IMI plc

Good morning, everybody, and welcome to IMI's 2022 preliminary results presentation. Next slide, please. So this slide covers the key messages from the presentation. And the first thing to say is that it was another strong performance in 2022. There is great momentum in this business, and we delivered 10% revenue growth, and the group order book was up 14%, with the critical order book, a particular highlight, up 18% at the year end. Growth Hub is getting stronger and stronger, creating a customer-led entrepreneurial culture, and it's really helping to drive the better world growth that is right at the heart of our strategy. We delivered 52 million pounds worth of orders from Growth Hub last year, and I'm gonna give you some exciting examples later on. This cultural change is reflected in our customer satisfaction scores. We are now achieving industry leading benchmarks across our company. We completed three acquisitions in the year, all in attractive better world growth markets. Our adjusted operating margin increased by 80 basis points as we make further progress towards achieving our through cycle margin target of 20%. Employee engagement remains a top priority for the Board and for the Exec, and with that I am very proud to report record scores and a significant reduction in health and safety incidents in the year. Finally, I am pleased to report that we are increasing the final dividend by 10%, which reflects the Board's continued confidence in the prospects for this business. Okay, so with that, I'm going to pass over to Dan, please.

Thanks, Roy, and good morning, everyone. I'm pleased to be able to take you through our 2022 results today. So next slide. So an overview of revenue and operating profit. First, as Roy already said, really solid results, organically up 4% on revenue and 8% on operating profit. All three divisions are up on the top line and increased their margins in the year, with the group margin up 80 basis points to 17.8%. We continue to manage corporate costs closely, and although the figure is slightly higher than last year, you'll recall there was a one-off property sale in 2021, which helped us by about 1.5 million pounds. For 2023, corporate costs are expected to be around 26 million. Adjusted EPS increased 15% on last year to 105.5 pence, at the top of our previous guidance. Operating cash flow remained strong and our net debt to EBITDA came in at 1.8 times, in line with the guidance we gave in November. So next slide, please. Since the launch of our Better World Strategy in November 2019, we've made real progress in transforming the organization, putting the customer at the center of everything we do and enabling a culture of sustained profitable growth. You can see on this slide how, through a combination of strong organic growth and targeted bolt-on acquisitions in attractive market segments, we have delivered three consecutive years of profit and margin improvement. Adjusted operating margins have increased by 360 basis points since 2019. Next slide. We increased our margin target last year to 20% through the cycle. And as this slide shows, given the progress already achieved, we have a clear pathway to deliver on this commitment. Firstly, our complexity reduction program is progressing well and is expected to provide a further 42 million pounds of benefits over the next three years. Secondly, Jackie and team are continuing to drive growth in the aftermarket within critical engineering, providing margin support for both the division and the group. And then finally, continuing our growth in our attractive end markets will provide further margin support. Next slide. So looking at the income statement, as expected, the interest charge has increased to 19 million, reflecting the increased rate environment and the funding for our acquisitions. We also show a pension finance credit in 2022, but due to the final buy-in on our UK scheme, we expect a small charge in 2023. It means the overall finance charge in 2023 will increase to roughly 25 million pounds. Our adjusting items are broadly in line with last year, with lower restructuring costs and a hedge gain offsetting higher intangible amortization and the impact of our exit from Russia. And finally, taxation. Our rate returned to roughly 21% after getting a one-off benefit in 2021. We expect the rate to increase largely due to the UK rate increase and new minimum tax laws coming into effect. We currently are forecasting a 22% rate for 2023. So next slide, please. So next, an update on our complexity reduction program. As you saw on a previous slide, we have delivered sustained margin improvements since 2019, and complexity reduction has played an important role. In 2022, we delivered a further 13 million of benefits ahead of plan TO 84 MILLION POUNDS. THE CHARGE IN 2022 WAS LOWER THAN PRESENTED AT THE HALF YEAR. THIS IS A RESULT OF SOME PHASING CHANGES IN CRITICAL WITH CERTAIN PROJECT ANNOUNCEMENTS NOW PLANNED FOR THIS YEAR RATHER THAN LAST. THERE HAVE BEEN NO CHANGES TO THE TOTAL COSTS AND OVERALL THE PROGRAM REMAINS ON TRACK. As you can see, we expect to complete the projects and deliver the lion's share of the remaining benefits in the next two years. But as you know, we will always look for and execute on opportunities that will enhance the long-term competitiveness of the group. Next slide, please. So continuing to cash flow, where you'll see an improvement versus last year. Working capital was higher with debtors reflecting our top line growth and inventories increasing to support both the significantly higher critical order book and customer service in Precision and Hydronic. Both Hydronic and Precision reduced their stock levels in the second half, although we still are experiencing supply chain challenges within certain parts of these businesses. We will continue to manage our position closely and reduce levels further when conditions enable us to do so without adversely impacting customer service. CapEx of 71 million is about 1.2 times depreciation and includes investments to support growth and our sustainability initiatives. We continue to see good opportunities to deploy capital into our core businesses to drive further performance improvement. Our net debt has increased to 812 million at the year end, reflecting in-year acquisitions, but also an adverse FX movement of around 50 million pounds due to our U.S. and Euro debt positions. Net debt to EBITDA remains within our target range, and we continue to develop an attractive pipeline of bolt-on acquisitions. Next slide. Okay, so getting into the division performance, Precision had an excellent 2022. Adjusted revenue was up 18% with organic growth up five. Profits are 23% higher and margins improved by 70 basis points to 18.5%. Running through the sectors, Industrial Automation's organic revenue was up 7% with the integration of bar progressing really nicely. Process control organic revenue was up double digits at 16%. Life sciences revenue was down 8% organically, although do remember we had the last of the ventilator surge sales, about 12 million pounds, in the first few months of 2021. Life sciences grew organically by 10% if you exclude those surge sales. Now, adjusted revenue is up significantly due to the ADAPTIS acquisition, which is performing very strongly. Its order book at the end of 2022 was $16 million higher than at the start of the year, a 66% increase. And the growth opportunities being identified from the collaboration between ADAPTIS and IMI's existing life science businesses are significant and growing. Commercial vehicle revenue was down 1% in the year, with positive results in Europe and the Americas offsetting Asia, which was heavily impacted by China's COVID lockdown. We still see business being held back by component shortages, but maintain our strong relationships with OEMs, which position us well to meet demand when these pressures ease. and our rail business continues to trade well, delivering 12% organic revenue growth in the year. We are tapping into very good growth opportunities, particularly in Asia, where our solutions significantly enhance the safety of passengers during their journeys. Before moving to Outlook, I wanted to highlight the important evolution of Precision's business since 2009. Our sector businesses have grown from roughly 30% of revenue to over 50% now, reducing our exposure to the cyclicality of general industrial production. In addition, Beth and the team continue to build out industrial automations aftermarket, which now represents about 40% of IA revenues. So finally, the 2023 outlook. Based on current market conditions, including the softening industrial production environment, we expect precision engineering's organic revenues to be lower than 2022 with margins slightly higher. So next slide. So Critical had an outstanding 2022 with strong order intake, continued organic growth, and margin expansion. Orders were up 12% in the year, led by a 16% increase in aftermarket. The energy end markets, particularly upstream oil and gas, including LNG, delivered well. New products are playing a big part in Critical's growth, with 43 million pounds of growth of orders in the year. Organic revenue was 2% higher than the prior period and 3% higher on an adjusted basis. Margins are up 90 basis points and now at 19%, reflecting the division's actions to reduce complexity and its continued evolution toward a more aftermarket intensive business. You can see in the top right how aftermarket orders have grown at an 8% compound annual growth rate since we launched the strategy in 2019. Critical ending order book is up 18%. We saw significant new construction activity in the second half of the year, and given longer lead times, we expect much of those orders won't ship until 2024. Therefore, on outlook, based on current market conditions, we expect 2023 organic revenues to be up high single digits. Margins are also expected to be higher. Next slide. And onto hydronic engineering, a solid performance from Phil and the team with 4% organic growth against a stronger 2021 comparator given the installer catch-up activity post-COVID. We continue to see strong demand for our energy saving solutions like our Halo B thermostatic radiator valve, which Roy will highlight shortly. Although we cannot fully quantify, we know there was some distributor destocking in the second half of last year. Hydronic's on-time delivery remains consistently above 90%, which is excellent performance, but does mean our customers can get comfortable holding less stock. Operating profit is up 5% organically, and the division continues to invest for the future while remaining a 20% plus margin business. In terms of outlook, Based on current conditions, we expect Hydronic Engineering's 2023 organic revenues to be higher supported by demand for our energy saving solutions. Margins are also expected to be higher supported by the heat miser acquisition. Next slide. Now we have brought the pension slide out of the appendix as there is some news, two things really. First, we completed a final buy-in of the remaining UK pension liabilities in December last year. This has fully de-risked the DB-UK scheme. Many of you will remember when we started this journey back in 2014 with an overall UK liability of 1.3 billion pounds. Through a series of buy-ins and buy-outs, we have managed the position and the risk down. We will now assess the merits of a final buyout in 2023, which would remove the remaining UK asset and liability from our balance sheet. Second, as a result of this buy-in and the adequately funded position, we have stopped the previously required 7 million annual cash contributions. So we were seeing an immediate cashflow benefit of 7 million pounds going forward. The overseas schemes will be the focus of the team going forward, where we will continue to look for opportunities to reduce our outstanding liabilities. Next slide. We also thought it was a good time to remind everyone about our capital allocation principles. We look to maintain a very disciplined approach to capital deployment. Given the diversity and resilience of our businesses, we target a debt to EBITDA position of between one and two times. The cash generative nature of our businesses means our leverage level should reduce by about half a turn during 2023, unless we are successful with additional acquisitions to accelerate our performance. Capital investment continues to be an important driver of sustainable profitable growth. We focus on better world opportunities and expect to continue to spend at a level above depreciation. Operating expense investment is equally important with R&D expenditure exceeding 3% of sales in 2022. This figure still does not fully reflect all the growth of activity around the group. It truly is embedded into everything we do now. On acquisitions, we will continue to pursue those that help us move further into attractive markets, and we will execute that within our strict return guidance, delivering IMI's cost of capital by year three, and to not be materially dilutive to the group's overall rowing by year five. And finally, we manage our debt position to minimize both the interest rate and liquidity risks. maintaining roughly 75% of our debt at fixed rates, which are currently fixed at about 3%. And we have spread the maturities of this debt over six years, starting in 2025. Now the final slide before I hand over to Roy, the group outlook statement. Based on current market conditions, we currently expect adjusted EPS to be around 111 pence in 2023. That's considering a net interest charge of around $25 million, 22% tax rate, and assuming FX creates a tailwind of around 2%. So with that, let me hand back to Roy to take you through the strategy update. Thanks, everyone.

Thank you, Dan. This next slide clearly shows how our strategy is delivering sustainable improvements in our financial KPIs since the strategy was launched in 2019. Revenue has been growing at 3% CAGR. Our operating margin is up 360 basis points at 17.8%. And adjusted profit before tax has been growing double digits at an 11% CAGR. ROC has improved by 130 basis points to 12.7%, and adjusted EPS has increased from 73.2% pence up to 105.5 pence. Next slide, please. So I want to provide a quick refresher on our strategy. At the heart of the 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 to solve key industry problems, helping our customers become safer, helping them become more sustainable and more productive. And really there are three key pillars to our strategy. The first is customer satisfaction. We provide world-class engineering expertise and excellent service to all of our customers, alongside 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 incubator, Growth Hub, supported by Selective M&A, enabled us to develop breakthrough solutions to support our customers with their most challenging and complex engineering problems. And 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. Next slide, please. Our three divisions are aligned to attractive growth markets and we have a portfolio that is supported by global macro trends. The long-term fundamentals in each of these markets are strong and we have the ability to make a significant positive impact. I'm going to highlight a few examples. In life sciences, the global health threats that we face, along with the rapidly improving approach to diagnosis and treatment, presents a huge opportunity for us. We can empower our customers by helping to automate their processes to diagnose disease early and support highly tailored, patient-focused critical care. In indoor climate, the global drive to net zero, along with increased energy prices, means that more than ever, our customers need to reduce energy consumption, improving building comfort and to combat climate change. And Heatmoser, of course, is a really exciting acquisition for us in this space. Next slide, please. Growth Hub remains absolutely at the heart of our better world strategy. And I'm really pleased to report that a record 52 million pounds of orders were won through Growth Hub last year. Pipelines remain really healthy across all three divisions and more and more employees are getting involved and taking the knowledge that they gain back and applying it in our core business to create more value today. And whilst there were nine Growth Hub projects that delivered over a million pounds of orders last year, I would like to highlight three specific Better World projects that really demonstrate the commercial mindset and the customer-focused culture that Growth Hub is fostering within IMI. Firstly, our focus on hydrogen as a sustainable fuel is leading to a number of exciting early project wins. Our HydroGreen team are actively supporting the development of hydrogen refueling infrastructure with solutions that reduce the cost of operating refueling stations. And they secured 3 million pounds of orders last year, and we expect that to double this year. Secondly, you might remember that we introduced Aerosol at our Capital Markets Day back in 2021. Aerosol is an innovative solution that prevents steam erosion in process industries, minimizing plant downtime and extending plant life, improving efficiency and return on investment for our customers. It is now a significant driver of growth and we secured 17 million pounds of orders last year. Finally, our Halo B thermostatic radiator valve is a great energy saving new product. You might be aware that Germany had issued a regulation limiting the temperature of municipal buildings to just 19 degrees Celsius this winter. And this is a very effective way to save energy. A one degree Celsius decrease in temperature can reduce energy consumption of the building by around 6%. And after seeing this policy announced, our team quickly developed the Halo B valve, which helps limit the temperature in a building to 19 degrees C. This has been a great success in Germany, and we secured four million pounds worth of orders in the year. So hopefully these examples provide you with a good feeling of how our better world strategy is really accelerating organic growth. Next slide, please. As you know, we have completed four strategic acquisitions since December 21. And on this slide, I'd like to provide a very quick update on how things are going. Adaptus has traded very strongly since we acquired it in December 21. we continue to see a great opportunity to cross-sell Adactus' leading mass spectrometry technology into our existing OEM customer base and vice versa. Adactus has now been further complemented by the acquisition of Core Solutions, another life sciences business where we are already seeing very strong customer demand and a significant opportunity to scale up. The integration of bar is on track. We are actively progressing with our plan to rapidly scale bars, high added value products and systems through our northern sales network. And finally, we completed the acquisition of heat miser. the UK leader in smart thermostatic control in December 22. Heatmoser provides a unique opportunity to accelerate our growth in smart buildings, and we are very excited to scale Heatmoser's predominantly UK-based business right across hydronic school markets. All four acquisitions present the opportunity for significant synergies and are on track to deliver growth and financial targets. Next slide, please. I also wanted to take this opportunity to give you an update on our ESG progress and provide an overview of our new sustainability framework, Creating a Better World. This framework sets out the most important priorities for our business, and it has been developed in collaboration with our stakeholders who are part of our materiality assessment. There are three pillars to this framework. Firstly, empowering people. We develop and empower people to make an impact and to create a better working world. We have made great progress in the year with employee engagement now at record levels and our recordable accident rate improving by 38%. We are also making good progress on gender diversity and are benefiting from the strong female representation on our exec committee and our board. Secondly, sustainable solutions. We engineer solutions for our customers that are safer and more sustainable. Every day, our people are helping to improve energy efficiency in buildings, improve analytical devices to save lives, and reduce emissions in both oil and gas and in trucks. Thirdly, climate action. We play our part to address climate change and protect the planet by minimizing the environmental impact across everything that we do in IMI. We continue to see great progress in reducing our CO2 intensity with a 9% reduction last year and a 25% reduction since 2019. We are committed to a net zero target for scope one and two by 2040, and we are very pleased to announce a target to be net zero for scope three by 2050. Next slide, please. To summarize then, the key takeaways from today are, first, that our purpose-led strategy that we set out in late 2019 continues to deliver, with 4% organic revenue growth, 15% adjusted EPS growth, and the order book up in all divisions. At the heart of our strategy is our growth hub, which is going from strength to strength and delivered a record 52 million pounds of orders in 2022 while fostering a customer-led entrepreneurial culture. Third, we have completed four strategic acquisitions since December 2021, all of which are in attractive better world markets and present opportunities for growth. Fourth, as Dan said, we expect this year's EPS to be around 111p and remain on track to deliver our ambition of sustainable, profitable growth and a 20% through cycle operating margin. Okay, so with that, I'm going to stop talking and turn over to the moderator, please, for the Q&A.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you choose to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. And our first question today goes to Andrew Douglas of Jefferies. Andrew, please go ahead, your line is open.

Good morning, gents. Thank you for the presentation. I've got three questions. Two should be really quick, and hopefully one will also be quick. On precision, I'm just interested in your commentary on the outlook for industrial automation. I know that you're historically a PMI business, but one or two of your peer group who's also PI correlated are talking about reasonably healthy growth in IA. Can I just double check? Is this typical IMI concertism? Is there any kind of market share loss that we kind of need to be aware of or anything else that you can give us there? It just feels like that's potentially a little bit soft, but I'll leave you to discuss that. Secondly, on pricing, clearly lots of ups and downs when we think about the whole pricing equation. Can you just give us a view on whether we should be modelling prices up this year and whether that's an annualisation of last year's numbers or are you putting more prices through this year? And last but not least, on Growth Hub, clearly 52 million of orders is great. Are we looking to expand that in the current year? So any guidance there would be helpful. Thank you.

Great. Well, thanks, Andy. Yeah, precision. So On precision, we certainly don't feel we're losing market share, Andy. Our customer satisfaction scores, for instance, are now industry leading, right? So we use Net Promoter Score. We're up there in the 40s. So we definitely don't feel that. I think... You know, with us, Andy, we will pick a forecast that we think is absolutely achievable. With IA, what we've done is look at PMIs. We looked at previous recessions and we've used that. And it's very important for us as we manage the business to make sure that we get our costs in line. And as you see, although we're forecasting precision to be down in terms of sales, we're forecasting it up in terms of margins. So managing our cost base, very, very important for us and making sure that we can show the benefits of the restructuring as we have done since 2019. And as Dan said in his presentation, delivered over 80 million of benefits. And as you can see, profits since the 2019 pandemic result and the strategy presentation up nearly £100 million in that three years. So that's how we run the business. We want to make sure that the costs are in line. The other people could well be right. I mean, certainly early trading, January, February is solid, right, within precision. So they could well be right. But for us, we don't want to rely on any sort of better outcome. We want to make sure that if we do get a better outcome, Precision, of course, is a high added value business. You know, as I've said many times, I was managing it as we came through 2009 through the other side, and we got, you know, tremendous drop through in terms of the profit. And that's the way we want to run the business, right? We want to make sure that we are prudent, we're careful, we don't rely on any sort of second half recovery. I think some of the peers have got a point. And, you know, again, it's not clear to us because we get a mixed picture. Obviously out there right now, labor costs are high, right? And labor is difficult to get hold of. And that is making people think about automation. There's no doubt about it. So the question will be, does reduced consumer spending because of inflation and energy costs and everything else mean that capital starts to come down, capital spend starts to come down? At the moment, as I said, Andy, you know, we're solid. And, you know, we really hope that, you know, everybody else is right. But, you know, we don't rely on hope. You know, we make sure we get our costs in line. And if we get that extra sales, we'll be obviously absolutely delighted. And I'm sure everybody will be. So that was the first question. I think Dan, do you want to cover pricing?

Yeah, sure. Hey, Andy. Yeah, I mean, we did get good pricing. And I think last year was a lot around managing the input cost commodities and components and got that nicely. And you saw the results on the margins. We probably have about two points, two percentage points of carryover And as you know, there's probably a bit more pricing in hydronic and a bit less in critical. And off that base, our expectation is we will need to move pricing further in 2023. And that's more down, as Roy already just mentioned, the labor pressures and labor inflation. So we'll look to make sure we manage that. and clearly use all of the productivity as well to manage that as well. So looking for, for further price movement as we get through 2023. Yeah.

I'll just add to that, Dan, I think Dan's absolutely right. I think pricing this year will be mid single digit, Andy, and it'll be obviously predicated more on labor inflation. Last year was more material inflation. And as Dan said, probably, you know, at least 2% of that is carryover. And actually, most of the rest of it is now agreed. So, you know, we're pretty sure that that, you know, is going to come through. And then Growth Hub, I think, was your last question. Yeah, you know, I mean, first of all, delighted with what's happening with Growth Hub. I think... It's really cultural, Andy. It's the most important thing, right? Because we can look at those orders and they're important from those teams, really, really important to us that we can generate market-led innovation, that we can go out, solve customer problems, create solutions quickly. And as I showed some examples, I love that little Halo B example. Yeah. because the teams reacted so quickly. You know, the German government said 19 degrees in municipal buildings because they need the energy saving. Our team reacted, scaled up, you know, more than 10 times. It was a bit like the ventilator challenge in my mind. The team's so responsive, so market-facing, and that's what's key. And actually, even that HoloBee order, it was about 4 million, is not even in the Growth Hub numbers, right, because it wasn't done through all of the Growth Hub techniques. but it's another indication of how the culture is changing in the company. And that's why I'm actually trying to move away a little bit, Andy, from just a growth hub target, because I want the whole company to react like that, right? Deeply cultural, deeply based on our customers' needs, not on what we've got and trying to sell that, much more on you know we can solve your problem we react to you and that's why obviously the net promoter scores customer satisfaction scores are going up and that culture for the company will lead to higher growth and that you know that's what we want to keep accelerating that overall growth level andy so so yeah no really good news and um yeah we're pleased with it does that answer your questions yeah that's great great work guys thank you very much thanks a lot cheers

Thank you. And the next question goes to Christian Hinderaker of Goldman Sachs. Christian, please go ahead. Your line is open.

Yes, good morning, everyone, and thank you for the opportunity to take questions. I just wanted to come back to the margin expansion that you see across all three of your divisions. That's obviously encouraging. We know about the 20 million of restructuring savings, and you've talked a little bit about pricing. But I guess just to narrow in on that a little further, you mentioned wage inflation. You know, some companies here in the sector are talking about 5%, 6%, 7% cost inflation on the labour line. You know, what do you see in terms of that inflation rate? And also, more broadly, are there any considerations in the bridge to think about with regard to, say, M&A in terms of those margin expectations? And then I'll come back to the other two.

Yeah. No, thanks, Christian. Yeah, I think... Obviously, you know, we're seeing similar levels of labour inflation. We want to keep all our best people. We want stability in our workforce. And broadly, that's what we've got now. And we want to keep that. It's very, very valuable to us. So, yeah, similar levels. As I said, pricing. Matching that, though, we expect to win the overall inflation equation. We are seeing a bit of relief on some materials, and that will help us compared to the higher levels of inflation last year. So that's good news on the materials side. Roughly, our P&L is sort of just over 30% labour, just over 30% materials. So it's pretty equally balanced. So a bit of relief on materials is good. And of course, we've got our own efficiencies that we're driving as well, plus the 20 million from the programs. The good news on the programs is the vast majority of that is now done for the 20 million, which is great. That was three big site consolidations in precision. And I think Beth and the team have done a great job in terms of making sure those projects have been done on time to budget. And we're starting to see the savings coming through in the P&L already. So that's encouraging, Christian. So I think overall, in terms of inflation, The bridge, yeah, it will be helped by, obviously, the accretive margins on the acquisitions. But in the overall scheme of things, that's relatively small. Heat miser obviously does help hydronic. Probably that's the big one, really, Christian, in your models. And that is worth about 100 basis points. So for hydronic, it's obviously not for the group. It's not that big, unfortunately. But yeah, for hydronic, it's worth 100 basis points. So Dan, anything I missed in that bridge?

Now, I mean, that's why I presented it. I think we see a clear shot to getting ourselves up to that 20% through the cycle. I think also that gives us, as we continue to deliver close to that, the opportunity to continue to invest in the business to drive the top line growth as well organically. I think that's the key for us as we approach that number and get there. We'll want to make sure we're continuing to invest in the growth hub teams, but across the business in the better world segments.

It's a really good point, actually, Dan, this point I should have made. You know, we've improved profits by nearly 100 million over the last three years, despite a lot more investment in our business, despite the fact that 800 people have been contributing over that period of time into growth hub. despite the fact that R&D as a percentage of sales has gone up from just over 2% to just over 3%. So, yeah, I mean, we are investing heavily. We want this business to grow faster. I mean, that's our main activity. And that obviously contributes towards achieving those 20% margins.

Okay, thank you both. Maybe just turning to, you mentioned ongoing supply chain issues, I think, in critical and precision areas. I just wondered if you could elaborate on that in terms of magnitude, whether it's specific product categories or any regions in focus. It seems that peers in the market have seen a better situation in supply relative to, say, six months ago.

Sorry, I sort of missed the early part of that question.

Just just elaborating on the supply chains, I think. Yeah. Yeah. Yeah. Certainly the the boats are moving a lot faster around the world now and the ports have kind of caught up. We're not necessarily seeing lead times come down across all the elements. And, well, I would say, though, that in certain parts of our business, our customers have started to destock because they get confident because of our performance. And as you know, Christian, we are... moving more and more towards a local for local supply chain. We continue to look for ways to bring our products and produce them in country. So I suspect we're continuing to watch it. It's still within, I'd say, elements of hydronics, some components that we do take out of China into other parts of the world. And in precision, there are some elements that do do cross the long term borders. It is improving, but we're not going to declare victory just yet. And we're going to continue to maximize and focus on giving the customers the right on time delivery of the right performance. But having said that, I suspect. as we go through the year, subject to all of that, we'll look to bring some of those stock levels down and deliver an improved cash conversion for 2023. Yeah, completely agree.

Does that cover your question? It's not. Yeah, so it's not specific, say, to commercial vehicles within precision or particular end markets? I'd say no. Shipping issue, is that right?

Yeah, I'd say electronics are still the most effective components, right? So as Dan said, that affects parts of hydronics, parts of precision. And outside of that, as Dan said, lead times generally from supply, transport lead times have come down, no doubt, as Dan said. The boats are definitely much better, right? Transport costs have come down. But in terms of supplier lead times, We are not seeing a dramatic reduction in supply lead times yet. Some suppliers are still reporting, you know, hard to get hold of additional labour. But they are also reporting that they would like to start quoting for more new business as well. Right. Which is always a sign that they think capacity is going to get freed up, you know, in the future. in the short term future, Christian, right? So I think what we're going to see, I'm certainly talking to one of our lead supply chain directors. He was thinking sort of end of Q2, Q3, we probably start to see the effects of shorter lead times. But he did put one proviso in, which is that China opening up, which is obviously a good thing in terms of markets, doesn't, you know, suddenly soak up a load of capacity. So that's the only rider on that, Christian.

Thank you both. And then third and finally, Dan, you touched on cash conversion. I just wondered what level of free cash improvement we might expect along with the margin expansion this year. I think you've had around 136 million of cash out from working capital in the past two years. And then prior to that, an inflow of around mid-teens in terms of the million pound mark. What would be a reasonable expectation for working capital improvements as we move through this year?

Yeah, I'm going to shy away from giving an absolute target number. What I can say is we delivered 80% cash conversion this past year and, again, continue to put the stocks in to cover off the supply chains. I'd expect as we go through the year and based on what we see today, The cash conversion for 2023 is going to be kind of in the 90% range. Again, we are going to make the investments also on the CapEx side and continue to deploy capital that way as well. So, yeah. And I think... I think that's probably where we want it to get to. So we make sure we're continuing to invest in the business. So yeah, so a targeted cash conversion kind of as everything normalizes at around the 90% range feels about right. And that's what we're targeting right now, Christian.

Okay, thank you. Brilliant, thanks.

Thank you. And the next question goes to Andrew Wilson of JP Morgan. Andrew, please go ahead. Your line is open.

Hi, good morning, everyone. Thanks for taking my questions. I'll stick to two. I wanted to start on maybe a follow-up to a couple of comments you made, one in your, I guess, prepared comments and one to Andy Douglas' question. But Just on hydronic in terms of the destocking which you talked about, can you talk about where you think customers are in that and if you've seen any change? And I guess linked to that, have you seen any of the same effects in precision? Because I'm conscious that clearly that can have moved around a little bit and maybe customers had restocked earlier in the year. So just trying to get a sense of both of those dynamics, please.

Yeah, good point, Andy. So, I mean, Hydronic, you saw Hydronic slow significantly in the fourth quarter. That was certainly wholesaler destocking. We've always had conversations with those wholesalers and their own cash targets to achieve. Dan actually met personally with one of those wholesalers. So we got pretty good data on what happened. And the good news, Andy, is that as we've come to January and February trading, That has clearly stopped now. So I wouldn't say it's definitely all done. But as far as we can tell, the vast majority of the destocking in hydronics is done, which is obviously good news. As Dan said, you know, Phil and the team just done a tremendous job. I mean, they kept on time delivery pretty much throughout COVID. at around 95%, you know, always over 90%. And that was partly because of what they did operationally. And you'll remember they consolidated three warehouses into one, which gives us better stock profiles, better coverage, but also operationally, they're doing a fantastic job. So, you know, very, very good. That's where we want to be. Their net promoter scores are fantastic. Customer service scores are fantastic. But, you know, obviously that means that our wholesalers can take stock downs and be comfortable that we'll still deliver. So that's definitely what happened in hydronics, and that definitely reduced hydronics growth last year. And I would think, Andy, a similar thing has happened in precision. Obviously, precision way up in IA in the first half last year, pretty flat in the second half. And because we're a component supplier, we're on the end of the supply chain. And it always happens if you look at Precision's history. On the way up, you know, we'll get better growth. On the way down, you know, remember, you know, part of what we do, particularly in IA, is through distribution. And they will tend to adjust stocks accordingly when they see tougher times are coming. So, yeah, I think you're absolutely right in terms of what's happened there, Andy.

Thank you. And in terms of critical and just thinking about the outlook for 23, obviously, you provide some, again, have provided very helpful comments by sort of end market last year. I'm just interested in terms of the thought processes in terms of the big end markets for critical in terms of orders, because clearly there's a very, very good momentum in 23. You know, how sustainable is another year of growth if we think about specifically orders specifically? obviously sales very well underpinned, but orders for critical in 23.

Yeah, I mean, our plan is for orders, you know, all things being equal to be up again this year on last year. And again, you know, Jackie is winning. I mean, you could see fourth quarter super strong, right? Which is why we think sort of sales up this year, high single digit rather than the full order book, because obviously, as you know, you know, a lot of those orders will be 12 months, a bit longer, you know, fall into 2024. So, yeah, So, you know, we think critical is in great shape aftermarket strength as well. And, you know, really coming through very strong. Part of that's on the back of the growth up work that Jackie is absolutely driven and actually improved. You know, it's what I love about that team is that, you know, take the concepts and actually take them forward, you know, very, very quickly. So. So, yeah, we actually think orders will be up this year. Clearly, you can see it's oil and gas strength. And talking to Jackie, he feels that, you know, this year will be another strong year for LNG upstream. You know, similar to last year, there's projects out there. We're getting high hit rates. And then what normally happens is and I think Jackie's right in this is that, you know, you then get downstream strength. Right. And that sort of follows on for the for the period after that. So, as you know, we're strong in both areas and we feel pretty good. There's also actually a lot of conventional power going into China as well. over the next three or so years. And we're well placed with that because that's going to be the most sophisticated sort of power stations where, you know, we're very competitive, as you know. So, yeah, our installed base went up last year, parts went up, you know, and I think we're doing about 250 million now worth of parts business a year at, you know, very good margins, as you know, Andy. So, yeah, all in all, I think we feel good about critical. We feel good that, you know, orders should go up again this year.

Very clear. Thank you, guys. Thanks, Andy. Thanks, Andy.

Thank you. And the next question goes to Mark Fielding of RBC. Mark, please go ahead. Your line is open.

Yeah, morning, guys. Thanks for taking the question. Actually, first, can I just follow up on talking with Andy there about the critical outlook? And I suppose I'm curious on a bigger picture. I mean, your capital market's there a couple of years ago. Obviously, it was the lowest of the three growth targets you set for the divisions. You know, the world is obviously taking a significant shift since then in terms of energy crisis, et cetera. Just, thinking about how you think about the sort of medium-term growth dynamics of that business now. And then maybe a more specific question on that, which is if the OE orders that are coming in now and things are more about 2024, just I suppose, how do we think about the margin dynamic over the next couple of years? Because at the minute, as you said, a big part of your list of 20% margins, one part of that list is the critical aftermarket growth. But there is this period where not a bad thing in any way, OE might accelerate ahead of the aftermarket.

Yes, good point. Yeah. Yeah, I think, well, first of all, in terms of critical outlook, since the Capital Markets Day, yeah, it's changed quite fundamentally. I think energy security has risen to the top of the list for many, many countries. You know, and obviously LNG, you know, as a as a cleaner transition fuel has become a fundamental part of that. And one of our real strengths is LNG. So, you know, I think, yeah, you'd have to say the outlook for the medium term is good, actually. I've seen some numbers from one of our big peers projecting huge increase in LNG capacity up till 2030. And it's hard to sort of disagree with that now. So, yeah, I think if we were doing that Capital Markets Day again, Mark, we'd probably, you know, have a slightly different view. But, you know, so I think where critical is, is great. I think, you know, beyond the medium term, critical strategies is to really make sure that we win in the installed base. And that's what they've done fantastically. I mean, aftermarket orders last year up 16%, as you know, Mark. So I think, you know, that's still a fundamental thing. And we drive so much of the... you know, future profits of that business from the aftermarket that if we can grow that way beyond any, you know, next oil and gas surges on new construction, then that business has got, you know, I think a fantastic future because we think the installed base will obviously be there for decades. Right. And that's got to be good news. The other thing I would say is that the factories are in really good shape and, you know, During Mark's time, as you know, we focused heavily on the factories. And within Critical, we consolidated the number of factories. We basically halved it. We went from sort of 30 to about 16, I think it was. And the 16 we put it in were the better factories. Obviously, they were more operationally efficient. They're better at continuous improvement. They're more customer focused. And as we drop new construction business in there, it will flow through to the bottom line. And I don't see a massive dilutive effect from that, actually. What I do see is an accretive effect from the increase in aftermarket. Plus, as you know, we talked about this year's 20 million worth of rationalisation benefits. Actually... remember that in total we've got about 42 million to come as Dan said when he presented his chart and a big chunk of that second 22 million is going to come in critical so you know and we see that really starting to kick in next year you know to really underpin their margin performance as well into the future so now I think we feel good about critical and we feel good about a 20 percent plus margin target in critical you know you know through that medium term so yeah I think it's in a good place.

Thanks. And actually, can I just ask a sort of slightly related follow on in terms of the wider restructuring plan? I mean, it feels like, you know, you snuck out another roughly, you know, adding in the 2022 and the other years about another five million of extra benefits from the plan in the announcement today. Do you feel like once you get to the end of this, you know, 24, a little bit 25, but always there's obviously continuous improvement. Will that be largely it when we're thinking about restructuring benefits and also restructuring costs?

Yeah, I think, you know, as you know, we set out a plan, you know, and we've increased the margin targets and we increased the spend a bit on that plan. But fundamentally, it was the plan we set out back in 2019. And that will dramatically reduce the complexity of the business, as I said, in terms of the number of sites. Right. So. So. putting it into our best sites does so much more than deliver those benefits in the P&L. It massively reduces our complexity. And, you know, I can remember a chart back in, I think it was 2013, showing our supply chains. Now, you know, much of that is being consolidated. That big German plant that we've just consolidated into Burno was a huge part of that supply chain complexity. You know, so it's much more than about those short-term benefits. It's about the long-term growth and success of this business. But we will, as Dan said, we will always look for opportunity. I don't think, you know, they'll be up, you know, we'll be spending the sort of money that we've been spending per year. But, you know, could we spend, you know, something like, I don't know, 15 million mark on a project that would, again, give us more benefits? Of course, we could do that. And we wouldn't walk past it because, again, we want to grow faster. We want to keep taking the complexity out of the business. But largely, this particular programme will be done, yeah.

And I just say, you know, as we go forward, M&A sometimes gives rise to further moves as well. I mean, in the Adaptus case, we acquired a wonderful, wonderful business and a wonderful campus, and we've actually been able to move some of our activity into Palmer, Massachusetts, and that's gone really, really well. So that's the other caveat I'd say, Mark, as we bring further bolt-ons into the family. that could be another option.

Yeah. If they're multiple site, I mean, yeah, you know, the ones that are single site, obviously we're buying them for their tech and for their growth, you know, heat miser, we absolutely want to build on that site and invest in it. It's just fantastic in terms of smart buildings. So, so yeah, but multiple site, those sort of complex acquisitions would certainly look at the opportunity. Yeah.

Great. Thank you very much. Thank you. Thanks Mark.

Thank you. And the next question goes to Jonathan Hearn of Barclays. Jonathan, please go ahead. Your line is open.

Hey, guys. Good morning. I have three questions, please. Just one on industrial automation and two on critical. Firstly, just on industrial automation, can you just talk about the 40% of sales that are taken from aftermarket and essentially how that sort of aftermarket sort of trades through the cycle? Is it a lot more resilient for you versus the OE? That was essentially that.

Yeah, no, Jonathan, absolutely it is. You know, it's higher margin and it's definitely more resilient. Right. So so you definitely find that people, you know, are obviously keeping their own kit running. They're not necessarily involving investing in new production lines. But, you know, generally, unless it's a super severe recession, I can only think of one of those. They continue to buy all the spare parts. Absolutely. And so that that 40 percent, you know, is part of the reason that we think that precision would be a more resilient business this time.

that's very clear and the same question is just on critical just coming back to to the margin there i think if you look at the the chart that you put up on on slide eight obviously you've got about a 15 million of savings to come through from that over the next few years if you kind of put that into into critical it would kind of imply a margin of around about sort of 21 percent um but i know your target is 20 but i think the ultimate question is is that you know basically you know, can critical be a 21, 22% margin business over time? Is that what you feel can be achieved?

I mean, Jackie's now listening. He's probably going to kill me, Jonathan. I mean, you know, you... It depends on the cycle as well. You need a bit of help from the markets, but we're not putting a lid on margins, as I've said on previous calls. And as aftermarket strength continues, as he delivers the complexity reduction, you know, of course, you know, if the markets are good, of course, you know, margins can go up plus 20 percent. There's no doubt. And We, as I said, we will continue to invest in the businesses for growth. And I don't want anybody to think, you know, that we're not going to be doing that. We're certainly going to be doing that. So, you know, that will obviously constrain margins in the short term slightly. But can we do 21, 22 percent? You certainly couldn't rule it out, Jonathan.

OK, so basic critical is a 20 percent margin, a 20 percent plus margin sort of business rather than the sort of. I suppose, a 20% target that you have out there, really.

Precisely. And I think we've already said that, Jonathan, actually. I think 20% plus, yeah.

And then, Sergi, just a final one. Just coming on, well, just carrying on with critical. I just wanted you to talk about sort of nuclear. Obviously, there's a lot of refurbishment activity out there. If we look at your orders in FY22, they were sort of plus one. Can we see a sort of a step up in terms of that activity coming through? And just can you talk about the dynamics of sort of nuclear aftermarket? Is that really sort of high margin for you? Is that maybe your highest margin segment or is that not the case?

Yeah, I mean, it's high margin. I mean, when we do an upgrade valve in nuclear, which is obviously aftermarket, that's good margin. The path's a very good margin, obviously. The issue on nuclear is always new construction because everybody knows that the aftermarket path stream is good. And, you know, you need it to be good because the new construction margins are, you know, it's competitive, I would say, Jonathan. But on the aftermarket side, it's good. Yeah, and we do see some potential for nuclear funding. Timing is always tricky on nuclear because these projects always take longer, whether they're upgrades or new construction, as you know, right? And anybody that follows, well, any of the big projects knows that it can take longer. But the US, for instance, is prolonging the life of its nuclear power stations. And I think we'll see more and more of that. I think France is obviously dedicated to nuclear and is at the moment talking within the EU about making sure that nuclear is counted as as a green fuel and they made some progress on that. They're still obviously talking with Germany about that. But I think, so for us, yeah, we see nuclear upgrades as profitable. We see the parts as very profitable and we do, yes, see some good opportunity there.

Great, guys. That's very clear. Thank you very much.

Great. Thanks, Jonathan.

Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypads. And our next question goes to Aurelio Calderon of Morgan Stanley. Aurelio, please go ahead. Your line is open.

Hi, good morning. Thanks for taking my questions. I've got two. The first one is on hydronic, and historically, if we look at the division, it's been more, and correct me if I'm wrong, but it's been more of a balance between growth and margins. I think now for the first time in several years, we can talk about renovation, we can talk about a structural or a secular kind of uptake in that business. So how do you think about the margin profile going forward? Is it a matter of growth versus margins, or can you get both in this cycle?

Yeah, I mean, I think, you know, I think since 2019 it's grown about 5%, I think, you know, despite COVID and everything else that's hit us. So I think, you know, Phil and Tim doing a fantastic job. I also think I really, externally, energy savings definitely come up the agenda, right, for lots of reasons. One is it's got a lot more expensive energy. Secondly, because... because of commitments, carbon commitments by big companies, by governments, right? So I think to me, it's in a really good place versus where it was three years ago. And as we look forward, I think energy carbon saving is going to stay fundamentally important, as I said in the presentation. You know, the German government is doing, you know, faster legislation around energy saving, for instance. I think, you know, you know, 80, 90 percent of that business is Europe as well. And the business, the culture in the business is fantastic. They actually got our highest employee engagement scores in the group, you know, which is which is great. And what we do. cost the customer about two or 3% of the cost of their HVAC system, but it can save them a third of the energy costs, right? Because we help them design the system. We help them actually sometimes reduce the number of pumps in the system. We certainly help them, you know, with the way that the whole system is balanced and require less pumping cost. So, yeah, I, you know, I feel like that business is in a good place. And as we said, the capital markets day, you know, we expect sort of five percent growth, you know, long term plus. And we expect 20 percent margins. And that was before we acquired Heatmiser, which gives us another hundred basis points. Yeah. And again, I'm not trying to constrain the margins. They'll go 20% plus, but we are committed to fully investing in that business, again, to help it grow faster. So, yeah, I think it's in a good place, that business, and the outlook is healthy. I think mid-single-digit growth again this year, margin improvement again this year. So, yeah, we feel good.

That's super helpful. And the second question, and sorry to labor the point on critical margins, but I think it's one of the key highlights in my view. I guess if we go back to 2021 in your capital markets, you were talking about 20% to 30% of the critical business that didn't have margins that were attractive to you. I guess the question is more on M&A strategy going forward, especially for critical. One is, do we see any obvious parts of the portfolio that need to be taken care of? And second part would be, can we find a heat miser for critical?

Oh, what a brilliant question, Aurelio. You know what? It's almost like you were listening to a conversation with Jackie in one of our business meetings because, you know, we would obviously, aftermarket's going great, right? But if we could even take it to the next level, It will probably be via instrumentation, digital, you know, exactly as you say, right? The heat miser equivalent. So we would love an acquisition like that to accelerate our progress in critical aftermarket. Yeah, fantastic. So as we think about critical, the 30% that we had under review, I think, you know, I mean, the margins are barely diluted now on that 30%. And that's a testament to those teams and to Jackie, because, you know, what they had to do was... absolutely flipped to get much more aftermarket business. And they've done that. And I've visited both of the major parts of that business in the last six months. And the teams are great. They're focused on refurb. They're focused on driving, upgrade valve, just like we've done in the rest of Critical. So I'm really excited about the prospects for that part of the business. But Acquisitions, as you say, would tend to be more instrumentation and certainly more at driving aftermarket for the long term, that sort of growth.

That's very helpful. Thank you. Thank you.

Thank you. And our final question goes to Mark Davies-Jones of Stiefel. Mark, please go ahead. Your line is open.

Thank you very much. Morning both. A couple, if I may, both on precision on some of the moving parts there. Firstly, on CV, what's the view for 2023? Obviously, China was very weak last year, should be reopening, getting better. But conversely, supply chain is still very tight. Western cyclical market is a bit weaker. So how does that balance out, do you think, this year?

Yeah, Mark, I think you just described it perfectly. It's exactly how we see it. You know, we should get a rebound from China. Western markets, you know, we think, well, let's say flat to slightly down, you know, is where we've got it. So we've got the whole thing at flat to slightly down within our 111p. Again, you know, let's hope that things improve from there. But, you know, that's exactly how we've called it.

Okay, great. The other bit was life sciences, about which you are sounding quite excited, and clearly Adaptus is going very well. Can that become a much more material bit of the division? And if so, they're fairly niche businesses. Do you need to enter more niches? Is that a big focus of M&A?

Yeah, I think, I mean, certainly we can grow the life sciences further, yeah. There's some good opportunities, and Beth said, You know, Martin and the team, they're doing a cracking job. And I think the talent in that team and the opportunities they're opening up. And Beth told me about another couple of contracts that we've won via that ADAPTAS team. So, you know, just literally the other day, Mark. So, you know, I feel really good about life sciences. Yeah, the funnel's good in terms of opportunity, you know. we trying to do more of what we did with eat wise. Well, you know, we did it with core solutions. I know it's a lot smaller, but yes, they tend to be quite niche, technically very, very capable. And what we look for is obviously acquisitions that have already established good product market fit. We obviously check with the customers. We know, you know, most of those customers pretty well now that it's a technology or a product that's really, you know, going to get some traction. So it does take a bit of time. It is a very selective process, but you know, the funnel, you know, It's got some interesting opportunities in it, yeah.

Presumably that part of the Precision portfolio should be still growing nicely in 23. Absolutely, yeah. We're past all the valve surge stuff now, aren't we? So that falls out. Yeah. Yeah.

Yeah. As you saw, I've been underlying, you know, that group about 10% last year. And yeah, we're past all the, all the ventilator belt stuff. Having said that, we've actually had an order in January to support China on ventilators. Quite, quite a large one. So yeah. I mean, but in terms of the real noise, you know, the big stuff, I think we're past it. Yeah. Yep.

Great. Thanks very much. Great. Thanks, Mark.

Thank you. We have no further questions. I'll hand back to Roy for any closing remarks.

Well, brilliant. I think, you know, from my perspective, it's a good solid set of results. The strategy that we announced back in 2019 is clearly working really well. Customer satisfaction is high. Employee engagement is high. You know, we've added, as I said, almost £100 million to profit since 2019. I think we've got... great momentum in this business and actually you know as we sit here today you know we feel reasonably optimistic about this year so thanks for joining us everybody and all the best thank you