Good morning, everyone. Welcome to today's IMI plc third quarter interim management statement. My name is Seb, and I'll be the operator for your call today. If you would like to ask a question during the Q&A session, please press star one on your telephone keypad, and if you'd like to withdraw your question, please press star two. I will now hand over to Roy Twite, Chief Executive Officer. Please go ahead.
Good morning, everybody, and welcome to IMI's quarter three trading update. I am joined here, as usual, by Dan Shook, our CFO. Hopefully, you have all had the chance to read through our update this morning. I would like to highlight that third quarter performance was in line with our expectations, and we are reconfirming guidance for this year at 120-126 pence of EPS, reflecting the continued delivery of our growth strategy. The middle of that range puts our forecast EPS growth at 11% CAGR since we launched this new strategy in 2019. Process automation was a particular highlight: 14% orders growth in the third quarter, with further good progress in the aftermarket. That put book to bill at an exciting 1.15 over the last 12 months, showing continued momentum and that the best is still to come in Process Automation.
The other good news is that margins in both platforms were up in the quarter, as we benefited from our significant aftermarket business, continued delivery of high value-added solutions, and further efficiency gains. We also completed the acquisition of TWTG. This is a very entrepreneurial, fast-growing, and profitable company that is fully aligned with our growth strategy. It has great IoT solutions that will help accelerate aftermarket growth in the process automation installed base. I would like to extend a very warm welcome to Nadine, John, Dimme, and the entire TWTG team. Lastly, I'm sure that you will have seen the announcement earlier this week about Luke Grant, who will be appointed CFO and join the board next July, when Dan will step down. Firstly, I want to acknowledge and thank Dan for his invaluable contribution. And secondly, I want to congratulate Luke on his appointment.
This is a wonderful reflection of how we nurture, develop, and promote talent at IMI, and I look forward to working closely with Luke to continue to drive our business forward. So with that, I'm going to hand back to the operator who will manage the Q&A session. Thank you.
Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, please press star two. Our first question comes from Christian Hinderaker from Goldman Sachs. Please go ahead.
Morning, Roy. Morning, Dan. I want to start on IA if I can. Obviously, you've seen some softening in PMIs and also in some of the automation hardware markets. What are you hearing from customers in IA in terms of order orientations, but also maybe stocking levels into year-end and beyond?
Yeah, thanks, Christian. Morning, everybody. Yeah, I think if you look at what's happening in IA, and I don't want to get everybody too excited, but actually, the 60-day moving average orders have gone positive, which is obviously great news. I think this business is obviously a far, far better business than it was 10 years ago. And I say that because I think Jackie and the team are doing a great job of focusing on, obviously, gaining market share, focusing on the aftermarket like they were doing in process automation. And that 45% of aftermarket is definitely providing resilience. When, as you say, Christian, historically, when the PMIs were as low as sort of, what is it, 43 in Germany at the moment, then clearly we would have seen far, far bigger reductions in demand. I think there's that aspect to this business.
Now, the other aspect is that we've dramatically improved customer service, and I was delighted to report that they've actually hit Net Promoter Score of 60, which is world-class. And again, if I think back to sort of 10 years ago, around that time, we'd have been 15, 20. We'd have been nowhere near the levels that we're doing now. And a lot of that, Christian, has come from consolidating into our very best factories. And you know that our best factories are in areas like the Czech Republic and across IMI's, obviously in Mexico, China, India. And I think what we've done is obviously reduced the fixed cost base, which is providing margin resilience. But we've also got much better responsiveness, which is generating that much better customer satisfaction number.
So yeah, I think IA is, and I talked to a few people this morning who said IA is standing up really, really well. It is. And I think that, as I said, it's really down to that work that Jackie and the team have done. I think the other big effect is we're much more exposed to the U.S. now in IA, obviously since the Bimba acquisition, and that is certainly helping us versus where certainly Germany is right now in terms of industrial production. So yeah, in terms of orders, they are slightly positive. I'm not calling a recovery in that market. I don't see the markets themselves getting better, but I do see our business improving, which is great.
Thanks, Roy. That takes me well on to the second one, given you mentioned Mexico and the US, and I appreciate relatively recent news given yesterday's election result. But you've got about a quarter of your revenue base in the US. Can you just talk about potential risks and opportunities there in terms of both cost base and component procurement alignment to that 25% or so revenue mix in the United States?
Yeah, yeah, really good. Yeah, so as you said, bang-on question as always. 25% in the U.S., very, very important market to us. Clearly, where we see opportunity, process automation. I mean, obviously, as you know, the majority of that business is energy. And with the news coming out yesterday, we see that business has been doing incredibly well, but that should provide even more tailwinds for that business. I think in terms of tariffs is the other big element, obviously. We'll see how those tariffs play out. We have over time, I think you all know, built much more regional supply chains. So actually, China is 8% of our sales, but it's only 5% of our manufacturing. And that 5% is mainly for China. So we've very much had a China for China investment strategy over the last several years.
In the U.S., yes, a lot of our U.S. sales are out of Mexico, but I think that is a better position. When I study where our competition are manufacturing across IMI and look at where manufacturing and our supply chains come from, actually, from the information that we have about where tariffs could be applied, I think we'll actually be in a better situation, and I think it will be a relative gain, Christian, and as you know, we've proven we've had strong pricing power. If some of those tariffs need to be passed on, then obviously, particularly with overall 45% aftermarket across IMI, we'll be looking for that area in particular to pass on some of these tariffs as they arise, so until we get more specifics, I can't say more than that, Christian.
But yeah, at the moment, overall, we think that what's happened yesterday will be net positive in terms of IMI.
Thanks, Roy.
Thank you very much, Christian.
Next question is from Andrew Douglas at Jefferies. Please go ahead.
Morning, everyone. Three quick questions for me, please. Can you talk to us about the progress you made in energy markets in the third quarter? You clearly called that out along with the aftermarket. Which specific energy markets are you referring to, both from the end market and from a regional perspective? Second question is on Life Sciences. Still on double-digit declines, but clearly the comps are getting better, and hopefully, given what other people are saying in terms of destocking, do you expect that to turn positive in the fourth quarter, or is it going to be into next year? And then last, but by no means least, can you just make a comment on the progress that Jackie's making in his new role as CFO, how that's kind of driving additional either share or margin opportunities in the business? Thank you.
Andy, I've got to say, your line was absolutely awful.
Do you want me to go one by one?
Dan, right? No worries. No worries at all, Andy. But just if I start answering the wrong question, then please stop me, right? So if I talk a little bit about energy markets, Dan, and then you talk about life sciences, and then I'll talk about COO, right? Okay, so on energy markets, I mean, as you know, Andy, 60% of that business almost is aftermarket, right? And what we're seeing across the aftermarket is broad spread growth, with, I would say, highlights in LNG and actually power. So very, very important to us, but it's broad spread growth in the aftermarket. On the new construction side, and again, because of the nature of the orders in this business, I tend to look at it on a year-to-date basis, Andy, because in any particular quarter, it's not really going to help you with trends.
On a year-to-date basis, we've seen real strength in hydrogen, real strength. That's coming from the growth accelerator projects. And I should say that Growth Accelerator projects this year are now, in terms of orders, nearly double last year. So the amount of innovation happening is fantastic. And a big part of that extra growth is coming out of hydrogen and VIVO and what we're doing in process automation. So that's where we see a lot of new construction growth. And the other area we're seeing new construction growth, which won't surprise you, is in marine, right? So if you look year on year, year-to-date, marine is strong.
The rest of oil and gas is fine, but the extra, the sort of rapid growth is coming from those areas, which is pretty much what we said it would do back at that capital markets event, which I know you attended, Andy. So that's it in terms of energy markets. Dan, do you want to talk about life sciences? Yeah, life sciences, Andy. I think we can go back probably nine to 12 months when we started, when people were starting to predict and trying to predict how the markets were going to evolve. We didn't see it coming through. We saw our orders kind of come down to a lower level. And as you know, we've just set our business up to allow for trading at that level. And that's what we communicate, and we work towards that.
I think that's part of the reason why, even though you see the third quarter and year-to-date for overall Life Tech margins actually have ticked up. We've certainly been able to protect the margins in Life Science by being prepared. There's so much good things happening behind the scenes with our customers in terms of next products and making the next diagnostic equipment better. But in terms of order demand, we're still predicting that we're going to be at that lower level, and we want to prepare for when it ticks up. We're just not in a position, and I think it's played out well for us to say we're going to just be prepared to stay at this lower level. Overall, the good thing is the fourth quarter is an easier comp.
So again, I think we'll tick up a little bit with regards to quarter-on-quarter comparison and pretty much trading kind of as we expected and as we've called it. We are prepared, and that's the one conversation we have out with our businesses. We do think when it does tick up, and we're not going to call that, but when it does, we think it will go up in a pretty quick way as people try to get out with their new devices. But for the moment, we're pretty happy with how the team is managing what has been a tough environment.
Thank you.
Alex, you said it's your question.
Yeah, 100%.
I'm so obviously really pleased with Jackie assuming that position, Andy. As you know, our strategy has been pretty consistent since 2019, right? It's around Better World growth and really those three pillars of commercial excellence, innovation, complexity reduction, and driving best practice that Jackie really embedded in process automation, driving that commercial excellence, innovation, and complexity reduction right across all five sectors. As always, Jackie is starting with really making sure we've got excellent customer coverage, making sure that our CRM systems are giving us the data to make the best commercial decisions we can make, and then driving growth as growth accelerator thinking in terms of solving customer problems at pace, creating innovation that actually creates real value-add growth.
So, really pleased, as you probably suspect, we're also driving efficiencies across the piece, as we've done, to be frank, since the margins were 14% back in 2019 to where they are going to be this year, pretty close to 20%, right? And so yeah, of course, we're still driving efficiencies, but the main focus is on growth, generating that top-quality growth. And yeah, really pleased with what he's doing.
That's really good. Thank you very much, guys.
Thanks, Andy.
Our next question is from Mark Davies Jones at Stifel. Please go ahead.
Thank you. Morning, Roy. Morning, Dan. Slightly unfair question because you're not going to guide on next year, but just thinking about that sort of 10-11% CAGR that you were flagging, which is great. A lot of that has been driven by margin recently. And you're very close to that 20% goal. So in terms of maintaining that sort of growth in 2025, is that now all about markets picking up, or do you think you can get there? Are there other levers you can pull? Can we look again at those margin targets, for instance, or do you think you step up M&A? Can you just think about growth for next year?
Thanks, Mark. Now, clearly, free cash flow wasn't very much five years ago. Now, free cash flow is becoming very, very significant. And next year, we'll be around that GBP 300 million of free cash flow. Obviously, we need to pay the dividend out of that. But as you say, as I start to think about not just next year, but the next five years, the next sort of strategic period, you think, well, okay, we need to drive organic growth at that 5%, profits at 5%, and maybe next year slightly higher as we do that final part of the journey to get to the 20% margins. And then, of course, deploying that free cash flow.
And we've just done TWTG, which is small, but is obviously vital to getting sensors into the process automation installed base to really help us accelerate further that whole strategy of upgrade valve, right, which is working so well. So more really good M&A like that, that's what we're going for. It's a good pipeline, but as we all know, we will not overpay, right? We've got a very, very disciplined approach to M&A. And if we can't do the M&A, we put out our financial framework. Our net debt to EBITDA is going to be between one and two times. And on that basis, any excess cash will be returned to shareholders, probably in the form of share buybacks.
And so the math would show that if you get that over a strategic period, you should be driving something and continuing to drive, I should say, something like double-digit EPS growth, low double-digit EPS growth, right, Mark? So that's the way we see the business. Much prefer to invest in great acquisitions, obviously. We love that compounding effect, but we'll remain very disciplined in our approach.
Thank you. That's helpful as a framework.
Thank you, Mark. Thanks.
Our next question comes from Stefan Klepp at HSBC. Please go ahead.
Yeah, morning, guys. Just one question. So you delivered 1% organic growth now in Q3. Should I be worried or should we be worried that the growth that we all have been expecting for the full year is not coming through? Can we talk about the phasing of sales? Am I right to assume that the year-end bias of process automation is so strong that we shouldn't worry at all?
Yeah, I mean, Stefan, if you look at the order intake in process automation of 14% growth in the quarter, 10% aftermarket growth again, 20% new construction, then that's a very, very strong quarter. I think everybody on this call appreciates that. The phasing of order shipments in process automation is always more Q4-weighted, right? And December, we've got a big December. As always, the veterans on the call will know we always have a big December. And that's down to customer budgets, right? I mean, that's something that is very difficult to change. It's a structural thing in the industry. So absolutely, Stefan. The big change, the 1%, if you break it all down in Q3 versus where we'll probably end up this year, if you look at the middle of our EPS guidance, it's probably around 4% organic growth, right? Around that number.
And so if you look at the phasing of shipments in process automation, the whole thing ties together. So yeah, I'm not worried. That's why we reaffirm guidance, obviously, Stefan. And it's just the majority of that is process automation, order shipment phasing.
Yeah. And then can I add on to Mark's question on use of capital and mentioning share buybacks, having an efficient balance sheet and understanding that you want to be in a one to two times leveraged target corridor? I mean, if you just look out a few months' time, you basically are at the lower end anyhow and are going to be below. When would be the time then, because you're very disciplined on M&A, I understand that. When would be the point in time that you could openly think about share buybacks again?
Yeah, obviously, we'll review the situation at the full year results, right, Stefan? So the normal way we look at it is we're looking at the full year, we're looking at the half year, and we consider where we're going to be, and then we'll take action just like we did at the half year this year, Stefan.
Okay, perfect. Thank you.
Brilliant. Thank you, Stefan.
Our next question is from Jonathan Hearn at Barclays. Please go ahead.
Hey, guys. Good morning. Just a few questions for me, please. Firstly, can we just come back to TWTG? Obviously, it's an interesting acquisition, gives you more digital exposure, but can you maybe just give us some sort of potential revenue numbers or potential addressable market that you think you can get through having that capability now? That was the first one. The second one was just on Climate. Obviously, 4% growth is pretty decent for Climate. What's underpinning that? And also just maybe related to Climate, just following on, is that if we kind of look at data centers, if we look at digital cooling, it's a huge opportunity. I know data centers for you right now are small, but can you just give us a feel for what you're doing in that space and potentially what that could become going forward?
And then lastly, was just in terms of restructuring, obviously going into FY25, restructuring is now going to come above the line. Can you just give us a feel of what that cost impact is going to be? And in the early years, is there potential for that to be higher as sort of Jackie Hu executes on his plan across the sort of five business areas? Thanks.
Excellent. Jonathan, wow, that's a lot.
Sorry, guys.
TWTG. It's great. TWTG, I'm absolutely delighted. Obviously, Jackie and I visited them in Rotterdam. We've been chasing them for a while. It came out of a great accelerator project, Jonathan, and it really does solve customer problems. Fundamentally, at the moment, it's in refineries, which probably won't surprise you since it's in Rotterdam. But it's selling lots and lots of sensors because a couple of things. One, it's got a vibration sensor with a full frequency spectrum capability. So it can find vibrations in rotating equipment. It can find vibrations in valves, basically across the whole spectrum. At the moment, it's very, very limited in terms of the applications that the company is pursuing, right? Because each application we have to do is map the vibrations to a particular fault mode and predict from that data what's going to go wrong based on that vibration.
What that does, obviously, I mean, some of these process plants are now doing $3 million a day or more of output. What they're desperately trying to do is make sure that all their maintenance happens in a planned outage. This particular sensor, one has a full frequency range to pick up all different faults and predict all different faults, but only with the help of very knowledgeable applications engineers like our Valve Doctors, because you've really got to understand what's happening in the valve and, critically, what you're going to do about it if you get that particular signal. They then create, or they have created, the software that interprets all of those signals. The market for this particular device is very, very big. Our acquisition case more than pays for itself on the sales of sensors and software.
It's very, very fast growing at the moment, Jonathan, right? The reason that customers can apply literally hundreds or even thousands of these sensors in one process plant is because it can be battery powered. So it uses LoRaWAN technology, which is designed to be very good at monitoring. And that means low packets of data are sent for very big distances. So over tens of kilometers, they can send robust, accurate signals and use very, very little of the battery. So it's got the battery lasts five years. So you don't need mains, which obviously is very expensive, mains electricity when you try and put that into a refinery. And you don't need any other sort of relay because the data goes to very, very long distances. So the market is very substantial for the sensors.
Really, for us, though, and it'll take some time because we've got to map all the frequencies, we've got to test it in valves and all of that, we've got to get customers comfortable with this. But honestly, if anybody can get customers comfortable with this, it'll be us. We've proven that we can do an upgrade valve strategy. The real prize is to help grow faster the GBP 600 million PA aftermarket business. Because obviously, every 1, 2, 3% extra growth we get there is very, very profitable. Remember that the gross margins in process automation aftermarket are two and a half times what they are in new construction, right? It's a very profitable business. You get the upgrade valve, and then you get that beautiful part annuity coming afterwards once you've got your valve installed.
And roughly, Jonathan, we are replacing five competitor valves for every and losing one to competition at the moment. That'll give you an idea of how strong that strategy is becoming. So yeah, that's why TWTG, rather than just thinking about the sensor market, it's going to be good, it's fast growing, it's going to be big. But the bigger thing for us really is how we really start to grow eventually. 18 months' time, something like that, two years' time, we start to really get another lift on process automation. So that's TWTG. Climate, yeah, very pleased with 4% growth. Obviously, Stefano doing a great job leading that division. As you know, it's being driven by energy savings. So everybody says, "How are you doing better than X, P, Y, P?" Energy saving is at the core of that business. And we are a very small part.
Typically, our products cost 2 or 3% of the cost of the system, but they can save 30% of the energy. And so that value equation really helps that business generate growth. Really, really pleased with what they're doing. Data centers, yes, it's a small part of the business at the moment. But yes, it's growing quickly. And of course, we're looking to do more, Jonathan, right? And Stefano set up a dedicated team, obviously, to really think about how do we scale what we're doing in data centers? Because yes, we can really help data centers save a lot of energy, particularly as the data centers are being driven by AI and therefore using even more energy. I think that will also actually help eventually. Again, this will not be overnight, Jonathan, but it will also actually help our nuclear business, right?
Both in terms of retrofits, but I think it potentially will help in SMR as well. And we've got a strong position in small modular reactors. Again, I'm not talking about the next few years. It's probably a 2030 thing. We are well placed to benefit from that as the world has to be decarbonized. And then restructuring, yeah. So just to give you an idea, so we've said for a while now that this is the last year of restructuring, and we mean it. There won't be below-the-line costs. Of course, as you said, right, we are very keen to continue to improve and improve the efficiencies and invest in the right things in this business. Grow faster, create the space to invest the cash to grow even faster. That's been our mantra since we launched the Better World strategy in 2019.
There will be some costs above the line. We haven't done the budget review yet, Dan, and I know Jack and I have talked about it at least twice a week since August, right? We said, "No, don't worry, we're already on it." Jack is all over it, and so there will be probably, Jonathan, one or two pence of EPS in terms of cost next year. Once it's in the denominator, it's in the denominator, right, that cost. And then we'll just be able to run and carry on creating EPS growth, but yeah, at the moment, a rough guide, we'll tell you more in February about that. But a rough guide, Jonathan, would be one or two pence of EPS.
And the only caveat, Jonathan, as you know this, if we do do an acquisition like when we did Bimba and it came with nine sites, and there would be a need to do some rationalization and footprint moves, when we do those acquisitions, we might just flag a number there, which would end up in the middle column of restructuring because that truly is one-off. But for the core business, we've really got the footprint now that we want and can take us forward. Good point, Dan.
Great. So that answers all your questions, Jonathan. Thank you so much.
Yeah. Thanks, guys. Very clear. Thank you.
Brilliant. Thanks, Jonathan.
The next question is from Bruno Giani from BNP Paribas. Please go ahead.
Thanks for taking my question. The first one was just on the 60-day rolling order trends in Industrial Automation, which you had commented had grown. I was wondering whether you could shed some color on book to bill and what that looked like?
Yeah. So I mean, it's only slightly up, Bruno, right? It's slightly up. I think it's 1% up or something like that in the last 60 days, right? So I wouldn't say it's starting, as I said, be careful, right? It's just good news. And the reason I touched on it is because it's very resilient in very difficult industrial markets, right? So I wouldn't say it's starting to grow, but it is slightly up. In terms of book to bill, it is about one, maybe a little bit under, and there's a bit of order book that we've certainly been selling out of. So I'd say it's relatively stable, Bruno, and we're watching it. So yeah, there's nothing there that would indicate any major challenges.
As Roy said, with a 60-day moving average of plus one, I think that gives us a little bit of some nice news as we head into Q4. Yeah. Because the order book is slightly longer than it would have historically been. So obviously, it's coming down. You'd expect sometimes to come down as we still come through some of the effects of COVID and obviously improve and improve. Yeah.
Got it. And just on Transport, sales have declined harshly as expected given the tough comps. Could you, I guess, provide us with some color in regards to how long you think this downside call may last for you? Is it another?
Yeah. Yeah. Yeah. So Bruno, so the way I'll characterize it is the second half of last year really ramped up, right? As we said at the time, you'll probably remember. So post-COVID, suddenly the truck manufacturers could get all the electronic parts, which allowed them to speed up their production lines. And we were running flat out to keep up, right? So as we said in the statement, we've got a very, very tough comparator in Q3, Q4, right? I'd say we're returning to more normal levels now, and we see that sort of continuing into next year. I think that at some point, potentially late next year, volumes will start to build again because in the year after that, there's going to be some legislation changes which are going to add quite a bit to the cost of a truck.
And so there's going to start to be a prebuy. So yeah, I think we're going to run at these sort of current levels for a while, and then it will start to pick up again. And our job, I remember, transport's 8% of our business. Our job is to make sure that while that's happening, we obviously keep pushing for better returns out of that business.
Understood. Just coming back again to the earlier comment of around 4% organic sales growth for the year, which I think implies roughly around 6% in Q4. It doesn't sound as if you're baking in much of a recovery in transport in the very near term. Are you baking in any sort of sequential recovery on, say, the shorter cycle sides of your business into Q4, or is it just pretty much all process-led or very vast majority process-led?
Yeah. The vast majority is process-led, Bruno, as I said, right? So vast majority is that. As Dan said, I think it'll be slightly up Q4, flat to slightly up. It's not massive. And climate continues its good progress. And it's really good to see climate doing what it's doing, actually. And a bigger and bigger part of that business is the connected product. Last month, for the first time, I just saw on our intranet yesterday, we sold 1,000 TA- Smart valves. Now, a TA- Smart valve is a fully connected intelligent device. And that replaces so typically, and again, there's a range, right? I'm oversimplifying. But typically, the price of a fully connected TA- Smart valve for us is five to 10 times what a mechanical simple balancing valve would be.
So as the industry moves towards requiring much better control to meet the legislation to drive the energy efficiencies that are required, then we sell more and more connected devices. One, because they deliver better control. Two, because they actually deliver the data that proves that you're delivering better control as well. So yeah, it's a good trend. And again, great job by the climate team. And it's some really good new product coming through there. And next year, there'll be another, what I call a real banner product, new product coming through, which will be very much linked with the Heatmiser technology, that Heatmiser acquisition that we did nearly a couple of years ago, wasn't it, Dan? So I think it's shaping up quite nicely, actually, Bruno.
Understood. Thank you very much.
Thank you.
Our next question is from Harry Phillips at Peel Hunt. Please go ahead.
Yeah. Good morning, everyone. Two hopefully straightforward ones, please. The first is just on Growth Hub and the sort of comments you're making around that, Roy. Just how does that spread across the five different divisions in terms of sort of emphasis? And also, is there a big difference in payback on those Growth Hub projects in those different businesses? And then secondly, and this is I missed it, I think, just how big is the aftermarket exposure in industrial automation, please?
Yeah. So I'll do the easy one first. Aftermarket in IA is about 45% of the business. And I think we've got it's obviously different to process automation, right? Where you might be selling a 50,000-pound, 60,000-pound valve as an upgrade. It might be a lot more than that, actually, in places like petrochem, Harry. Whereas these are much more small transactions to a very fragmented customer base. And I think, again, Jackie, using data, Jackie is just getting better, and the team are getting better and better at really highlighting when something is an aftermarket transaction in all of that data complexity and making sure that we then sell on speed, service, and obviously price. It's not really about price. It's about making sure that that kit is running, right? So yeah, I think we're getting better at that, but it's about 45% in IA.
Growth Hub, obviously, that's my favorite subject, right? Absolutely. And so yeah, Growth Hub. So actual orders, first nine months, GBP 98 million, actually up 91% on last year. Process automation, again, is doing superbly, Harry. What they've done is, so on top of everything that we've presented that's all on the web, Retrofit 3D, EroSolve, and all of those brilliant projects, which are now doing over GBP 20 million each a year, it's the hydrogen projects that are really starting to shine, right? So the main process automation hydrogen project, I think we did GBP 1 million of orders a couple of years ago. We did GBP 9 million of orders from memory last year.
And this year, I was just in Italy literally last week with Jackie and the whole team down there. And we'll do over GBP 40 million of orders this year. It might even be more than that.
But it's really starting to ramp up, Harry. And margins are obviously moving in the right direction. We're starting to do more service along with those projects. And yeah, we've just got a nice niche of the market that totally uses our oil and gas capability in this new area. So process automation going really well. Climate, as I said, some fantastic projects on the connected side. TA-Smart, I just talked about. I won't talk about that again. But really using more and more connected product to give better control and give the data is where a lot of those projects are going, which is great. We were in Sweden with the board three weeks ago, and they showcased a lot of this innovation. They've also got more areas that we need to control, Harry.
So obviously, the amount of balancing valves required in the building directly affects the energy use because the more control you get, the less energy you need to use. And again, there's more legislation and standards coming down the pipeline, which will help us in some of our really important markets like Germany. So yeah, innovating behind that trend, really good. Transport as well, I call out. We've got some great innovation coming through on transport, particularly around the core valves that enable so much of our technology around things like the air systems on the truck. Even things, Harry, like reducing the ride height of the truck to improve fuel economy, things like that.
We've got a really good new core valve, and we've booked already tens of millions worth of orders on the back of what that will do as part of an ecosystem which does control on the truck. So yeah, that's going well. Where have I mentioned? So life sciences, it's more around making sure that we're on the next platform for these big OEMs and making sure we've got the best. As you know, we've got a market-leading position, global market-leading position in things like electron multipliers and just making sure that we're on those next platforms. And then IA has lots of incremental innovation in IA, which is again around digital and making sure that sort of valve protocols are the best in terms of analytics and preventative maintenance and making sure that that whole product arena is very, very competitive.
Yeah, I'm pleased with the whole mindset change versus sort of five, six years ago where we're much more focused on making sure that everything we do solves an acute customer problem. We can quantify the value that it creates. We can prove that we can capture some of that value through the customer willingness to pay all very, very early in the cycle. These are high-value-add projects, Harry, and payback times are short because it's a fundamental change. We spend far less cost before we start to get customer commitment. That's the whole point of using this sprint team approach, Harry.
Just sorry, just to double-check the number.
Not a question.
Yeah, yeah. No, just in terms of so the order intake in Growth Hub is GBP 98 million after nine months this year. So you're getting on basically for if that continues to grow at the rate it is, that is and then hydrogen is circa 40% of that? Sorry, GBP 40 million of that?
No, no, sorry. That's two different numbers. What I'm predicting is that hydrogen by the year-end will be £40 million. Obviously, the overall number will be bigger by then. But that's the nine-month number. And when I was down in Italy, there's also potential for at least another couple of orders, Harry. So I'm saying it's going to be £40 million plus by the year-end of a number that's obviously going to be quite a bit bigger than £98 million. Yeah.
Fantastic. No, that's really clear. Thanks very much indeed, Roy.
Yeah. All the key projects are growing. EroSolve, Retrofit3D, they're all growing, Harry.
Excellent. Thank you.
Thanks, Harry.
The next question is from Margaret Scully at Redburn. Please go ahead.
Yeah. Good morning, Roy. Good morning again. Just a quick one for me because we've been through a lot. But could you just give us an update on the M&A pipeline? We've talked a lot about the fact that you have a very solid balance sheet. TWTG was quite small. What areas are you starting to see that perhaps multiples are coming down or things starting to look more interesting?
Thanks, Margaret. Margaret, yeah, TWTG is quite small, but it's very important. I hope I got that across in terms of its effect on.
No, you did. Yeah.
Let's face it. It's the biggest profit pool in our business, right? Process automation is, what, 37%-38% of IMI? 60% of that is aftermarket, and that's just what we're going after. That's why that's important. Yeah. M&A pipeline, so we're going after three areas. One is obviously automation. TWTG is a classic example of what we like in automation. Something where us plus the other company equals a lot more than the sum of the parts, right? One plus one equals a lot more than two. And so things like sensors, connected devices, things that can get us even closer to customers, things that can help our customers do that maintenance in a very effective way, in a low-cost way, is obviously crucial. So we love those sort of automation acquisitions, clearly smart buildings, and the things that drive energy efficiency ultimately in smart buildings, connected devices.
That is another very good pipeline. I'd say our pipeline on commercial buildings is stronger than our pipeline on residential buildings. And we're fine with that, right? Commercial buildings, we think that's a really good space for energy efficiency. So your pipeline's good there. And then the third place is around life sciences. And again, the pipeline is good. We won't overpay in our terms, right, Margaret? So out of those three areas, what we found is that we have a higher hit rate on automation and smart buildings than we do in life sciences because often there's some big U.S. companies that will pay some very big multiples in life sciences, which for us is tricky because, again, just so you know, Margaret, for us, we've got to be above our cost of capital in terms of returns by year three.
IMI, on our basis, where we've got everything in the denominator, including writing back all of any goodwill written off since we started, on that basis, we're over 13% growing. We do not want to be materially reducing that number. We want to be hitting that number within a five-year period. So we're very strict about that. Yeah. I think multiples for deals, they really haven't changed that much through this entire period. I think that's partly because we're always interested in those businesses that are operating very nicely already, and we can see a great combination synergy like TWTG. So yeah, it's not really a multiple. As Roy said, we'll always look and try to develop those relationships so we can do deals out of process, which enable us sometimes that usually tends to the multiples come down a little bit.
But overall, it's really down to that framework of making sure we get to our cost of capital within three years and then get up to that 13% number by year five.
Thank you. Just one more question. Yeah, it does. The TWTG acquisition, I agree. I think you explained that very, very well. But one of the other areas that I think you've been hiring a lot of software engineers internally. So with that acquisition and the other IP you have within the business and the whole overlay of growth enablers, are you really starting to see that momentum in terms of being able to use one technology to overlay? So for instance, could those sensors of TWTG be applicable in climate? Is that really starting to come together internally, given your focus on internal hires as well?
Really interesting. Yeah. So Jackie is going to be running workshops with, obviously, across all the divisions. So we've put it in process automation because that's the biggest opportunity. But of course, this technology and again, talking to Nadine and the team in Rotterdam, they have inquiries from other areas, which includes things like the smart grid, monitoring the smart grid. It includes things like infrastructure monitoring. And because of the nature of the way that the data works and the software, yes, I can see that there are other opportunities potentially, certainly into climate, potentially into industrial automation as well. So absolutely. I'm trying to sort of keep these messages reasonably straightforward, Margaret. But yes, yeah, I think this has got several potential growth streams or avenues for IMI. Totally agree.
Yeah. Thank you very much. I appreciate that. Very clear.
Thanks, Maggie.
Our last question today comes from Richard Page at Deutsche Bank. Please go ahead.
Morning, all. Thank you. Just one question from me on process automation. Another good quarter of strong order growth in the aftermarket. Could I just ask what part is the upgrade of competitive valves playing in that number? Thank you.
Yeah. Thanks, Richard. Yeah. I mean, upgrade valves are up this year to date. Well, sorry, in the quarter, Richard, I was just talking about the quarter, 30%. So 30% year-on-year is upgrade of competitive valves. Yeah. So yeah, it's becoming significant. And obviously, for commercial reasons, I'm not going to go through this list, but Jackie's given me a list of the different competitors that we're upgrading. And remembering, we're upgrading typically from a sort of cage valve technology, right, which is less control, obviously cheaper, because that's why the EPC bought it in the first place, Richard, to DRAG valve designs, to very sophisticated control valves. And obviously, that's because the end user is most interested in reliability. If you've got $3 million a day or that sort of range coming out of your process plant, you want it to be reliable.
And so, yeah, generally, we're upgrading from obviously older, what I would say is less technically good technology into our severe service valves. Yeah, it's a broadening range of valves that we're upgrading. Using CRM, we're getting better data and starting to find patterns in that, that means that we can upgrade more valves more systematically across the world.
Brilliant. Thank you very much.
Thank you, Richard. Thanks, Richard.
We have no further questions on the call, so I'll hand back to management to conclude.
Thanks, everybody, for joining the call. And I'll just reiterate, we're maintaining guidance. We fully believe that we're going to be within our range for the year-end. And I think the key point is the free cash flow point that a lot of you asked about. But as we go into this next period, we still see that sort of 5% plus profit growth, but we've got something like £300 million to use, either on great acquisitions, which of course is our preferred option, but we will be disciplined. And if we can't find the right acquisitions, we'll be using that to give back to shareholders, probably share buybacks. And therefore, you get to an EPS growth that sort of continues that trend we've been on somewhere around double-digit. Great. Thank you very much, everybody. Have a great end of the year.
This concludes today's call. Thank you all very much for joining.