IMI plc

Hello, everyone, and welcome to the IMI PLC Q3 Interim Management Statement. My name is Nadia, and I'll be coordinating the call today. If you would like to ask a question at the end of the presentation, please press star followed by one on your telephone keypad. I will now hand over to your host, Roy Twight, CEO to begin. Roy, please go ahead.

Good morning, everybody, and welcome to IMI's third quarter trading update. I am joined here today by Luke, our CFO. It was another excellent performance from our team in the third quarter. Organic revenue was 12% higher than the same period last year and is now 5% higher year to date, demonstrating the continued success of our growth strategy and the strength of our One IMI operating model. We delivered an outstanding performance in process automation, supported by rising global energy demand and our focus on high-margin aftermarket orders, which are now up 7% organically year-to-date and were up 1% against a strong performance in the third quarter last year. The climate control, industrial automation and life science and fluid control market sectors all perform well. There is strong momentum across the business, and remain on track to deliver our fourth consecutive year of mid-single-digit organic revenue growth. And I am therefore pleased to reconfirm guidance. We continue to expect that full-year EPS will be between 129 pence and 136 pence. With that, I'm going to hand back to the operator who will manage the Q&A session. Thank you.

Thank you. If you would like to ask a question, please press star, followed by 1 on your telephone keypad. If you would like to remove your question, please press star, followed by 2. When preparing to ask your question, please ensure your phone is unmuted locally. The first question goes to Christian Hinderaker of Goldman Sachs. Christian, please go ahead.

Morning, Roy. Morning, Luke. I want to start on the process automation growth rate. I think you've called out what the year-to-date number was, but what was the quarterly figure? And then just how do we think about the quantum of the shipment catch-up that you've flagged, both with respect to process, but maybe elsewhere as well? Thank you.

Yeah, hi, Christian. Good morning to you. So in terms of process automation, Obviously, the sales grew 26% in the quarter. That was shipment phasing. So we still see process automation at high single digit, maybe slightly higher, maybe 9%, 10% for this year in terms of shipments. No change to that. But what we've done is de-risk the final quarter, which obviously if you do the maths, we expect to be flattish in terms of shipments. Versus last year, if you remember last year, we had an absolutely fantastic Q4 in terms of shipments. And December in particular was massive. And what we've done is de-risked that. So I'm really pleased with the team. Obviously, to be able to ship 26% more is excellent in terms of execution. And that really has been a long journey in terms of our investment in the factories, our investment in supply chains, and obviously the team. On the orders side, in Q3, we were flat. in the quarter versus last year, which was a very tough comparator. I mean, from memory, last year, aftermarket orders in the third quarter are up 10% and new construction was up 20%. So it was a huge third quarter. So I'm pleased we're flat. The difference really was mainly those big hydrogen orders that we won with Vivo in Q3 last year, which we said we're never going to repeat, right? Because The grants that were given by governments and local governments were not repeated this year in hydrogen to that extent. So, yeah, we were flat in terms of orders. Year-to-date, I think the important number that we put in the release is that total orders outside of the multi-year marine order, which we called out last year, are up 5% organically year-to-date. And we see, obviously, Christian, we do see good support from combined cycle gas, energy in general across process automation, obviously on the back of what's happening with the energy demands for electrification and for data centers and AI. So we see good demand there. I think we see good demand in nuclear aftermarket at the moment for the sort of upgrades that to the existing plants, the life extensions to the existing plants. And in time, we expect to see, you know, good demand on new construction nuclear, but that will obviously be a few years out. That's not something that's going to happen quickly. But in general, process automation, I would say, yeah, in good shape. We had a good look, Luke and I, at the pipelines with Jackie and Robbie and the team and the pipelines of opportunity for aftermarket new construction, and they look good. So, yeah, I would say in terms of shipments, we are about where we thought we would be. Maybe the year end will be slightly better than we thought at the half year for process automation. And in terms of orders, again, pretty much bang on where we thought And that would lead Christian into what I would call good growth for next year, not at the high single-digit level. I don't think we'll be quite that good next year, but around the mid-single-digit level for process automation in terms of shipments.

Yeah, maybe just the second question you asked, Christian, was on shipment catch-ups in the quarter. So the group overall, as you know, grew 12% organically, and we think about 2% to 3% of that were shipment catch-ups. And quite a bit of that was in the life science and fluid control sector, some in industrial automation, and then the

automation and then there was a reason on our catch-up in life sciences the control in the quarter very helpful thank you can i just go ahead yeah yep i was just going to say we do think the catch-ups about done now okay can i just squeeze one on ia i guess just interested in any commentary around regional um and I guess the sort of underlying backdrop there. Obviously, data's been a bit mixed.

Yeah. No, we had a good look at this. And broadly, all regions are broadly flat, Christian. You know, I think industrial automation markets generally are still struggling a bit. You know, we haven't yet seen the recovery we were hoping for. I think I said, you know, previously the sort of 60-day moving average was up, which it was. Now it's about flat. in industrial automation. So still not yet seeing that investment. We all know it will come. You know, it's just a question of when. And we've all seen these cycles before. But it's across the regions, Christian. It's broadly black.

Thank you very much.

Thank you.

Thank you.

Thank you. The next question goes to Lashanthin Mahendra Raja of JP Morgan. Please go ahead.

Morning, guys. Thanks for taking my questions. I've got three, I think. The first is on process automation and orders. And I guess early in the quarter, I appreciate there's a sort of, I think, 9 million comp in Q3. I think X that, where sort of new construction orders are 10% in Q3. Just wanted to send a check of my maths there. And if so... what are the key end markets driving that? I know you sort of called out Powell already. It's interesting to hear what's driving that sort of early growth there. The second question is on next year, if possible. I know it's early, but I don't know if you've got any initial thoughts. I know you've sort of touched on process already, but across some of the other end markets as well, and also margin-wise, I think we need to think about... And the third question is just on transport and the strategic review. Just any update you can give there. I appreciate the backdrop is probably tougher now than maybe we thought it was going to be six, seven, eight months ago. Just if that's impacted your thinking in any way.

Yeah, three good questions last year. On process automation orders, I think your maths is about right. So orders in the third quarter were just over 90 million. and, yeah, the hydrogen orders that you, I think, were referring to, the comp on that is about 10 million. So, yeah, you're right. If you did, you know, and be careful what we strip out, I think, but if you did take out those sort of hydrogen orders from the grants from last year, yeah, you'd be looking at about 10% growth in the quarter on new construction. I still think, Lush, you know, in my mind, the sort of 5%, It's very much a year-to-date business process automation. As you know, it's a longer cycle. So I still think that sort of total orders are 5% up organically year-to-date. If you strip out the marine order that we called out last year, I still think that's a pretty good guide. But as I said, we do see, you know, good opportunity pipelines in both combined cycle gas and in gas generally, LNG and so on. The second question then was about next year. So obviously we haven't completed the budget reviews yet. We've sort of done some pre-budget reviews. But, you know, we saw one of the peers call out yesterday sort of 4% organic growth for next year in overall terms across the piece. You know, and I wouldn't disagree with that. Again, you know, I think, you know, mid-single digit growth for next year, It looks to me at the moment about right, subject to sort of current market conditions carrying on. I think on top of that, our tax rate, unfortunately, will be going up next year. This year, we have benefited from settling some old tax cases. And next year, our tax rate will be going up to just over 26%. So that's worth getting into your models. And then The other thing, clearly, we are already investing more in cyber. Having been through the cyber incident beginning of this year and seeing what else is happening, obviously, around the pace in the industrials, but more broadly in retail, an automotive, we are upping our game already. Luke talked a bit about it on the last call, investing in the team, investing in the best systems, investing in training broadly across IMI. In all of this, it'll probably cost us about one and a half pence of EPS incremental next year. So, again, it's an investment I absolutely believe we need, having been through that attack earlier this year. And then your last question on transport, yes, tough market, particularly U.S. That is a regional effect where some of our customers have literally shut down for a week or more because of the lack of demand. So transport market, tough. The transport strategic review made very good progress in the course, I have to say. We've got a really strong team. As you know, we brought in some ex-passenger car people last year. They have come up with a pragmatic but ambitious plan, which was presented to the board, accepted by the board. It's a five-year plan, obviously, in line with all of our plans. I talked a little bit about it on the last call. Obviously, it's predicated on value engineering, new products with better margins, and exiting, frankly, some of the lower-margin businesses. They've also built on that. There's more continuous improvement, lean and cost-effectiveness that's gone into the plan as well. That's sort of a fourth leg of that plan. And then the fifth leg is all about working capital, particularly stock turns. And they've made good progress this year, and we can see good runway for next year as well. So they're very focused on improving the return on capital of that business. And, indeed, by the end of the five years, getting – the return on capital employed of transport to be pretty close to the IMI average. So, yeah, it's a good plan. Lush, they're very focused. Clearly, as you said, externally, truck market's not great, and we're very much focused on the internal plan, getting our heads down to deliver those improvements.

Does that cover all your points, Lush? Yeah, no, that was really helpful. Thanks very much.

Okay. Thanks, Lush.

The next question goes to Colin Grant of Davey. Colin, please go ahead.

Yeah, hi, everyone. Good morning. Just a question on two things, really. Just firstly on margin development. Is there anything you can give us in terms of what you're expecting margins to do in the current year, 2025? I mean, you've got very strong growth coming through here and you're getting it in your higher margin areas. Just any kind of view on the equation that you might get at a margin would be helpful. And secondly, Justin, if you could give us an update on any thoughts looking into 2026 around potential share buybacks that you might look to try and do next year, given the strength of your balance sheet. Thanks very much.

Yeah, great. Thanks, Colin. I'll let Luke talk about share buybacks in a moment for next year. Just a couple of points for me. Margins, you know, as I said, you know, where are consensuses for this year? is our base case, looks about right. That would mean margins of about 20% for this year, which obviously I'm very pleased with the team, Colin, because we started at 14% and we've made year-on-year progress towards that original target. As we go forward over time, you know, I would expect over the sort of five-year period, as I've said before, for those margins to tick up. And if you take roughly a 30% drop through, because we are going to continue to fully invest in the business, growth is our number one priority. So we will continue to fully invest in the business. But we still expect to do around, on average, obviously it won't be every year, around a 30% drop through over that five-year period. And that will take margins closer to sort of 22% over that period. Before I let Luke talk on share buybacks, I will just say the acquisition pipeline does look better than it's looked for a while. Of course, these things are very binary, you know, and we're very, very disciplined about how we use shareholder money, and as you know, we're looking for returns above the cost of capital within three years, and we're looking to be not too dilutive to IMI's sort of 13%, you know, over a five-year period. So, we're very strict about that, but I would say, Colin, that the muscles that we've built, particularly around aftermarket growth of innovation, around the way we go to market commercial excellence, the use of data, and obviously our operational footprint, which I really say was truly world-class, and the way we can improve companies in that way, means that we are more confident of generating those returns. With that, I'll let Luke talk about share buybacks.

Yeah, good morning, Colin. And, you know, looking at the year's free cash flow, I think we feel really good about the work we've been doing, particularly on working capital this year and particularly inventory reduction. work we're doing since it's nice cash generation coming through there. And we've always said we'll look at our leverage and operate roughly between a one to two times range. And at the half year, it was 1.4 times. And subsequent to the half year, we completed the share buyback, paid the dividends. So sort of as we now approach the end of the year, we said we'll de-level to around about 1.1 times come the end of this year. And as we get into next year, we'll look ahead. And if we sustainably think we'll, have leverage below at times, we'll definitely look at initiating a share buyback. But I'd sort of echo the same as Roy, that we continue to have M&A as part of our strategy and look at that as well.

Great. Thanks very much. Thanks Colin.

Thank you. The next question goes to Jonathan Hearn of Barclays. Jonathan, please go ahead.

Hey guys. Good morning. Just three questions, please. Just going to focus on some of the other subsections. Firstly, just in terms of climate control, obviously 5% growth. If you kind of look to Q4, there's a really tough comp, probably the toughest comp of the year. Do you think that business can still grow at sort of 5% in Q4? And if you can just give us a little bit more info about that sort of exposure to data centres and what you're seeing. I think we had 14 million orders of that last time you spoke about it, where we're sitting in that area. Second question was just on sort of life science and fluid control. Obviously, big spike up in growth, 30%. Can you just sort of break that out? How much of that is underlying and where is that coming from and how much of that is catch up? And then the third question was just coming back to process, but just focusing on that sort of nuclear opportunity there. I mean, look, there's a lot of talk out there about what that market can ultimately be. Can you just sort of give us some more information about where you sit, where you're winning, what type of growth rates? you expect. Just some sort of more colour on that nuclear opportunity going forward for you in process, please. Thank you.

As usual, Jonathan, you managed to find three new questions after everybody else asked. That's great. Climate, 5%. Climate has been growing at 5% pretty much year in, year out for the last five years, something like that, Jonathan. And it really is driven by overall requirement for energy saving, principally in Europe, right? So it's had great growth record. It does have a very difficult comparator in Q4, so I'm not sure if we'll quite grow that fast. But in the overall year, we'll be around that 4% to 5% level for climate. So very pleased with their performance. As you said, data centres is becoming an increasing part. It's only 2% or 3%. But that's come from nothing over the last few years, obviously, for data centers. And the pipeline is strong. And as I said on the last call, you know, we will follow several years after those initial investment decisions on those data centers. So that's good for the future because that means with all that data center investment that's been announced, you know, that gives us a very good pipeline. Life sciences, yeah, I mean, 13%. I'll let Luke talk in a minute about what was catch-up. Clearly the catch-up side was on the fluid control side, and we flagged that at the half year. I still think life sciences in overall term will be about flat for the year, about flat for the fourth quarter. So we're not seeing that inflection point yet. Certainly, though, the mood music is better. And at some point next year, I'm not going to call first or second half at this point, Jonathan, but at some point next year, I would expect it to start to return to, you know, let's say low single digit growth before eventually kicking up to more that mid single, you know, even higher growth that we saw historically. And then on nuclear, yeah, I mean, you know, nuclear new construction, as I said earlier, is not going to happen quickly. These are long, long cycle projects. But it's very good news for IMI. I mean, this year, as you know, we won a big project in the UK already. I think nuclear, in terms of nuclear new construction and aftermarket put together, will probably be 7% or 8% of our orders this year, so ticking up. Nicely. Per reactor, we can get up to £20 million worth of content, you know, around the valves and the strainers. And then on an SMR as well, you know, that could be up to £20 million worth of content as well. So, again, longer term, but bodes well for the future as that starts to really kick in. Aftermarket will be up in nuclear again this year. And that's the extension to the, you know, the nuclear reactor's that's already happening, and I expect to see more of that, Jonathan. And that aftermarket is just about the best aftermarket we have in terms of the capture rate, obviously a lot of it's regulatory, and in terms of the margins, because everybody competes very hard on new construction, as you probably remember, but then aftermarket can be annuity for decades. After that, a very good recurring revenue stream. Does that Capture your questions. Apart from that, I'll just let Luke talk about what was catch-up.

On the life science and food control organic growth, there's 13% growth in the quarter. About 3% to 4% of that was underlying growth, and then the rest was catch-up. Roy said the most important thing is that it's now brought us to where we thought we would be, which is 1% year-to-date growth, and then around about that for the year.

Great, guys. That's very helpful. Can I just have one just very quick follow-up just on that sort of aftermarket within process? Can you sort of tell us where that sits in terms of percentage of the division? I know it's been growing, but where are we kind of in that sort of AMOE mix, and where do you think you can go to in process?

Yeah, yeah. So, Jonathan, it's about 60%. I think last year it was 59%. So, you know, it's in that sort of 60% aftermarket, 40% OE. Clearly, I want both segments to grow, you know, as fast as possible, right? That will be my absolute dream, which means the mix wouldn't change. Naturally, I think, you know, what's changed over the last couple of years is the power requirement globally has obviously stepped up, and that's very good for our combined cycle gas, good for LNG, good for our gas business in general. So, you know, let's see how the next sort of, you know, few years sort of you know, form out. You know, we have said at the capital markets today, back a few years ago now, that we expect aftermarket to grow more like 5% to 7% new construction in the longer term, probably a bit slower than that, which will mean the mix will tick up, which will mean obviously the margins will tick up. Roughly, our gross margins are two and a half times in the aftermarket what they are in new construction. So as that mix does tick up over time, Jonathan, that's obviously very healthy for us.

That's great, guys. Thank you very much for that. Thanks, Jonathan.

Thank you. The next question goes to Mark Davies-Jones of Stifel. Mark, please go ahead.

Thanks very much. Morning, both. We're getting down to some gory detail here, but on process, I just wanted to ask quickly on the non-PowerGen-related markets and whether you're seeing any softening in the sort of refining petrochem end of the world, given where current oil prices are. That was the first one. And then on IA, obviously it hasn't really turned yet, but looking into next year, are you starting to hear any more positive noises out of particularly Germany, given the sort of similar plans coming through there? Is that likely to feed through to you or is that still fairly distant?

Yeah, good questions, Mark. Yeah, you're absolutely right. On process, it's downstream where orders are lower. You're absolutely right. I think everybody's seeing that and we're certainly seeing that. In IA, I would say it's early days yet, Mark. I would, you know, when you look at a normal IA cycle, I say we're overdue an uplift. And certainly with the investment going into Germany at some point, I mean, Germany is 12% of IMI's total sales. And the biggest part of that is into the sort of industrial production economy, which is obviously both IA and the fluid control part of fluid control and life sciences. And then very close behind that, we've got climate control with what we do in HVAC. So generally very important to IMI. At some point, I'm pretty sure there will be a lift now. When exactly that is, it's difficult to call, I would say, Mark.

Okay, understood.

Thank you. The next question goes to Stephen Klepp of B&P Paribas. Stephen, please go ahead. Stephen, your line is open. Moving on to the next question from Richard Page of Deutsche Bank. Richard, please go ahead.

Thank you. Yeah, morning all. As Mark said, down to the nitty gritty, but could you just remind us on gas combined cycle, what the size of your opportunity there and ultimately how quickly our aftermarket flows from new construction there. And then secondly, just a point of clarity, on the climate control data centre work, is all of that exclusively European customers, please?

Yeah, good questions. I'll let Luke talk about data centres. in climate in a minute. In terms of gas combined cycle, well, in terms of let's call it conventional power, which is mainly gas combined cycle, that's about 25% of process automation. 5% is new construction at the moment, and 20% is aftermarket. So, yeah, that's a significant tailwind, and I'm sure you've seen what's happened to our customers recently. in that segment, their order books are very, very full. And, you know, that's building for us and we're getting nice high hit rates as well. So very encouraged about that. In terms of data centers, do you want to talk a little bit about data centers in climate?

Yeah, definitely. So, you know, we continue to see lots of opportunity there with our cooling products going in there and that's fully global exposure. So of the orders we've had year to date, about half is Europe, 40% is in North America and then about 10% in Asia Pacific. So I think we've got a pretty opportunities there.

Thank you.

Thanks, Richard.

Thank you. The next question goes to Mark Fielding of RBC. Mark, please go ahead.

Yeah, hi. Actually, I'm going to be not original when asking you a question, but actually circle back to one right at the start in terms of just getting a little bit more sense around this phasing in process automation. I was trying to think about clever ways to ask it. But I think the simplest one is, in terms of us understanding how good Q3 was and what that means in Q4, how do you think the sequential progression will be Q4 and Q3 in the revenues in process automation?

Yeah, very good. Yeah, so you're right, Mark, because I think what you've cottoned on to is that last year, The comparator in Q3 was weaker, and the comparator in Q4 was a lot harder, right? But if we look at overall shipments in Q3 this year, we shipped about 200 and just over 230 million, right, Luke?

Yeah.

And then in Q4, we're going to be shipping just over 300 million. That's the plan, right? And that will be very similar, as I said earlier, to the level that we shipped last year, Mark. So you're right. We've still got a lot of work to do, and the teams know that. And that probably puts it better in context than I did, Mark. So thank you for that.

Very helpful. Thanks.

Cheers.

Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. And we have a question from Stefan Klepp of BNP Paribas. Stefan, please go ahead.

Can you hear me now, guys? Hello? Yes, it's a very, very bad line, though. Oh, I'm very sorry. I speak a bit louder, please help. Just a lot. Sorry for that. On transport, you sounded very positive on the internal catch-up plan. Are you ruling out that you divest the division?

And secondly, on the acquisition side of things, I think you have for a long time not been that positive about acquisitions. What are you looking at at the moment size-wise? Because the last big acquisition was TWTG, and that was a tiny one.

What is basically in your funnel there at the moment? Excellent. I think I heard you right. So transport, I think you were asking about the balance between, you know, the internal efforts and what we might be doing externally. And as I said earlier, Stefan, the real focus is on internal progress with a great team at the moment. Clearly, the external market with what's happening, particularly in the U.S., is not in great shape. And so we will always, as we always do, as we run through our strategic review process, look at both, you know, across the business and what value we can generate over a reasonable time period versus what value we can attract externally. But right now, as I said, the focus is on internal improvement, I think for obvious reasons. And it's a great internal improvement plan, I have to say, from the team. I think the second question is what sort of size of acquisitions do we look at? And there's really no change there to what we've always said. We would look at bolt-ons up to a value of about £500 million in terms of the acquisition cost. What's really important for us is that one plus one equals a lot more than two. As I said earlier, the muscles that we have around aftermarket generation, around things like innovation around our commercial exits, the broad, the global teams that we have that can really expand businesses. That when we really look at that and we're quite harsh on our judgment, which is why, you know, we're only doing an acquisition, you know, every year or so, that when we do that, that the returns, we understand the returns on day one and that we understand the returns on the end of year three and they have to be above our cost of capital and and then at the end of the five-year period that we're not too dilutive to our overall IMI, return on invested capital. And we really look at that and we make sure that we can look ourselves in the face. We are paid in our long-term investment plan on our all-in return on invested capital, right? So we are incentivized to make sure that we create shareholder value, and it is, I can tell you, top of our minds. But, yeah, the acquisition pipeline, as I said, Stefan, does look better than it's looked for a while, and there's a few interesting ones in there. I'm sorry I couldn't hear, you know, your question in detail because of the line, but hopefully that covered what you asked.

Thank you. Maybe I've lost Stefan altogether.

from harry phillips of pill hunt harry please go ahead yep uh good morning everyone um again sorry two questions for myself and again the sort of given some of the other questions around nerdy detail that sort of got up my competitive streak so another nerdy detail one just wondering around the lng opportunity and what scale that is within the business and then secondly i just missed the data centre percentage of climate earlier on. I know you've just given us a jog split, but I missed the original one as a data percentage of total climate at the current time.

Please. Data centre climate, 2 or 3%, Harry, that's a nice easy one. And then in terms of LNG, LNG is around 10%. When you look at aftermarket and new construction combined, It's about 10% of process automation, Harry. And as you said, the pipeline of opportunities, the projects as we go sort of into next year and the next few years looks very strong to us, yeah.

Fantastic. Thank you very much, Steve. Thank you, Harry.

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

Well, I'm obviously just going to use this as a big thank you. A lot of people across IMI listen to this, and I want to thank them for an excellent, and I don't use that word often, but an excellent operational performance, excellent execution in the third quarter, an excellent recovery from cyber and everything else that's happened geopolitically this year. And in particular, I want to thank, obviously, Jackie and the operations team for I think it was a really outstanding performance and we look forward to closing out the year from here. Thanks very much, everybody, for listening. Thank you.

Thank you. This now concludes today's call. Thank you all for joining.