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.