms of, obviously theoretically, that becomes quite a big range, but just to try and get a sense of kind of what messaging you're really trying to get across with that. But also, I guess, some of the considerations that have gone into setting that guidance, given, you know, the fact there's a fair amount going on in the world, and also at IMI. Just the various kind of puts and takes, I guess, thinking both top line and then for things like cost inflation, et cetera.
Perfect, Andy. Do you want me to take that question first? I think you said you got three questions. It's great, yeah.
Yeah. I'll tell them one at a time.
You can break them up. That's. Yeah.
Yep.
Yeah, it makes it easier for me. Thanks, Andy. Yeah. In terms of guidance, as you said, you know, we obviously do our normal detailed divisional reviews. We look at all of the moving parts. What we're really saying is that in the round, we're at updated consensus at about GBP 1.02-GBP 1.03, and we're perfectly comfortable with that. To sort of let you into the sort of inside story, originally, we were gonna put a top end on that guidance.
Actually our markets at the moment are strong, you know, the markets, industrial automation, obviously, life science underlying market, if you take out the ventilator moves, obviously construction in terms of energy efficient buildings. Those markets, as you can see, the Q4 exit rates were good. On top of that, the Critical order book is up 3%, right? You know the Critical order book is our longest order book, it's about nine months. When we put all that together, we're perfectly comfortable with guidance being in line with updated consensus GBP 1.02-GBP 1.03. There is room on the upside in terms of market momentum, potentially. Potentially there's also room on upside in terms of some of our self-help.
I'm obviously talking about Growth Hub, I'm obviously talking about, you know, pricing, that pricing inflation equation, and I'm talking about our ability to do further cost efficiencies, Andy. It became quite difficult to put a narrow guidance around it, and I have noticed that not many companies are guiding at the moment. Through our detailed reviews, as I said, perfectly comfortable with where consensus is at the moment in terms of markets. There are a lot of moving parts, as we all know globally, in terms of external influences, so we wanted to make sure that we underpinned it at about a pound . You know, potentially there's some upside from there as well, depending on how events pan out externally mainly. Does that answer your question okay, Andy?
Yeah. No, no, very helpful. I was just trying to get an understanding of, yeah, to kind of put some teeth into that. I guess second thing, I wanna talk about supply chain. You mentioned it in, I think, just on the last slide and with regards to 2022 as well. It doesn't seem that the challenges have been there to the same degree it appears. I suspect they probably have, but it doesn't seem as visible in the numbers, and it doesn't seem that it's something you're particularly talking about, which suggests maybe you feel reasonably good about how you've handled it.
I guess just trying to get an understanding of whether that's fair because it's perhaps just not as visible as it's been at maybe some of the other companies who've reported.
Yeah. I mean, I'm just so proud of our supply chain teams. I said on a previous call, Andy, that I don't think we've ever had a better supply chain team than we've got now. They actually won the President's Cup at our conference a couple of weeks ago, and it was just fantastic. Andy, it's not just what they're doing now, 'cause they're working harder than ever now, right? We're chasing suppliers just like everybody else. You know, we're trying to make sure we're top of the priorities of our suppliers just like everybody else, right? That is a daily thing that we're doing. No doubt about it. Absolutely, I would say supply chains are probably where they were about three months ago, but where they were three months ago was a very difficult position.
The work is the culmination of you know the last few years' worth of work, where we have consolidated our suppliers in particularly in Critical, but also to a level in the other divisions as well. What that does is give more business to less suppliers, which obviously takes you up their list in terms of priority. We've dramatically cut the number of single source suppliers as well. We're far less dependent on those single source suppliers, right? We used to have more than 60 single source suppliers in Critical. We've now got six. Then in Precision, which has a more complex supply chain, we've put something like a third now of all of those suppliers under specific contracts. They're beneficial to our suppliers, and they're beneficial to us, so it's a real win-win, right?
All of those things have culminated in a better position for us in terms of serving our customers. I think what that's done actually in a couple of places, it's allowed us to actually take some share, because some of our particularly smaller competitors have definitely been suffering. I would say, though, Andy, there are definitely two areas that we are, you know, feeling it as well. One is obviously with our truck customers. I think everybody knows that. Actually in the fourth quarter, despite the fact that the underlying sales in Precision, so when I say underlying, I'm just adjusting for ventilators, were 19% up. Actually, within that, our transport business, which is mainly truck and a bit of train, was only 4% up.
Definitely our customers there, you know, are working their production lines far less hard than they would be if they had availability, particularly to more electronic components, right? That's definitely one area. The other area is in Phil's area, in Hydronics, where construction projects are still being slowed down by the availability of some suppliers, some materials, some components actually as well. I would say, you know, yeah, it was definitely in the fourth quarter, we felt it like everybody else did. But, you know, as I said, I'm very proud of the teams. Really the only two areas I would say were trucks and construction, Andy.
I guess finally, just around capital allocation, 'cause if I sort of look at the year-end net debt EBITDA, it's a bit misleading because you clearly completed on Adaptas but didn't then get the earnings in 2021. If I look at the balance sheet going forward, it seems, I think from the Capital Markets Days that there's a bit more maybe, I guess, activity and effort towards looking at M&A maybe with a bit more proactivity than when there was, I guess, more going on internally within the group. How are you sort of thinking about that pipeline? Then I guess capital allocation in terms of M&A versus obviously the buyback that you did this year or last year, I should say.
Dan, in a sec, I'll let you.
Yeah, sure.
Do you wanna talk about capital allocation? I'll just talk about the M&A pipeline. I absolutely agree, Andy. I mean, you know, we've got the business development resources in the divisions. They've been in the divisions now for what? A couple of years. They're closely associated, all of them, with Growth Hub. They are becoming very familiar with our markets, with the sort of industrial problems that we can solve. What that's doing is bringing more and more ideas to the pipeline. I can honestly say in my tenure, the pipeline has never looked better. Obviously, we've had COVID, right, which slowed us down a bit. Right now, the pipelines look really good and, you know, I think the quality of the businesses in that pipeline would really help propel our growth.
In the same way that I think Adaptas will, right? I visited Adaptas a couple of weeks ago, and it's crystal clear how those teams are now working together, right? Our team and the Adaptas team are becoming one. The excitement, the opportunity for one plus one equals a lot more than three, you know, as we look further at the commercial synergies. Our pipelines have got more and more of those companies in, Andy. You know we're very strict in terms of capital returns as well, though. Obviously, you know, whether we get some of those or not, you know, we'll see in time. Dan, do you wanna talk about capital allocation?
Yeah, sure. Yeah. Andy, you'll see it, debt to EBITDA around 1.5x . I think that's very comfortable. Clearly that doesn't have the impact on the denominator yet of the Adaptas coming in and the synergies, as Roy talked about. I mean, without any additional M&A, we should see that number come back down to around 1.1x, maybe 1.2x as we go through. That still gives us lots of capital to deploy against our M&A pipeline. It feels quite good. I think as we go around and we'll go and see the shareholders in the next couple of weeks.
The feedback has always been pretty consistent around them, looking for us to deploy the free cash flow that we've got and not distribute it back. Yeah, we'll continue the discipline. If we get to the end of 2022 and we're down back at around 1x , we'll revisit the share buyback. Right now I think we're in a very comfortable place. As Roy said, the Adaptas acquisition out of the gates really well. A lot of that has to do also with the cultural alignment as we've gotten in. It's a great team that's come in and we're looking for great things.
Yeah. Thanks, Andy. Does that answer your question?
Thanks. Take care. Thanks, guys.
Yeah, brilliant. Thank you, Andy.
Thanks, Andy.
Yeah. No, very happy. Thank you.
Our next question comes from Michael Tyndall with HSBC. Michael, the line is yours.
Morning, gentlemen. Just a couple of questions from me if I can. Can we talk a bit about Growth Hub? GBP 23 million of incremental orders in FY 2021, looking to double that in 2022. I don't know whether you can give us a split. I guess what I'm curious about is it accelerating in Critical? It was GBP 6 million in 2020, GBP 20 million in 2021. Does that number grow again in Critical? Where I'm struggling a little bit is to kind of square that with the 3%-5% growth, because at GBP 20 million, we're already at 3% of the orders and sales at Critical.
I just wonder how, if the underlying markets are strong as well, does that not give you quite a lot of scope to actually go through the top of that 5% growth objective because you've got this incremental orders coming through? Second question, just around the restructuring. Looks like numbers haven't really changed, but the timeline seems to be moving a bit. Am I reading that the right way? And are you finding more things to do as you go through it? Or is it just, it's tricky because it involves people, it involves businesses, and sometimes it takes longer or sometimes it doesn't?
Brilliant. Yeah. No, Michael, so, Growth Hub, yeah, I couldn't be more delighted really with the way Critical and the other two divisions have now embraced that. Michael, you know, eventually we'll come away from reporting these numbers because actually the effects of Growth Hub, obviously with 700 people, right, having participated, are much bigger than the innovations. It's affecting the whole way that our sales teams go to market, right? Because rather than serving customers trying to sell them what we've got, we are now really trying to make sure that we are solving their issues, right? Optimizing their systems, whether it's their HVAC system, whether it's their industrial automation, machine, you know? That mindset to me is so much more powerful.
When you're trying to compete on differentiation, at the heart of that is customer value creation, and that's where you've got to focus the whole organization, and that's what's happening. That's really good. Now, as to whether we'll go through the 3%-5%. We only just set the 3%-5%, right? Which seemed ambitious, I think at the time. You know, we're a long way off of that, I would say, Michael, right? I'm totally comfortable with Critical at 3%-5%. Remember, the vast majority of Critical is dealing in areas like oil and gas. You know, the long-term prospects for that will be, let's say a flat market. Obviously what we're more excited about in the longer term, Michael, is things like hydrogen, right?
Because hydrogen will obviously replace some of those petrochemicals in, certainly in heavy industries, you know, cement, steel, maybe aviation. That's where we're focused in terms of future growth. I think, you know, before we raise the target, we should consistently hit the target. I think to your question about Growth Hub, Critical will grow their orders again in Growth Hub this year. Yeah, absolutely. Critical, remember, have got, I said 18 months, it's probably 18 months, two years, something like that, head start on the other two divisions, and it definitely takes time, right? When I talked about test and learn at the Capital Markets event, it is really like that. It is really test and learn.
You know, I think we even gave the stats on how many projects fail, and in the early days it can be up to half the projects fail. You know, what we have to do is learn from those failures, right? 'Cause it's difficult to create this sort of innovation. But I'm really excited about what we did last year with Growth Hub. As I said, in the sort of formal presentation, also excited about the projects that are now moving into scaling. What it's doing, you know, is fundamentally shifting customer-centric tools, customer-centric culture, but also we're developing a lot more digital capability now. You can see, for instance, again in Hydronic, right?
In the construction markets, the big building owners will not only be expected to save energy, they'll be expected to prove that they're saving energy and monitor it. That's exciting for us, obviously, because we can play, you know, a major role in that. Yeah, Growth Hub, intrinsically good news, but I'm not about to push up Critical's growth targets until we've achieved them for a while. In terms of restructuring, the overall numbers are the same. We over-delivered last year, as you know. I think at the half year we said we delivered GBP 22 million, we actually delivered GBP 25 million. We've always said that in this next phase things are gonna get more difficult, right? I think we said that we did say we've announced a major Central European factory closure within Precision, right?
That is a big deal because, you know, there's lots of complexities with, you know, making sure that all of the consultation with all of the European Works Council, everything is done absolutely correctly. There's all the operational issues of moving a complex factory. We wanted to make sure within Precision, we've obviously now done four. We started at 32 factories. This is pre-Adaptas, right? We'd moved down to 28, and we just made sure that we could manage these projects effectively because they're complex and you have to manage them effectively. We've done that. We're very pleased with the results. Now, you know, we're taking on a much bigger factory. The prize is also equally bigger, but it will take us longer to get, which is why the benefits from that closure, very, very small this year.
Very, very small, but would obviously come into next year. The prize is not only cost reduction, 'cause obviously you're taking, you know, a high-cost factory which is complex, and you're moving it to, you know, a lower cost area in the Czech Republic. The prize is also massive complexity reduction and that's why I've made complexity reduction one of the pillars of the strategy because complexity slows your growth down all the time. It impairs your customer service. This, by doing this, we can streamline supply chains, and we can make our responses to customers much, much quicker. Did I miss anything, Dan, in that?
No, I think it just proves out over and over again. Just as an aside, you'll recall, Mike, we consolidated our warehouses in Hydronic as one of the programs as well.
Yeah.
That was a key element in this last year of making sure our on-time delivery and our customer deliveries were really well executed. We didn't let them down. A lot of that had to do with the single hub of inventory going out across Europe. Yeah, you can't stress enough the complexity reduction you get as you consolidate down to a couple of high caliber facilities running.
That's a really good point, Dan. Like I talked about, Hydronic's, you know, potentially taking a bit. Obviously, you saw they grew at 15% organic last year, taking a bit of share of some of the smaller competitors, and partly that's because their on-time delivery with the consolidated warehouse stayed at between 90% and 95%.
Yeah.
I can promise you in this supply chain disruption, that is pretty fantastic actually. As you move warehouses together, you consolidate the stocks, then the standard deviations of demand are smooth, right? Then suddenly you get much better availability. It's a good point, Dan. Thanks, Michael. Does that answer your questions okay?
Absolutely. Brilliant. Thank you.
Great. Thank you.
Thanks.
Our next question comes from Jonathan Hurn of Barclays. Jonathan, please go ahead.
Good morning, guys. I just have three questions, please, one on each division. I think firstly just focusing on Critical. Could you just talk a little bit about the strengths that you're currently seeing in the aftermarket? I know you noted that obviously parts demand was good. But can you talk a little bit about upgrades? 'Cause obviously that's a key focus for you within Critical, and also just give us a flavor for how services are coming through as well, please.
Brilliant. Yeah. Thanks, Jonathan. Jonathan, yeah, as you know, aftermarket is such a core part, you know, of the Critical strategy. You know, we laid that out at the Capital Markets event that we did. I'm really pleased because upgrade valves, so this is where, and this is central to the aftermarket strategy, right? We go into the installed base, we upgrade either one of our own valves or one of the competitor's valves. That upgrade valve business has grown at 13% CAGR since 2019. 13%. So I mean, that's really nice momentum because not only does that obviously give us the business, and upgrade valves typically are at around twice the margins of new construction valves, so it's important in its own right.
The other thing, obviously, it gives you the parts annuity in the future. That's, you know, really good. Our parts business has also grown over the last three years. Obviously it's been hit by COVID, but it's grown at a smaller amount. Field service obviously has not, right? Because field service has been hit. Field service is something like, I think it's about 15% of our aftermarket business, something like that. It has been hit basically because of site access during COVID, restrictions on travel during COVID. What it tells me is that the remaining field service business is very, very resilient, right? Because in some cases, we've had to fly people. Some cases even on private jets when, you know, flying hasn't been done into specific locations.
Because as you can imagine, these locations, some of these processes are creating more than a million dollar a day worth, much more than a million dollar a day worth of output, and they can't, you know, not have a correct maintenance outage 'cause these are the critical applications. Field service has come down. It was actually up slightly last year, I think, Dan, it was up maybe 5% or something like that.
Yeah, a little bit. Yep.
That sort of number. It is gradually recovering. You know, I think over time it will be a gradual recovery field service. Don't expect a big rebound, I don't think, Jonathan.
That's very clear. Thank you. The second one was just on Precision and particularly on industrial automation, obviously up 17% in 2021. Can you just give us a little flavor of how it's performed in Q4? What's driving the strength? You know, is it market share gain or is it essentially just that sort of lag relative to PMIs? As we go into 2022, how do you see that industrial automation side of Precision playing out?
Yeah. Industrial automation. Yeah, fourth quarter industrial automation sales growth was 23%. That's obviously, you know, really, really strong. For the whole year it was 17%. And if you look across the various regions in Precision, it was strongest, obviously in APAC, and it was strong in China. Industrial automation, it was a tremendous momentum at 23%. As we've come into this year, orders still strong. Order books still in good shape. I'd say on industrial automation, the positive thing is that. Well, across Precision, I should say, we gained 3% on genuine new product last year, and a fair share of that was industrial automation, Jonathan. I you know, I wouldn't claim that we're gaining share yet. I would just claim that we're holding our own in industrial automation.
I think we did gain share in trucks, and I think we did gain share in life sciences in Precision, particularly on the back of all the work we did on ventilators and the extra contracts that that's led to. I think industrial automation, it's probably fair to say that we're holding our own.
Yeah. PMIs are still in positive territory. We gotta, you know, watch it. I think the order books also, although we don't talk a lot about the order books in the other two divisions, we still have a really nice entry point into 2022.
Yeah. Dan's made. Yeah, it's a good point on PMIs, right? 'Cause I think you all understand that historically, you know, through sort of, I think it's three or four recessions, basically the PMIs give a pretty good 3- to 6-month leading indicator on industrial automation markets, right? At the moment, for us, they're all sort of 55-60 at the moment, Jonathan.
Yeah.
That normally, you know, on top of the sort of incoming orders, gives us some reassurance in terms of what's happening going forward. I think the only area in Precision that you know is obviously has come under pressure is transport. That is mainly trucks, as I said, and that's only 4% growth in the final quarter. Definitely our customers are still experiencing disruption. To be honest with you, it's difficult to get a really clear view on where that's going. The good news on that is that we are definitely making headway in China. China obviously announced China VI diesel emissions regulations, and our business in China on trucks has gone from basically zero three years ago to GBP 18 million last year, and we see further growth again this year.
The other good news on China trucks, Jonathan, is that we've now got our hydrogen technology, where basically we're involved in the flow of hydrogen into the fuel cell, plus into the heat management of the fuel cell as well. We've now got that technology on almost 3,000 buses and trucks in China as a pilot, working with a couple of the biggest OEMs. You know, that's not gonna do wonders this year, but for the future, as you know, particularly Asia is heavily investing in hydrogen technology, hydrogen fuel cell technology, that's obviously, you know, exciting.
That's very clear. Thank you. Just last one, just on the Hydronic again, just on sort of the growth outlook for 2022. Is there still some installer catch up, do you feel to come through for Hydronic in 2022, or has that kind of run its course in 2021? Also, you know, previously at the CMD last year, you talked about the demand driver coming from legislation. I mean, what kind of impact do you feel that can have for Hydronic in 2022?
Especially 'cause there's about four questions now.
Right. In terms of-
Sorry.
Jonathan, great. They're great. Very, very relevant questions. Now, I think in terms of installer catch up, I think a lot of that was done, I wanna say, by the autumn. I think, you know, from what we understand, Jonathan, they worked their socks off basically, weekends, holidays, to catch up by then. I don't think there was too much installer catch up in the fourth quarter, for instance.
Yeah.
There's a second element to that, though, which is wholesaler stocking. You know, some increased their stock, some decreased it fourth quarter. Difficult to say exactly, Jonathan, as you know, across all of those stocking points. You know, my sort of assumption is it was somewhere near neutral in that fourth quarter, right. I still think they're holding more stock than they used to, though, right? You know, when you come into this year, at some point, it's a bit like us, right? We're carrying more-
Yeah.
stock than we would-
Mm-hmm.
in normal times. When those supply chains finally bed down and when they show, you know, a few months, if not quarters of stability, and we get our trust back, I think there's probably some wholesaler destocking to happen at some point, right? We roughly estimated that. You gotta keep saying, right, these are incredibly rough figures. But in our business review, we roughly estimated that that could hit sales by 2%, Jonathan, didn't we?
Yeah.
You know. That's another element. The third element, Jonathan, which is still happening, is supply chain disruption to that construction market, right?
Yeah.
There were definitely projects being slowed down because they can't get other supplies other than our equipment, right? That is, it's a very complex picture in Hydronic. Again, you know, you would hope that at some point this year, that would start to improve. There's sort of things going different ways there, which is why we put, you know, our guidance, try to pick through all of that and said, "Okay, we actually still expect good growth this year," partly because of the fourth point, which is what you said, we expect a tailwind from those, incentives around energy efficient buildings this year. What we said is that, you know, this year we do expect a tailwind.
Over time, we think that tailwind will be anywhere between 1%-4% growth, depending on how fast those incentives come in and, you know, how fast that works its way through to the market. Yes, we do expect that to help with the tailwind towards that overall good growth this year, Jonathan.
Great. Thank you, guys. That's very helpful. Thanks a lot.
Great. Thanks, Jonathan.
Thanks, Jonathan.
Our next question comes from Robert Davies with Morgan Stanley. Robert, the line is yours.
Morning. Yep. Thanks for taking my questions. My first one was just on the decision to move the energy business out of Precision into Critical. That's obviously been a bit of a discussion point, I think, for the last few years of what the rationale was for having that. My understanding was it was always sort of smaller pneumatic type of valves rather than the big kind of larger Critical heavy-duty valves. I guess why now? What was the sort of trigger point for deciding that was the right thing to do?
Yeah. Great. Robert, effectively, the energy, you know, Critical is an energy business fundamentally, right? We wanted to align that business with its end markets. The end users are pretty much the same people that you will all know and love in oil and gas. We saw it as a natural thing to move that business across. There are also synergies actually in marine as well, some of which we've all already got.
Yeah.
You can see actually in some of the energy numbers in the detail, in the order intake-
Yeah.
increase last year. Better synergies in terms of the market, which is good for that business because we should be able to make it grow faster, number one. Number two-
Mm-hmm.
it takes the complexity out of Precision.
Yeah.
As you know, core part of the strategy, right, take the complexity out. We've been reducing the number of sites. Beth is aligning the whole of Precision around its markets, and obviously, we wanna focus Precision on, you know, excellent markets, right? Industrial Automation, life sciences, and transport, right? That becomes very clear now. Certainly the business reviews that we do, Dan, are just so much clearer now because Beth is aligned globally around that structure. You know, we get a much better view of the sort of competitive dynamics in the market now than I've ever had in my sort of almost three years, you know, in the job. That's the rationale in terms of making the move.
As you said, you know, and I've been building to this, you know, for a while now, I think probably a year and a half, two years is what I've been thinking about this over.
Mm-hmm.
Ultimately, we wanna be aligned with the markets. As you said, though, Robert, right? It's a different size of valve.
Yeah.
Critical makes big valves, fundamentally, right? Precision makes small ones. To me, the more important thing was to align around the market than to align around the factories. Because the factory that we've moved is a self-contained factory. It's run exceptionally well. You know, moving that operation into Critical is, to me, not the big issue. The big issue is how do we grow faster? To do that, we need the synergies, you know, from the common markets.
Yeah.
Anything else to that, Dan, or?
No.
Thank you.
You know, clearly the catalyst as Beth was restructuring, as you said.
Yeah.
It made us wanna look at it again.
Yeah.
These businesses have always collaborated really well. Now under one, you know, one team led by Jackie, we're just seeing the acceleration already and the orders come through as they really tighten up with the customers.
Yeah. I do apologize to all the analysts-
Yeah.
in the finance community, 'cause I know, you know, Dan and Luke and everybody.
Internally as well.
We are working flat out for the last six months to align everything. For the medium term.
Yeah.
No, no, actually for now, Jonathan.
Yeah.
Jonathan.
Robert.
Robert, yeah. It's, you know, it's the right thing to do for the business.
Yeah.
Yeah.
Definitely.
Thank you. My another question just, and it might be slightly tricky, but just in terms of your employee feedback, where you said 80% of the employees recommend IMI, I guess kind of interesting to hear kind of the feedback from the 20% that wouldn't. What was it within the business that people think needed to be changed or that they weren't happy about?
Yeah. That's a great. That's the way I always look at it as well. Robert, I think we got. Obviously that is not the most motivating way to look at it. No, it's really interesting. 80% of people said-
Yeah.
they would recommend IMI to their friends and family. Actually, we've used that number in the annual report, which is why I referred to it, right?
Yeah.
'Cause it's a constant number. Actually 85% of people said that IMI was a great place to work. Yeah.
Mm-hmm.
Not everybody would recommend it to their friends and family, right? I certainly wouldn't want my daughters working in IMI for lots of reasons you can imagine, right? They gotta go and find their own way in the world.
Mm.
But they think it's a great place to work, 85%. On the other 15%, Robert, it's very much in pockets, right? We have definitely got some-
Mm-hmm.
factories, some of them that have been, you know, exposed, as you can see from our numbers right, to some rationalization, some big changes. We've got some pockets where we need to do a better job, you know, in terms of motivating those people towards the purpose and really refocus them on the possibilities for the future rather than, you know, what might have been happening to them at that time. I would say in summary, that's the overall reflection of that, let's call it the 15%. Dan, anything on that?
Yeah. You know, certainly we dive into the detail with the site leadership.
Yep.
That gives us, you know, it gives us good ideas as to how to, at a very local level, change the way in which things are working to try to move those numbers up. Yeah, there are consequences if our site leadership can't get that. I think development is an area we're absolutely focused on as well.
Yeah.
I think that's the other thing that comes out of the broader element, making sure people can fulfill their career aspirations and giving them, whether it's locally and certainly if they're willing to be a bit mobile, making sure they have all the, you know, all the resources, first of all, and then all the guidance and the development that we can give them so that they can achieve their career ambitions as well.
Yeah. Yeah, you know, we're determined to improve that number, as you say, Robert.
Yeah.
You know, you really want everybody to do that, right? You know, if you look at it, we look at it versus the benchmarks. I think there was, I wanna say, Robert, 15 benchmark questions, something like that, against a huge database of companies.
Yep.
We were above on every single one, sometimes substantially above on all the questions. So say 14 out of 15 from my memory.
Yeah.
On one, we were the same as the industry benchmark.
Right.
I think it's an opportunity to improve, but I'm really pleased with the progress as well.
Yeah.
Thank you. My final one was just, I guess around some of picking up on some of those points around restructuring and footprint and balancing the growth sort of initiatives for the company. You mentioned a big Precision installation where you were making some changes, but are there other sort of larger facilities that you've sort of got your eye on in the next 2-3 years? How do you sort of juggle that against the disruption that you potentially cause to the sort of growth and the new projects you're bringing to market? How do you sort of, you know, kind of get the relative moving parts correct there and not kind of disrupt the business and the organic growth improvement that IMI is trying to bring to market as well?
Yeah, no, it's always, you know, a very well thought through decision that is not taken lightly for all of those reasons. Plus the social-
Mm-hmm.
reasons as well, as you can imagine, Robert, right? For us, yeah, it has to have a reasonable payback, obviously. As I said, it's also about how much can we take, complexity can we take out of this company? Because we know that over the longer term, that will help us grow faster. If we can shorten supply chains, improve our response to customers, that is obviously really, really important. We also look, Robert, at the site itself. We look at its things like its net promoter scores, its customer service, its culture.
Mm-hmm.
You know, all of that is taken, you know, into account in our decision to make sure that we're actually gonna, you know, once we've gone through all of this pain, we're gonna build a better company for the future. What we've laid out, you know, and as you can see, a lot of the savings now are gonna start to come from Precision. Actually, that is that big site I referred to in Central Europe. Plus there's another site, actually in the U.S. that we're working through, starting to work through now as well. Again, won't hit that much this year, a little bit this year, but will affect next year. It won't surprise you that we're consolidating into Mexico.
You know, our major very efficient, very customer-focused factories are Czech Republic, excuse me, Mexico, India, and China. Plus, we've got other very important factories in higher cost economies, you know, which have got great engineering capabilities, great responsiveness to local customers, and they're very important to us as well. You know, all of that is in the mix. What we are looking to do, Robert, is improve the profitable growth rate of the whole company for the future and balance out, as you said, local disruption, which is why we've been very careful and we've tackled a few smaller sites first to make sure that muscle that you need and all of that process, right?
These Gantt charts have over 1,000 lines on them in terms of how you move a factory, that all of that process is well embedded, and that people have learned and have done that before we you know, move on to the next one. We'll continue to take that decision. You've probably done the math, Robert, right? Even when we've done what we've announced, we're still gonna have, you know, a lot of factories, right? Again, we'll look at that in our strategic planning and decide whether that's the right number or whether, you know, there's more opportunity. Certainly, you know, for instance, with Bimba, when we acquired Bimba, we acquired nine factories, right?
Yeah.
You have to look again at your footprint and say, "Is that really the optimal footprint to win in the future, or do we need to adjust it again?
That's very interesting. Thank you both. Thanks.
Thanks.
Great. Thanks, Robert.
Our next question comes from Alexander Virgo with Bank of America. Alexander, please go ahead.
Thanks very much. Morning, gents. A couple of questions in terms of follow-up. I wondered if you could talk a little bit about pricing dynamics, I guess, through the year, and then as things stand in looking into 2022. Probably more a question for Hydronic and Precision, given their business models. That's the first one.
Thanks, Alex. Well, obviously, you know, as we announced on some of the calls, you know, we recognized inflation early. You know, we always thought it was gonna be pretty sticky. We could see what was happening to copper prices. You know, we could see obviously a bit after that, what's happening to labor inflation. You know, every company that wants to retain its talent right now is obviously faced with that. You know, I was really pleased 'cause the teams reacted early. As you say, with Critical, you know, in the new construction part of Critical, obviously we price projects. Then if we win them, we immediately lock in the material costs, and so we know the margins we're quoting at.
The margins in the order book are slightly better than they were 12 months ago because of that aftermarket mix coming through. Put Critical to one side a minute. In terms of Hydronic, well, we've got absolutely fantastic brands. We've got leading market positions. Our technology typically costs 2% or 3% of the cost of the HVAC system. Only 2% or 3%, but it can affect up to 25%, even 35% of the energy used in that system. It can affect the capital cost considerably of the system. If a system's better balanced, you need far less of the other components in the system. You know, we've got a good position and, you know, we're well on to passing that inflation that's coming through into Hydronic, you know, through to customers in a careful, considered way.
Obviously there's more inflation coming still, Alex. I think we all know that. Energy costs, right, being a prime one. You know, we'll monitor that as we go through. We have the flexibility to go back and say, actually. This isn't just us, Alex. This is everybody, right? Everybody knows that this is on the agenda and our customers are hearing it from, you know, practically all of their supply base. You know, we're onto that. Hydronic would have been the biggest issue because remember, Hydronic uses a lot of raw material, uses a lot of things like gunmetal, which use brass, they use zinc, and we've got our own foundries in Hydronic, right? They're all automated, they're all in automated machine, automated assembly.
What that means is, though, that those cost increases tend to come straight through to us. We're on top of that. We're passing it through. In Precision, we tend to buy, you know, already added value components in a lot of cases. Sometimes we do the machining. But what our supply chain team have done is a really good job of consolidating supply and resisting a lot of that cost coming through the system in Precision. Plus, they're doing value engineering exercises to improve the design and take costs out. Plus, we're passing price through in all of the sensible places. Again, deep analysis, deep segmental analysis of the various parts of the business. Obviously, aftermarket is a key place where we're passing through price.
Obviously, smaller customers that are buying very special systems out of Precision, we're passing through price there. You know, in overall terms, Alex, I feel good about what the teams are doing to stay ahead of the inflation, the costs are coming through the system. It's giving us, you know, something extra to manage, but, you know, we're managing it pretty well at the moment, Alex.
Okay, great. Thank you. Second question was just on the energy business that you've moved across. If it's one factory operating very well already, it's margin dilutive, I guess, to Critical. What is it that can happen there that's gonna get that margin up to the sort of 18%-20% number that you're targeting? Then I've got one final housekeeping question, which is just Russia-Ukraine exposure, which I guess is predominantly in Critical.
Yeah.
That's it, I guess. Thanks.
Yeah. Do you wanna just talk about that closer?
Yeah. Obviously, we're watching carefully. Thoughts are with everybody on the ground out there. We don't have any employees in Ukraine. We obviously have a team in Russia. We're staying close to them. 2% of our overall turnover, as you said, Alex, largely in Critical. But we do sell both of the other divisions go through that central team. Watching it carefully, we don't see it as a big direct impact at this stage. Yeah. Well, I guess I'll leave it there.
Yeah. No, yeah, I agree with Dan. You know, definitely thoughts go out to those people affected. That's a sad situation. In terms of energy, the energy business, well, number one, Alex, is growth, right? So you saw the orders are well up last year, and it's good drop through, it's good margin business, that energy business. Yes, it is dilutive at current volumes to Critical, but, you know, Jackie has a clear plan, as he's done with everything else, right? You'll remember the 20%-30% as well as I do. That 20%-30% this year, assuming we hit our plan, is gonna be almost non-dilutive to Critical.
Yeah.
It's that good, right? You think about where that came from, Alex. Jackie has a clear plan. It's about increasing the overall size of that business. It's also about value engineering. The operational effectiveness in terms of the productivity of the key factory is good, but there are other cost efficiencies definitely which Jackie will get at within that business. Yeah, again, you know, a bit like the 20%-30%, we're confident that won't be dilutive within, you know, a few years. It will be bang in line with the rest of Critical, which, as you know, our ambition is to get that to be a 20% margin business.
Right. I guess it was 21% in 2020, wasn't it? The 72 orders you took in 2021 convert at that sort of margin or much closer to that margin than the 14-odd that you can see in the 2021 numbers. Is that the right-
Yeah. I mean, the orders rose nicely. Remember that the previous year's orders were obviously hit by COVID as well, right?
Yeah.
It was running a bit lower.
Yeah.
Its fixed costs were a bit high. Exactly, Alex. You get lovely leverage, you know, as those volumes come through. They did invest, Alex, actually a million pounds extra in growth last year as well, mainly in Asia. Again, that's a cost that, you know, as the volumes come through, will pay back quickly.
Yep. Perfect. Thank you very much.
Great. Thanks, Alex.
Thanks, Alex.
Our next question comes from Harry Philips of Peel Hunt. Harry, please go ahead.
Yeah. Good morning, everyone. Just a couple of questions, please. The first is just in terms of ventilators, obviously big swings in the last two and a half years. Is it now sort of should we view as a pretty much neutral situation and it doesn't cause a disruption, certainly to how the numbers look, going forward? Secondly, just around the Growth Hub and the opportunities there. I mean, should we assume the Growth Hub margins, particularly say growth margins, will be higher than other elements of the business, or is that too simplistic?
You know, they are accretive. I'll take that one first. Yeah. They are accretive to their business segments, Harry, which is what we want, right? 'Cause as we grow, we want, you know, to be a naturally that sort of 18%-20% margin business, right? So they are accretive, yeah. That comes from the fact that they add a lot of value for customers, Harry, so yeah. That's fairly straightforward on Growth Hub. On ventilators, Dan, do you wanna talk about that?
Yeah. Probably just a little bit left. We did about GBP 11 million more than our base 2019 level, Harry, in 2022. That was mostly in the first quarter of last year. It's a GBP 11 million headwind for us, and Beth to overcome. On the flip side, obviously, as Roy already said, the relationships that were built and all the good things that happened during that ventilator surge, I think helps us with the overall life science business and the fluid OEM sector in Beth's business. Yeah, a little bit of a remaining headwind, but clearly sets us up really well.
In the medium term, Harry, as well, we estimate that the installed base-
Yeah
... of our ventilators has gone up from something like 350,000, something like that, to about 600,000.
Yeah.
Obviously over time they get replaced and, you know, so our installed base over time, you know, will probably have a positive impact on those sales as well.
Yeah.
Probably not this year though, right?
No.
Because there's probably gonna be hopefully.
A year or two.
overcapacity in the ventilator base, right?
Yeah, indeed.
Does that answer your question, Harry?
Great stuff. Thanks very much indeed.
Yeah. Lovely.
Yeah.
Thanks, Roy.
Brilliant. Thanks, Harry.
All right, I think we're running out of time.
Our next question comes from Alasdair Leslie with Société Générale. Alasdair, please go ahead.
Oh, yeah. Hi. Thanks. Good morning, guys. Just to follow up on the comments you were kind of making earlier in relation to Hydronic and seeing a tailwind from energy efficiency in sensors in buildings this year. I was just wondering if that's kind of in relation to the EU Renovation Wave, because I think most other companies we've kind of been speaking to with sort of similar construction exposure have been indicating that might be more of a sort of have a more tangible impact, I'd say next year, i.e., in 2023. Just wondering if you could, you know, what you're kind of hearing from your operational guys today about the kind of implementation of those national strategies, you know, across some of your key markets.
Do you see that process moving along and translating now into specific incentives and funding? Maybe you could touch upon which markets you're maybe most excited about at this stage. Thank you.
Yeah. I think, well, you know, Germany, right, is incredibly important to that business. It's about 25% of hydronic-
Yeah.
Alasdair, right? What I love about Germany is, one, it takes energy efficiency incredibly seriously, right? People follow the standards. Two, it's a really professional industry. You know, these are installers that do a proper job. I think the average cost of a residential heating system in Germany is 2x or 3x what it is in the U.K., Alasdair, because you know, the quality that's built in, the energy saving that's built in, and everything else.
Yeah.
Obviously, Germany is very important. You know, Scandinavia is very important, which is similar in many ways to that sort of German market, and then Benelux. What I would say, what Phil told us in the business review, was that there are local incentives happening. You're right. I'm not sure much of this is actually really European Green Deal yet, but there are local incentives which, as Phil described, are basically skewing installer behavior. You know, if you've got tons of jobs on your books, right? It's skewing that towards the more energy efficient programs. The countries that Phil mentioned was France in particular, and then the parts of the Netherlands as well, is the two areas that he's mentioned where that's happening, Alistair.
If you want a bit more detail on that, I'm sure that John could set up a call with Phil, but that was the sort of overview, Alasdair, of what's happening.
Okay, great. Thank you very much, Roy.
All right, thanks.
One more.
Our final question comes from Mark Fielding with RBC. Mark, please go ahead.
Yeah, morning, guys. Just a couple of follow-ups. One, just following up actually from Alex's question earlier, where you were talking around sort of pricing. I mean, obviously, when you, Roy, took over as CEO, you noted a sort of renewed focus, you know, particularly I think in Precision on pricing in general. It's been overtaken a bit by the whole sort of, you know, supply chain issues and rising input costs generally. I suppose more structurally, where do you feel you are in terms of that pricing strategy and, you know, is there more to work on in that, or is it all now going along as you wish in that area?
Then if I could as well 'cause it's a bit linked, is the other thing you talked about, you know, back then was also SG&A reduction in the group. Do you feel like you've got SG&A set at the right level now for where it needs to be? Obviously, that's been part of the cost savings for the last couple of years too.
Brilliant. Well, I'll talk about SG&A first, and Dan, just chip in. So there's definitely more room to go on SG&A. Definitely. I mean, principally in Precision, right? Because as Beth is streamlining, some of the savings we've indicated actually are from doing exactly that. But as we streamline the whole division around the markets, and as we consolidate the factories, we need less, let's call it back-office overhead-
Yeah
...to run that business, right? As it becomes less complex, we need less overhead. 'Cause what we are doing though is reinvesting in growth areas, right? More engineers, obviously, more salespeople, more digital marketing, more product marketing-
Yeah
into those areas. What we'll see is a reshaping of SG&A towards the growth agenda. Last year, as I said, you know, we invested quite a bit more in the end than 50 basis points worth of incremental investments. The margins went up, you know, despite the fact of that investment. This year in our plan and in our outlook, we've included actually more than that, again, incremental investment, because we wanna grow this business faster, right? That was probably the biggest criticism when I took over. Really, you know, when you compare this to our peers, we weren't growing fast enough for a long period of time. You know that's my ambition to change that trajectory.
I'd say there's a reshaping of SG&A, but there will be some reductions as well as that comes through in Precision. Anything else to add on SG&A, do you think, Dan?
You know, we don't talk about the ERP and the systems, infrastructure as much, but clearly that's an enabler of exactly what you're just talking about. As we get our systems a little bit more streamlined, we bring in, quite frankly, more data and business intelligence folks. We don't call them statisticians anymore. It's actually enabling us to get at the right data as well and do it in a much more streamlined way. Yeah, as you say, I think there's more we can do with our systems, which actually takes away work that people didn't wanna do anyway, and redeploy those folks into much more business partnering activity.
Yeah. Into the sprint teams as well.
Yeah. Yeah.
That's what I would say on SG&A. On pricing, yeah, when I came in, I felt that we needed to increase our commercial acumen, as you say. We did that, right? For the first two years, and I'm probably gonna get these numbers slightly wrong, but we again, by very careful segmentation, you know, we're not gonna go to our big customers, right? Our big customers, you know, the biggest ones are about 2% of sales, something like that. They're obviously people like commercial vehicle customers.
Yeah.
You don't just go, you know, into them head on. You have to use other techniques like value engineering and all that other stuff, right? Very careful segmentation basis, particularly looking at the aftermarket, particularly looking where we were selling into the aftermarket, small value items that were very, very special. Things like that, we got better at that over the first couple of years. Thank goodness, right? Because as we face this inflationary environment, we actually, you know, have got a muscle now that we are using to make sure that we stay ahead of inflation, and that really is the name of the game now, to make sure that we keep up that momentum.
It's a moving feast, isn't it? Because, you know, just when you think, you know, you roughly understand where material pricing is, and obviously we've got some hedging in place, then your energy costs are moving. Or, you know, like last year when freight costs were moving.
Yeah.
You know, stay on top of that. As I said, we've got really good supply chain teams. We resist it as much as we possibly can in terms of cost inflation, but then pass through where we can't. That's how I describe where we are. I don't think there's massive upside on pricing now. I think that it is enabling us to come through, you know, a more difficult inflationary period. So far, you know, so good.
Perfect. Thanks. Can I just ask one other question, which is just in terms of actually this year's growth, as I basically, you know, asked Dan to come along and fill in my model for me, practically. When you talk about the sort of growth rates and higher and slightly higher, is it fair to think, I think, you know, Precision obviously you've got the 3% order book. Sorry, not Precision, Critical. Do we think of that as a good guide? The wider question is basically, do we think this year, you know, you're also hitting those longer term target growth rates in the divisions?
Yeah. No, it's a difficult one, isn't it? 'Cause there's so many moving parts at the moment, as you can imagine, externally. I think, you know, Critical yeah, it's the best guide we've got. Let's put it that way.
Yeah.
There's still GBP 300 million roughly of book to ship to get into Critical, right?
Yeah.
Just to put it into perspective, but the best guide we've always had, and Mark, you know, and it normally plays out, right, is the 3% order book growth. So, you know, if you say that's slightly higher, then obviously we expect the other two divisions to be a bit better than that, right? That's what we think and that's what's in our guidance. You know, there's plenty of moving parts. There's supply chain difficulties. You know, there's now tremendous difficulties in Eastern Europe. Nobody really knows how that's gonna pan out, right? There's lots of other moving parts, but the way we saw it, as we put together that guidance, is pretty much as you described.
Yeah. Great. Thanks, guys.
Brilliant. Thanks.
Brilliant. Thanks.
We have no further questions on the phone line, so I'll hand back to Roy for any closing remarks.
Great. Well, thanks for your questions. I think, you know, I'm pleased with the results. I think, you know, we've set out another good set of results. Remember we upgraded, I think, twice or three times last year. I think, you know, that was good to get that final result through at the end of the year. I think the momentum is good in the business. I think we are now investing heavily in our growth engine. As I said, you know, if you think about it, by the end of this year, then margins could have been, you know, at least another 100 basis points higher, all being well with our plan based on the level that we're investing in our growth engine.
I think that has to bode well for the future and really creating that quality growth company that is our aspiration. Thank you.