Good morning, everybody, welcome to IMI's 2023 Interim Results Presentation. I'm joined here today, as usual, by Dan Shook, our Finance Director. Next slide, please. This slide covers the key messages from the presentation, and the first thing to say is that it was another excellent performance from the team in the first half. There is great momentum in this business, and we delivered 12% revenue growth, 7% of which was organic. Adjusted operating margins were up 140 basis points, and adjusted profit before tax was up 17%. Our Complexity Reduction Program delivered GBP 8 million of benefits in the first half, and our good working capital management has allowed us to deliver significantly improved operating cash flows. We're also announcing the next steps of our purpose-led strategy as we further align our business to key sectors to accelerate growth.
I will provide more detail on the next slide. We are reiterating the guidance that we upgraded our May IMS. We expect that the full year Adjusted EPS will be between GBP 1.12 and GBP 1.17. Next slide, please. Today, we are announcing the next steps of our purpose-led strategy: breakthrough engineering for a better world. IMI is always evolving. The sectors in which we operate have expanded, and the way in which we help solve customer problems has strengthened. As such, we're making some changes to our structure to further set us up for success. To build on our customer-focused journey and maximize our growth opportunities, we are organizing IMI into an Automation business and a Life Technology business.
The aim is to accelerate better world growth by continuing to get us closer to our customers through sector-focused teams and align our world-class engineering capabilities. Effectively immediately, Jackie Hu will lead the Automation business, which will leverage deep automation technology and applications expertise to improve productivity, safety, and sustainability in the process automation and Industrial Automation sectors. This platform includes IMI Critical Engineering and IMI Precision Engineering's Industrial Automation business. Beth Ferreira will lead the Life Technology business, which will focus on technologies that enhance and improve everyday life, particularly in the areas of health, sustainability, and comfort across the climate control, transport, and life science and fluid control sectors. This platform includes IMI Hydronic Engineering and IMI Precision Engineering's fluid OEM and transport businesses. Reporting will be aligned across the two businesses and five sectors alongside our 2023 preliminary results announcement. Next slide, please.
Our new structure aligns IMI to five better world sectors, where secular macro trends will support sustainable, profitable growth. The long-term fundamentals in each of these key sectors is strong, and we have the ability to make a significant positive impact. Our process automation business will benefit from a renewed focus on energy security, the need to reduce emissions and develop new green technology, as well as our customers' continued investment in process efficiency and safety. We believe that this sector can grow at a 5% CAGR in the medium term. Industrial automation can grow at 5% CAGR through the cycle. In the current labor market, the payback on our customers' automation projects is faster than ever, and we see significant tailwinds from continued investments in reshoring and demands for mass customization. Our climate control business specializes in delivering optimal building comfort, energy efficiency, and connectivity.
Our premium products play an important role creating the smart buildings of the future and helping our customers to meet their environmental and sustainability goals. Supported by favorable regulation, we believe that this sector can grow at 5%+ CAGR. In life science and fluid control, we are helping our customers to improve their processes to diagnose disease early and support highly tailored, patient-focused critical care. With the demand for healthcare expected to increase substantially and scientific advances unlocking novel new treatments, we see this sector growing between a 5%-10% CAGR in the medium term. Our transport business sits at the heart of our customers' journey to reduce emissions and develop the next generation of commercial vehicles. We believe that this sector can grow between 3%-5% CAGR in the medium term. Next slide, please.
Before I hand over to Dan, I do want to provide a quick refresher on our strategy and how it underpins our new financial framework. At the heart of our strategy is our purpose: breakthrough engineering for a better world. This is an incredibly powerful driver which has unleashed the tremendous energy of our people and our partners to solve key industry problems, helping our customers become safer, more sustainable, and more productive. There are three key pillars to our strategy. The first is customer satisfaction. We provide world-class engineering expertise and excellent service to our customers. We have deep sector knowledge and know-how. Our focus is on solving our customers' problems. We have market-leading brands, and we are achieving industry-leading customer satisfaction scores across IMI. The second is market-led innovation.
Our innovation accelerator, Growth Hub, supported by selective M&A, enables us to develop breakthrough solutions to support our customers with their most challenging and complex engineering problems. The third is complexity reduction, and we continue to simplify and improve our global manufacturing footprint and demonstrate a resilient supply chain to support our customers. The good news is that this strategy is delivering significant improvements in our financial KPIs. We have grown revenue at 3% CAGR between 2019 and 2022. Our operating margin has increased by 360 basis points, and adjusted profit before tax grew at an 11% CAGR. ROIC improved by 130 basis points to 12.7%, and full-year Adjusted EPS increased from GBP 0.73 to GBP 1.05.
Reflecting on the considerable success of our strategy, alongside our sector-aligned operating model, our evolved portfolio, and the renewed strength of our energy markets in process automation, we have revised our financial framework and set ambitious new goals for the group. We want to deliver 5% organic growth, 20% operating margin, and 90% cash conversion through the cycle. Finally, we want to maintain our return on invested capital above 12% as we continue to create real shareholder value through acquisitions. With that, I'm going to hand over to Dan to talk through our first half results in more detail.
Thanks, Roy. Good morning, everyone. I'm pleased to be able to take you through our first half results today. Next slide. As Roy mentioned, a really strong first half as our purpose-led strategy continues to deliver. Revenue increased by 12%, adjusted operating profit was up 21%, and our adjusted operating margin increased by 140 basis points as we made further progress towards our 20% through-cycle target. We also improved our operating cash flow during the first half and are increasing our interim dividend by 10%, reflecting our continued confidence in the business. Next slide. Firstly, some more detail around our strong revenue and operating profit performance.
First half revenue increased by 12% to GBP 1.1 billion, as we delivered 7% organic revenue growth and benefited from our recent acquisitions, as well as a 4% currency tailwind. Adjusted operating profit increased by 21% to GBP 193 million. Organic profits increased by 13%, we again benefited from our acquisitions and FX. I will cover it a little later, the recent strengthening of sterling will obviously change the FX effect for the full year. Next slide. As Roy mentioned, we are aligning our business to five better world sectors, where we see a significant opportunity to create value and deliver sustainable, profitable growth. This slide shows how we performed across each of the key sectors in the first half.
Process automation had another outstanding period, with 15% organic revenue growth and continued strong order intake. Overall, orders were up 30% organically, with a 26% increase in aftermarket. We have seen particular strength in LNG, marine, and downstream oil and gas. New products continue to make a major contribution to growth, particularly through upgrade opportunities. Industrial automation delivered a good performance despite more uncertain markets, with revenue up 8% and 2% organically. We see continued demand for solutions that automate processes that help our customers improve labor efficiency. Climate control organic revenue was up 5%, as we continue to see demand for our energy-saving solutions. Adjusted revenue was up 15%, with the integration of Heatmiser progressing really well and providing a positive contribution to performance in the period.
Life science and fluid control grew by 1%, with a 3% reduction on an organic basis. Underlying demand remains solid, although, like many in this space, we have seen customer destocking in the first half. Transport was up 12% and 6% organically. We saw growth across all regions as supply chains began to normalize and have particularly benefited from a strong recovery in China. As you know, we are a fluid and motion control specialist. We continue to successfully share our engineering talent and expertise across all these sectors, particularly across our Growth Hub teams. A number of our key manufacturing facilities serve multiple sectors, as do key support functions like procurement, IT, and finance.
We will finalize our reporting under this new structure through the remainder of the year, but you'll see the division detail included in an appendix, in the appendix in this pack. Next slide, please. Looking at the income statement, as mentioned, we saw strong organic growth in revenue and operating profit, respectively up 7% and 13%. As expected, the net interest charge has increased to GBP 12.7 million, largely reflecting the increased rate environment and funding for recent acquisitions. We continue to expect the full-year charge to be roughly GBP 25 million. Adjusting items have increased when compared to the prior period, reflecting an increase in restructuring costs, which I will run through shortly, and an increase in acquired intangible amortization following the three acquisitions completed in 2022.
Our adjusted tax rate for the first half was 22.3%. We expect this to be maintained for the full year. Finally, our adjusted basic EPS increased by 15% to GBP 0.54 in the first half. Next slide. Continuing to cash flow, where we delivered significant improvement during the first half, supported by our profit performance. We saw a GBP 48 million working capital outflow in the first half, with debtors increasing in line with our top-line growth. Inventory levels increased by GBP 52 million, with investments to support the significant increase in process automation orders, which more than offset reductions across our other sectors. CapEx of GBP 36 million is about 1.2x depreciation and includes investments to support growth and our sustainability ambitions.
We continue to see good opportunities to deploy capital into our core businesses to drive organic growth and deliver further productivity improvements. Our net debt has reduced from GBP 812 million at the end of the year to GBP 772 million at the half year, with a net debt to EBITDA reducing to 1.6x, giving us ample capacity to continue to invest both for organic and inorganic purposes. Next slide, please. Given the importance free cash flow delivery is in fueling our future growth, I thought it would be good to review our recent performance and where our ambitions lie. While IMI is consistently cash generative, we do see a clear pathway to delivering a step change in free cash flow generation in the coming years.
Starting with our 2022 figure of GBP 158 million, firstly, we invested GBP 85 million in working capital in 2022 to support customer deliveries. We would expect this to normalize as supply chains settle back down. Secondly, we plan to conclude our Complexity Reduction Program in 2025, and I'll update on that shortly. Including 2023, we expect to deliver a further GBP 42 million of incremental annual benefits, and this, combined with the elimination of the cash investment, will further boost free cash flow. Finally, continuing growth in our attractive end markets will further increase our free cash flow. Overall, we see IMI building over the next years to a free cash flow delivery in excess of GBP 300 million. Next slide.
Given this free cash flow expectation, I thought it would be important to remind and reinforce our disciplined approach to capital allocation. Our priority is delivering consistent, profitable growth, so we continue to invest in both our people and operations to accelerate breakthrough solutions to solve our customers' most challenging and complex engineering problems. This includes investment in Growth Hub, which is going from strength to strength and really embedding a customer-led, entrepreneurial culture across the organization. Next, as you know, we have completed four strategic acquisitions since December 2021 and will continue to pursue targeted better world acquisitions. These deals must be in attractive, better world markets like smart buildings, life sciences, and automation. They must be scalable within IMI, and they must deliver returns in line with our strict financial criteria.
The integration of our recent acquisitions is progressing well, and we continue to develop an attractive pipeline of bolt-on opportunities. Last, but certainly not least, we will continue to deliver returns to shareholders. Our progressive dividend is an important commitment we will maintain even while we invest in the business, both organically and inorganically. Should we see a situation where we expect our leverage will fall meaningfully below our target range, we will look to return additional capital to shareholders through share buybacks. You will remember and see on the slide that we did this in 2021, completing a GBP 200 million share buyback in that year. Since launching our strategy in 2019, we have effectively deployed over GBP 1.4 billion of capital, all while increasing our return on invested capital. Next slide, please. Next, an update on our complexity reduction program.
We delivered GBP 8 million of benefits in the first half. Continue to expect to deliver GBP 20 million for the full year. All projects are progressing to plan, and we still expect the overall program to come to its conclusion in 2025. Final slide before I hand back over to Roy, the group outlook statement. As I mentioned earlier, it is important to note that the pound has strengthened since we last issued guidance in May. Given we make the majority of our profits overseas, we now expect to see an FX headwind of 1% rather than the 2% tailwind previously flagged. Despite the FX movement, due to the resilience of our precision business and continued strength in critical, we are reiterating guidance.
We continue to expect full year Adjusted EPS will be between GBP 1.12 and GBP 1.17 in 2023. Finally, I would just like to confirm that the divisional guidance issued in our May IMS remains unchanged. With that, let me hand back to Roy to take you through the strategy update. Thanks, everyone.
Thanks, Dan. The first thing I want to say is that our Better World strategy is clearly delivering results. We are building a track record of compounding profitable growth, and you can see on the slide that our Adjusted EPS has grown at 13% CAGR since we launched our new strategy back in late 2019. Next slide, please. We are building a track record of successful acquisitions, underpinned by our disciplined approach to capital allocation and strict financial criteria. You may remember that we acquired PBM back in September 2019. PBM specialize in the development of high-quality industrial flow control solutions, with particular strengths in pharma and biotechnology. This acquisition has been a real success story. As well as providing further exposure to Better World growth markets with secular growth trends, we have generated great synergies through scaling.
The acquisition is on track to deliver our financial criteria in full. We delivered returns above WACC in year three, and we are on track to deliver returns in line with the group ROIC by year five. Next slide, please. I also wanted to take this opportunity to give you an update on our ESG progress. At IMI, we engineer solutions for our customers that are safer and more sustainable. Every day, our people are helping to improve energy efficiency in buildings. They're helping to improve medical analytical devices to save lives and reduce emissions, both in oil and gas and on trucks. While there are countless examples I could talk through today, I'd like to highlight how we're adding value to the hydrogen value chain.
Hydrogen looks set to play an important role in the transition to net zero, our focus on hydrogen is leading to some very exciting projects. Firstly, we are providing valves and actuators to support electrolyzers, which generate 100% green hydrogen. Secondly, our HydroGreen team are actively supporting the development of hydrogen refueling infrastructure with solutions that improve the reliability of refueling stations. Refueling stations will be key to unlocking the hydrogen economy, we are well-placed to capitalize. Third, the storage of liquid hydrogen also presents a great opportunity for us, we are seeing some promising early wins, applying our technology to store hydrogen at cryogenic temperatures safely and securely. Finally, hydrogen fuel cell trucks. We see a great opportunity for growth here, largely as a result of the additional fluid control requirements on hydrogen fuel cell trucks when compared to traditional vehicles.
We've actually been supplying products into nearly 3,000 hydrogen vehicles in China, as well as into trucks being launched this year in the US. We feel really excited about the future growth opportunities. We delivered GBP 7 million of hydrogen orders in 2022. We expect to double that in 2023. Hopefully, this gives you a good feeling for how our Better World Strategy is translating into sustainable, profitable growth in rapidly growing sectors. Next slide, please. We are committed to playing our full part to address climate change and protect the planet by minimizing the environmental impact across everything we do. We continue to see great progress in reducing our CO2 intensity, with a 26% reduction since 2019. We are committed to a net zero target for Scope 1 and Scope 2 emissions by 2040, and for Scope 3 by 2050.
We're also progressing initiatives to reduce our water usage. We have improved and reduced our water intensity by 9% since 2020. Next slide, please. At IMI, we want to develop and empower our people to make an impact and to create a better working world. Employee engagement remains really high. We are making good progress on gender diversity, and are benefiting from the strong female representation on both our executive committee and our board. Training and development remains a core part of our talent strategy. We continue to invest in focused programs to ensure our people are able to progress and grow our business. Next slide, please. To summarize then, the key takeaways from today are, first, that the purpose-led strategy that we laid, laid out in late 2019 continues to deliver.
Organic revenue grew 7%, the adjusted operating margin was up another 140 basis points, our Adjusted EPS increased by 15%. Second, we are organizing our business into two platforms focused on key market sectors, supported by long-term secular growth trends that will support sustainable, profitable growth and our new financial ambitions. Third, finally, as Dan said, we are maintaining guidance. We continue to expect that this year's EPS will be between GBP 112 and 117 . Okay, I'm gonna stop talking there and turn over to the moderator for the Q&A, please.
If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. First question comes from George Featherstone with Bank of America. Your line is open.
Everyone, thanks for the question. Roy, you mentioned in your. How much that has.
You came in and out, George. Can you hear us?
I can, I can hear you. Can you hear me better?
Yeah.
Yes.
Yeah.
That's better, George. Yeah.
Yeah. Could you try again? Sorry about that.
Sorry about that.
Yes. No, no, no, no worries, no worries at all. Well, first, thanks for taking the questions. I, I just wanted to pick up on something first, Roy, that you mentioned about payback periods for your automation proposition, maybe never been better than they are currently. I just wondered if you could give us a sense or perhaps frame it for us, just how much that has changed.
Yeah
A year, or is it more than that? Just, just examples of that.
Yeah, I think for our customers, George, automation, as I said in, you know, I've been involved in this business, you know, more than 30 years, right? I think, you know, what's happened obviously, is that across most of our major markets, labor is really scarce. If you look at obviously material inflation's coming down, energy is coming down, but labor is still, you know, moving. You know, it, it's still going through an inflationary period. Because of that and, and just the sheer ability to get people, I think there's a third thing as well, George, which I'd say is that supply chains, the robustness of supply chains is, is right up there in people's minds, obviously, given a period of, of quite a severe disruption. I think the companies that.
Well, I know the companies that managed to supply customers throughout that period took share, right? And some of that stuck, certainly for us. You know, I've highlighted many times in areas where our competitors couldn't supply and we could, you know, that gave us an advantage, and some of that has stuck. So I think, George, all of that is combining to mean that when people look at the financial case for automation, you know, in my opinion, it's stronger than it's ever been. You know, I, I think perhaps another effect on top of that is reshoring. So people are reshoring generally to higher cost economies like the US, and there you have to automate to, to stay competitive.
I think there's a mixture of factors that mean that when people look at the financial case for Automation, it's stronger than ever, George.
Yeah.
Now I can't hear you again, George, so I hope you can hear me.
Sorry. Yeah, I can hear you better. Sorry, there's obviously a problem with the line. The Precision business, I just wanted to maybe talk a little bit more about that. The IA growth seems to still be kind of disconnected a little bit from its historical correlation with PMI. Is there anything that you can see from your customers that would suggest have, you know, that sharp reconnection maybe in H2 at all, or perhaps not as the case may be?
Yeah, I mean, so far so good, as you say, George. You know, looking at the PMIs, we would have expected a reduction by now. You know, Beth and the team, they've done a great job already. 2% growth in the first half, much more resilient than people would have expected. Improvement in margins again, you know, as we take the complexity out of that business. No, pleased so far. Clearly, PMIs have dropped further this month, you know, we are all over that, as you can imagine, George, with Plan Bs in place. We have forecast a reduction in sales in the second half because that's what traditionally happens. At the moment, having said that, George, we, you know, we use our 60-day moving average, and it's only slightly down on last year in terms of order intake.
There's still opportunity to sell out of the order book, because the order book versus traditional levels is still a bit longer than it would normally be, George. You know, so far so good, but, you know, we've got a very keen eye on any changes in those order patterns and make sure we're ready with Plan Bs if it does actually happen.
Okay, thank you very much. Last one from me, three cycle targets, obviously, very welcome, so thanks for providing those. The 5% growth, how should we interpret that? Is that more kind of a CAGR, and there'll be some plus and minuses along the way, or do you expect to kind of be around that level on a per annum basis, based on how you've sort of looked at those end market dynamics?
Yeah, it's, it's the first example, George, right? We expect, you know, there will be some pluses and minuses, I'm sure. 5%, you know, is our, let's call it, our medium-term growth ambition. You know, I think as you can see from our, you know, our outlook, we're gonna be close to that this year. You know, I wouldn't say the markets are easy right now. I think there's a, a mix as usual. I think that's the, the strength of the diversity of our business. I think that, you know, if you put all of our Capital Markets Day targets together, you'd have probably ended up with 4%-5%. This is a move up to 5%. Couple of things in there. Clearly, Critical outlook's improved dramatically. We haven't seen the Critical markets, you know, like this for a decade.
If anything, you know, Jackie, we did the review, business review, Jackie would say momentum is super strong in that business and, and if anything, accelerating slightly, right? We feel very good about where critical is. Probably that plus the fact that we made some nice acquisitions in some good spaces, life sciences, smart buildings, that we know we can build on for the future. The mix of business is improving. You know, we think that, yeah, ticking it up to sort of 5% organic growth target through the cycle is a sensible place to be. Obviously, reinforcing the 20% margin for the business and a 90% cash conversion as well.
That means that, you know, as I said in the presentation, we think we can start to become a compounder, you know, as we have done over the last four years, as we've compounded EPS at 13% CAGR. That's really just laying out the financial framework, you know, for everybody, so they can see what sort of company we're becoming.
Great. Thank you very much.
Thanks, George.
Thanks, George.
Our next question comes from Christian Hinderaker with Goldman Sachs. Your line is open.
All right, Dan, good morning. Hopefully, you can hear me, and thank you for the presentation. I've got three questions. Maybe we can take them in turn. Firstly, I wonder, please, can you give us an indication on how price and volumes are progressing across the different businesses, as inclusive of whether or not we've got new price increases or if it's just price tailwind from last year?
Yeah, I'll take that one, Dan, chip in here by all means.
Yeah.
No new price increases. Obviously, we've got the price increases from the beginning of this year, George, obviously, right? There's no mid-year price increases like there were last year. You know, we, we are winning the inflation equation, so no need for that. If you look at our 7% growth, about a third of that is coming through volume, and about 2/3 is, is coming from price. Again, George, just to give you a rough idea, you know, without getting into commercial sensitivities, pricing is a bit higher in Hydronic, and is a bit lower in Critical, right? Precision sort of through the middle, just to give you a, a rough idea.
Yeah, no new price increases, and, you know, that therefore will, as a comparator, if you're thinking about your models, start to taper, you know, towards the end of the year.
Thanks, Roy. Very clear. Maybe you can comment as well on the, on the destocking in life sciences, organic growth at -3% for the half from +2% in the Q1. Assuming an equal weight, that's the -8% for the Q2. I wonder if there are specific customers, regions, product categories that that's impacting more or less than others, and how much of that relates to lead time compression?
Yeah. Thanks, Christian. Yeah, I think, you know, I, I was looking obviously at our US peers earlier in the week, exactly the same story. You know, Q2, you're almost bang on actually, Christian, it's a 7% reduction for us in that segment. It was sharp. When we talk to customers, there's more to come in the second half. I think that's obviously included in our guidance, right? Originally, you know, I thought on the last call that that would be finishing by the end of the first half. No, that's gonna continue through the second half. I think, you know, in overall terms, Christian, we think Critical's now slightly better than we thought a few months ago, and obviously, that segment of Precision a bit lower.
I think, you know, again, looking at what peers are saying, talking to some, to some people in the industry, it, it's what's happening across that segment, and it's in analytical devices. You know, which is obviously now post Adaptas, the biggest part of our- of that, business for us now, Christian. Yeah, you know, it, it's, it's worse than we thought, but it's happening across the whole piece. Anything you'd add to that, Dan?
Just that fundamentally, I think those businesses are still, you know, certainly 10% businesses, that we are gonna go through this period. Money costs money again, and I think we're seeing that, starting to play through some of the, you know, some of the end, end markets that we serve.
Yeah, no, I mean, these are life-saving devices.
Yeah.
Christian. That's a good point, Dan. Ultimately, the demand is there, that's for sure.
Yeah.
After, you know, a few years of very strong growth, there's a bit of a reset in the supply chain.
Yep.
Fair enough. Thank you both. Then finally, on the comment of money costs money, the M&A targets have a value creation hurdle for ROI to be above WACC, I believe, by year three. J ust want to understand the mechanics there in terms of whether that cost of capital is fixed at point of acquisition or if it's a moving target. Then secondly, how your cost of capital has evolved today versus, say, 2019 when you flagged the PBM acquisition earlier.
Yeah, no, all good points. I think, Christian, over to you, Dan.
Yeah. So it certainly has evolved, you know, and where we're sitting right now, it's probably more we're looking at hurdle rates more like 8.5% versus 7% for our overall weighted average cost of capital, and that's both sides kinda ticking up. I mean, we don't get so analytical around, you know, changing targets. Once we have those businesses in, the focus is very much around delivering the synergies, both cost and revenue. I mean, we showed in the presentation, Roy went through it. As PBM has become, you know, more integrated into the critical process automation business now, you can just see how we're able to move those ROICs up for those individual businesses.
Certainly, as we look at acquisitions today, we have to have greater conviction that it's gonna enable to achieve that 8.5, and let's watch and see where that number goes. We really look at it at the point in time, but certainly, as we get through a bit of an inflationary environment, hey, that, that, that absolutely enables us to use the inflation equation to actually augment the profit. Overall, if anything, if we're buying, you know, the right businesses that fit really well with our market segments, and we can integrate them quickly and effectively, we should be able to expand out those profits and drive towards that 12, you know, well, 12.7%-13% ROIC we're sitting at today.
Yeah, I think that's, that's the broader point, really, Christian.
Yeah.
Is that we, you know, have a very strong drive to increase our overall ROIC. We have a very tough measure, as you know, Christian. You know, we write back all of the goodwill into the denominator. We wanted a tough measure, and we moved that up from, I think it was 11.3% on that measure back in 2019 to 12.7%. Therefore, you know, we now put an underpin at 12% as we acquire, that we wanna drive returns on acquisitions, you know, reasonably quickly up to our group average.
Yeah.
We are incentivized on that as well, Christian, you know, so, yeah, we take it seriously.
Very clear. Thank you.
Thanks, Christian.
Thanks.
We now turn to Lushanthan Mahendrarajah with JP Morgan. Your line is open.
Hey, morning. Morning, both. Thank you, and thanks for the presentation. A couple of questions, which I'll take one by one, if that's okay. The first is on Hydronic, just how we think about that sort of H2 outlook. I think there's probably some slightly easier comps and sort of destocking and pre-buying in Q2 last year, but clearly sort of read across and the macro is a bit tougher. Just how we sort of think about that into H2 and actually to next year as well.
Yeah, I think that's right. That, that is you've just nailed the two conflicting trends there, right? You know, I, I think the, the comp was tougher in, in Q2, will be a bit easier in Q3, but European construction market's tough. We have obviously got an energy-saving angle on that, which I think will mean we do better than, than a lot of people. It's interesting looking at, you know, one of our peers yesterday was, was suffering already at a negative first half, you know. I think, I think, you know, out of it all, we'll, we'll do okay out of this, but European construction markets are definitely tougher. Back to the cost of money, as, as Dan said, that's clearly having an effect.
We're actually calling the overall year modest growth, and I think that's probably, you know, a good description of where we see Hydronics. A lot will depend on the strength of the heating season. I, I'm sure you know that Hydronic does a lot of business, you know, in the run-up to the colder weather in Europe. A lot will depend on how much energy security is an issue, how much governments really push energy saving, you know, as they did last year in that period. A lot will depend on people's energy bills and how much focus they have on that, and how much, you know, they then drive during that period. I think, you know, you've, you've called it right.
We're thinking about modest growth for Hydronic for the year now because of the European construction markets, but we'll obviously let you know more as we come to our next update.
Okay, that's really helpful. The second, which is kind of linked to this, if we look at that sort of EPS guidance range for, for the year, I guess, what does the 112 imply in terms of your assumptions, and what does the 117, you know, is 117 industrial automation flat, for example, and the 112? Dan, just to get an idea of what's in sort of the budget.
You want to peel back every layer of the model, right?
Yeah.
I would say broadly.
Yeah, it could be all day.
That's your job, right?
Yeah.
I think broadly speaking, that obviously what could go even better than the middle of the guidance will be things like critical aftermarket, right?
Yeah.
Jackie and the team doing a fantastic job with that strategy. You know, obviously, some of that critical aftermarket order book will be shipped next year. I think you understand that the upgrade valve part is on a similar lead time to new valves, i.e., 12 months plus, right? Some of the parts business is very strong, so that's, that could obviously be a positive. Industrial Automation, as you said, could be stronger. We've, we've obviously forecast a decline, particularly in Q4, so it could be stronger if, if it is dislocating a bit from PMIs. You know, I think they're probably the two things that, that could go that way. Hydronics, as I said, could have a stronger heating season. You know, people could, could really come back to front of mind. Governments can always underpin that, like they did last year.
If you remember, we gave an example in Germany, where the German government suddenly said, "All municipal buildings need to be 19 degrees Celsius, fixed," because that would obviously help them through the winter. Things like that can obviously help us. You know, on the other side, industrial automation, you know, could come off a little bit more even than we think.
Yeah.
We brought it down. I think, you know, that would sort of be the mix of things. You know, remember, we do have a lot to ship in, critical in December as well, always. I know that's, that's out there in the market, but we, we have to deliver all of that, and I know that will mean that Jackie and the team won't get much of a Christmas break, right? As I didn't for sort of eight years. You know, it's.
Yeah.
I'd say they're the sort of moving parts.
Yeah.
Have I missed any moving parts there, Dan?
You know, the only thing, transport's operating nicely, 6% up in the first half. We'll, we'll expect that to go as well. There's nothing there that would indicate that's gonna come off. As we know, when the truck business starts, you know, when they move, they move relatively quickly. You know, that's the only other area that we can see potentially going positive or negative. Where we see it today, I think, you know, I think, we'll be, we'll be fine on, on the CV side.
Yeah, I mean, you know, Lush, I suppose the only other thing, Dan, is what you said in the video, right? Is that we would have upgraded again if it wasn't.
Yeah
For FX. FX, you know, has been moving around a bit, right? That's probably the only other ingredient.
Mm.
So, yeah, that's probably, I think that's it.
Yeah, that could go either way as well.
It can go either way, yeah.
Okay, brilliant. That's super helpful. Then just last one from me, just in terms of the change in sort of the reporting structure, I guess. Could we get a bit more color on sort of some of the internal benefits and perhaps some examples of sort of combining some of these sort of subdivisions, I guess, into some of these bigger divisions?
Brilliant. Yeah, no, you know, we are obviously super excited about this, and you know, I'm really looking forward to the second half, and Beth and Jackie and the teams, you know, really getting into this now. Because really what's happened, if you think about the last four years, we have driven very much a market segment approach, right? As you know, Precision used to be organized regionally. Beth has done a really good job under the Customer First reorganization of making sure that globally we have teams responsible for transport, for life sciences and process, and, and obviously, Hydronic has also focused on their markets and industrial automation, right? We, we've got a, we've got a really nice now set of what I would call market sector focus teams.
When Dan and I do the reviews, including the deep strategic reviews that we do, what's really pleased me now is that we've got sector specialists that really know their markets, and they know how to win in their markets. A part of the inflection point with the new strategy has been that, knowing your markets, knowing how to win, and then using our deep engineering expertise to really support customers, solve their problems, create growth. Now that that has happened over the last few years, you obviously strategically look at the sectors and you say: Okay, which of these sectors go best together to really enable us to optimize the use of our resources to grow faster? you know, better world growth, that's what it's all about.
You look at the two Automation platforms, Critical Engineering, obviously, is really better described as process automation. You know, you're automating using valves, actuators, and controls, and increasingly software. You're using those technical capabilities to automate refineries, to automate combined cycle gas power plants, to automate LNG compression plants, and so on. Industrial Automation is very similar, but in Industrial Automation, you're doing discrete automation of things like assembly plants in pharma, you know, and other sectors, right? Testing capabilities as well. Naturally, now that we've managed to get the sector teams, it makes sense to put those two sectors together and end up with a globally competitive GBP 1 billion plus Automation platform. Then we've also got what we call the Life Technologies.
All of these technologies, whether it's reducing emissions from buildings while making them comfortable, reducing emissions from trucks, or whether it's building out our life-saving technologies in life sciences, all of those are life technologies. They make a difference and an improvement to everyday life, they all have a very similar business model, where we're working with the customer, engineering at the system level, whether it's a truck or whether it's an analytical medical unit, and then making sure that our components improve the productivity or the safety or the sustainability of the whole customer system. We're really important to the customer. Really, that's why those businesses, it's now time to put those sectors together in those two platforms. I'm really excited because I think that, you know, will help us propel for the next phase of the strategy.
Okay, that's super, super helpful. Thank you very much.
Great.
Thanks, Lush.
We now turn to Jonathan Hearn with Barclays. Your line is open.
Morning, guys. Just a couple of questions from me. I think first question, just following up on the last one, and obviously the new divisional structure. Obviously, you've talked through, but Roy, is there some sort of hard synergies that you can get from those combinations? I think possibly in terms of the sort of the sales synergies more than the cost, but do you think there's some good synergies that can come through from putting those businesses together? That was the first one.
Yeah. No, thanks. Thanks, guys, today as well for breaking up the questions. It makes my life so much easier than trying to remember all write down 3. No, the absolute focus of this restructuring is faster growth, right? Jonathan, we've laid out the margin targets, 20% through the cycle. We've made really good progress. As you know, we're up from sort of 14% in 2019, roughly. You know, we're almost at 18% last year, and we're well on our way to 20%. We want to achieve that target. Undoubtedly, there's bound to be some efficiencies in the new structure. We're very likely to reinvest that in future growth, right?
Yeah.
As we have been, you know, more into the aftermarket area in the, in the, in the process automation business, you know, more into digital, analytical. We're investing in CRM, world-leading customer relationship management software right across the business. We're starting to use the data much more effectively, Jonathan, to really ascertain at a granular level where we win, how we win. You know, it'll be much more. You know, there will be some efficiencies, I'm sure. You know, Jackie and Beth, you know, are very good at that, but we'll be reinvesting in the business, in the frontline to grow it faster.
No, that's very clear. And the second one was just, just on Critical. Obviously, the order book plus 32 at the half year. Can you just sort of talk us through where that order book sits, just in terms of margin? Are we seeing some margin progression in the order book? Obviously, there's, there's strong growth in aftermarket coming through, and just how that feeds into, into 2024. Are we still thinking that Critical can do sort of double-digit growth in 2024?
Yeah, no, really good. Well, if, if you look at it, Jonathan, actually, the orders in the first half, just as well, it splits on the, on the presentation, isn't it? New construction was actually up 36%, aftermarket up 26%, right? The order book margins I would characterize as pretty similar to, to, you know, the previous period. Not, not a big shift in the order book margin. Clearly, with the extra volume, you're getting better head, overhead absorption.
Yeah
So that will obviously help. Plus, we've got more, remember, we've got more restructuring benefits to come through in Critical into next year. You know, we see a clear pathway as Critical moves towards that 20% margin. I would say that to your second point, that the order book, you know, is 32% up. As I said earlier, a big part of those orders are now for next year.
Yeah.
Me and Jackie, you know, we think it's, it's very likely now that the order book will end up this year double-digit ahead, ahead, right, in % terms, which means that next year, you know, we expect to see very good growth again, Jonathan. Yeah, we're certainly building for the future, you know, in, in what is becoming the process automation sector.
Yep.
That's very clear. Maybe just, just, just one last one. Just in terms of one of your earlier comments, obviously, you need a strong December, but in terms of sort of the book to ship that's left for, for, for Critical, what's, what's that for the second half, roughly?
Yeah, it's, it's obviously shrinking fast. We've got all the new construction for this year.
Yep.
You know, which is, let's say, almost half the business, as you know, Jonathan. Aftermarket, as you know, 3-4 month lead time, so we've still got some aftermarket to come through in the next couple of months. Yeah, aftermarket momentum, as you can see.
Yeah.
Is good, so we're feeling good about this year, yeah.
On the parts side, upgrade, upgrade still going well, that's, that's definitely 2024.
Good point. Yeah.
Very clear, guys. Thank you very much.
Great, Jonathan. Thanks, Jonathan.
Our next question comes from Mark Davies Jones with Stifel. Your line is open.
Thanks very much. Morning, Roy. Morning, Dan. Bearing in mind, or putting to one side maybe, Dan's comments around cost of capital, obviously. Structurally, as you look at the next period of the strategy, do you think M&A will play a bigger part in the IMI story from here? Clearly, there's an increased focus on growth, but are we going to see more and bigger deals as part of that, do you think?
I, I think, Mark, you know, we like the deals we've done. We like bolt-ons, you know, Adaptas was a bigger one, but we like bolt-ons that we can fit into our sector businesses, because obviously, that's the way we get, you know, the, the synergies, right? Especially the growth synergies. You know, both Adaptas, as, as you know, Adaptas allows us access to the top, actually, analytical OEMs globally, but particularly in the US. That great cross-sell between our existing technology and the Adaptas customer framework and the Adaptas technology the other way is exactly what we like, right? Because as we want to improve the mix of the business, and we want to accelerate the growth of the business, that sort of action, acquisition fits really well. Same thing with Heatmiser, right?
Yeah.
Fantastic business, leading share in the UK, great tech, growing very fast, grew double digit in the first half. Giving that access to Europe, you know, is the way that one plus one equals a lot more than two. That sort of size of bolt-on really suits us, and we've done, I think, four in the last 18 months.
Yeah.
Isn't it, Dan? Yeah.
Yeah.
You know, that sort of rate, you know, give or take, obviously it will increase over time, but I wouldn't expect to see you know, a massive shift in that, Mark.
Yeah. certainly, as we generate the cash.
Okay, thank you. Perfect one.
Yeah, certainly as we generate the cash, we'll have the ability to do it. I, I think the, the only thing I'd add is those bolt-ons culturally often fit really, really well, and as everybody knows, that's so important. Having their teams join IMI seamlessly, and in, in every case, that's been, that's, that's absolutely worked well. We get, we get so many benefits from bringing those teams into, into IMI and, and vice versa. That's the other reason I think we, we kind of like the size of deals we do.
Yeah.
Thank you. Can I just then a follow-up, slightly unrelated, but coming back to Hydronic, even modest growth for this year, I think looks pretty impressive given the backdrop. We're hearing very weak trends, particularly in Germany and the Nordics, which are obviously big markets for you. Can those micro trends around energy efficiency really offset or continue to offset that general picture to the extent that you can grow in any sort of way for the year?
Yeah, I, I think we feel, we feel, you know, reasonably good about that. Certainly, Phil and the team feel good about that, and, and they, you know, have got a great track record, even through COVID, actually, of, of nailing where we're gonna be, you know, through a, through a sort of half a year. Y- y- you are right. It, it is, you know, as I said earlier, you know, there's, there's some ups and downs around that, right? Around the heating season, around, you know, how governments react, you know, to any energy crisis in Europe. There are definitely some ups and downs in there. On balance, we think that's the sort of base case for us.
Obviously, we have Plan Bs, and, you know, Phil's all over it in terms of making sure, you know, we protect margins. Yeah, I think our base case is pretty sound, and certainly what we've seen so far, Mark. I, I think, you know, with a bit of sensitivity around it, I think our base case is, is okay.
Great. Thanks very much.
Thanks, Mark.
Thanks, Mark.
Our next question comes from Kulwinder Rajpal with AlphaValue. Your line is open.
Good morning, everyone. Can you hear me?
Yes.
Yeah, Kulwinder.
Yeah. My first question was on the new sector breakdown. When I look at it at first glance, transport seems to be the slowest growing sector, maybe from a medium-term perspective, it would cease to be a smaller part of your portfolio, we haven't seen some divestments for a while. Maybe from a medium-term perspective, is there a remote possibility that you would divest this business? Maybe I'm completely off base here, or would you try to accelerate growth eventually?
Kulwinder, obviously, we constantly look at that. We constantly look at, you know, each sector and make sure it fits with our overall ambitions. You know, and Beth has made. As I said, she's carved it out now, right? We've got transport carved out, and that's really, really good news, and we're making really good progress. You know, Beth put new leadership in place. Steve, he's doing a fantastic job in that segment. In each strategic review we do now, we get more confident in terms of the, let's call them, the longer-term growth prospects of that business, right? In terms of driving profit growth, that's certainly happening, right? Certainly not on our agenda right now.
Mm.
To do anything like that. You know, there's a lot of value to come out of that business. I think in the longer term, obviously, we've got to manage an energy transition. As we said at the Capital Markets Day, the exciting thing for us is that a hydrogen fuel cell truck uses more content for us than a diesel truck. You know, so far, so good. As I said on the presentation, we're doing trials in China on hydrogen fuel cell trucks. We're doing trials in the US, and we're pretty excited about it. What we're gonna have to do is, over time, expect that the growth rate of that division, of that segment rather.
Yeah.
You know, improves, right? Rather than doesn't improve. All we're flagging is, as it goes through that transition, you know, growth could be slightly slower.
Yeah.
That's it.
Okay, thank you very much. The second one is on Critical Engineering. As you rightly pointed out, the growth has been great, and I find myself going back to the CMD, where you unpacked Critical's business into new markets, new construction, and then aftermarket. Could you please elaborate a little bit on the business development in the new markets, particularly marine and hydrogen, and how should we look at it from the second half perspective and more from a medium-term perspective?
Yeah, I mean, since that Capital Markets Day, I think.
Yeah.
It's been basically all good news for Critical, right? You know, if, if I think about each part of that, Kulwinder, so aftermarket, we said we would grow. I think it was, sort of 5%-7%, something like that. Actually, it's grown 8%. I think the best is in front of us, actually. You know, I think the aftermarket part and that whole aftermarket strategy, I won't go through it again and bore everybody on the call, right? You know, what Jackie has done with the team is phenomenal because, you know, everything we said we would do, we've done and more in terms of aftermarket.
A lot of that is about upgrading our own valves and then getting the parts annuity that comes from that, and also upgrading our competitors' valves and using a lot of innovation, Retrofit3D, EroSolve, all the things.
Yeah.
We talked about, to give more value for customers, increase our installed base, and obviously increase the business. I think, you know, that segment, you know, is going really well. Obviously, what's changed is new construction at that time, I think we called it pretty flat, right? Obviously, the markets, because of energy security, you know, they, those markets are, are growing quickly, and our win rates are really good. So I think new construction is, is shifting in the right direction.
What I've said is, and, you know, I think it's clear in the numbers, we still expect to achieve the 20% margins because as the new construction creates overhead recovery, as that drops through, as the footprint changes that Jackie Hu's done start to drop through, the benefits from the, from the projects comes through, you know, we're still shifting Critical towards 20% margins. So, so that space good. Then on hydrogen, I talked quite a lot about that on the call, so I'm not gonna go back through that, but hydrogen, we're excited about.
Mm-hmm.
For the whole of IMI, right? Then pharma, well, PBM was a big part of that, that pharma segment, and as we showed you in the numbers, that's really doing well. Again, I think, you know, PBM has had, had a very good start because we got some good savings, actually synergy savings.
Yeah.
Particularly on indirect spending. You know, we found some, some nice big areas, but then obviously now it's the growth, right, that's really coming through. Yeah, I think across all of those segments, it's, it's been going well.
Yeah, you mentioned marine as well.
Oh, yeah.
That's the last element, which of course, in light of everything going on in, in the world, that element and, and things like AUKUS, where Australia's looking at leveraging, sub-technology of the UK and the US and coming together, all of that just gives us a nice platform to continue to grow. Of course, you saw the growth in, in just in the UK business, with the orders coming through in the first, in the Q1, for a very nice, long, long portfolio there. Definitely, and, and also through some Growth Hub opportunities there, we see even ways to, to expand their, their, their, their markets.
Yeah. Yeah, thanks, Dan.
Thank you very much. Lastly, just for you, Dan, so, in your bridge for increasing free cash flow generation, could you talk a little bit more about rationalization measures? Just a little bit more detail. Is it related to restructuring or is it something else?
Yeah, yeah, I think it's, it's, it's delivering on the Complexity Reduction that we've, we've already flagged and pretty much flagged since we started the strategy, getting that final 42. Well, we delivered eight, so we're down, you know, that GBP 34 million of benefits, of course, that will improve profits, but it also flow through to cash. Yeah, these, these Complexity Reduction programs do, you know, require investment, it's on the slide as well. You can see the cash, kind of, the cash investments we need to do as we go through the end of this program.
I think the combination of that additional GBP 34 coming through, you know, GBP 43 starting from 2022, plus the reduction of that investment will all go to help move that free cash flow up to that GBP 300 million level.
Okay. Thank you. Have a nice day.
Great.
Thanks.
Thanks, Operator.
As a reminder, if you'd like to ask any further questions, please press star one on the telephone keypad now. We now turn to Rory Smith with UBS. Your line is open.
Hi. Morning, Roy. Morning, Dan. Thanks for taking my questions. Hopefully, three quick ones from me, all on critical. Could you just please flesh out what the order intake would have been in new construction, stripping out the, the large one-off marine order in, in the Q1?
Ah, well.
The order was.
Yeah.
The order was about GBP 25 million.
About GBP 25 million. Looking at new construction, that might be, that might be 10, 10 and a bit % of the growth if we took that out.
Brilliant.
Without.
Yeah, absolutely.
What, 25%?
Yeah, something like that.
Yeah.
Yeah.
Okay, fantastic. Thanks. Looking at aftermarket, can you just help me try and understand the sort of the phasing there or maybe the comp effects quarter-on-quarter? Obviously up very strong in the Q1 and then up, but sort of strong, but less strong in the Q2, and how that kind of impacts that that look forward into the second half for growth in aftermarket. Sorry if it was answered on a previous question and I missed it.
Yeah, it, it's, yeah, so aftermarket up almost 10% in the Q2.
Yeah.
As you said, up 47% in the Q1 . You know, and it, and it is a bit lumpy, right? We get some big upgrade valve orders and so on, but, but still good growth coming through in the Q2 . How it plays out, well, it, it was sort of answered earlier. The upgrade valve parts, Rory, are very similar lead times to new construction valves. They're more like 12+ months. The parts lead times are more like 3-4 months, right? The parts element of that, Q1 will ship.
Yep.
Or has shipped, some of it in the Q2.
Yeah.
Some of it will ship in the third and Q4, but the upgrade valve parts will ship later. Field service, you know, is a mixture of the two, really. You know, you can have longer-term field service contracts and some shorter-term ones as well. I would say, you know, because obviously upgrade valves well up, what was the % they were up, Dan, in the first half, upgrade valves?
Over 40.
Yeah, over 40%, right? Just to give you a rough idea. It'll be a mixture of what ships this year, what ships next year, Rory.
Yeah.
We feel good about the second half.
Okay, yeah.
As you can tell, right? In terms of our guidance, yeah.
Yeah.
Yep.
No, absolutely. Thank you. Given this sort of, very strong growth across, energy markets in Critical, is that causing a problem for any of your suppliers or are there any pinch points that you can see?
Yeah, I think we're acutely aware of that. Our, our bigger factories, you know, the other one in South Korea, the one in India, you know, are still only working just over a shift. Obviously, they're working two shifts on some of the bottleneck areas. In terms of suppliers, if you remember, we've done a really good job. Jackie's done a really good job, to be fair of. We used to have 3,000 direct suppliers, round numbers, Rory, in Critical. We've now only got about 1,000, but at the same time, we've taken the number of single-source suppliers down from about 60 down to about six. What we've, generally speaking, what we've done on the bigger castings and the forgings, we've tended to duplicate supply. Often it's, you know, we had a supplier in China, and we've duplicated that capability in India.
Yeah.
Where you've got the sort of longer lead times like we've got in Critical on new valves, you know, that means that we've got time to make sure that sourcing, you know, is in a good place. I think Critical's done a really good job. Obviously, we're acutely aware of it. In fact, Jackie told us at the last business review that we're starting to get a bit of a competitive advantage because we are holding the lead times on some of our new construction valves to 12 months, and actually, some of the competition's already moved that out by three months or more. We are starting to get, see a little bit of a competitive advantage in, in some areas. I'm pleased with what's happening in Critical.
Brilliant. Thanks a lot. Cheers.
Thanks, Rory.
Cheers, Rory.
Our final question comes from Bruno Gjani, with BNP Paribas Exane. Your line is open.
Thanks for taking the question. I just wanted to go back to Critical and the margin delivered in H1. Good organic revenue growth, the margin improved by 90 basis points. I don't want to take anything away from what was a very good performance, but given the strong top line growth and the richer aftermarket growth within the mix, I think that business grew 20 odd %. I would have expected the drop through to be somewhat richer than the 20% rate delivered in H1. Is there anything that perhaps held back the margin in H1, greater levels of investment or say, older orders, older priced orders leaving the books? Should we just think of this 20% as a more normal drop-through to consider for Critical looking forward?
No, I think the, you know, Critical's margin target is clear where we're going with that. As I said, we've, we've ramped it up considerably over the last few years. Of course, we are investing, you know, as I've said, you know, on several occasions in that business. Aftermarket salespeople, Growth Hub, as I said, CRM systems, new IT to make the business, you know, grow faster in the long term, plus the new areas like hydrogen, like pharma, where we see, you know, nice long-term growth capability in that business. Yeah, some good investment going in from Jackie and the team, and, you know, as I said, good progress and we expect to make, you know, further progress towards that 20% in the full year.
Yeah.
Okay, got it. Just on the order trends in Critical, another good quarter of organic order growth, another good half. I think on an organic basis, this means that we're nearing levels last seen in 2014, where we were riding an LNG super cycle. It was a different market. What does the order pipeline look like today? What does the project pipeline look like? How do you expect order trends to develop from here, conscious that the comps are getting a little bit tougher as we look towards H2 of this year and next year as well?
Yeah, I mean, you know, that's a question that we always have for Jackie and the team, right? Right now, the order pipeline looks really good, right? In the areas that you would expect, I think, you know, in LNG, in oil and gas generally, and, you know, what we expect to happen is this to start sort of at the upstream ends. Middle East is super strong right now. US, yeah, we expect it, and then we expect that sort of wave, a bit like last time, as you referred to, to then ripple through into downstream over a period of time. Yeah, at the moment, very strong pipeline in terms of project activity and, yeah, all to play for, I think.
Okay, got it. Just on Hydronic finally, could you describe where the business is today relative to 2019 in volume terms? It looks like, at least to me, that we're back to 2019 levels. Volumes for the Hydronic business still look like they've moderated over the last few quarters. I guess on a 12-month rolling basis, on my analysis, I think perhaps 7%-8% lower than the peaks reached towards the end of 2021. Given this moderation in volumes that I suspect has played out over the last quarter, does this actually limit the downside as we look forward? I guess if you take a step back, if you look at this business on a seasonally adjusted basis, I, I guess the question I'm asking is, is the volumes delivered in Q2, is that rate sustainable?
How, how are you thinking about this?
Yeah, I think, well, I've given the Hydronic guidance, so, you know, I, I won't sort of expand on that part, but I, I think what you say is interesting. You know, because supply chains have sort of been a bit all over the place over the last few years, I think wholesaler stocking, destocking is definitely playing more of a role than it was back in 2019. I think, you know, if you take the market, 2019, good market, pre-COVID, you know, construction in a pretty good place across Europe. I think, you know, that with interest rates moving up as they have and as Dan said, as the cost of money, you know, is increasing, clearly, that's putting pressure on construction, right? On new construction. You know, which is a portion of that business.
It's, it's probably, you know, at the moment, it's probably in the sort of 20-25% region of that business, but it is having an effect.
Yeah.
Having said that, on the positive side, you've definitely got energy saving, which is much more acutely in focus than it was back in 2019 because of what's happened, you know, with oil and gas and, and the, you know, invasion of Ukraine. You know, there's a lot of things going on, and I think it's not quite as simple as, you know, that comparison to 2019. I think, you know, as I said it to, to an earlier question, I think modest growth this year feels about right, right for us in Hydronic.
Yeah.
Yeah, understood. I guess, I guess what I was getting at is just, when you look through prior cycles, this business isn't very cyclical on the downside. Even if you go back to the GFC, you don't see particularly harsh declines. If, if we're only 7, 8% below, say, a prior peak level, then perhaps that might limit the downside from here. I appreciate the color. Very, very useful.
No, I, I think, you know, you've made a good extra point, right?
Yep.
20.
2009.
2009, I think sales in Hydronic were down 4% from memory, Dan. Yeah, you're absolutely right. What tends to happen is that, you know, our customers, the, the installers, move to more refurbishment, and governments tend to incentivize refurbishment, particularly energy efficient refurbishment, in a downturn. You know, what you've said is absolutely true, and it's been, you know, a very resilient business in a downturn, absolutely.
Yeah.
In fact, in 2009, I think the profits and certainly the cash went up because the price of its raw materials.
Yeah.
Dropped, and it's very resilient in terms of its pricing. Obviously, it's serving a very fragmented market with very strong brands and into that energy saving space. No, you make a good point. That is a fair point.
Thank you.
Great. Thanks, Bruno.
Thank you, Bruno.
Cheers.
This concludes our Q&A. I'm gonna hand back to Roy Twite, CEO, for closing remarks.
Well, great. Well, thanks ever so much for your time this morning. Good questions. We think it's a good first half, 7% organic growth, margins up in all the divisions, cash flow obviously improving a lot on last year. We're starting to see much better cash flow and, and, you know, we feel really well-placed. We're really excited about the new structure, and I know that Beth and Jackie are as well, and we, you know, look forward to optimizing on that, in the second half and beyond. Thank you.
Ladies and gentlemen, thank you.